Hewlett-Packard International Bank Plc Capital Requirements Directive Pillar 3 Disclosures Code of Conduct for Basel II Pillar 3 Disclosures Medium

Transcription

1 Hewlett-Packard International Bank Plc Capital Requirements Directive Pillar 3 Disclosures Code of Conduct for Basel II Pillar 3 Disclosures Medium Enterprises December 2012

2 Section 1: Overview 1.1 Business Overview Hewlett-Packard International Bank ( HPIB ) is a captive leasing company of Hewlett-Packard Company ( HP Co. ). The primary activity of the Bank is the provision of leases & loan facilities, rentals and asset management capabilities to clients of Hewlett-Packard. The technology solutions can be composed of exclusively Hewlett-Packard products or be integrated with third party products. 1.2 Requirements of the Capital Requirements Directive The Capital Requirements Directive (Directive 2006/48/EC) also known as the Basel II Accord is a complex standard for capital adequacy of banks worldwide. Basel II was implemented by HPIB on 1 st January The purpose of the Accord is to promote the safety and soundness in the financial system, align regulatory capital more closely with underlying risks and to encourage ongoing investment in bank s risk management practices by offering incentives. Page 2 of 30

3 Basel II Menu: Basel II Pillar 1 Minimum capital Pillar 2 Supervision Pillar 3 Market discipline Credit Operational Market Minimum capital Reporting Standardised Basic Interest Rate Banking Book Comparability Foundation Standardised Certification Usefulness Advanced AMA Intervention IR The Basel II Pillar 3 disclosure requirements are specified in Articles and Annex X of Directive 2006/48/EC. The purpose of this document is to report HPIB s disclosure requirements as per Pillar Reporting Dates Where possible, information contained in this disclosure document is extracted from the annual accounts to 31 st October Where required disclosures were not included in the annual accounts, it has been reported based on data gathered for the quarterly submissions to the Central Bank of Ireland as at 31 st December Page 3 of 30

4 Section 2: Capital Resources 2.1 Summary of HPIB s approach to assessing the adequacy of internal capital to support current and future activities Historically HPIB has been, and continues to be, predominantly financed by capital and holds a Letter of Comfort from its parent confirming continued parental support. HPIB has a formal internal process for assessing its internal capital adequacy. This consists of the annual Strategic and Business Planning process. Board and Senior management committees such as the ALCO committee and the Pricing and Residual committee meet regularly to consider the adequacy of our capital. Annual Strategic and Business Planning Process The HPFS annual Strategic and Business Planning process involves the HPFS Global Marketing Council (the HPFS EMEA Director of Marketing and Business Development is a member of this council) reviewing: The status of the HPFS strategic initiatives for the current year - focusing on 1) the status of the initiative, 2) customer profiles and needs, 3) competition and challenges and 4) future plans The HP Co. strategic plans for the next year/future years Market analysis i.e. IDC and Gartner market analyses with particular focus on the IT industry. From these reviews high level strategies for HPFS for the next year are formulated. 80% of these strategies are HPFS global strategies with 20% regional (EMEA) specific. The draft strategies are presented to the HPFS Global Leadership team (GLT). The HPIB Managing Director is a member of this team. The GLT provides feedback on the strategies to the HPFS Global Marketing Council. The Marketing and Business Development team create detailed plans for each strategic initiative using the learnings from prior years, stakeholder inputs (HP and the HPFS GLT) and market/hp internal changes. Key focus areas for the year are documented and an owner allocated to each initiative. Key activities, deliverables and measures of success are documented for each initiative. Page 4 of 30

5 The strategic initiatives are communicated to all HPFS staff at the start of year Kick Off sessions and updates on progress are provided throughout the financial year. Annual Business Planning Process As an output of the annual Strategic and Business Planning process the annual Business Plans are set for each HPFS geographic region including HPIB. The HPIB Business Plan is drafted by the Financial Planning and Analysis department within the HPIB Finance function and is prepared with a five year horizon. The key elements to the plan are: Base run-outs these reports provide details of all existing lease deals booked in our systems and how they run-off in the P&L and balance sheet over future years. The reports are available by country and currency. New inceptions our planning model streams out the P&L and balance sheet for all new deals to be booked in future years. These are also prepared at a currency/country level. A detailed planning and consultation process takes place to ensure that there are valid assumptions with regard to new business written. Growth targets are determined by country and target margins are set out in conjunction with the Pricing department. Assumptions are also made regarding FX and interest rates with guidance from our Treasury department. Asset Management targets are mainly based off lease expiration values, together with customer specific data. These targets are set at a country level together with Asset Management Leaders. Bad debt assumptions are determined by the Credit department and are set as a percentage of portfolio assets. Inputs on interest income and expense (based off balance sheet cash / debt level assumptions) and FX gains and losses are obtained from the Treasury department. Administration expenses are prepared for each function in consultation with the function leader. Taxation charge is agreed with the Tax department based on effective taxation rates. Once all inputs have been obtained and a P&L and balance sheet plan prepared, these are reviewed by HPIB senior management prior to completion and approval. Page 5 of 30

6 Action plans are put in place to ensure HPIB meets our Business Plan. One of which is to ensure sufficient capital is available to meet the projected balance sheet/business requirements and to ensure that capital usage is optimised. HPIB ensures that capital is optimised through its risk management processes. The main components of which are: 1. Operational Risk 2. Treasury Risk 3. Credit Risk 4. Residual Risk 5. Capital Risk 6. Concentration Risk 7. Strategic/Business Risk 8. Ownership Risk 9. Governance Risk The HPIB governance structure ensures that the Board and the Board Committees identify, monitor and review each of the above risks. The management committees Operational Excellence Council, Credit and Investment Committee and Pricing and Residual Committee manage the risks on a day to day basis via the business metrics. The HPIB Board reviews and approves the HPIB Business Plan on an annual basis. Each month senior management reviews performance against the Business Plan and the quarterly performance against plan is presented to the Board. Also the ALCO Board committee meets quarterly to consider the adequacy of our capital to ensure that both working capital and regulatory capital requirements are met. Page 6 of 30

7 2.2 HPIB Own Funds Tier 1 Capital 31-Oct-12 $000 Share Capital 10,036 Capital Contribution/Other Reserves 1,660,125 Revenue Reserves 896,396 Total Tier 1 Capital 2,566,557 Tier 2 Capital Portfolio provision 31,824 Total Capital 2,598,381 Section 3: Risk Management The Bank is firmly committed to the management of risk, recognising that sound internal risk management is essential to its prudent operation. Risk management is given top priority throughout the Bank. Responsibility for risk management policies and limits on the level of risk assumed lies with the Board of Directors. The Board charges management with developing, presenting and implementing these policies, controls and limits. The framework is designed to provide a reasonable degree of assurance that no single event, or combination of events, will materially affect the well-being of the Bank. The Risk Committee assists the Board of Directors in fulfilling their Risk Management responsibilities; by advising the Board of Directors on current risk exposures and future risk strategy. The ALCO Committee, the Credit and Residual Committee and the Operational Risk Committee report to the Risk Committee at least four times per year to assist the Committee in carrying out its duties to the Board. Senior management plays a key role in the identification, evaluation and management of all risks. All credit and new product decisions require direct senior management approval. Management is supported by a comprehensive structure of internal controls, analyses and reporting processes and periodic examinations by the Bank's Internal audit department. Page 7 of 30

8 Management have identified HPIB s material risks as follows: Credit Risk (leasing and treasury counterparty risk) Treasury Risk (including liquidity risk, interest rate risk & currency risk) Operational Risk (risk of loss arising from people, processes, systems & external events) Residual Risk (residual value exposures at end of lease term) Capital Risk Concentration Risk (counterparty, industry and geographic) Strategic/Business Risk Ownership Risk Governance Risk The HPIB Governance Structure: Risk Governing Board Committees Operational Risk Operational Risk Committee & Risk Committee Treasury Risk ALCO Committee & Risk Committee Credit Risk Credit & Residual Committee & Risk Committee Residual Risk Credit & Residual Committee & Risk Committee Capital Risk ALCO Committee & Risk Committee Concentration Risk Credit & Residual Committee & Risk Committee Strategic/Business Risk Risk Committee N/A Ownership Risk Governance Risk Governing Management Committees Operational Excellence Council N/a Credit & Investment Committee Pricing Committee Credit & Investment Committee HPIB s appetite for risk is expressed in its Board approved Risk Appetite statement, an extract from which is given below: A certain level of risk is inherent in any business and it is the responsibility of the Board to approve the level acceptable to HPIB. The HPIB risk appetite should be a satisfactory trade off between the level of risk and likely level of returns. HPIB defines material risk as any risk which may significantly adversely affect HPIB s ability to undertake business. Any risk that causes an impact of $20m or greater is classified as a significant risk to the business. Page 8 of 30

9 3.1 HPIB Minimum Capital Requirements MATERIAL RISKS 31-Dec-12 $000 Operational Risk 26,964 Treasury Risk 8,051 Credit Risk 232, ,534 Section 4: Credit Risk HPIB has adopted the standardised approach to Credit Risk under Pillar 1 of the CRD. The core values and main procedures governing the provision of credit are laid down in the HPIB Credit policy document. This has been approved by the Board of Directors and is reviewed regularly. The Bank's credit risk management system operates through a hierarchy of exposure discretions. All exposures over a certain level require the approval of the Credit Committee, which is composed of senior executives and some of the directors of the Bank. Exposures below Credit Committee's discretion are approved by reference to the Bank s Schedule of Authority document. A detailed credit review is performed on each new business case. The Bank uses a risk rating system to evaluate the financial and repayment risk of proposed advances and to ensure appropriate returns for assuming risks. Credit analysts undertake a detailed review of each client prior to approval of advances. Credit lines are approved for customers with strong external credit ratings. An annual financial review is conducted for all credit line customers. The ten largest exposures are reviewed each quarter by the Board of Directors of the Bank. The quality of Bank lending is reviewed monthly by the Head of Credit of the Bank, the objective of which is to provide an accurate measure of the underlying quality of the group's loan portfolio, to facilitate early identification of deterioration in quality and to enable management to focus on problem loans as soon as weaknesses begin to emerge. This review includes a review of the aged debtors listing, historic write off experience and an analysis of the lease portfolio by risk category. Page 9 of 30

10 The table below shows the gross maximum exposure to credit risk for the components of the balance sheet including derivatives, including the amount of leased assets that are considered to be impaired (impaired assets are fully provided against). The main considerations for the impairment assessment are where payments are due for more than 90 days and there are known cash-flow difficulties for the lessee. In the event of a default the Bank reserves the right to recover the leased assets. Extract from HPIB statutory accounts (note 26) 31 October 2012 Gross maximum exposure to credit risk 2012 Investment Non Investment Impaired maximum Grade Grade exposure US$ 000 US$ 000 US$ 000 US$ 000 Cash and balances with Central Bank of Ireland 6, ,264 Loans and advances to banks (excluding cash on hand) 469, ,620 Lease assets (gross of provisions) 1,707,387 1,134,793 6,504 2,848,684 Financial fixed assets 1, ,046 Other assets 136, ,517 Prepayments and accrued income 1, ,235 Foreign exchange contracts 42, ,642 Amounts due from fellow subsidiaries 39, ,447 T otal 2,404,158 1,134,793 6,504 3,545,455 Committed credit line ,133 Total credit risk exposure 2,404,158 1,134,793 6,504 3,606,588 The value of leases which would have been past due or impaired but have been restructured during the year is $6,326k. (2011: $11,207k) There is no difference in the accounting treatment of these leases. Gross maximum exposure to credit risk 2011 Investment Non Investment Impaired maximum Grade Grade exposure US$ 000 US$ 000 US$ 000 US$ 000 Cash and balances with Central Bank of Ireland 7, ,921 Loans and advances to banks (excluding cash on hand) 403, ,139 Lease assets (gross of provisions) 1,716,473 1,139,008 7,150 2,862,631 Financial fixed assets 8, ,884 Other assets 184, ,873 Prepayments and accrued income 1, ,406 Foreign exchange contracts 19, ,479 Amounts due from fellow subsidiaries 83, ,672 T otal 2,425,847 1,139,008 7,150 3,572,005 Committed credit line ,678 Total credit risk exposure 2,425,847 1,139,008 7,150 3,605,683 Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result in changes in value Specific provision for bad debts US$ 000 US$ 000 Impaired 6,504 7,150 Greater than 180 days provision 3,605 4,383 10,109 11,533 Page 10 of 30

11 Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result in changes in value. All figures are based on financial year end 31 October 2011 and 31 October 2012 balances. Impaired exposure by industry type 31 December 2012 $000 Manufacturing 4,710 Services 1,895 Transportation, Communcations, Energy 49 Wholesale Trade 638 7,292 Impaired exposure by geographical area 31 December 2012 $000 France 374 Denmark 255 Ireland 49 Israel 101 Norway 638 Netherlands 88 Portugal 322 Spain 2,838 Switzerland 161 UK 2,466 7,292 Past due exposure by industry type 31 December 2012 $000 Agriculture 176 Construction 2,102 Finance, Insurance, Real Estate 20,234 Manufacturing 64,241 Mining 149 Public Admin 7,550 Retail Trade 5,594 Services 15,645 Transportation, Communcations, Energy 8,860 Wholesale Trade 5, ,436 Page 11 of 30

12 Past due exposure by geographical area 31 December 2012 $000 Ireland 864 Austria 524 Belgium 524 Czech Republic 2,704 Denmark 1,644 Finland 1,672 France 30,922 Germany 24,634 Israel 2,128 Netherlands 910 Norway 755 Portugal 7,365 Romania 2,016 Slovenia 826 Spain 22,883 Sweden 11,194 Switzerland 1,121 United Kingdom 17, ,436 Concentrations of credit risk The Bank's financial assets can be analysed by the following geographical regions: Extract from HPIB statutory accounts (note 26) 31 October 2012 Gross maximum Gross maximum exposure 2012 exposure 2011 US$ 000 US$ 000 United Kingdom 1,063, ,196 Germany 594, ,270 Ireland 389, ,992 France 296, ,661 Spain 249, ,107 Sweden 215, ,439 Netherlands 121, ,554 Luxembourg 88,968 8,920 Finland 44,006 51,508 Denmark 25,877 31,190 Other countries 317, ,886 T otal 3,407,704 3,385,723 Page 12 of 30

13 Total exposure by geographical area and exposure class 31 December 2012 (US$000) Central Government/ Central Banks Admin Bodies Institution Corporate Retail Other Total Ireland 52,561 1, ,759 10,835 6, , ,110 Austria , ,364 24,648 Belgium ,755 8,504 4,726 10,546 28,115 Czech Republic ,155 1,598 15,765 22,686 Denmark 38-4,454 9,327 2,514 10,459 26,792 Finland , ,181 36,602 France ,278 56,045 25, , ,521 Germany 361 4,602 30, ,498 27, , ,819 Iceland ,938 3,958-6,896 Israel ,173 2,785 3,966 Luxembourg ,000 4,798-2, ,627 Netherlands 1,264 8,263 1,422 50,632 22,393 36, ,031 Norway ,124 13,873 2,380 39,602 57,997 Portugal ,154 38,669 5,517 23,679 72,042 Romania ,150 3,936 4,712 13,907 Slovakia Slovenia , ,019 4,494 Spain , ,307 21,220 86, ,019 Sweden 67 10,376 2,757 37,131 3, , ,697 Switzerland 1,712 1,282 6,307 16,501 2,506 34,778 63,086 United Kingdom 1,127 15, , ,044 57, ,005 1,210,769 57,273 42, ,282 1,043, ,707 1,643,781 3,585,858 Minimum related capital requirements by exposure class 31 December 2012 Standardised exposure class $000 Minimum capital requirements Central governments or central banks 285 Administrative bodies 972 Institutions 14,722 Corporate 77,996 Retail 12,043 Other items 126,501 Total for standardised approach 232,519 Page 13 of 30

14 Total lease exposure by industry type $000 $000 $ December 2012 Tangible fixed assets Finance lease receivables Total Agriculture 6,634 2,409 9,043 Construction 34,370 31,836 66,206 Finance, Insurance, Real Estate 331, , ,591 Manufacturing 393, , ,752 Mining 3, ,488 Public Admin 99,130 48, ,532 Wholesale/Retail Trade 150, , ,046 Services 70, , ,228 Transportation, Communcations, Energy 211, , ,029 1,301,325 1,525,590 2,826, External Credit Assessment Institutions (ECAIs) HPIB has nominated Standard and Poors as its external credit assessment institution. Customers that do not have an external credit rating agency rating are allocated an internal credit rating. 4.2 Portfolio and Specific Provisioning Policy The objective of HPIB s collective reserve and specific bad debt provisioning policy is to establish write-offs within specific reserve targets. HPIB maintains collective reserves for uncollectability in the lease portfolio and specific reserves for credit losses from identified customers. The collective bad debt reserve is based on a percentage of the lease portfolio assets. The percentage is reviewed on a quarterly basis and is based on several factors, which include: Historical performance Portfolio risk profile Competitive benchmarking Specific bad debt reserves are established for identified loss exposures on leases or loans that have not yet been written-off within the lease accounting system. A write-off or specific reserve of billed accounts receivable is mandatory at 180 days past due, unless specific exceptions are granted by the relevant individuals identified with the HPIB Credit Policy and HPIB Schedule of Authorisation. A write-off or specific reserve may be warranted sooner if it is deemed that the account is not collectible. The remaining net investment is to be reviewed on a deal by deal basis with final reserve decisions based on credit quality and the status of collection efforts. Page 14 of 30

15 Extract from HPIB statutory accounts (note 6) 31 October 2012 Provision for impairments US$ 000 US$ 000 US$ 000 US$ 000 Specific Collective Total Total At 1 November 11,533 31,969 43,502 39,609 Provisions acquired during period - - Provisions created during period 9,764 15,613 25,377 31,414 Provisions released during period (10,810) (14,385) (25,195) (28,164) Adjustments including FX (378) (1,373) (1,751) 643 At 31 October 10,109 31,824 41,933 43,502 The charge against profits is analysed as follows: Provisions created during period 9,764 15,613 25,377 31,414 Provisions released during period (10,810) (14,385) (25,195) (28,164) Write-offs 12,542-12,542 14,857 Recoveries (4,280) - (4,280) (2,628) Charge against profits 7,216 1,228 8,444 15,479 Page 15 of 30

16 Section 5: Treasury Risk 5.1 Liquidity Risk The liquidity risk management process is designed to ensure that the Bank is able to honour all of its financial commitments as they fall due. As lease assets are financed primarily by capital resources, liquidity is monitored by the Treasury and Treasury Control departments. The liquidity position of the Bank is reviewed by the Board of Directors on a quarterly basis. At the 31 st October 2012 the Bank had third party financing requirements of approximately US$734 million. This debt may vary depending on the requirements of the business. The debt is drawn from the Bank s three active debt programmes a European Certificate of Deposit programme with a maximum value of US $500 million, an Interbank programme with uncommitted facilities of US $522 million and a Corporate Depositing programme. The main component of the Bank s financing, totalling US$2.6 billion, is provided by way of capital contributions from HP Company and the Bank's retained earnings. Hewlett Packard Company is committed to providing for the Bank's ongoing financing as required. The Bank ensures its liquidity ratios meet the requirements of the Central Bank s Management of Liquidity Risk guidance note. The Bank is in full compliance with the qualitative and quantitative requirements of this directive. Specifically the Bank is committed to maintaining appropriate liquidity ratios across all the prescribed time bands. These ratios are achieved by ensuring the mix of debt and investment maturities are consistent with both the needs of the business and the required ratios set out by the Central Bank. In addition, the Bank maintains a statutory deposit with the Central Bank. The liquidity ratio at the end of financial year, 31 October 2012 was as follows: Regulator Requirements % % % 31 October 0-8 days days Page 16 of 30

17 The following table shows an analysis of assets and liabilities according to when they are expected to mature or be settled: Liquidity analysis 31 October 2012 Liquidity analysis 2012 Assets Not more than 3 months More than 3 months but not more than 6 months More than 6 months but not more than 1 year More than 1 year but not more than 5 years US$ '000 US$ '000 US$ '000 US$ '000 Cash and balances with Central Bank 6, Loans and advances to banks 469, Tangible fixed assets 16,585 32, ,323 1,161,390 Loans and advances to customers 4,576 23,428 51,812 1,355,855 Other assets 136, Cash flow hedges 5,305 6,852 11,530 17,632 Derivatives at fair value 1, Amounts due from fellow subsidiaries 39,447 - Total financial assets 679,637 63, ,665 2,534,877 Liabilities Deposits by banks 371,617 10, Deposit by customers (including debt securities in issue) 190, , Other liabilities 43, Accruals 18, Cash flow hedges 5,574 6,003 14,767 32,619 Derivatives at fair value 1, Amounts due to fellow subsidiaries 4, Total financial liabilities 636, ,832 14,767 32,619 More than 5 years Total US$ '000 US$ '000 Assets Cash and balances with Central Bank - 6,264 Loans and advances to banks - 469,620 Tangible fixed assets 5,740 1,338,818 Loans and advances to customers 32,261 1,467,932 Other assets - 136,517 Cash flow hedges - 41,319 Derivatives at fair value - 1,323 Amounts due from fellow subsidiaries - 39,447 Total financial assets 38,001 3,501,240 Liabilities Deposits by banks - 381,660 Deposit by customers (including debt securities in issue) - 442,943 Other liabilities - 43,298 Accruals - 18,823 Cash flow hedges - 58,963 Derivatives at fair value - 1,920 Amounts due to fellow subsidiaries - 4,705 Total financial liabilities - 952,312 Net liquidity surplus 2,548,928 Page 17 of 30

18 Liquidity analysis 31 October 2011 Liquidity analysis 2011 Assets Not more than 3 months More than 3 months but not more than 6 months More than 6 months but not more than 1 year More than 1 year but not more than 5 years US$ '000 US$ '000 US$ '000 US$ '000 Cash and balances with Central Bank 7, Loans and advances to banks 403, Tangible fixed assets 20,176 28, ,366 1,411,505 Loans and advances to customers 6,195 15,938 72,633 1,107,070 Other assets 184, Cash flow hedges 2,650 1,502 5,065 5,381 Derivatives at fair value 2, ,849 Amounts due from fellow subsidiaries 83,672 - Total financial assets 710,658 45, ,064 2,526,805 Liabilities Deposits by banks 391,366 20, Deposit by customers (including debt securities in issue) 195, , Other liabilities 59, Accruals 16, Cash flow hedges 8,420 10,669 21,179 53,624 Derivatives at fair value 2, Amounts due to fellow subsidiaries 85, Total financial liabilities 759, ,773 21,179 53,624 More than 5 years Total US$ '000 US$ '000 Assets Cash and balances with Central Bank - 7,921 Loans and advances to banks - 403,139 Tangible fixed assets 5,334 1,565,408 Loans and advances to customers 51,885 1,253,721 Other assets - 184,873 Cash flow hedges 14,598 Derivatives at fair value - 4,881 Amounts due from fellow subsidiaries - 83,672 Total financial assets 57,219 3,518,213 Liabilities Deposits by banks - 412,328 Deposit by customers (including debt securities in issue) - 425,515 Other liabilities - 59,620 Accruals - 16,830 Cash flow hedges - 93,892 Derivatives at fair value - 2,478 Amounts due to fellow subsidiaries - 85,113 Total financial liabilities - 1,095,776 Net liquidity surplus 2,422,437 Page 18 of 30

19 5.2 Market Risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates and foreign exchange rates. The Bank reduces its exposure to market risk by entering into forward currency contracts which hedges any risk associated with foreign currency fluctuation. Assets Interest Rate Foreign Exchange Bank investments Investments are short term. Interest rate risk is All investments are hedged as part of the minimised due to the short average tenor of Balance Sheet FX risk management process. investments and deposits. Finance leases Operating leases Liabilities Fixed rate. The Bank is exposed to interest rate risk Balance sheet hedging process which is on the portion of the balance sheet that is funded by monitored monthly debt; mis-match approved by board Fixed rate. The Bank is exposed to interest rate risk Balance sheet hedging process which is on the portion of the balance sheet that is funded by monitored monthly debt; mis-match approved by board Bank and customer deposits Deposits are short term. Interest rate risk is All investments are hedged as part of the minimised due to the short average tenor of Balance Sheet FX risk management process. investments and deposits. Capital N/A N/A 5.3 Interest Rate Risk Interest rate risk arises when there is a mismatch between positions which are subject to interest rate adjustment within a specific period. The Bank does not have a trading Book. At this time, the Bank s lease portfolios are primarily financed by the Bank s capital resources. Where the lease portfolio is not funded by Capital resources it is funded by third party debt and is therefore exposed to US dollar interest rate risk due to the duration mismatch between the Assets and Liabilities. The effect on net interest income, and therefore profit before tax over a 3 year period, of a 1 basis point shift in the yield curve would be as follows:- +1 basis points -1 basis points +1 basis points -1 basis points US$ 000 US$ 000 US$ 000 US$ 000 Currency USD 53 (53) 55 (55) Page 19 of 30

20 5.4 Currency Risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The table below (extract Note 21 HPIB Statutory Accounts 2012) shows the Bank s transactional currency exposure in the non trading book; in other words those nonstructural exposures that give risk to the net currency gains and losses recognised in the profit and loss account. Such exposures comprise the non-trading monetary assets and monetary liabilities of the bank that are not denominated in the operating (or "functional') currency of the Bank which is US Dollars. The objective is to eliminate this exposure through active management by the Treasury department. Management of the transactional currency exposures is performed by the Treasury department. Forward rate contracts are entered into to manage this exposure. The actual currency exposures are monitored against the anticipated exposures which were hedged by the Treasury department. The exposure is reviewed as part of the monthly financial review carried out by the Managing Director of the Bank. The Bank mitigates the effect of currency fluctuations caused by the revaluation of the Balance Sheet at the end of each accounting period by hedging all assets with different source currencies from the Bank s functional currency of USD, thereby hedging 100% of foreign currency denominated exposures. As a result of the use of derivative instruments, the Bank is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Bank has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and the Bank maintains risk limits that correspond to each institution s credit rating and other factors. The Bank s established policies and procedures for mitigating credit risk on principal transactions and short-term cash include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. Master agreements with counterparties include master netting arrangements as further mitigation of credit exposure to counterparties. These arrangements permit the Bank to net amounts due from the Bank to a counterparty with amounts due to the Bank from the same counterparty. To further mitigate credit exposure to counterparties, the Bank may enter into collateral security arrangements with its counterparties. These arrangements require the Bank to post collateral or to hold collateral from counterparties when the derivative fair values exceed contractually established thresholds which are generally Page 20 of 30

21 based on the credit ratings of the Bank and its counterparties. Such funds are generally transferred within two business days of the due date. As of October 31, 2012, the Bank held US$1.9 million of collateral and posted US$24.9 million under these collateralized arrangements, of which US$1.9 million was through re-hypothecation and US$23.1 million in cash. The Bank did not have any derivative instruments under these collateralized arrangements that were in a significant net liability position. As of October 31, 2011 the Bank had no collateralized arrangements. Extract from HPIB statutory accounts (note 21) 31 October 2012 Balance sheet by currency US$ 000 US$ 000 US$ 000 US$ 000 (incl. effects of (incl. effects of Assets: hedging) hedging) Denominated in United States Dollars 342,371 3,151, ,880 2,869,238 Denominated in Euro 1,711,475 1,981,640 1,860,198 2,156,619 Denominated in GBP 1,095,055 1,095,055 1,080,503 1,080,503 Denominated in other currencies 390, , , ,328 Total assets 3,539,726 6,621,243 3,553,909 6,510,688 Liabilities: Denominated in United States Dollars 2,904,784 3,176,789 2,595,069 2,891,490 Denominated in Euro 574,591 1,967, ,203 2,149,479 Denominated in GBP 44,672 1,092, ,501 1,074,360 Denominated in other currencies 15, ,273 25, ,359 Total liabilities 3,539,726 6,621,243 3,553,909 6,510,688 Page 21 of 30

22 Section 6: Operational Risk HPIB has adopted the standardised approach to Operational Risk. Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. The Board has approved the HPIB Operational Risk Management Framework. HPIB Operational Risk Management Framework: Corporate Governance Risk Environment Strategy / Goals Credit Risks Market Risks Liquidity Risks External Regulatory / Legal Monitor Indicators Operational Risks Operational Risk People Processes Systems Reputational Analyse Near Miss/Loss Causes Assess Controls Action Plans Financial Risks Identify Risks Assess Risks Strategic Risks Identify Controls Compliance Risks Indepedendent Assurance Reporting Risk Management Framework Risk and Control Assessments (RCA) are in place for all departments. Risks are assessed using the HPIB Risk Appetite Matrix. Controls are assessed for their design and their performance. The RCAs are reviewed and updated quarterly or as risk profiles change within the business. Key risks and operational risk loss events are monitored and reported monthly to senior management via the Operational Excellence Council and quarterly to the Board via the Operational Risk Committee. Page 22 of 30

23 Section 7: Residual Risk Residual value exposure arises where, at lease inception, there is a future expectation that an asset value remains at the end of the primary term which can be recovered through a secondary transaction. Details of unguaranteed residual values are outlined below. These residual values are arrived at through a detailed analysis of transaction history on asset recovery to projected future values. Residual realisation is constantly monitored. Extract from HPIB Statutory Accounts dated 31 st October 2012 (Note 32): Residual Values Details of unguaranteed residual values are outlined below US$ 000 US$ 000 Finance Leases Finance Leases - Over 5 years 2,741 2,244-5 years or less but over 3 years 21,449 22,653-3 years or less but over 1 year 25,097 25,223-1 year or less 1,108 4,098 50,395 54,218 US$ 000 US$ 000 Tangible Fixed Assets Tangible Fixed Assets - Over 5 years years or less but over 3 years 22,281 25,885-3 years or less but over 1 year 127, ,374-1 year or less 72,973 59, , ,129 The residual value risk appetite is defined in the residual value authority matrix. On a monthly basis the Pricing and Residual Committee review residual risk decisions on an individual product group basis. This assessment includes the review of historical residual recovery rates, along with customer behaviours at end of term. Scenario testing is employed to assess impacts of predicted future events and to ensure the financial levels of risk assigned to the product groups are within the committee s comfort levels. All standard product groups are reviewed by the Pricing and Residual Committee at least annually as per the FAB13, SEC and Sarbanes Oxley requirements. Any impairment concerns identified through the review process are further analysed in a specific impairment analysis and review. Corrective measures are taken if impairment is identified. Page 23 of 30

24 Section 8: Capital Risk The Bank is a mono-line business therefore capital risk is measured at an overall business level. The ALCO and Risk Committees are responsible for monitoring Capital risk. Given the strong level of capitalisation, the major sources of HPIB s capital risk are:- 1 Significant loss events leading to a reduction in capital balances. 2 Rapid balance sheet growth without a corresponding increase in capital invested. The Bank is authorised and regulated by the Central Bank of Ireland and is required under the relevant regulations to maintain sufficient capital to meet its liabilities. The Bank has in excess of almost 10 times capital cover in place as calculated under Pillar 1. Capital Requirement 31-Dec-12 $000 Share Capital 10,036 Capital Contribution/Other Reserves 1,667,670 Revenue Reserves 896,396 Total Tier 1 Capital 2,574,102 Tier 2 Capital 31,441 Total Capital Resources 2,605,543 Capital Requirement 267,534 Total Capital Excess 2,338,009 Page 24 of 30

25 Section 9: Concentration Risk The HPIB Credit Policy has defined the credit risk appetite in terms of country limits, customer concentration limits and business segment limits. These limits are incorporated into the HPIB Credit Policy and presented to the Board when the Credit Policy is reviewed annually. The policy contains four specific limits detailed below: Prudential Maximum Exposure: HPIB s exposure to a customer or group of customers, other than a credit institution, should not exceed 25% of own funds. Geographical Restrictions: HPIB s exposure to any one country shall not exceed 40% of its total portfolio. Inter-group Exposures: HPIB will not provide lease or loan credit to the HP Company without prior approval from the Central Bank, and if approved should not exceed 10% of own funds. Industry Restrictions: HPIB s exposure to a specific industry shall be limited to 40% of its total portfolio. These measurements are taken on a portfolio level but also where needed on a transactional level. Awareness within the credit organisation is key when reviewing/approving large customer limits and the effect the exposure would have on a customer level but also on an industry risk perspective. As mentioned, a review is completed annually of the concentration risk limits at the same time as the review of the Credit Policy and annual Stress Testing scenario s to ensure appropriateness of limits. The review also includes an understanding of the HPIB Business Plan and its potential impact on the structure of the portfolio. This review is presented to the HPIB Board, Risk Committee and Credit and Residual Sub-Committee. HPIB also completes a number of stress tests on concentration risk focusing on industry, one obligor and geographic concentrations. Page 25 of 30

26 Section 10: Strategic/Business Risk HPIB s strategy is to support and enhance HP Company s product and service solutions. HPIB enables customers to acquire complete IT solutions, including hardware, software and services. HPIB offers innovative, customized and flexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs. From a risk perspective HPIB is a monoline business offering financing to high end, corporate and enterprise customers. We do not offer financing to consumers. Business risk management is an integral part of the day to day management of HPIB. Risks are managed via the management Committees on a day to day basis and the internal policies and procedures that govern the day to day operations of HPIB. Schedules of Authorisations are in place where the Board of Directors delegates the daily activities to management. On a quarterly basis the Board, Board Committees and the Board Sub- Committees monitor HPIBs performance against its business plan and objectives. At a strategic level the Board are responsible for supervising the management of risk by the Risk Committee in accordance with HPIB s relevant policies and procedures. At each Board meeting the Board review the performance of the Risk Committee and the Sub-Committees ALCO, Operational Risk and Credit and Residual Committees. Page 26 of 30

27 Section 11 Ownership Risk HPIB is owned by a non-financial, commercial entity which has been identified by the Central Bank as a Pillar 2 risk, requiring additional capital requirements. HPIB is required to continue holding additional capital of 150% of its total Pillar 1 capital requirements for ownership risk which is in addition to the minimum level of own funds set out in Regulation 19 of the 2006 regulations. Section 12 Governance Risk Governance risk relates to the overall management approach through which senior management manages and controls the business of HPIB. Governance activities ensure that critical management information reaches senior management and the Board to ensure they are enabled to make appropriate decision making. Through the Compliance Committee HPIB ensures that all new regulations issued by the Central Bank of Ireland, European Banking Authority, Bank of International Settlements, Basel Committee etc. are reviewed and implemented within the specified timeframes. Page 27 of 30

28 Remuneration Policy This section outlines remuneration for Identified Staff in respect of 2012 and provides brief information on the decision-making policies for remuneration and the links between pay and performance. These disclosures reflect the requirements set out in Committee of European Banking supervisors (CEBS, now EBA) Guidelines on Remuneration Policies and Practices, issued in December Identified Staff HPIB has completed a rigorous process through which 13 employees have been identified as key staff on the basis that their professional activities are deemed to have a material impact on HPIB s risk profile. Design, Structure and Decision-making process The HPIB Board of Directors approves the Remuneration Policy on an annual basis and any exceptions to the Policy must be agreed by at least one of the non-executive directors. It is noted that as the HPIB policy is dependent on the Hewlett-Packard Company ( HP ) group policies and charter (as set out in Appendices [A], [B] and [C]), the HPIB Board of Directors are satisfied that there exists independent and appropriate control functions in setting this policy at Group level. It is the view of HPIB that this structure avoids potential conflicts of interest and that no employee of HPIB has influence in determining the relevant policies. Of particular importance is the fact that HPIB s capital structure does not correlate to the level of remuneration paid to HPIB management or employees. HPIB has historically enjoyed large levels of capital relative to its risk assets and this is due to the operating model which HP has chosen for its Irish subsidiary. HPIB is not involved in equity or bond trading, proprietary or as agent and therefore, this Policy reflects the limited business within HPIB and the limited associated risks. It is the intention that the HPIB remuneration policy and practice is consistent and promotes sound and effective risk management. This policy forms part of the overarching requirement to have robust governance arrangements in place and is in line with the business strategy, objectives, values and longterm interests of HPIB and of the Hewlett Packard Company. Page 28 of 30

29 On the basis above and after due consideration regarding proportionality, it is agreed that there is no necessity to form a Remuneration Committee for HPIB. In addition, the remuneration of the members of the management body in its management function should be consistent with their powers, tasks, expertise and responsibilities. The management function does not determine its own remuneration. This is determined by the governing HP Group policies and therefore it is considered that a supervisory function is not required. Link between pay and performance In relation to the Non-executive Directors, it is noted that the independent directors are compensated a fixed amount which is not correlated to any financial HPIB metric (e.g. cash flow, net profit) and the other non-executives serve at the behest of the Hewlett-Packard group without compensation. The compensation structure of the Managing Director and members of the Credit Investment Committee are covered by either the HP Policy or the world wide HP Financial Services ICP Scheme and not limited to the results of HPIB. Overall compensation is dependent on the results of the Hewlett- Packard Corporation at group level. HPIB s Schedule of Authorisations also ensures that no one individual is permitted to unilaterally make key decisions which could have a financial impact upon HPIB s results. Strict policies regarding credit, treasury and operating risk also ensure appropriate segregation of duties and diversified decision making. It is still acknowledged that the Managing Director must have the ability to make important decisions but this is balanced by the internal governance structures of HPIB. The Head of Internal Audit, Head of Human Resources and Head of Risk Management are also compensated in accordance with the HPFS Annual Incentivised Compensation Plan with their variable remuneration below the CRD guidelines/limits. Page 29 of 30

30 Remuneration Expenditure The following table shows the remuneration awards made by the Bank to Identified Staff in Managing & Non-Executive Directors USD $ 000s Other Senior Managers USD $ 000s Number of Identified 7 6 Staff 2012 Remuneration 760K 1,371K 2012 New sign-on and severance payments No new identified staff received a sign-on payment during 2012 relating to their commencement of employment No severance payments were made during 2012 to these staff. Page 30 of 30