IV. Contenido del proyecto
5. Capítulo quinto. Registro mercantil de las sociedades
Credit risk
In risk management execution the Bank pursues the main goal – to identity and minimize the adverse effects of insolvency of the party undertaking an obligation to fulfill the terms and conditions of a financial agreement.
Credit risk management policy specifies the existence of clearly formulated parameters with the help of which the credit risk will be controlled, in particular, the sufficient loan portfolio diversification (concentration analysis, monitoring and control over risks, etc.).
Credit risk management process is action sequence arranged in a certain way consisting of the following stages: - Risk acceptance (risk factors identification, risk appraisal, strategy selection);
- Risk optimization (portfolio diversification, allowance making, limits setting, provisions under active operations); - Credit risk management (concentration analysis, risk monitoring and control etc).
In credit risk management the Bank uses Advanced IRB technique that is based on the borrower financial ratings and is applied by means of the analysis and assessment of the following credit risk components:
- Probability of Default - Loss Given Default - Exposure at Default - Maturity.
The integrated analysis of the above mentioned indicators and the indicators required by the National Bank of Ukraine regulations is provided by specialized application suites, which in addition to analysis also enable loan portfolio monitoring and promptly reacting at its quality loss.
Table 27.1.
Major credit risk normative standards dynamics *
Normative standard Regulatory requirement % 2010 2009
Í2 Regulatory capital adequacy 10 138.48 59.93
Í3 Capital adequacy 9 15.56 16.80
Í4 Quick liquidity 20 59.76 56.26
Í5 Current liquidity 40 91.66 105.08
Í6 Short-term liquidity 20 105.54 33.69
Í7 Maximum level of credit risk exposure per 1 contractor 25 21.36 24.94
Í8 Large credit risks 800 459.14 338.22
Í9 Maximum size of loans, guarantees and bails granted to a single
insider 5 1.06 0.22
Í10 Maximum size of loans, guarantees and bails granted to insiders 30 1.62 0.41
*(ratios as set by the Instruction on the order of regulation of banks’ operations in Ukraine approved by the National Bank of Ukraine Board Resolution dated 28 August 2001 No368 as amended).
Market risk
Market risk is the risk caused by the possible influence of market factors that affect the cost of assets, liabilities and off- balance sheet items. These factors, first of all, are fluctuations im rates, changes in prices of precious metals, and changes in market value of financial instruments.
The Bank, according to the adopted risk classification, classifies market risk to financial risks category and separates the following types of market risk: interest rate risk, currency risk, liquidity risk.
The market risk is managed to establish, identify those methods and approaches used by the Bank to avoid risks resulting from uncertainties in future financial performance due to the volatility of events and factors that determine this result.
The market risk is usually managed by the Bank in accordance with its strategic objectives. The priority is to ensure maximum preservation of assets and equity due to the reduction of possible losses and insufficient income on the Bank's deposits in financial instruments, including deposits in foreign currency.
The objective of market risk management for the Bank is to: - distribute responsibility between the market risk objects;
- identify, define and measure of the acceptable level of market risk; - continuously monitor and control market risk;
- take measures to reduce market risk;
- adherence by all the Bank's employees to regulations, statutory and internal documents.
Market risks management structure consists of: the Board of the Bank, Assets and liabilities management Committee, the Treasury office, the market risk monitoring and control department, Credit Agricole CIB Group market risk department. Different limits of risk levels, other norms are set at Credit Agricole CIB Group level on the general basis taking the peculiarities of a certain country into account. These may be reviewed at the Initiative of the Bank.
Department of Monitoring and Control over Market Risks is responsible for: - daily monitoring of internal indicators, parameters, elements of market risk;
- daily monitoring of adherence to the economic standards of the National Bank of Ukraine;
- timely reporting on actions taken to Market Risk Department of Credit Agricole CIB and the Board; - performing calculations of currency, interest rate and general market risks.
Detection, measurement and determination of acceptable level of market risk consists of the following: - identification of market risk;
- assessment of market risk, including interest rate, currency, price, liquidity risks; - monitoring of market risk;
- control and / or minimizing market risk.
For the purposes of identification and analysis of market risk the Bank estimates the parameters, change in condition and amount of which indicates the specific characteristics of certain activities of the Bank and adoption by the Bank of a completely different market risk.
The main objective of the market risk management system is to ensure the adoption of proper management decisions on a particular area of the Bank's activities to reduce the impact of market risk on the Bank as a whole.
The Bank identifies and assesses the market risk level on an ongoing basis. For each set of indicators used by the Bank to measure bank risk levels, a system of limits is set, excess of which means the increasing effect of risks for the Bank as a whole and oncoming critical situation.
The market risk (currency risk, interest rate risk, price risk) is minimized through: - compliance with the approved policy of Assets and liabilities management Committee;
- consideration the market risk report at the meetings of Assets and liabilities management Committee; - use of VAR-method for quantitative measurement;
- diversification of financial instruments portfolio; - setting limits on open trade positions;
- managing the structure of assets and liabilities to maximize the amount of net spread and net interest income.
Currency risk
Currency risk is an actual or potential risk for profit and equity of the bank arising as a result of adverse changes in foreign currencies exchange rates and bank metals rates.
Currency risk management is the process with the help of which the Bank identifies currency risk, carries out its appraisal, monitors it, controls its own open currency positions, limits open currency positions, takes the interrelationship between currency risk and other risks into account.
To manage, appraise and control currency risks the bank uses VAR-methodology (the appraisal technique of potential losses of open currency position due to currency exchange rates risk factor). The approved VAR-methodology parameters comply with Basel 2 requirements. The bank sets limits to manage open currency positions. Credit Agricole CIB Group head office sets these limits and also decides what currencies the Bank may have in its portfolio as well as sets the limits on currency exchange transactions volume within one operational day.
VaR (Value-at-Risk) technique is the currency risk appraisal technique, on the basis of which VaR back-testing is performed. It worth mentioning that this risk appraisal technique (not only for currency but for interest one also) is prevailing for the whole Credit Agricole CIB Group. Open currency positions management is one the main functions of the Treasury whose head is the member of the Board of the Bank. Assets and liabilities management Committee supervises the currency risk management paying special attention to structure position if any; to reserves in foreign currencies, income in foreign currencies. The market risk monitoring and control department that is a part of the Financial division exercises the control over limits and normative standards. The market risk monitoring and control department reports daily to the President of the Bank, Treasury, financial department, market risks monitoring and control department of Credit Agricole CIB Group head office.
Table 27.2.
Currency risk analysis
(UAH thousand)
2010 2009
Line Item monetary assets monetary liabilities derivatives net position monetary assets monetary liabilities derivatives net position 1 USD 705 051 (862 675) - (157 624) 1264 263 (1262 495) - 1 768 2 EUR 561 138 (478 758) - 82 381 423 266 (288 352) - 134 914 3 GBP 288 (80) - 208 169 - - 169 4 Other 6 294 (6 004) - 289 4 595 (4 568) - 27 5 Total 1 272 771 (1 347 517) - (74 746) 1692 293 (1555 415) - 136 878 Table 27.3.
Change in profit or loss and equity resulting from probable movement of the currency rate set at the reporting date with all other variables held constant
(UAH thousand)
2010 2009 Line Item
effect on profit (loss) effect on
equity effect on profit (loss)
effect on equity 1 Strengthening of USD by 5% 7 326 7 326 (4 460) (4 460) 2 Weakening of USD by 5% (7 326) (7 326) 4 460 4 460 3 Strengthening of EUR by 5% 6 382 6 382 5 397 5 397 4 Weakening of EUR by 5% (6 382) (6 382) (5 397) (5 397) 5 Strengthening of GBP by 5% 3 3 2 2 6 Weakening of GBP by 5% (3) (3) (2) (2)
7 Strengthening of other currencies by 5% 2 2 1 1
8 Weakening of other currencies by 5% (2) (2) (1) (1)
Table 27.4.
movement of the currency rate set as the weighted average exchange rate with all other variables held constant
(UAH thousand)
weighted average exchange rate for 2010
weighted average exchange rate for 2009
Line Item
effect on profit (loss) effect on equity effect on profit (loss) effect on equity
1 Strengthening of USD by 5% 7 302 7 302 (4 364) (4 364) 2 Weakening of USD by 5% (7 302) (7 302) 4 364 4 364 3 Strengthening of EUR by 5% 6 357 6 357 5 144 5 144 4 Weakening of EUR by 5% (6 357) (6 357) (5 144) (5 144) 5 Strengthening of GBP by 5% 3 3 2 2 6 Weakening of GBP by 5% (3) (3) (2) (2)
7 Strengthening of other currencies by 5% 2 2 1 1
8 Weakening of other currencies by 5% (2) (2) (1) (1)
Interest rate risk
Interest Rate Risk affects both the Bank's profitability and economic value of its assets, liabilities and off balance sheet instruments. As a result of adverse fluctuations of interest rates in the market the Bank is exposed to the interest rate risk.
Interest rate risk arises mainly as a result of movement of the interest rates when there is mismatch between interest rate assets and liabilities. One of the main sources of risk for a financial instruments is the risk of changes in market interest rates or interest rate risk - the possibilty of financial losses due to changes in interest rates in the market during a certain period of time. A positive gap, i.e. the excess of sensitive assets over liabilities leads to the change in the Bank's interest income in one direction with changing interest rates. A negative gap causes a change in interest income in the opposite direction to changing interest rates.
The important elements in interest rate risk management are balancing the assets and liabilities sensitive to changes in interest rates by maturities and analysis of changes in interest rates. The Bank uses a comprehensive risk management system based on assessment and limitation of risk, stress-models creation. The head office of the Department of Monitoring and Control over Market Risks of Credit Agricole CIB Group communicates to the Bank the list of financial instruments using the interest rate, deadline and possible hedging instruments, sets appropriate limits. The Department of Monitoring and Control over Market Risks daily controls and monitors the compliance with the established limits. VaR (Value-at-Risk) technique is the interest rate risk appraisal technique, on the basis of which VaR back-testing and GAP analysis are performed.
In addition to continuous assessment of interest rate risk, the Bank carries out operational monitoring of various parameters that characterize the level of interest rate risk assumed by the Bank. Operational and regular monitoring of interest rate risk allows the Bank management to take timely and adequate decisions to ensure the profitability of the Bank's operations and comply with established limits of interest rate risk.
Interest rate risk is managed by:
- Assets and Liabilities Management Committee considers the cost of liabilities and return on assets, develops recommendations regarding interest policy, minimum permissible level of margin and spread;
- Risk Management analyses interest rates levels on assets and liabilities, calculates indicators of net interest margin and spread, prepares proposals for consideration of Assets and Liabilities Management Committee regarding optimal values of interest rate risk.
- report on yield of interest earning assets and cost of interest bearing liabilities (monthly); - report on net interest margin and spread (monthly);
- report on return on assets and equity (monthly);
- other reports on the grouping according to Group standards.
As at the reporting date interest rates and contractual maturities of financial assets and liabilities were not revised. Table 27.5. Line Item On demand and within 1 month 1 – 6 months months 6 – 12 More than 1 year Non-monetary Total
2009
1 Total financial assets 3 638 739 897 752 15 9 650 - 4 546 156
2 Total financial liabilities 3 421 912 99 349 653 224 379 - 3 746 293
3
Net gap on interest rates as at 31 December 2009 (end of the day)
216 827 798 402 (638) (214 729) - 799 863
2010
4 Total financial assets 3 650 896 565 327 57 400 43 804 - 4 317 427
5 Total financial
liabilities 3 505 084 7 503 1 214 231 149 - 3 744 950
6
Net gap on interest rates as at 31 December 2010 (end of the day)
145 812 557 824 56 186 (187 346) - 572 477
When analyzing interest rate risk, interest income and expenses are included to related interest bearing financial assets and liabilities.
In compiling the table, the Gap analysis method was used, i.e. analysis of non-compliance of amounts of financial assets and liabilities with maturities within one period.
Effect of interest rate risk on the Bank in the reporting year:
- when rates are decreased by one percent (1%), interest income will be maximum reduced by UAH 4 860 thousand per year;
- when rates are increased by one percent (1%), interest income will be maximum increased by UAH 4 860 thousand per year.
Effect of interest rate risk on the Bank in the previous year:
- when rates are decreased by one percent (1%), interest income will be maximum reduced by UAH 6 520 thousand per year;
- when rates are increased by one percent (1%), interest income will be maximum increased by UAH 6 520 thousand per year.
The Bank seeks to cover the above risk by entering (introduction) the "floating" interest rates in loan agreements. The Bank changes the interest rate for the borrower over a certain period of time based on rates of attracting customer assets.
Table 27.6.
Monitoring of financial instruments interest rates
(%)
2010 2009 Line Item
UAH USD EUR Other UAH USD EUR Other
Assets
1 Cash and cash equivalents 2.74 0.1 0.19 - 3.07 0.1 0.3 -
2 Trading debt securities - - - - 9.27 - - -
3 Other debt securities at fair value through
profit or loss - - - -
4 Due from banks 5.61 - - - 22.95 - - -
5 Loans and advances to customers 9.49 4.1 2.99 - 24.12 4.93 5.72 -
6 Securities available for sale - - - -
7 Securities held to maturity - - - -
8 Other assets - - - -
9 Transfers to non-current assets of disposal
group classified as held for sale - - - -
Liabilities - - - - 10 Due to banks 4.61 0.33 - - 15.77 0.33 1.43 1.2 11 Due to customers - - - - 11.1 Current accounts 1.14 0.25 0.38 - 5.88 0 0 0 11.2 Term deposits 2.35 0.58 0.43 - 10.05 0.36 0.75 0 12 Debt issued - - - -
13 Other borrowed funds - - - -
14 Other liabilities - - - -
15 Subordinated debt - - - 4.67 - -
16 Liabilities directly associated with the non-
current assets classified as held for sale - - - -
Interest on amounts on customers’ demand and on amounts due to banks in foreign currency is accrued at variable interest rate, on the rest of assets and liabilities – at fixed rate.
Other price risk
Except for the above mentioned kinds of risk the Bank is exposed to in its operations, it shall be deemed that other price risks do not arise and are not available i.e. threatening for the Bank.
Geographic risk
Geographic risk concentration is based on analysis of assets and liabilities origin (place of registration). Thus, most sensitive to the geographical risk are those institutions that conduct their activities in different economic environments caused by different political, regulatory and legal economic conditions. In this situation a wrong choice of funds directions can lead to financial losses.
Credit Agricole CIB Group conducts a risk assessment for each country and sets appropriate limits for management of geographic risk. This assessment is the maximum amount of assets that can be placed in a particular country; it is conducted through the analysis of each country in which the Group operates and assignment of an appropriate rating. The Group's Policy allows to set reasonable limits and conduct appropriate monitoring on a regular basis, basing on the advanced administrative and information systems.
Considering the fact that the Bank operates primarily in Ukraine and due to the fact that the Bank is a part of Credit Agricole CIB Group and conducts operations primarily with banks of the Group within the set limit, the geographical risk is considered by the Bank as not essential, i.e. it doesn’t have a significant impact on the Bank's income and equity.
Table 27.7.
Analysis of geographical concentration of financial assets and liabilities for 2010
(UAH thousand)
Line Item Ukraine OECD Other counties Total
Assets
1 Cash and cash equivalents 544 192 498 074 4 886 1 047 151
2 Trading debt securities - - - -
3 Other debt securities at fair value through profit or
loss - - - -
4 Due from banks 106 037 (9) (98) 105 931
5 Loans and advances to customers 3 077 197 1 703 3 077 901
6 Securities available for sale 1 240 - - 1 240
7 Securities held to maturity - - - -
8 Other financial assets 21 720 21 141 - -
9 Total financial assets 3 750 385 519 208 5 491 4 275 084
10 Non-financial assets 97 528 - - 97 528 11 Total assets 3 847 913 519 208 5 491 4 372 612 Liabilities 12 Due to banks 395 386 - 66 395 452 13 Due to customers 2 998 627 115 599 6 044 3 120 270 14 Debt issued - - - -
15 Other borrowed funds - - - -
16 Other financial liabilities 38 863 31 558 31 874 102 295
17 Subordinated debt - 229 229 - 229 229
18 Total financial liabilities 3 432 876 376 385 37 984 3 847 245
19 Non-financial liabilities 15 477 2 371 15 851
20 Total liabilities 3 448 353 376 388 38 355 3 863 096
21 Net balance position 399 561 142 820 (32 864) 509 516
22 Lending commitments * 3 640 688 771 7 401 3 648 860
*including the commitments amounting to UAH 3 002 174 thousand at the reporting date that are revocable and
Table 27.8.
Analysis of geographical concentration of financial assets and liabilities for 2009
(UAH thousand)
Line Item Ukraine OECD Other countries Total
Assets
1 Cash and cash equivalents 587 357 654 283 3 538 1 245 178
2 Trading debt securities - - - -
3 Other debt securities at fair value through profit or
loss - - - -
4 Due from banks 9 512 - - 9 512
5 Loans and advances to customers 3 143 624 1 - 3 143 625
6 Securities available for sale 1 240 - - 1 240
7 Securities held to maturity - - - -
8 Other financial assets 654 539 5 1 198
9 Total financial assets 3 742 408 654 814 3 531 4 400 753
10 Non-financial assets 101 780 - - 101 780 11 Total assets 3 844 187 654 814 3 531 4 502 533 Liabilities 12 Due to banks 648 944 263 922 30 912 896 13 Due to customers 2 490 755 98 562 12 354 2 601 670 14 Debt issued - - - -
15 Other borrowed funds - - - -
16 Other financial liabilities 7 385 1 936 2 9 324
17 Subordinated debt - 231 727 - 231 727
18 Total financial liabilities 3 147 084 596 146 12 386 3 755 617
19 Non-financial liabilities 48 418 80 6 48 503
20 Total liabilities 3 195 502 596 226 12 392 3 804 120
21 Net balance position 648 685 58 588 (8 860) 698 413
22 Lending commitments 3 077 276 4 784 7 187 3 089 247
*including the commitments amounting to UAH 2 846 108 thousand at the reporting date that are revocable and
riskless for active operations of the bank, net credit risk under lending commitments is UAH 243 139 thousand. Other risks concentration
In addition to financial risks, functional risks have significant impact on banks' activities arising from inability to carry out timely and full control over the financial and economic processes. Functional risks are harder to identify than financial risks, as well as quantify and express in monetary units. However, functional risks are no less dangerous than other types of banking risks and eventually they also lead to financial losses. Banks are trying to reduce functional risks, improving the system of internal audit, developing the scheme of document flow, developing internal methods and technical and economic software for certain operations. Reduction of these risks is also stimulated by well reasoned resource, logistic and personnel policies. Functional risks include:
1. Operational and technological risk. The main task facing the Bank in the management of operational risk is development of the system of operating risks internal control, the main aim of which is to ensure strict compliance with technical orders, regulations, administrative decisions, relevant quality standards of operating activities (upon the condition that the evaluation, control and minimization of operational risk measures do not require too large non-production costs).
2. Legal risk. Legal risk management policy is based on implementation of standards and procedures of contracting and claim-related work, build of transparent relationships with law enforcement and regulatory
authorities, as well as a detailed study of the requirements of laws, regulations, contracts, systematic monitoring of changes and amendments to legislation.
3. Reputation risk. Reputation risk management policy is aimed on creation and maintenance of positive image of the Bank at financial markets, customers, and at regulatory agencies, developing and strictly following the technology of performance of banking operations and rules of internal order of work.
4. Strategic risk. Strategic risk management policy is directed on definition of the Bank's strategic objectives and implementation them in practice and continuous improvement of practices of development, updating and implementation of the Bank’s strategic plans.
Liquidity risk
Liquidity risk – financial loss risk associated with bank’s failure to timely and fully meet its liabilities. Liquidity risk may arise due to inability to sell a financial asset quickly and at the prise close to fair value.
The main objective in managing liquidity is to ensure that the Bank fulfills all the undertaken obligations in full, in due