AmBank Islamic Berhad. (Formerly known as AmIslamic Bank Berhad) Pillar 3 Disclosures

Transcription

1 AmBank Islamic Berhad (Formerly known as AmIslamic Bank Berhad) Pillar 3 Disclosures As at 30 September 2015

2 CAFIB - Pillar 3 Disclosures 30 September 2015 Table of Contents Page 1.0 Scope of Application Capital Management Capital Structure General Risk Management Credit Risk Management Credit Risk Exposure under The Standardised Approach Credit Risk Mitigation Off-Balance Sheet Exposures and Counterparty Credit Risk Securitisation Non-Traded Market Risk Equities Liquidity Risk and Funding Management Shariah Governance Structure 39

3 1.0 Scope of Application The Bank Negara Malaysia s ( BNM ) Risk Weighted Capital Adequacy Framework - (Basel II) and Capital Adequacy Framework for Islamic Bank - ("CAFIB" ) Disclosure Requirements ( Pillar 3 ) is applicable to all banking institutions licensed under the Financial Services Act 2013 ( FSA ) and all Islamic banks licensed under the Islamic Financial Services Act 2013 ( IFSA ). The Pillar 3 disclosure requirements aim to enhance transparency on the risk management practices and capital adequacy of banking institutions. The following information has been provided in order to highlight the capital adequacy of the Bank. The information provided has been verified by the Group internal auditors and certified by the Chief Executive Officer. Frequency of Disclosure Full disclosure requirements under the BNM guidelines are made on an annual and semiannual basis except for disclosures under paragraph 10.1 of the guidelines and all qualitative disclosures which are made on an annual basis if there are no material changes in the interim reporting periods. Medium and Location of Disclosure These Pillar 3 disclosures of the Bank is available on the AmBank Group s corporate website at Capital Adequacy Ratios BNM guidelines on capital adequacy require regulated banking entities to maintain an adequate level of capital to withstand any losses which may result from credit and other risks associated with financing operations. Each of these entities is independently held by AMMB as a regulated banking institution there are no cross-shareholdings within or between these entities. With effect from 1 January 2013, the capital adequacy ratios are computed in accordance to BNM s guidelines on Capital Adequacy Framework for Islamic Banks (Capital Components) issued by the Prudential Financial Policy Department on 28 November 2012, which is based on the Basel III capital accord. Prior to that, the capital adequacy ratios of the Bank were computed in accordance to BNM s Risk Weighted Capital Adequacy Framework for Islamic Banks (General Requirements and Capital Components), which are based on the Basel II capital accord. The Bank has adopted the Standardised Approach for Credit and Market Risks and the Basic Indicator Approach for Operational Risk, based on BNM s Guidelines on Risk Weighted Capital Adequacy Framework (Basel II Risk Weighted Assets). 1

4 1.0 Scope of Application (Cont'd.) The minimum regulatory capital adequacy requirements under the guidelines for the risk weighted capital ratios are as follows: Calendar year Common Equity Tier 1 ( CET1 ) Capital Ratio Tier 1 Capital Ratio Total Capital Ratio % 4.5% 8.0% % 5.5% 8.0% 2015 onwards 4.5% 6.0% 8.0% The minimum regulatory capital adequacy requirements as stipulated in the above table have not factored in capital buffers that will be introduced in calendar year 2016 onwards. 2.0 Capital Management The capital and risk management of the banking subsidiaries of AMMB Holdings Berhad ("AMMB") are managed collectively at Group level. The Group s capital management approach is driven by its desire to maintain a strong capital base to support the development of its businesses, to meet regulatory capital requirements at all times and to maintain good credit ratings. Strategic, business and capital plans are drawn up annually covering a 3 year horizon and approved by the Board of Directors ("Board"). The capital plan ensures that adequate levels of capital and an optimum mix of the different components of capital are maintained by the Bank to support its strategy. 2

5 2.0 Capital Management (Cont'd.) The capital plan takes the following into account: (a) (b) Regulatory capital requirements: forecast demand for capital to support the credit ratings; and increases in demand for capital due to business growth and market shocks. Or stresses: available supply of capital and capital raising options; and internal controls and governance for managing the Bank s risk, performance and capital. The Bank uses internal models and other quantitative techniques in its internal risk and capital assessment. The models help to estimate potential future losses arising from credit, market and other risks, and using regulatory formulae to simulate the amount of capital required to support them. In addition, the models enable the Bank to gain a deeper understanding of its risk profile, e.g. by identifying potential concentrations, assessing the impact of portfolio management actions and performing what-if analysis. Stress testing and scenario analysis are used to ensure that the Bank s internal capital assessment considers the impact of extreme but plausible scenarios on its risk profile and capital position. They provide an insight into the potential impact of significant adverse events on the Bank and how these events could be mitigated. The Bank s target capital levels are set taking into account its risk appetite and its risk profile under future expected and stressed economic scenarios. The Bank s assessment of risk appetite is closely integrated with Bank's strategy, business planning and capital assessment processes, and is used to inform senior management s views on the level of capital required to support the Bank s business activities. 3

6 2.0 Capital Management (Cont'd.) The Bank uses a capital model to assess the capital demand for material risks, and support its internal capital adequacy assessment. Each material risk is assessed, relevant mitigants considered, and appropriate levels of capital determined. The capital modelling process is a key part of the Bank s management disciplines. The capital that the Bank is required to hold is determined by its statement of financial position, commitments and contingencies, counterparty and other risk exposures after applying collateral and other mitigants, based on the Bank s risk rating methodologies and systems. BNM has the right to impose further capital requirements on Malaysian Financial Institutions. The Bank operates processes and controls to monitor and manage capital adequacy across the organisation. It is overseen by the Group Chief Executive Officers Committee ( Group CEOs Committee ). The Group CEOs Committee is also responsible for managing the Group s statement of financial position, capital and liquidity. A strong governance and process framework is embedded in the capital planning and assessment methodology. Overall responsibility for the effective management of risk rests with the Board. The Risk Management Committee of Directors ( RMCD ) is specifically delegated the task of reviewing all risk management issues including oversight of the Bank s capital position and any actions impacting the capital levels. The Audit and Examination Committee ( AEC ) reviews specific risk areas and the issues discussed at the key capital management committees. Group CEOs Committee proposes internal triggers and target ranges for capital management and operationally oversees adherence with these. For the current financial year ending 31 March 2016 ( FY 2016 ), these ranges are 8.1% to 10.1% for the Common Equity Tier 1 capital ratio, 9.6% to 11.6% for the Tier 1 Capital Ratio, and 14.0% to 16.0% for the Total Capital ratio. The Bank has been generally operating within these ranges. The Capital and Balance Sheet Management Department, is responsible for the on-going assessment of the demand for capital and the updating of the Bank s capital plan. 4

7 2.0 Capital Management (Cont'd.) Appropriate policies are also in place governing the transfer of capital within the Bank. These ensure that capital is remitted as appropriate, subject to complying with regulatory requirements and statutory and contractual restrictions. Table 2.1: Capital Adequacy Ratios The capital adequacy ratios of the Bank are as follows: 30 September 31 March Common Equity Tier 1 capital ratio 9.239% 9.200% Tier 1 capital ratio 9.239% 9.200% Total capital ratio % % On 30 January 2015, as part of an arrangement between AmBank (M) Berhad ( AmBank ) and the Bank in relation to a Restricted Profit Sharing Investment Account ( RPSIA ) agreement, AmBank records as "deposits and placements with banks and other financial institutions" its exposure in the arrangement, whereas the Bank records its exposure as "financing and advances". The RPSIA is a contract based on Shariah concept of Mudarabah between AmBank and the Bank to finance a specific business venture where by AmBank solely provides capital and the business ventures are managed solely by the Bank as the entrepreneur. The RPSIA exposes AmBank to the risks and rewards of the financing, and accordingly AmBank accounts for all impairment allowances and risk weighted assets arising from the RPSIA financing. As at 30 September 2015, the gross exposure and collective allowance relating to the RPSIA financing were RM1,363.8 million and RM1.6 million respectively (31 March 2015: RM1,363.8 million and RM1.6 million respectively). There was no individual allowance provided for the RPSIA financing. RPSIA assets excluded from the risk weighted capital adequacy computation of the Bank for 30 September 2015 amounted to RM1,363.8 million and the risk weight on assets funded by RPSIA are accounted for in the computation of capital adequacy of AmBank. 5

8 Table 2.2: Risk Weighted Assets and Capital Requirements The breakdown of risk weighted assets ( RWA ) by exposures in major risk category of the Bank is as follows: 30 September 2015 Exposure Class Gross Exposures/ Exposure At Default ("EAD") Risk Total Risk before Credit Risk Mitigation ("CRM") Net Exposures/ EAD after CRM Risk Weighted Assets Weighted Assets Absorbed by PSIA Weighted Assets after effects of PSIA Minimum Capital Requirement at 8% RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM' Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 3,686,415 3,686, Banks, Development Financial Institutions ("DFI") and Multilateral Development Banks ("MDBs") 4,377,003 4,377, , ,540 71,163 Corporates 16,241,753 15,990,225 13,000,601 1,367,987 11,632, ,609 Regulatory Retail 13,365,402 13,354,421 10,207,351-10,207, ,588 Residential Mortgages 112, ,401 39,474-39,474 3,158 Other Assets 243, , , ,363 19,469 Defaulted Exposures 507, , , ,071 56,886 Total for On-Balance Sheet Exposures 38,533,891 38,269,717 25,091,400 1,367,987 23,723,413 1,897,873 Off-Balance Sheet Exposures Over the counter ("OTC") Derivatives 166, , , ,229 10,818 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 1,818,916 1,698,573 1,577,499-1,577, ,200 Defaulted Exposures Total for Off-Balance Sheet Exposures 1,986,139 1,865,576 1,713,623-1,713, ,090 Total On and Off-Balance Sheet Exposures 40,520,030 40,135,293 26,805,023 1,367,987 25,437,036 2,034, Large Exposure Risk Requirement Market Risk Short Long Position Position Rate of Return Risk - General rate of return risk 1,881,611 1,748, , ,785 19,743 - Specific rate of return risk 127,205-4,220-4, Foreign Currency Risk 76,373-76,373-76,373 6,110 Total 2,085,189 1,748, , ,378 26, Operational Risk 1,520,474-1,520, , Total RWA and Capital Requirements 28,652,875 1,367,987 27,284,888 2,182,792 6

9 Table 2.2: Risk Weighted Assets and Capital Requirements (Cont'd.) The breakdown of risk weighted assets ( RWA ) by exposures in major risk category of the Bank are as follows: 31 March 2015 Gross Exposures/ Exposure At Default Exposure Class ("EAD") Risk Total Risk before Credit Net Weighted Weighted Minimum Risk Mitigation ("CRM") Exposures/ EAD after CRM Risk Weighted Assets Assets Absorbed by PSIA Assets after effects of PSIA Capital Requirement at 8% RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM' Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 5,774,979 5,774, Banks, Development Financial Institutions ("DFI") and Multilateral Development Banks ("MDBs") 3,598,897 3,598, , ,085 61,527 Corporates 16,167,057 15,570,668 12,187,668 1,363,811 10,823, ,908 Regulatory Retail 13,554,097 13,544,051 10,355,040-10,355, ,403 Residential Mortgages 119, ,313 41,884-41,884 3,351 Other Assets 260, , , ,888 20,871 Defaulted Exposures 473, , , ,526 52,282 Total for On-Balance Sheet Exposures 39,949,239 39,341,191 24,268,091 1,363,811 22,904,280 1,832,342 Off-Balance Sheet Exposures Over the counter ("OTC") Derivatives 113, ,798 79,124-79,124 6,330 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 1,682,902 1,553,632 1,433,782-1,433, ,703 Defaulted Exposures 7,055 6,555 9,833-9, Total for Off-Balance Sheet Exposures 1,803,755 1,673,985 1,522,739-1,522, ,820 Total On and Off-Balance Sheet Exposures 41,752,994 41,015,176 25,790,830 1,363,811 24,427,019 1,954, Large Exposure Risk Requirement Market Risk Long Position Short Position Rate of Return Risk - General rate of return risk 1,749,946 1,635, , ,117 16,729 - Specific rate of return risk 152,592 30,655 3,816-3, Foreign Currency Risk 17,696-17,696-17,696 1,416 Total 1,920,234 1,665, , ,629 18, Operational Risk 1,553,441-1,553, , Total RWA and Capital Requirements 27,574,900 1,363,811 26,211,089 2,096,887 7

10 3.0 Capital Structure The capital structure of the Bank includes capital under the following headings: Common Equity Tier 1 capital; Additional Tier 1 capital; and Tier 2 capital All capital instruments included in the capital base have been issued in accordance with the BNM rules and guidelines. The existing Tier 2 Capital instruments of the Bank do not meet all qualifying criteria for full recognition of capital instruments under the Basel III accord, on the requirements for loss absorbency at the point of non-viability, and write-off or conversion mechanisms for achieving principal loss absorption and or loss absorbency at the point of nonviability. The Bank s Tier 2 Capital instruments qualify for the gradual phase-out treatment under the transitional arrangements of the Basel III accord. Under this treatment, the amount of capital instruments that can be recognized by the Bank shall be capped at 90% of the base in 2013 (as counted separately for Additional Tier 1 Capital (if any) and Tier 2 Capital respectively), with the cap reducing by 10% in each subsequent year. To the extent that an instrument is redeemed or derecognized after 1 January 2013, the amount serving as the base is not reduced. 3.1 Common Equity Tier 1 Capital Common Equity Tier 1 Capital consists of the following: Paid-up Ordinary Share Capital Paid-up ordinary share capital is an item of capital issued by an entity to an investor, which is fully paid-up and where the proceeds of issue are immediately and fully available. There is no obligation to pay a coupon or dividend to the equity holder of ordinary shares. The capital is available for unrestricted and immediate use to cover risks and losses, and enable the entity to continue trading. It can only be redeemed on the winding-up of the entity. 8

11 3.1 Common Equity Tier 1 Capital (Cont'd.) Share Premium Share premium is used to record premium arising from new shares issued in the entity. Retained Earnings Retained earnings at the end of the financial year/period and eligible reserves are accumulated resources included in the shareholder's funds in an entity s statement of financial position, with certain regulatory adjustments applied. The retained earnings is included in Common Equity Tier 1 Capital net of any interim and/or final dividend declared, and net of any interim losses. Quarterly interim profits have been included in Common Equity Tier 1 Capital subject to review/ audit by the external auditors. Other Disclosed Reserves Other disclosed reserves comprise the following: Statutory Reserve Statutory reserve is maintained in compliance with the provisions of Islamic Banking Act ("IBA") and is not distributable as cash dividends. When IFSA 2013 came into effect to replace the repealed IBA, the maintenance of this reserve is in accordance with Section 57(2)f of the IFSA. Available-for-Sale Reserve/(Deficit) This comprises the unrealised fair value gains and losses on financial investments available-for-sale. Where the available-for-sale reserve is a net gain outstanding balance, the Bank can recognise 45% of the total outstanding balance as part of CET 1 Capital. Where the available-for-sale reserve is a net loss outstanding balance (i.e. deficit), the entire outstanding balance is deducted in CET 1 Capital. Profit Equalisation Reserve ("PER") Profit equalisation reserve is the amount appropriated out of the total Islamic banking gross income in order to maintain a certain level of return to Investment Account Holders ( IAH ) which is as stipulated by BNM s Guidelines on Profit Equalisation Reserve. Profit equalisation reserve is allocated from retained profits and classified as a separate reserve in equity and is non-distributable. The amount of the profit equalisation reserve is derecognised in the calculation of CET 1 Capital. As at 30 September 2015, the Bank has discontinued with the application of PER. 3.2 Additional Tier 1 Capital The Bank does not have any Additional Tier 1 Capital in issue. 9

12 3.3 Tier 2 Capital The main components of Tier 2 capital are collective impairment provision and regulatory reserves (subject to a maximum of 1.25% of total credit risk-weighted assets determined under the Standardised Approach) and subordinated debt instruments. The amount of Tier 2 Capital Instruments that can be recognized in the computation of the capital adequacy ratios of the Bank has been capped at 90% of the total qualifying Tier 2 balance outstanding as at 1 January For 2015, the amount of such Tier 2 Capital that can be recognised in the computation of the capital adequacy ratios is capped at 70% of the total qualifying Tier 2 Capital balance outstanding as at 1 January This is in accordance to the transitional gradual phase-out treatment under the Basel III regime. Table 3.1 outlines the application of the grandfathering provisions in respect of the Tier 2 Capital instruments for the Bank, details of the Tier 2 Capital Instruments are outlined below. Table 3.1 Tier 2 Capital Instruments of the Bank and the Basel III Gradual Phase-Out Treatment Base for Tier 2 Capital Instruments outstanding on 1 January 2013 Instruments Subordinated Sukuk Musharakah Tranche 1 Subordinated Sukuk Musharakah Tranche 2 Subordinated Sukuk Musharakah Tranche 3 Total qualiflying base RM' , , ,000 1,000,000 Calendar year Cap on Tier 2 Capital Instruments that can be recognized in capital adequacy computation each year Cap (%) Cap (RM'000) % 900, % 800, % 700, % 600, % 500, % 400, % 300, % 200, % 100, % - 10

13 3.3 Tier 2 Capital (Cont'd.) Subordinated Sukuk Musharakah On 30 September 2011, the Bank implemented a new Subordinated Sukuk Musharakah programme ( Sukuk Musharakah ) of up to RM2.0 billion. The purpose of the programme is to increase the Bank s Tier 2 Capital. The Sukuk Musharakah is for a period of ten (10) years. The Bank may exercise its call option and redeem in whole (but not in part) the Sukuk Musharakah on the 5th anniversary of the issue date or on any anniversary date thereafter at 100% of the principal amount together with the expected profit payments. Sukuk Musharakah issued under the Sukuk Musharakah programme was included as Tier 2 Capital under BNM's capital adequacy framework. Effective 1 January 2013, the Sukuk Musharakah qualify as Tier 2 Capital as a capital instrument eligible for gradual phase-out treatment under the transitional arrangements of the Basel III accord. The salient features of the Sukuk Musharakah issued under the Subordinated Sukuk Musharakah programme and outstanding as at 30 September 2015 are as follows: Issue Date First Call Date Tenor Profit Rate Nominal value outstanding 30 September September years Non- Callable 5 years 31 January January years Non- Callable 5 years 24 December December years Non- Callable 5 years 4.40% per annum 4.35% per annum 4.45% per annum (RM million) 480 Total

14 3.3 Tier 2 Capital (Cont'd.) Basel III Subordinated Sukuk Murabahah On 28 February 2014, the Bank had implemented a Subordinated Sukuk Murabahah programme of RM3.0 billion. The objective of the programme is to enable the issuance of Tier 2 capital from time to time, for the purpose of enhancing the Bank s total capital position. The programme is set-up in accordance to the requirements spelt out in the CAFIB (Capital Components) issued by BNM, and the securities issued under this programme are fully Basel IIIcompliant and qualified for recognition as Tier 2 Capital for the purpose of capital adequacy ratio computation. The programme has a tenure of thirty (30) years from the date of the first issuance under the programme. Each issuance of Tier 2 Subordinated Sukuk under this programme shall have a tenure of at least five (5) years from the issue date, and is callable on any profit payment date after a minimum period of five (5) years from the date of issuance of each tranche. The salient features of the Sukuk Murabahah issued under this programme and outstanding as at 30 September 2015 are as follows: Issue Date First Call Date Tenor Profit Rate Nominal value outstanding (RM million) 28 February February years Non- 5.07% per 200 Callable 5 years annum 25 March March years Non- Callable 5 years 5.05% per annum 150 Total

15 3.3 Tier 2 Capital (Cont'd.) Table 3.2: Capital Structure The components of Common Equity Tier 1, Tier 2 and Total Capital of the Bank are as follows: Common Equity Tier 1 ("CET1") Capital Ordinary shares Share premium Retained earnings Available-for-sale deficit Statutory reserve Profit equalisation reserve Less : Regulatory adjustments applied on CET1 Capital - Intangible assets - Profit equalisation reserve CET1 Capital/ Tier 1 Capital Tier 2 Capital Tier 2 capital instruments meeting all relevant criteria for inclusion Tier 2 capital instruments (subject to gradual phase-out treatment) Collective allowance and regulatory reserves Tier 2 Capital Total Capital 30 September 31 March RM'000 RM' , , , , , ,523 (18,325) (6,592) 483, ,345-3,904 (16) (20) - (3,904) 2,520,873 2,411, , , , , , ,338 1,367,963 1,355,338 3,888,836 3,766,701 The breakdown of the risk-weighted in various categories of risk are as follows: 30 September 31 March RM'000 RM'000 Credit RWA 26,805,023 25,790,830 Less : Credit RWA absorbed by PSIA (1,367,987) (1,363,811) Total Credit RWA 25,437,036 24,427,019 Market RWA 327, ,629 Operational RWA 1,520,474 1,553,441 Total Risk Weighted Assets 27,284,888 26,211,089 13

16 4.0 General Risk Management The Risk Management Framework takes its lead from the Board s Approved Risk Appetite Framework which provides the catalyst to setting the risk/ reward profile required by the Board, together with the risk appetite statements, limit framework and policies required to enable successful execution. The Risk Appetite Framework is approved annually by the Board taking into account the Bank s desired external rating and targeted profitability/ return on equity ( ROE ) and is reviewed periodically throughout the financial year by both the executive management and the Board of Directors to consider any fine tuning/amendments taking into account prevailing or expected changes to the operational environment. The Risk Appetite Framework provides portfolio parameters for Credit Risk, Traded Market Risk, Non-Traded Market Risk and Operational Risk and Regulatory Compliance incorporating, inter alia, limit structures for countries, industries, single counterparty, group, product, value at risk, stop loss, stable funding ratio, liquidity and operational risk and regulatory compliance triggers. Board Approved Risk Appetite Statement The Bank's strategic goals are to sustain the top quartile return on ROE, and to maintain the credit rating of BBB+ or better (from international rating agencies) for the next one to two years. This is supported by sustainable asset quality and continued portfolio diversification within retail and non-retail, with greater contribution from non-interest/profit income, complemented by robust management of liquidity, disciplined execution of interest rate risk/rate of return risk in the balance sheet, and with support from strong level of capital. The Bank intends to maintain sufficient quantity and quality of capital in excess of Basel III requirement for CET 1, Tier 1 Capital and Total Capital. Our capital requirements are robustly tested over a three year period. We adopt a conservative approach to liquidity management, maintaining stable and diversified funding base consistent with Basel III liquidity matrix (Net Stable Funds Ratio, and Liquidity Coverage Ratios). Our targeted Unadjusted Financing Deposit Ratio is up to maximum 100% with continually improving current account and savings account ( CASA ) deposit composition and market share. The Bank manages Operational Risk by setting the operational risk appetite statements and measurements that the Bank is willing to tolerate to support its business strategies and objectives. The Bank manages its reputational risk by not engaging in any activity that has potential to result in a material event or loss that would be outside the expectations of its stakeholders. The Bank also manages its regulatory compliance risk by setting positive compliance culture and ensuring that the letter and spirit of regulatory requirements, applicable laws, rules, and standards in the respective jurisdictions are complied with. 14

17 4.0 General Risk Management (Cont'd.) The Bank manages shariah risk by ensuring that its operations, business, affairs and activities are in compliance with rulings of the BNM s Shariah Advisory Council (SAC) and the Bank s Shariah Committee. The Bank manages trading and sales activities by instituting appropriate governance, culture, and controls to promote acceptable trading behaviour. Risk Management Governance The Board is ultimately responsible for the management of risks within the Bank. The RMCD is formed to assist the Board in discharging its duties in overseeing the overall management of all risks covering market risk, liquidity risk, credit risk and operational risk and regulatory compliance risk. The Board has also established the Group CEOs Committee to assist it in managing the risks and businesses of the AMMB Group. The committee addresses all classes of risk within its Board delegated mandate: balance sheet risk, credit risk, legal risk, operational risk, market risk, shariah risk, compliance risk, reputational risk, product risk and business and IT project risk. Group Product Committee ( GPC ), a sub-committee of the Group CEOs Committee is responsible to oversee activities in managing products for the Bank; and to advise and report to the AMMB Group CEOs Committee on product related matters. 15

18 4.0 General Risk Management (Cont'd.) Risk Management Governance The following chart sets out the organisational structure of the Group CEOs Committee and an overview of the Group CEOs Committee s roles and responsibilities. BOARD OF DIRECTORS AMMB Holdings (AMMB) BOARD OF DIRECTORS AmBank/ AmBank Islamic/ AmInvestment Bank (Entity) Board Committees Group Information Technology Committee (At AMMB) Group Nomination and Remuneration Committee (At AMMB) Governance Committee (At AMMB) Audit and Examination Committee (At AMMB and Entity respectively) Risk Management Committee of Directors (RMCD) (At AMMB and Entity respectively) Executive Committee of Directors-EXCO (At respective Entity) Shariah Committee (established by AmBank Islamic Board, not a Board Committee) Management Committees Group CEOs Committee (GCC) Credit and Commitments Committee - CACC (Entity Level) Sharia h Risk Traded and Non Traded Market Risk Balance Sheet/ Capital Risk Portfolio and Impairment Management Operational Risk Legal Risk Reputational Risk Insurance Risk IT Risk Regulatory Compliance Risk Group Product Committee Group Strategic Sourcing Management Committee Credit Risk Business and IT Project Management Governance Committee 16

19 5.0 Credit Risk Management The credit risk management process is depicted in the table below: Credit risk is the risk of loss due to the inability or unwillingness of a counterparty to meet its payment obligations. Exposure to credit risk arises from financing, securities and derivative exposures. The identification of credit risk is done by assessing the potential impact of internal and external factors on the Bank s transactions and/ or positions as well as Shariah compliance risk (Please refer to Section 14 for discussion on Shariah Governance Structure). The primary objective of credit risk management is to maintain accurate risk recognition - identification and measurement, to ensure that credit risk exposure is in line with the Group Risk Appetite Framework ("GRAF") and related credit policies. For non-retail credits, risk recognition begins with an assessment of the financial standing of the customer or counterparty using a credit rating model. The model consists of quantitative and qualitative scores that are then translated into rating grades. The assigned credit rating grade forms a crucial part of the credit analysis undertaken for each of the Bank s credit exposures. 17

20 5.0 Credit Risk Management (Cont'd.) For retail credits, credit-scoring systems to better differentiate the quality of customers are being used to complement the credit assessment and approval processes. To support credit risk management, our rating models for major portfolios have been upgraded to facilitate: improvement in the accuracy of individual obligor risk ratings; enhancement to pricing models; financing loss provision calculation; stress testing; and enhancement to portfolio management. Financing activities are guided by internal credit policies and Risk Appetite Framework that are approved by the Board. The Bank s Risk Appetite Framework is refreshed at least annually and with regard to credit risk, provides direction as to portfolio management strategies and objectives designed to deliver the Bank s optimal portfolio mix. Credit risk portfolio management strategies include, amongst others: concentration threshold/ review trigger: - single counterparty credit; - industry sector; and - country setting financing to value limits for asset backed financing (i.e., property exposures and other collateral); Classified Account processes for identifying, monitoring and managing customers exhibiting signs of weakness and higher risk customers; and setting Benchmark Returns which serve as a guide to the minimum returns the Bank requires for the risk undertaken, taking into account operating expenses and cost of capital. Individual credit risk exposure exceeding certain thresholds are escalated to Credit and Commitments Committee ( CACC ) for approval. In the event such exposure exceeds CACC authority it will be submitted to Executive Committee of Directors ( EXCO ) for review and endorsement or approval, as the case may be. Portfolio credit risk is reported to the relevant management and board committees. The Group CEOs Committee regularly meet to review the quality and diversification of the Bank s financing portfolio, approve new and amended credit risk policy, review the portfolio risk profile against the GRAF. Group Risk prepares monthly Risk Reports which detail important portfolio composition and trend analysis incorporating asset growth, asset quality, impairment, flow rates of loan/financing delinquency buckets and exposures by industry sectors are reported monthly by Group Risk to executive management and to all meetings of the Board. The Bank applies the Standardised Approach to determine the regulatory capital charge related to credit risk exposure. 18

21 5.1 Impairment Definition of Past Due and Impaired financing and advances All financing and advances are categorised as either: Neither past due nor impaired; Past due but not impaired; or Impaired An asset is considered past due when any payment (whether principal and/or profit) due under the contractual terms are received late or missed. A financing is classified as impaired under the following circumstances: (a) (b) when the principal or profit or both is past due 1 or the amount outstanding is in excess of approved limit (for revolving facilities), each for more than 90 days or 3 months on any material 2 obligation; or for financing where repayments are scheduled on intervals of 3 months or longer, the financing is to be classified as impaired 1+30 days or 1 day+1 month past due (the 30-days grace period is to allow for exclusion of administrative default 3 ) (c) (d) for trade bills/facilities, an account is deemed default and impaired when the past due is 90 days from due date of the bill A financing may also be classified as impaired: i. as deemed appropriate by the Watch and Control Committee where it is determined the financing have a high probability of default: or ii. cross-default occurs when: - a default of a financing obligation of a customer triggers a default of another financing obligation of the same customer or - a default of a financing obligation of a customer triggers a default of a financing obligation of other customers within the same customer group. The CACC is allowed to waive the declaration of cross-default across all accounts of the same customer or accounts of all customers within the same customer group. 1 For credit card facilities, an account is "past due" when the cardmember fails to settle the minimum monthly repayment due before the next billing date. 2 Material obligation as determined by Management 3 Administrative defaults include cases where exposures become overdue because of oversight on the part of the obligor and/or the banking institution. Instances of administrative defaults may be excluded from the historical default count, subject to appropriate policies and procedures established by the banking institution to evaluate and approve such cases. 19

22 5.1 Impairment (Cont'd.) Definition of Past Due and Impaired Financing and advances (Cont'd.) (e) Debt instruments (for example, fixed income securities, debt converted instrument etc.) shall be classified as impaired when the coupon or profit payment is 1 day past due Methodology for Determination of Individual and Collective Allowances An assessment is performed to determine whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant or not individually impaired. Individual Assessment Individual assessment is divided into 2 main processes detection of an event(s) and an assessment of impairment: (a) Trigger management In trigger management, financial assets which are above the pre-set individual assessment threshold are assessed using the relevant impairment triggers for objective evidence of impairment. (b) Valuation of assets Financial assets which are triggered by the impairment triggers will be measured for evidence of high likelihood of impairment, that is, estimated recoveries (based on the discounted cash flow projection method and taking into account economic conditions) is less than carrying value or fair value is less than the carrying value. Collective Assessment Financing and advances, and commitments and contingencies below the significant threshold and those not assessed to be individually impaired, will be subject to collective assessment and a collective allowance will be computed accordingly. The collective impairment assessment and provisioning methodology uses historical loss data to derive the level of provisions. The collective provisions are computed after making the necessary adjustments to reflect current economic conditions. 20

23 Table 5.1: Distribution of gross credit exposures by sector The distribution of credit exposures by sector of the Bank is as follows: 30 September 2015 Agriculture Mining and Quarrying Electricity, Manufacturing Gas and Water Construction Wholesale and Retail Trade and Hotel and restaurants Transport, Storage and Communication Finance and Insurance Government and Central Banks Real Estate Business Activity Education and Health Household Others Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 On-Balance Sheet Exposures Sovereigns/Central Banks , ,632, ,686,415 Banks, DFIs and MDBs ,377, ,377,003 Corporates 1,489,545 2,245,367 2,335, ,087 2,500, ,976 1,438,717 1,050,492-2,592, , , ,419 38,143 16,241,753 Regulatory Retail 17,221 3,880 47, ,948 46,045 23,920 1,068-25,377 13,449 43,334 13,096,465 1,207 13,365,402 Residential Mortgages , ,411 Other Assets , ,363 Defaulted Exposures ,675 3,542 10, , , ,136 4, ,544 Total for On Balance Sheet Exposures 1,506,975 2,249,249 2,383, ,501 2,602,898 1,046,814 1,463,234 5,428,640 3,632,016 2,966, , ,011 13,494, ,178 38,533,891 Off-Balance Sheet Exposures OTC Derivatives - - 1, , ,406 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 151,235 32, ,529 20, , ,254 59,178 47, ,033 94,814 26, ,502 1,584 1,818,916 Defaulted Exposures Total for Off-Balance Sheet Exposures 151,235 32, ,038 20, , ,254 59, , ,253 95,004 26, ,503 1,584 1,986,139 Total On and Off-Balance Sheet Exposures 1,658,210 2,282,183 2,771, ,593 2,993,393 1,179,068 1,522,412 5,641,298 3,632,016 3,140, , ,922 13,795, ,762 40,520,030 21

24 Table 5.1: Distribution of gross credit exposures by sector(cont'd.) The distribution of credit exposures by sector of the Bank is as follows (Contd.): 31 March 2015 Agriculture Mining and Quarrying Electricity, Manufacturing Gas and Water Construction Wholesale and Retail Trade and Hotel and restaurants Transport, Storage and Communication Finance and Insurance Government and Central Banks Real Estate Business Activity Education and Health Household Others Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 On-Balance Sheet Exposures Sovereigns/Central Banks , ,719, ,774,979 Banks, DFIs and MDBs ,598, ,598,897 Corporates 1,413,869 2,193,270 2,186, ,074 3,186, , ,709 1,194,702-2,529, , , ,959 35,451 16,167,057 Regulatory Retail 19,443 5,121 48, ,078 46,047 33,952 1,219-22,588 15,452 46,893 13,263,681 1,430 13,554,097 Residential Mortgages , ,330 Other Assets , ,888 Defaulted Exposures ,714 7,703 11,341 5, , , ,901 5, ,991 Total for On-Balance Sheet Exposures 1,433,791 2,198,394 2,238, ,737 3,301, , ,165 4,794,901 5,719,903 2,867, ,768 1,003,994 13,657, ,926 39,949,239 Off-Balance Sheet Exposures OTC Derivatives , ,798 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 123,353 69, ,793 16, , ,712 71,524 9, ,657 92,113 19, , ,682,902 Defaulted Exposures , ,055 Total for Off-Balance Sheet Exposures 123,353 69, ,301 16, , ,721 71, , ,767 92,327 19, , ,803,755 Total On and Off-Balance Sheet Exposures 1,557,144 2,268,323 2,560, ,916 3,715,837 1,095, ,689 4,917,802 5,719,903 3,021, ,095 1,023,290 13,921, ,891 41,752,994 22

25 Table 5.2: Impaired and past due financing, individual and collective allowances by sector The amounts of impaired and past due financing, individual and collective allowances, charges for individual impairment allowances and write offs during the period/year by sector of the Bank are as follows: 30 September 2015 Impaired financing Past due financing Individual allowance Collective allowance Charges/(Writeback) for individual allowance Write-offs against individual allowance Wholesale and Agriculture Mining and Quarrying Manufacturing Electricity, Gas and Water Construction Retail Trade and Hotel and restaurants Transport, Storage and Communication Finance and Insurance Real Estate Business Activities Education and Health Household Others Not Allocated Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM' ,417 17,831 9,908 12,840 18, ,600 4,205 4, ,184 1, ,497 7,337 2,420 63,624 17,991 59,377 19,634 23, ,681 11,149 19,824 3,498,257 10,682-4,127, ,356 10,673 5, ,302-13,719 1, , , , (1,954) (1,918) (92) (1,100) 542-8, , , , March 2015 Impaired financing Past due financing Individual allowance Collective allowance Charges/(Writeback) for individual allowance Write-offs against individual allowance Wholesale and Agriculture Mining and Quarrying Manufacturing Electricity, Gas and Water Construction Retail Trade and Hotel and restaurants Transport, Storage and Communication Finance and Insurance Real Estate Business Activities Education and Health Household Others Not Allocated Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM' ,143 21,100 9,590 6,763 12, ,332 4,211 6, ,040 1, ,455 9, , ,489 25,479 21, ,431 23,256 19,005 3,845,999 13,554-4,312, ,351 13,031 5,444 2,564 10,760-5,221 1, , , , ,581 13,031 4,664 2,367 10,359-5, ,

26 Table 5.3: Geographical distribution of credit exposures The geographic distribution of credit exposures of the Bank is as follows: 30 September 2015 In Malaysia Outside Malaysia Total RM'000 RM'000 RM'000 On-Balance Sheet Exposures Sovereigns/Central Banks 3,686,415-3,686,415 Banks, DFIs and MDBs 4,353,326 23,677 4,377,003 Corporates 16,241,753-16,241,753 Regulatory Retail 13,365,402-13,365,402 Residential Mortgages 112, ,411 Other Assets 243, ,363 Defaulted Exposures 507, ,544 Total for On Balance Sheet Exposures 38,510,214 23,677 38,533,891 Off-Balance Sheet Exposures OTC Derivatives 166, ,406 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 1,818,916-1,818,916 Defaulted Exposures Total for Off-Balance Sheet Exposures 1,986,139-1,986,139 Total On and Off-Balance Sheet Exposures 40,496,353 23,677 40,520,030 24

27 Table 5.3: Geographical distribution of credit exposures (Cont'd) The geographic distribution of credit exposures of the Bank is as follows: 31 March 2015 In Malaysia Outside Malaysia Total RM'000 RM'000 RM'000 On-Balance Sheet Exposures Sovereigns/Central Banks 5,774,979-5,774,979 Banks, DFIs and MDBs 3,598, ,598,897 Corporates 16,167,057-16,167,057 Regulatory Retail 13,554,097-13,554,097 Residential Mortgages 119, ,330 Other Assets 260, ,888 Defaulted Exposures 473, ,991 Total for On-Balance Sheet Exposures 39,948, ,949,239 Off-Balance Sheet Exposures OTC Derivatives 113, ,798 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 1,682,902-1,682,902 Defaulted Exposures 7,055-7,055 Total for Off-Balance Sheet Exposures 1,803,755-1,803,755 Total On and Off-Balance Sheet Exposures 41,752, ,752,994 25

28 Table 5.4: Geographical distribution of impaired and past due financing, individual and collective allowances The amounts of all impaired and past due financing, individual and collective allowances which reside in Malaysia of the Bank are as follows: 30 September 2015 Total RM'000 Impaired financing 640,497 Past due financing 4,127,847 Individual allowances 67,044 Collective allowances 440, March 2015 Total RM'000 Impaired financing 606,455 Past due financing 4,312,934 Individual allowances 66,075 Collective allowances 458,453 26

29 Table 5.5: Residual contractual maturity by major types of credit exposure The residual contractual maturity by major types of gross credit exposures of the Bank is as follows: 30 September 2015 Up to 1 month >1 month to 3 months >3 months to 6 months >6 months to 12 months >1 year to 3 years >3 years to 5 years > 5 years No Maturity specified Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 On-Balance Sheet Exposures Sovereigns/Central Banks 2,368, ,318,190-3,686,415 Banks, DFIs and MDBs 1,396,775 2,260, , ,386-4,377,003 Corporates 4,158,691 1,590,323 1,822, ,914 2,506,758 1,854,966 3,952,835-16,241,753 Regulatory Retail 260,757 5,461 12,383 70, ,146 2,283,225 9,908,382-13,365,402 Residential Mortgages ,039 3, , ,411 Other Assets 747 1,638 2,244 4,987 16, , , ,363 Defaulted Exposures 324, ,806 3,955 56,210 34,893 85, ,544 Total for On-Balance Sheet Exposures 8,510,000 3,858,126 2,479, ,098 3,406,548 4,282,773 15,450, ,958 38,533,891 Off-Balance Sheet Exposures OTC Derivatives ,564 34,877-13,600 34, ,406 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 144, , , , , , ,263-1,818,916 Defaulted Exposures Total for Off-Balance Sheet Exposures 145, , , , , , ,732-1,986,139 Total On and Off-Balance Sheet Exposures 8,655,226 4,007,494 2,843, ,377 3,735,061 4,405,385 15,993, ,958 40,520,030 27

30 Table 5.5: Residual contractual maturity by major types of credit exposure (Cont'd.) The residual contractual maturity by major types of gross credit exposures of the Bank is as follows (Contd.): 31 March 2015 Up to 1 month >1 month to 3 months >3 months to 6 months >6 months to 12 months >1 year to 3 years >3 years to 5 years > 5 years No Maturity specified Total RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 On-Balance Sheet Exposures Sovereigns/Central Banks 4,468, ,306,366-5,774,979 Banks, DFIs and MDBs 1,334,046 2,165, ,732-3,598,897 Corporates 3,688,257 1,625,186 1,875, ,169 2,000,321 2,703,410 3,981,237-16,167,057 Regulatory Retail 279,140 5,757 22,510 55, ,975 2,101,194 10,322,567-13,554,097 Residential Mortgages ,169 3, , ,330 Other Assets 698 1,427 2,215 4, , , ,888 Defaulted Exposures 329, ,435 3,253 23,843 28,925 85, ,991 Total for On-Balance Sheet Exposures 10,100,096 3,798,407 1,902, ,206 2,920,964 4,837,055 15,908, ,193 39,949,239 Off-Balance Sheet Exposures OTC Derivatives 30, ,876 27,434-2,906 38, ,798 Off-balance sheet exposures other than OTC Derivatives or Credit Derivatives 226,503 85, , , , , ,726-1,682,902 Defaulted Exposures - 4, ,055 Total for Off-Balance Sheet Exposures 257,028 91, , , , , ,584-1,803,755 Total On and Off-Balance Sheet Exposures 10,357,124 3,889,649 2,098, ,027 3,240,772 4,977,437 16,373, ,193 41,752,994 28

31 Table 5.6: Reconciliation of changes to financing impairment allowances The reconciliation of changes to financing impairment allowances of the Bank is as follows: 30 September 2015 Individual impairment allowances RM'000 Collective impairment allowances RM'000 Balance at 1 April , ,453 Charge for the period net 4,375 94,589 Amount written-off (3,406) (112,215) Balance at 30 September , , March 2015 Individual impairment allowances RM'000 Collective impairment allowances RM'000 Balance at 1 April , ,465 Charge for the year net 46, ,295 Transferred to AmBank * - 2,463 Amount written-off (29) (302,770) Balance at 31 March , , September 2015 (Charge off)/recoveries RM'000 Bad debts written off during the period (6,538) Bad debt recoveries during the period 60,192 (Charge 31 March 2015 off)/recoveries RM'000 Bad debts written off during the year (7,902) Bad debt recoveries during the year 147,282 * As at 30 September 2015, the gross exposure and collective allowance relating to the RPSIA financing amounted to RM1,368.0 million and RM1.6 million respectively (31 March 2015 :RM1,363.8 million and RM1.6 million respectively). There was no individual allowance provided for the RPSIA financing. 29