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Credit Risk
- Credit risk is defined as the risk of loss arising from any failure by a borrower or a counterparty to fulfil its financial obligations as and when they fall due.
Credit risk is the single largest risk faced by the Group. It is inherent in the activities of the Group such as loans and lending-related commitments, treasury and capital market operations, and investments. Business units have primary responsibilities for the day-to-day and active management of credit risks.
Credit risk exposures are managed through a robust credit underwriting, structuring and monitoring process. The process includes monthly reviews of all non-performing and special mention loans, ensure credit quality and the timely recognition of asset impairment. In addition, credit review and audit are performed regularly to proactively manage any delinquency, minimise undesirable concentrations, maximise recoveries, and ensure that credit policies and procedures are complied with. Past dues and credit limit excesses are tracked and analysed by business and product lines. Significant trends are reported to the Credit Committee.
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Credit Risk Measurement
- The Group firmly believes that a disciplined approach towards credit risk measurement is essential to the effective management of credit risk. Advancements in quantitative risk management methodologies have made it possible to accurately measure and understand credit risk. The Group intends to continuously harness best practices in credit risk management techniques for risk-based pricing and capital allocation. Apart from the methodologies developed to satisfy Basel II regulatory capital computation, the Group has an on-going programme to develop its credit risk economic capital framework.
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Credit Risk Concentration
- A rigorous process is in place to regularly review and report asset concentrations and portfolio quality. These include monitoring the concentration of exposures by obligors, portfolios or borrowers, industry groupings and countries.
Obligor limits ensure that the Group is not over-exposed to a single borrower or groups of borrowers. Limits are set as a percentage of the Group’s capital fund.
Portfolio/Borrower limits ensure that lending to customers with weaker credit ratings is confined to acceptable levels. The limits are set based on the borrower’s credit-worthiness, measured by the borrower’s FRR.
Industry limits ensure that any adverse effect arising from industry-specific risk event is confined to acceptable levels. Industry limits are set taking into account the current economic environment as well as the Group’s expertise in a particular industry.
Cross-border limits ensure that the Group is not over-exposed to country-specific risk. In line with the Group’s rigorous risk measurement approach, the Group intends to adopt more risk-sensitive methodologies in the management of credit concentration risk in the future.
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Country Risk
- Country risk arises where the Group is unable to receive payments from customers as a result of political or economic events in the country. Country risk is defined as the risk in cross-border lending resulting from events in the country. These events include political and social unrests, exchange control, moratoria, currency devaluation, nationalisation and expropriation of assets.
Country risk is managed within an established framework that includes setting of limits for each country based on the country’s risk rating, economic potential as measured by its GDP, as well as the Group’s business strategy. Country exposures are analysed and significant trends are reported to the Credit Committee.
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Credit Exposure from Foreign Exchange and Derivatives
- To manage credit risk arising from derivative activities, master agreements such as International Swaps and Derivatives Association agreements are established with counterparties. Such agreements allow the Group to cash-settle transactions in the event of counterparty default, resulting in a single net claim against or in favour of the counterparty.
The Group also establishes bilateral collateral support agreements with selected counterparties. Under such agreements, either party may be required to provide collateral, based on periodic valuations of selected portfolios, when the exposure exceeds a pre-defined threshold.
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Settlement Risk
- Settlement risk arises in transactions which involve an exchange of payments with counterparties. The Group’s foreign exchange-related settlement risk has been significantly reduced, relative to the volume of our business, through our membership in the Continuous Linked Settlement scheme. This scheme allows transactions to be settled irrevocably on a delivery-versus-payment basis.
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Credit Stress Test
- The Group incorporates periodic credit stress testing as an integral part of its portfolio management process. This allows the Group to assess the potential credit losses arising from the impact of plausible adverse events. Remedial actions such as exposure reduction, portfolio rebalancing, hedging and review of credit acceptance guidelines will be taken if necessary.
