GHIB Pillar 3 Disclosures as at 31 st December Ghana International Bank plc. Pillar 3. As at 31st December Version 1.4

Transcription

1 Ghana International Bank plc Pillar 3 As at 31st December 2015 Version 1.4 Prepared by: Team March 2016

2 Document Revision and Control Version Report Issue/Revision Date Description March-16 First draft for review by GM Finance & Admin with Risk Manager Author(s) Regulatory Reporting April-16 Reviewed by EXCO Regulatory Reporting April-16 Reviewed by GM Finance & Admin to incorporate agreed EXCO changes April-16 Reviewed by GM Finance & Admin to incorporate OPCO changes April-16 Reviewed by ARCC and Feedback incorporated Regulatory Reporting Regulatory Reporting Regulatory Reporting Document Review and Approval Issued under the authority of the Chief Executive Officer to the following: Recipient Title Review/Approval Date EXCO Executive Committee Reviewed on 06-April-16 OPCO Operational Committee Reviewed on 11-April-16 ARCC Audit, Risk and Compliance Committee Reviewed & agreed on 20-April- 16 GHIB Board Board Chairman & Directors Reviewed & approved on 22- April-16 Page i

3 CONTENTS 1. INTRODUCTION BACKGROUND HIGHLIGHTS SCOPE OF APPLICATION FREQUENCY AND LOCATION VERIFICATION AND SUPERVISION KEY CAPITAL RATIOS RISK MANAGEMENT RISK MANAGEMENT APPROACH RISK APPETITE RISK TYPES AND CURRENT LEVELS CREDIT RISK (INCLUDING CONCENTRATION RISK) MEDIUM MARKET RISK MEDIUM OPERATIONAL RISK MEDIUM LIQUIDITY RISK MEDIUM CONDUCT RISK LOW REPUTATIONAL RISK - LOW LEGAL RISK MEDIUM FINANCE RISK MEDIUM CAPITAL CAPITAL REQUIREMENTS / RISK WEIGHTED ASSETS CAPITAL RESOURCES CAPITAL INSTRUMENTS CREDIT RISK CREDIT RISK MITIGATION FOR RISK MANAGEMENT CREDIT RISK : DISCLOSURES MAXIMUM EXPOSURE TO CREDIT RISK GEOGRAPHIC ANALYSIS OF EXPOSURE INDUSTRY ANALYSIS OF EXPOSURE MATURITY ANALYSIS OF EXPOSURE ASSET QUALITY PROVISIONING REMUNERATION CODE 20 Page ii

4 1. Introduction 1.1 Background Ghana International Bank plc (GHIB) is registered in England and based in London. GHIB is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Under the FCA s conduct supervision regime which assigns firms to one of four categories C1 to C4, Ghana International Bank has been categorised a C4. The PRA has its own classifications for assessing a firm s significance to the stability of the UK financial system. The categories range from 1 to 5. The Bank has been classified as a Category 4 firm. All shareholders are major Ghanaian Financial Institutions. The Bank focusses on selected African markets. It has a representative office in Accra that markets products and services across the West African region. It also has a services agreement with Benaba Limited, in Nairobi, to provide coverage for its existing as well as prospective business in Eastern and Southern Africa. This disclosure report covers GHIB as a single regulated entity and although it is majority owned by the Bank of Ghana with a 51% shareholding, it is entirely self sufficient for capital purposes. This report is prepared in accordance with the Capital Requirements Regulation and Directive IV ( CRR and CRD IV, also known as the CRD IV legislative package ). It contains detailed information on the underlying drivers of risk-weighted assets (RWA) and capital ratios as at 31 December 2015 in accordance with the European Union s (EU) Capital Requirements Regulation (CRR) as implemented in the United Kingdom (UK) by the Prudential Regulation Authority (PRA). CRD IV places emphasis on credit institutions underlying risks and on the three pillars set out below: Pillar 1 covers the calculation of risk weighted assets for credit risk, counterparty credit risk, market risk and operational risk. Pillar 2 refers to the supervisory review process. Its main intention is to find out whether additional capital is required over and above the Pillar 1 risk calculations. A firm s own internal models and assessments support this process. Pillar 3 covers external communication of risk and capital information by banks as specified in the Basel rules to promote transparency and good risk management. This document should be read in conjunction with the Bank s Annual Report for the year ended 31 December Highlights The Annual Report and Financial Statements as at 31 December 2015, demonstrate the stable nature of the Bank, with shareholders funds more than sufficient to support the assets of the Bank. Profitability fell on the back of significant economic events in Ghana, mainly due to a reduction in forex inflows and fiscal challenges that began in 2014.The impact can be seen in two of the Bank s main activities, lending and trade finance. A more cautious approach was taken in lending during 2015 resulting in a fall of 5.6% in interest and fee income from loans, whilst income from trade finance fell 25.4% from However, the loan book remained healthy as evidenced by the fact there were no provisions in CET1: The Bank is well capitalised with a Common Equity Tier 1 (CET1) ratio of 24.2%, which is well above the PRA s present Total Capital Requirement of 8%. The components of the Bank s capital are shown in fig 1 below. Basle III Leverage Ratio: The Bank is not highly leveraged. This is borne out by the leverage ratio for 2015, (a measure of capital as a proportion of total assets), of 18% which is well ahead of the prescribed minimum requirement of 3% defined in the Bank for International Settlements (BIS) via its document BCBS 270 dated January Page 3

5 Fig1: Own Assessment ( '000) Capital to Meet ICG ( '00 Pillar 1 41,199 41,199 Pillar 2 28,967 24,448 PRA Buffer 19,735 19,735 Total Capital Requirement 89,902 85, ,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Own Assessment ( '000) Capital to Meet ICG ( '000) PRA Buffer Pillar 2 Pillar 1 The Bank complied with all externally imposed capital requirements throughout the year ending The Bank s capital as at 31 December 2015 was m as against a total capital requirement under the Bank s Individual Capital Guidance (ICG) of 85.38m as prescribed by the PRA. 1.3 Scope of Application The Bank has complied with the PRA s prudential capital regulations, as set out in CRD IV and CRR and supported by the EBA Regulatory Technical Standards (RTS) and the PRA Policy Statements throughout the year. This disclosure is presented in respect of the year to 31 December It should be noted that while some quantitative information in this document is based on financial data in the Bank s 2015 Annual Report, other quantitative data is sourced from the Bank s regulatory processes, which may be calculated according to a different set of rules. The difference between the data sourced from the Bank s Annual Report and that sourced from the Bank s regulatory reporting process is most evident for credit risk disclosures where Pillar 3 disclosures require the use of Exposure at Default (EAD). EAD is defined as the expected amount of exposure at default. It is reported net of provisions and includes consideration of any off balance sheet exposure adjusted by a regulatory credit conversion factor. Pillar 3 quantitative data is thus not always comparable with the quantitative data contained in the Bank s Annual Report. GHIB calculates and maintains regulatory capital ratios based on its balance sheet 1.4 Frequency and Location Page 4

6 These disclosures have been approved by the Directors of the Board and are made annually as at 31 December and are published on GHIB s website Pillar 3 disclosures have been prepared purely to explain the basis on which the Bank has prepared and disclosed certain capital requirements and information about the management of certain risks and not for any other purpose. Pillar 3 disclosures are a regulatory requirement. 1.5 Verification and Supervision These Pillar 3 disclosures are not subject to external audit, except where they are extracted from the Bank s audited Annual Report and Financial Statements dated 31 December This Pillar 3 Disclosures report was reviewed by the Bank s Executive Committee (EXCO), the Operational Committee (OPCO), and the Audit, Risk and Compliance Committee (ARCC) and subsequently recommended to the Board of Directors for approval. The review and approval process is in line with the internal guidelines for the publication of external disclosures such as the Annual Report and Financial Statements and the Pillar 3 report. The Bank is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). 1.6 Key Capital Ratios Throughout the 2015 financial year the Bank has maintained adequate capital resources in line with the regulatory requirements. The Bank is well capitalised in proportion to its risk appetite and scale of its business. As at 31 December 2015 it had a total regulatory capital base of 127.2m. Table1: Bank s key capital resources and capital ratios as at 31 December Key Metrics As at 31st December 2015 Available capital (amounts) Common Equity Tier (CET1) ( '000) 127,239 Total Capital ( '000) 127,239 Risk-Weighted Assets (amounts) Total Risk-Weighted Assets ( '000) 463,478 Risk-based capital ratios as a percentage of RWA Common Equity Tier 1 ratio (%) 24.2 Total Capital Ratio (%) 24.2 Basel III leverage ratio Total Basel III leverage ratio exposure measure (%) Liquidity Coverage Ratio Total HQLA ( '000) 133,900 Total net Cash Outflow ( '000) 33,146 LCR ratio (%) 410 Page 5

7 The Bank experienced a marginal fall of 1.5% in risk weighted assets ( m in 2014 to m in 2015) which was in line with the measured approach taken by management in granting credit. The Total tier 1 ratio is 24.2% which is lower than the 2014 calculation of 25.8% but nevertheless above the Bank s regulatory requirement. As at 31 st Dec 2015 the composition of the GHIB s high quality liquid assets (HQLA) was as follows: 123,700,000 in our Bank of England reserve account, 10,000,000 in UK Treasury bills and 200,000 in cash. The leverage ratio is 18% which exceeds the minimum requirement of 3%. 1.7 Risk Management GHIB`s business activities are mainly centred on the following: Correspondent Banking GHIB acts as Sterling, US Dollar and Euro correspondent bank for the majority of banks operating in Ghana and selected West African countries. Corporate Banking GHIB provides banking services to major corporates in Ghana and other parts of Africa which have the need for offshore banking products and services, providing support in key areas such as transaction banking and lending which includes bilateral debt facilities, syndicated loan facilities and trade finance. Trade Finance and International Payments GHIB provides the full range of international trade finance services to Banks and major corporates primarily in Ghana and in selected African countries. The Bank is actively involved in trade finance related risk participation in London originated by major international banks as well as African banks. Treasury - GHIB offers time deposits in all major currencies and for periods tailored to customers expected cash flows and the Bank s liquidity needs. It also provides foreign exchange services to its customers. Retail Banking - The Bank provides a suite of Sterling, Euro and US dollar non credit related products, a GBP MasterCard debit card and internet banking facilities. The Bank does not offer any investment advice or sell regulated products. The Bank s Risk Management Framework ( RMF ) is the framework through which the Board of Directors and Senior Management establish the Bank s risk strategy and articulate how the bank adheres to the monitoring of its risk appetite as well as the policies, procedures, governance, systems and tools that it uses to enable effective risk management at the Bank. The objective of the RMF is to set out a clear and consistent methodology for the management of the Bank s risks, additionally providing guidance and standards for the use of risk tools and techniques. The RMF is written at an enterprise level and incorporates all the material risks of the Bank. Page 6

8 Outlined below is the GHIB Enterprise Wide Risk Structure: Fig 2: GhIB Board Assurance Evaluation Committee Representation Committee Representation Audit Risk and Compliance Committee Board Standing Committee (BoardCO) Remuneration & Nominations Committee Risk Reporting Compliance Reporting Assurance Reporting Audit Findings Committee/CEO Representation Risk Officer Compliance Officer Internal Audit External Auditors Operational Committee (OPCO) Review Findings & Agreed Actions Risk Register & Risk Models Executive Committee (EXCO) Assets & Liabilities Committee (ALCO) Business Strategy & Plans Risk Management Policy The RMF is supported by detailed policies and procedures. These combine to ensure that the Bank s risks are managed in a manner which is consistent with the size and nature of its operations. These policies and procedures are aligned to regulatory requirements and reflect industry best practice. The Board of Directors recognises the importance of on-going risk identification & management, and commits to providing sufficient resources to ensure that the Bank s risk management program is implemented and embedded. The RMF is a living document, which evolves continuously as the Bank s approach and appetite to risk develops. The RMF applies to all employees and consultants, and as a result all are encouraged to regularly evaluate their current practices to protect the Bank from financial and/or reputational damage. This approach to risk management is designed to reflect the Bank`s values, influence culture and direct operations which are aligned to its profile and strategic objectives. 1.8 Risk Management Approach The Bank has in place a bank wide Register that reports various risks within the risk types. The GHIB approach to risk management including operational risk management includes Risk Identification, Assessment, Control Monitoring, right through to Risk Reporting. The Bank`s approach will include Page 7

9 identification of Gross Risks and a definition of Residual Risks after taking into account related controls and mitigants in place. The Risk Register is used to monitor the range of operational risks identified under BASEL II and to ensure each risk is regularly assessed by both line and senior management. Discussions on Operational Risk matters are held in EXCO, but also by line management at the monthly meeting of the Management Committee. Additionally, line management by way of a certification process, report quarterly to Compliance confirming that they have highlighted any operational issues in the reporting period. Short lines of communication ensure that all operational issues are dealt with immediately and measures taken commensurate with the circumstance. 1.9 Risk Appetite The Bank takes a conservative approach to risk. All shareholders consider stability and prudence to be of overriding importance to sustained profitability. This is reflected in the Bank`s Risk Appetite which is articulated as follows: The level of risk appetite is formulated by way of quantitative measures, qualitative measures and zero tolerance risks. Risk appetite is based mainly on credit, market, liquidity and operational risk factors. For legal and regulatory risk, the Bank has zero risk appetite. Zero tolerance is driven by high ethical standards. There is a strong legal and regulatory compliance culture, led from the top, with procedures to inform staff so that they comply with legal and regulatory requirements and a whistleblowing policy. Management articulates its risk appetite through individual risk appetite statements addressing key and significant risks which are managed using a series of risk metrics and limits. In general GHIB takes a conservative approach to risk, meaning that it is risk averse. For example, the Bank will only lend up to 90% of its Large Exposure Capital Base (LECB) limit, to allow room for exchange rate movements. The Bank has strict treasury limits, maintains a positive 30 day liquidity cover coupled with sufficient liquid resources to protect the Bank against any severe yet plausible adverse liquidity scenario for at least 3 months. The Bank will maintain sufficient capital resources to cover all risks. For regulatory capital if the total minimum amount of capital falls below 12.8% of RWAs, Asset and Liability Committee (ALCO) will convene and recommend immediate remedial action. Capital adequacy ratios under BASEL III are monitored regularly to ensure capital held is always adequate to support the business. The level of capital has remained well in excess of regulatory requirements. GHIB wishes to take and manage risk that is proportionate to its strategy. In doing so management will seek to preserve strong capital and liquidity positions; to ensure that the Bank s behaviours and activities protect and enhance its reputation; and operate within set risk related policies, limits and thresholds. In doing so management will seek to preserve strong capital and liquidity positions; to ensure that the Bank s behaviours and activities protect and enhance the Bank`s reputation; and operate within set risk related policies, limits and thresholds. In accordance with its strategy, the Bank has an appetite for lending of up to 310m, and for its bond portfolio of 100m. This excludes the assets held as part of the liquidity buffer which should at all times exceed the liquidity buffer requirement. The Bank`s liquidity appetite is to maintain an adequate liquidity position at all times to meet its obligations both to customers and to meet both the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements. Risk appetite also forms the basis for the calibration and setting of the delegated authorities and financial limits for all aspects of market, credit, liquidity and operational risk. Page 8

10 The business model is intended to provide the Bank with a sustainable profit. A series of risk indicators is used to assess overall risk appetite. Should the performance of these indicators vary from plan (whether alone or collectively) in a material way, management is alerted to take a series of actions which may, for example include reducing business activity, slowing or stopping lending activity, generating additional liquidity and protecting capital levels. Risk appetite also forms the basis for the calibration and setting of the delegated authorities and financial limits for all aspects of market, credit, liquidity and operational risk. The risk appetite statements address both quantitative and qualitative aspects of risk taking. The Bank takes a comprehensive approach to risk management, with the defined risk framework and articulated risk appetite approved annually by the Board. Risk management planning is integrated with strategic and financial planning so that goals and responsibilities are aligned across the Bank Risk Types and Current Levels Management have categorised the desired level of inherent risk to each of its key and material risks Credit Risk (including Concentration Risk) Medium We maintain a medium risk appetite for inherent credit risk. The Bank is cognisant of the fact that it is primarily an emerging market focused institution with significant concentration in countries like Ghana and Nigeria. Credit risk associated with these emerging economies is greater than that for more developed economies due to the increased risk of potential political and economic volatility. The Bank is exposed to credit risk in relation to loans to customers, loans and advances including deposits in nostro account balances and bonds as well as in its secondary participations portfolio and contingent exposures. The Bank`s credit philosophy is to accept only risks that it understands, can control and which are appropriately priced. The Bank maintains a medium/low risk appetite for credit risk. Thus, its quantitative credit appetite for non marketable customer lending is kept at 40% of total assets. Contingent risk is maintained at 35% of total liabilities and undrawn commitments at 25% of total lending. Credit risk associated with these emerging economies is greater than that for more developed economies due to the increased risk of potential political and economic volatility. Our appetite is therefore constrained by the economic performance of these main concentrations. Because of the present funding base, the Bank has a low appetite for medium and long term risks, and has a low appetite for provisions. Medium term risks are those in excess of two years, where the Bank does not have matching deposits, and provisions are kept low by way of a strong credit process, and there is a history of low provisions. Country limits are in place and assessed individually according to economic and political conditions for each country where exposure exists. The largest country appetite relates to Ghana with a lower appetite for Nigeria and Kenya. These three countries represent the largest aggregate risk exposure for the Bank, being the home country and two larger Sub Saharan economies. Appetite for other countries is relatively low as their economies are generally smaller. Sector limits are also in place to ensure that the Bank is not overexposed to any one sector. There is an Available for Sale portfolio, where appetite is constrained by the interest rate risk prevalent in purchasing longer dated fixed rate assets. The Bank has appetite for counterparties which meet an acceptance criterion of A1/P1 and a select/approved group of A2/P2 counterparties for foreign exchange and money market dealings as approved by the Operational Committee and reported to the Board of Directors in accordance with the Bank s Large Exposures policy. Page 9

11 Market Risk Medium The Bank has a medium appetite for market related risks. For each of the 3 key market risks (interest rate, foreign exchange and asset pricing), the Bank does not undertake any hedging activities using derivatives and is therefore exposed to market movements, and on this basis market risk appetite is deemed to be medium. Because the Bank mainly engages in GBP, USD and EUR transactions, market risk appetite is deemed to be medium. In support of this assessment, it should be noted that the Bank only undertakes spot foreign exchange transactions, but that there is a mismatch between the capital of the Bank which is in sterling, and much of the lending which is in US Dollars. The Bank will not have a net open FX position of more than 2m The Bank`s interest rate risk appetite is kept within a figure of 5m using a net present value movement of 2% Operational Risk Medium The Bank has a medium appetite for operational risks. GHIB has exposure to operational risk as a result of the manual nature of operations and key man risk. Individual department managers are responsible for identifying and managing the risks inherent in the products, activities, processes and systems for which they are accountable. Operational Risk Appetite is described as the operational risk Ghana International Bank is prepared to tolerate. Operational Risk appetite is based on qualitative and quantitative measures. Quantitative expressions of Operational Risk Appetite are based on hard data derived from management information. Qualitative risks are those unavoidable risks which are not measurable but may be ameliorated by other means, for example, operational policies, controls and disaster recovery arrangements. The Bank`s objective is to manage operational risk to ensure it is maintained within the cost effective targets set against the overall risk appetite of the Bank and related to average profit. The Bank`s risk appetite is well below the basic indicator measure according to established Basel guidelines, and the historical record of such losses is very low. For the purposes of assessing risk according to Basel the Bank uses the Basic Indicator Approach as defined under BASEL II Operational Risk Methodology. This defines the operational risk capital charge for the Bank as the average over three years of gross income X 15%. GHIB has significant exposure to operational risk as a result of the manual nature of some operations and key man risk. Because of the short lines of communication in the Bank and the use of the four eyes principle, residual risk is considered low. The Bank has zero appetite for internal fraud. The Bank has a low residual appetite for operational losses of approximately 100,000 per annum. Consequently, although the Bank historically has a low level of operational losses, nevertheless, in view of the possibility of the risk of fraud, IT and Cyber crime there is a medium appetite for inherent operational risks Liquidity Risk Medium The Board approves the liquidity risk appetite taking into consideration past experience, counterparty risk, maturity mismatches, gap analysis, stress testing and other factors that may have a bearing on liquidity. The Bank has a high degree of liquidity and low leverage with the ability to repay all depositors from short term liquid investments as they fall due. Page 10

12 Wherever possible, the Bank matches maturity of risk assets with liabilities of like or longer maturities. The Bank s liquid asset levels are maintained at a level such that the Bank can meet its 30 day survival horizon. Additionally, it is the Bank`s policy to ensure it has sufficient liquid resources to protect the Bank against any severe yet plausible adverse liquidity scenario for at least 3 months. The Bank`s policy is for the Liquid Asset Buffer always to exceed the total net cash outflows over the next 30 calendar days coupled with sufficient liquid resources to protect the Bank against any severe yet plausible adverse liquidity scenario for at least 3 months. The Bank endeavours to have sufficient liquid assets to meet maturing obligations. The Bank has a short duration lending book, is well capitalised but because of the high concentration level considers the liquidity risk is medium. A maximum lending/deposits ratio of 70% is in place. The Bank is constrained in the amount of lending it can undertake in view of the large level of short term wholesale deposits Conduct Risk Low The Bank has a low tolerance to poor conduct risk driven by high ethical standards. Appropriate conduct is a key component of the Bank s strategic objectives and business model. GHIB seeks to operate at the highest levels of ethical and compliance standards in line with regulatory requirements and best practices. This bank has three over-riding goals: to serve customers well to operate with a sustainable and conservative risk profile; and to continue to build sustainable value for all shareholders. The Bank takes proactive action to prevent or mitigate the risk of poor conduct, and to put things right when they have gone wrong. The mitigation of bad conduct risk is an integral part of the Bank`s employees duties and responsibilities. Employees are pivotal in the mitigation of conduct risk. The Bank is committed to training all staff to ensure that they clearly understand and are aware of their responsibilities in this area. The Bank encourages and embeds the right culture to achieve the objectives of this policy. The Bank trains and continuously tests the behaviour and understanding of all employees. The Bank has no appetite for unfair outcomes arising from any element of the conduct risk lifecycle, which includes product design, sales or after sales processes and culture. Where an operational risk that may result in potential conduct risk for a customer is identified, the Bank will be proactive in escalating, agreeing appropriate action and communicating clearly with our customers to ensure that a fair outcome is achieved. Regular reviews and active management of the portfolio of products is done to ensure that the Bank continues to deliver value for its customers, identify areas of potential detriment and, where appropriate, take proactive action to mitigate any impact to its customers Reputational Risk - Low The Bank has a low tolerance to deterioration in its reputation which is driven by high ethical standards. GHIB considers the protection of its reputation and brand as paramount. The Bank will not conduct its Page 11

13 business or engage with stakeholders in a manner that could adversely impact its reputation. In addition, the Bank seeks to protect and enhance its reputation at all times through on-going identification and assessment of reputational risk events and establishment of clear mitigating plans and actions. The Bank has taken a number of actions to strengthen governance and to embed good cultural practices in the organisation. Every member of staff is encouraged to take responsibility for managing reputation risk in their day-to-day decisions. The Bank has a whistle blowing policy to encourage staff to report any actions that may be of detriment to the Bank. Training in many aspects of the Bank`s business is given including anti-bribery, complaints handling, financial crime prevention, fraud prevention, money laundering prevention, conflicts of interest and treating customers fairly. Reputational Risk is the failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction either by the Bank itself, employees of the Bank or those associated with the Bank that might cause stakeholders to form a negative view of the Bank. The Bank has a strong appetite to ensure high ethical standards are maintained. The Bank has a zero tolerance for behaviour that puts its reputation at risk. The short chain of command instils in all staff the importance of maintaining the Bank`s good reputation. Continuous training is given in good conduct essentials and treating customers fairly Legal risk medium There is a strong legal culture led from the top, with procedures to inform staff so that they comply with legal requirements. Being pan-african focused, the Bank is subject to a range of legal challenges in the countries in which it operates. Risks include: - Breach of applicable local laws; - Perfection and enforceability of security; and - Ever increasing need to clamp down on tax-evasion prompting the introduction by the United States of the Foreign Account Tax Compliance Act (FATCA) and the more recent international developments resulting in the Common Reporting Standard (CRS) being implemented under UK domestic legislation. Local knowledge is paramount to mitigating legal risks. Thus, as well as using reputable legal counsel (overseas and local) for documentation, developing an in-house knowledge pool with frequent visits to target markets and developing strategic alliances with local agencies, are invaluable risk mitigants Finance Risk medium Finance Risk is the risk that the Bank`s financial data is not materially accurate resulting in incorrect reporting to internal and external stakeholders. The Bank has a number of target ratios forming its finance risk appetite, and these include the cost/income ratio which the Bank intends to keep below 40%, capital adequacy ratio to be better than 12.8%, return on equity at least 9%, return on assets minimum 1.6%, provisions to loans no more than 1% and the rate of increase in the loan portfolio to be restrained to no more than 20% in one year. Page 12

14 2. Capital Capital Management The Bank s capital management objectives are to comply with regulatory capital requirements at all times, and to ensure that the Bank has sufficient capital to cover the risks of its business and to support its strategy. Capital adequacy and its effective management are crucial to the Bank s ability to operate its business lines, to grow organically and to pursue its strategy. The Bank is aware that its business and financial status could be negatively impacted if it is not able to manage its capital effectively or if the amount and quality of capital held is insufficient due to a materially worse than expected financial performance. Capital requirements and resources The Bank complied with all of its regulatory capital requirements throughout The Bank manages its capital resources to ensure that the overall amount and quality of resources exceeds the Bank s capital requirements. The Bank s capital requirements are primarily driven by credit risk and operational risk. The Bank s capital requirements also incorporate a regulatory capital planning buffer, the size of which is determined by stress testing as part of the Internal Capital Adequacy Assessment Process (ICAAP). Stress testing and capital planning The Bank uses stress testing as a key risk management tool to gain a better understanding of its resilience to internal and external shocks. In addition, stress testing provides a key input to the Bank s capital assessments and related risk management and measurement assumptions. The purpose of the Bank s stress testing is to ensure the following: confirm the Bank has sufficient capital resources; ensure the Bank remains within its risk appetite; ensure the alignment between the Bank s risk management framework and senior management decision making; and provide sufficiently severe and forward looking scenarios. The Bank assesses its existing and future capital adequacy under a range of scenarios, using a combination of quantitative and qualitative analyses in the ICAAP, which is reviewed by the regulator on a periodic basis. The ICAAP, which acts as a link between the Bank s strategy, capital and risk under stress, is approved annually by the Board. Page 13

15 2.1 Capital Requirements / Risk Weighted Assets Table 2: shows the amount of capital the Bank is required to set aside to meet the minimum total capital ratio of 8% of RWAs set by the CRR. Breakdown of the Bank's Regulatory Capital Requirement Capital Requirement ( '000) 31st December 2015 RWA ( '000) Exposure at Default ( '000) Central Gov/Central Banks 3,667 45,841 45,279 Claim on Inst & Corp with CR assessment 9, , ,921 Corporates 19, , ,552 Insitutions 1,312 16,404 80,308 Other Items 149 1,864 1,864 Public Sector Entities 3,262 40,778 66,407 Retail Total 37, , ,638 Credit and counterparty risk 37,078 Operational Risk basic Indicator Approach 3,844 Market risk 277 Pillar Requirement 41, Capital Resources Table 3: Reconciliation of Accounting Capital to Regulatory Capital Bank's Balance Sheet 31st December 2015 ( '000) Capital Base Total Equity 127,239 Ordinary Shares 75,000 -Retained Earnings 54,917 -AFS revaluation Reserve (2,678) Common Equity Tier 1 (CET 1) capital regulatory adjustments 127,239 Total Tier 1 Capital 127,239 Total Capital Base 127,239 Page 14

16 2.3 Capital Instruments The Bank s authorised capital is made up of Common Equity tier 1 only and has no debt capital hence it does not have any capital instruments to report. 3. Credit Risk The Board of Directors approves the credit risk appetite taking into consideration past performance and future plans. The senior management are responsible for implementing the credit risk strategy approved by the Board and for developing the policies and procedures for the identification, measurement, monitoring and controlling of credit risk. There is a risk manager responsible for co-ordinating matters of a risk nature and a credit administration manager responsible for recording and monitoring all credit risk exposure. The Pillar 1 minimum capital requirement for credit risk, based on the Basel 2 framework under the Standardised Approach, is taken as the starting point in considering what internal capital may be required. An assessment is first made as to whether the capital calculation fully captures the credit risk faced by the Bank. The Bank is exposed to credit risk in relation to loans to customers, loans and advances including deposits in nostro account balances and bonds as well as in its secondary participations portfolio and contingent exposures. The Bank`s credit philosophy is to accept only risks that it understands, can control and which are appropriately priced. All facilities are reviewed regularly, at least annually. The Bank`s credit risk appetite is articulated in the annual Strategic Review prepared for the Board. Country limits are in place and assessed individually according to economic and political conditions for each country where exposure exists. Sector limits are also in place to ensure that the Bank is not overexposed to any one sector. There are also Counterparty limits covering placement needs. Ultimate responsibility lies with the Board, and all limits are reviewed by the Board at least annually. Exposures against all limits are reviewed daily by management and quarterly by OPCO which is the main credit committee. There is a limit assessment and sanctioning procedure in place ensuring quality control is maintained, and informed decisions are made. A number of stress tests are undertaken periodically and include hypothetical and historical credit risk scenarios. Hypothetical stress tests calculate the loss that would occur if a specific set of adverse events were to occur. Historical tests take account of the historic level of provisions and other factors, applied to current and projected business levels. Part of the loan portfolio is held within the medium term limits of over two years duration. For the Available for Sale portfolio, there is a limit under this portfolio to restrict the interest rate risk prevalent in purchasing longer dated fixed rate bonds. The Bank uses the standardised approach for the calculation of credit risk capital requirements. The credit risk information disclosed in this document includes a breakdown of the Bank s exposures by CRD IV exposure class, by location, sector, maturity and asset quality. Page 15

17 3.1 Credit Risk Mitigation for Risk Management An in depth credit analysis is undertaken in respect of our risk exposures, and a tight sanctioning structure is observed. This provides our main mitigant against credit risk, but additionally, security may be taken where necessary. A system of controls and limits enables the Bank monitor and assess changes in risk quality. Longer dated exposure is kept to a minimum to control the inherent risk in such exposure. The Bank pays close attention to economic and political risks and is able to react quickly to changes in outside influences. The Bank has very short lines of communication; ensuring quick action can be taken in adverse situations. 3.2 Credit Risk : Disclosures Maximum Exposure to Credit Risk Table 4: shows the Exposure at Default (EAD) by standardised asset class as at 31 December 2015 Exposure to Credit Risk 31st December 2015 Exposure Class Total Exposure (EAD) '000 Risk Weighted Assets (RWA) '000 Agriculture 8,443 1,283 Business Services 28,900 21,766 Finance Industry - Banks 487, ,126 Personal Sovereigns 50,118 50,787 Transport, Utilities & Storage 47,595 33,423 Other items 1,864 1,864 TOTAL 624, , Geographic Analysis of Exposure Table 5: shows the geographic location of credit exposures based on Exposure at Default (EAD) Page 16

18 Angola Australia Belgium EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) Central Gov/Central Banks Claim on Inst & Corp with CR assessment Corporates Insitutions Other Items Public Sector Entities Retail Burundi Canada China Denmark 31st December 2015 Egypt Ethiopia France Gabon Gambia Ghana EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) Central Gov/Central Banks Claim on Inst & Corp with CR assessment Corporates Insitutions Other Items Public Sector Entities Retail Nigeria Norway Sierra Leone South Africa EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) EAD ( m) RWA ( m) Central Gov/Central Banks Claim on Inst & Corp with CR assessment Corporates Insitutions Other Items Public Sector Entities Retail Sweden Italy Ivory Coast Kenya Tanzania Togo United Kingdom Germany United States EAD ( m) RWA ( m) EAD ( m) RWA ( m) Central Gov/Central Banks Claim on Inst & Corp with CR assessment Corporates Insitutions Other Items Public Sector Entities Retail Page 17

19 3.2.3 Industry Analysis of Exposure Table 6: shows the Exposure at Default (EAD) displayed by the industry classification based on the purposes of the loan. 31st December 2015 Exposure Class Agriculture ( M) Business Services( M) Finance Industry- Banks( M) Personal( M) Real Estate( M) Sovereign( M) Transport, Utilities and Storage( M) Central Gov/Central Banks Claim on Inst & Corp with CR assessment Corporates Insitutions Other Items Public Sector Entities Retail Maturity Analysis of Exposure Table 7: show s the Bank s credit exposures by residual contractual maturity date. Maturity Analysis of Exposure 31st December 2015 <1 Year '000 >1-5 years '000 >5 Years '000 Total '000 Central Gov/Central Banks , , , Claim on Inst & Corp with credit assessment 214, , Corporates 152, , , Insitutions 80, , Other Items 1, , Public Sector Entities 32, , , , Retail Asset Quality Under the standardised approach, credit risk is measured by applying risk weights outlined in the CRR based on the exposure class to which the exposure is allocated. Table 8: shows Exposure at Default (EAD) displayed by risk weight band. Risk Weight Band Analysis of Exposure 31st December 2015 Central Gov/Central Banks ( '000) Claim on Inst & Corp with credit assessment ( '000) Corporates ( '000) Institutions ( '000) Other Items ( '000) Public Sector Entities ( '000) Retail ( '000) 0% % - 9, ,835-1, % - 62, % % 45,841 43,398 5,148-1,864 39, % , >150% Total 45, , ,980 16,404 1,864 40, Page 18

20 3.2.6 Provisioning Impairment provisions if necessary are made on the basis of the Bank s estimation of future cash flows and realisable value of any collateral held. During 2015 there was a recovery of a provision amounting to 161,228 as a result of a write back from earlier provisions of previous years. This was the remaining outstanding provision on the books, and the Bank had not recorded any bad debt provisions as at the year end The Bank has not foreclosed on any facility and therefore it has not been necessary to take possession of any collateral in the years ending 31 December 2015, 2014 and Page 19

21 4. Remuneration Code The PRA issued, in September 2012, its General Guidance on Proportionality: The Remuneration Code (SYSC 19A) and Pillar 3 Disclosures on Remuneration (BIPRU 11) which set out the PRA s requirements in this regard. The Bank s Remuneration and Nominations Committee continues to be responsible for the implementation of the Code and the annual review of the Bank s adherence to it. This statement sets out the disclosures required under the Code as they apply to the Bank. Staff Costs The Bank employed 62 staff as at 31 st December 2015 (2014: 62 staff), as detailed below: 5 Non UK Resident, Non Executive Directors 2 UK resident, Non Executive Directors 2 UK Executive Directors 53 Staff The staff costs excluding Directors of the Bank were as follows: Salaries and other emoluments 4,888,211 4,234,018 National Health Insurance 458, ,436 Other Pension Costs 394, ,971 Other Staff Cost 337, ,620 Compensation for loss of office 449,035 - TOTAL STAFF COSTS 6,527,326 5,059,045 Remuneration and Nominations Committee Governance of all matters related to remuneration within the Bank lies with the Remuneration and Nominations Committee. The Committee is composed of the Chairman, four other non-executive Directors and the Head of Human Resources, who acts as a secretary of the committee but carries no vote in decision making. No individual is involved in decisions relating to his or her own remuneration. The committee met four times in The Remuneration and Nominations Committee has reviewed the Bank s remuneration policies to ensure compliance with the Code. Additionally, it has confirmed the rules for use within the Bank for the identification of Code Staff as required under principle 12 of the Code. Page 20

22 Performance Awards The Bank has in place a performance award scheme for the benefit of its employees. Awards are linked to individual performance against set objectives (financial and non financial performance). Calculation of awards is linked to the Bank s performance against financial plan (annual budget prepared and approved by the Board). Performance awards under the scheme qualify as variable remuneration as defined in the Code. Individual performance awards are typically paid in March in the year following that to which the annual reward relates. The Remuneration and Nominations Committee reviews the overall level of staff remuneration (including performance awards) in the context of the longer term business performance of the Bank, including its capital adequacy, in order to ensure that staff costs are appropriate in light of the Bank s current and prospective capital adequacy. The table below shows performance awards granted in 2015 and 2014 to code and non-code staff respectively. STAFF COSTS Number 2015 Number 2014 Variable Remuneration Awards Code Staff , ,366 Non Code Staff , ,668 Total Variable Remuneration Costs , ,241,034 Code staff The Code requires that banks identify relevant senior executives and other staff and designate them as Code Staff. As at 31st December 2015 the Bank had 55 staff (excluding the 7 Non Executive Directors) of which 17 have been identified as code staff in 2015 (2014:17). The emolument of the highest paid director including pension contributions and compensation for loss of office was 825,329 (2014: 580,470). The director received 449,035 (2014: nil) in compensation for loss of office. Guaranteed bonuses are not offered as part of the Bank s current performance award arrangements and the Bank did not offer any sign-on inducements. Page 21