BOI BANK CORPORATION PILLAR 3 REGULATORY CAPITAL DISCLOSURES

Transcription

1 BOI BANK CORPORATION PILLAR 3 REGULATORY CAPITAL DISCLOSURES For the quarterly period ended September 30, 2017 i

2 Table of Contents Introduction 1 Pilar III report overview Basel II overview Governance and oversight 2 Regulatory capital 3 Terms of Capital Instruments Capital adequacy 4 Capital Management Capital Requirements for Credit Risk Capital Requirements for Market Risk Capital Requirements for Operational Risk Credit risk 6 General Disclosures Credit Risk Exposure Credit Risk Management Portfolios Subject to Standardized Approach Credit Risk Concentrations Credit Quality of Assets Credit Risk Disclosures for Port. Subject to Standardized Approach Credit Risk Mitigation Market risk 11 General Disclosure Market Risk Exposure Market Risk Management Capital Requirements for each sub-type of Market Risk Interest Rate Risk Currency Exchange Risk Operational risk 13 Non-Applicable Disclosures Statement 14 Appendices I. Credit Risk Concentrations 16 II. Credit Quality of Assets 17 III. Market Risk Exposure on Interest Rate Risk 18 IV. Market Risk Exposure on Currency Exchange Risk 19 ii

3 INTRODUCTION BOI Bank Corporation ( BOI Bank or the Bank ) was incorporated on March 14, 1994, pursuant to Section 332 of the International Business Corporation Act., Cap. 222, of the revised laws of Antigua and Barbuda. The Bank holds an unrestricted license to conduct international banking under Section 230 and 235 of the International Business Corporations Act., Cap The Bank s objectives are to perform, within the limitations established by the banking laws of Antigua and Barbuda, financial intermediary operations, including financial services and operations generally associated with international banking business; the Bank had $1.1 billion in assets and $272 million in stockholders equity as of September 30, The Bank belongs to a red in various countries of international services firms that forms part of Grupo Financiero BOD from Venezuela, the fifth largest bank from that country. The main activity of the Bank focuses on raising funds and placing them in Financial Instruments, being characterized as an Investment Bank for its clients, obtaining for them high yields in their placements. In addition to this, the Bank also offers at a smaller-scale, personal and commercial loans guaranteed with certificates of deposit, lines of credit for working capital, assignment of certificates of deposits to issue letters of credit with Banco BOD de Venezuela, securities lending, grant credit cards and asset management service. Pillar 3 report overview This report provides information on the Bank s capital structure, capital adequacy, risk exposures, and risk weighted assets ( RWA ). that will include internal models to translate risk exposures into required capital, as part of the completion of the ICAAP process. This framework will be presented to the board Of directors for its approval no latter that December 31, At the present and as of September 30, 2017, the Bank measures its capital level following only regulation standards and guidelines. Basel II overview The Basel framework consists of a three Pillar approach: Pillar 1 establishes minimum capital requirements, defines eligible capital instruments, and prescribes rules for calculating RWA. Pillar 2 requires banks to have an internal capital adequacy assessment process and requires that banking supervisors evaluate each bank s overall risk profile as well as its risk management and internal control processes. Pillar 3 encourages market discipline through disclosure requirements which allow market participants to assess the risk and capital profiles of banks. Capital rules under Basel II establish minimum capital ratios and overall capital adequacy standards for the international banking sector of Antigua and Barbuda. Basel II sets forth two comprehensive approaches for calculating RWA: a standardized approach ( Basel II Standardized ), and an advanced approach ( Basel II Advanced ). However, as part of the initial stage of the implementation process the Bank only follows the standardized approach. It is important to mention that the Bank is at its initial stage of developing and improving a comprehensive risk management framework 1

4 GOVERNANCE AND OVERSIGHT Risk is inherent of the Bank s business activities. When the Bank decide on the sale or purchase of an investment, disburses a loans or offers a variety of products and services to its clients, it takes on some degree of risk. The Bank s overall objective is to manage its businesses in a manner that balances serving the interests of its clients, and stockholders and protects the safety and soundness of the Bank. The Bank s approach to risk management will cover a broad spectrum of economic and other core risk areas, such as credit, market, liquidity, model development, operational, compliance, legal, capital and reputation risk, with controls and governance established for each area, as appropriate. The Bank believes that effective risk management requires: Acceptance of responsibility, including identification and escalation of risk issues, by all individuals within the Bank; Ownership of risk identification, assessment, data and management within each of the lines of business and corporate functions; and Bank-wide structures for risk governance. At the present, the Bank s keeps the following Committees that measure and monitor risk taking activities throughout the Bank: a) ALCO Committee, b) Compliance Committee, c) Audit Committee, and d) Risk Committee. All these committees are led by main members of the Board of Director assuring that the Board maintain all the information necessary for its decision-taking activity and its oversight role. All operating coordinators (Treasury Manager, Risk Officer, Internal Auditor and Compliance Officer) report operations and findings to its respective committees, being the responsibility of these organizations to elevate every finding to the Board which must decide, change and indicate corrective measures to all areas. The Bank s overall appetite for risk will be governed by the Risk Management framework that is under updating and reviewing. The framework and the Bank s risk appetite will be presented by the Risk Officer to the Risk Committee, to then be approved by the Boards of Directors no later than December 31, However, currently and through the Risk Committee the Bank measures and monitors main risks through quantitative estimations established to report on the status of liquidity and solvency risk, capital, credit risk, market risk, operational risk, stressed investment portfolio and stressed liquidity levels. The Integral Risk function ( IRF ), is independent of the general business of the Bank. The IRF recommends various standards policies and procedures, including risk policy, identification, measurement, assessment, testing, limit setting (e.g., risk appetite, thresholds, etc.), monitoring and reporting. Most of these standards are under development. As the second line of defense, the IRF function provides oversight and recommendations to all areas with risk taking activities. The final decision on the changes that must be followed by the organization ultimately rests with the President of the Board of Directors, and main stockholder of the organization. Internal Audit, a function independent of the businesses and the IRF function, will test and evaluate the Bank s risk governance and management, as well as its internal control processes. This function, the third line of defense in the risk governance framework, brings a systematic and disciplined approach to evaluating and improving the effectiveness of the all Bank s processes. The Internal Audit Function is headed by the Internal Auditor, who reports to the Audit Committee. 2

5 REGULATORY CAPITAL 1 Basell II Regulatory Capital encompasses three categories of risk based capital: Tier 1, 2 and 3. Tier 1 predominantly includes common stockholders equity (fully paid), noncumulative perpetual preferred stock, and disclosed reserves (publish or audited reserves derived from post-tax retained earnings and after dividends payments). Tier 2 capital includes subordinated debt, undisclosed reserves (availability is more uncertain), general loan loss reserves and hybrid debt equity capital instruments. Total regulatory capital is Tier 1 capital plus Tier 2 capital. Tier 3 capital consists of subordinated debt with some limitations. As per the forms issued by the Financial Service Regulatory Commission (FSRC), from which the Bank reports regulatory capital, current year s or quarter profit cannot be reported as Tier 1 capital until it has been subject to review by external auditors. Fair Value Reserve as result of gain and loss from financial instruments classified as available for sale per IAS 39, cannot be included as Tier 1, its part of Other Capital in lines 1800 to 1840 in the forms. These totals are not part of regulatory Capital for the Bank, as shown in the following table: Table 1. Regulatory Capital Regulatory Capital (in millions) Sept 30 Total Stockholder Equity (common stock) $ 5,000 Plus: Disclosed prior year reserves 267,756 Tier 1 Capital before regulatory adjustments 272,756 Less: Goodwill and other intangible assets (62) Total Tier 1 272,694 Long term debt and other instruments 0 Qualifying general loan reserve 0 Other Tier 2 capital adjustments 0 Less: Tier 2 capital deductions (0) Total Tier 2 0 Total Regulatory Capital 272,694 Terms of Capital Instrument The Bank only maintains Common Stock as Capital instruments. As of September 30, 2017, the Bank had 5,000 of common stock, authorized issued and fully paid at US$1,000 par value. The Bank does not maintain any complex or innovative or hybrid capital instruments. 1 In compliance with Pillar III Disclosures Table 2 Capital Structure, pag. 10/20 of Market Discipline Guidelines September

6 CAPITAL ADEQUACY 2 Capital management A strong capital position is essential to the Bank s business strategy and competitive position. Maintaining a strong balance sheet to manage through market volatility is considered important to fulfill the Bank s business objective and support current and future activities. The Bank s capital management strategy focuses on maintaining long-term stability to enable high yield for its clients, even in stressed environments. As mention above the risk management framework that will govern the capital strategy of the Bank is under updating and reviewing, however currently through the Risk and ALCO Committee the Bank monitors and measures its main exposures in liquidity, credit, market and operational risks; where the Risk Committee monitors the results and the ALCO Committee is responsible of every day management of risk. The following indicators are presented and evaluated by these Committees: Capital Adequacy a) Capital Adequacy Ratio and its change from quarter to quarter. b) Main change in Risk Weighed Assets (RWA) from quarter to quarter. Liquidity and Solvency Risk c) Current and historic regulatory liquidity ratio. d) Cumulative Cash Flow Mismatch, under normal and stressed conditions. e) Demand and Savings accounts volatility values measured at an 95% confidence level. f) Current and historic certificate of deposits renewal rate. g) Depositors Base Concentration levels. h) Investment portfolio value under stressed scenarios and impact on liquidity levels for each scenario. Table 2. Credit Risk portfolios subject to standardized approach i) Capital Adequacy level with portfolio value under stressed scenarios. j) Assets and liabilities rates behavior. Market Risk k) Unrealized Profit and Loss accumulated results. l) Realized Profit and Loss from sale of investment. m) VaR of the Investment Portfolio at each reporting date. n) Capital Adequacy ratio stressed by Investment Portfolio VaR results. o) Exposure to Currency Exchange Risk. Credit Risk p) Investment Portfolio segregated by ECAI s Risk level for the quarter. q) Loan and Credit Card portfolio movement. r) Loan and Credit Card loss provision. s) Security Lending movement. Operational Risk t) Operational Risk Weighed Assets (RWA) using the basic indicator approach. Under the risk-based capital guidelines of the FSRC, the Bank is required to maintain minimum ratios of Regulatory Capital to RWA of 8%, and Tier 1 Capital to RWA of 6%. As of September 30, 2017, the Bank reported the following values on the mentioned ratios: CAPITAL BASED RATIOS SEPT. 30, 2017 REGULATORY CAPITAL TO RWA 12.92% TIER 1 CAPITAL TO RWA 12.92% Capital requirements for credit risk In determining capital requirements for credit risk, the Banks applies the standardized approach using the FSRC prescribed risk weights to both on and off-balance sheet exposures. Following all Bank s portfolios subject to standardized approach as of September 30, 2017: 2 In compliance with Pillar III Disclosures Table 3 Capital Adequacy, pag. 11/20 of Market Discipline Guidelines September

7 Table No.2 STANDARDIZED APPROACH TO CREDIT RISK ON BALANCE SHEET EXPOSURE CREDIT EXPOSURE (IN THOUSANDS) SEPTEMBER 2017 DESCRIPTION TOTAL AMOUNT CRM RWA 110 Claims on Sovereigns (Investment in Securities) $ 965,570 $ 813, Claims on Corporates (Investment in Securities) 63,967 91, Claims on Banks and Securities Firms (Deposits with Banks) 21,135 22, Claims on Regulatory Retail Portfolio (Deposits with Banks) 12,246 $9,217 2, Claims falling outside the regulatory retail portfolio (Loans and SL) 19,667 19, Residential Mortgages (Loans and SL) Commercial Mortgages (Loans and SL) Secured Past Due Loans (Loans and SL) 1,189 1, Unsecured Past Due Loans (Loans and SL) 1,374 1, Tangible Fixed Assets (Other Assets) Other, including prepayments & debtors (Other Assets) 18,988 16,626 TOTAL ON BALANCE SHEET PORTFOLIOS SUBJECT TO STANDARIZED APPROACH 1,103, ,478 OFF BALANCE SHEET EXPOSURE CREDIT EXPOSURE (IN MILLIONS) 220 Transactions related Contingency (SBLC) $ 92,691 $ 46, Undraw Commitments 51,379 51,379 TOTAL OFF-BALANCE SHEET PORTFOLIOS SUBJECT TO STANDARIZED APPROACH 144,070 97,725 TOTAL CAPITAL REQUIREMENTS FOR CREDIT RISK 1,065,203 Capital requirements for market risk To calculate the market risk charge to capital, the Bank opted for the standardized measurement frameworks following the prescribed rules issued by the FSRC. This method comprises five sections; foreign exchange, interest rate, equity, commodity and options risks. The Bank completes general and specifics risk calculated for each class of financial assets and liabilities. General Risk is de risk of price change in the instrument due for example to a change in the level of interest rates. Specific risk relates to the risk of a price change in the instrument concerned due to factors related to the issuer or the underlying instruments. Following the standardized approach for market risk: Table No.3 STANDARDIZED APPROACH TO MARKET RISK (IN THOUSANDS) SEPTEMBER INTEREST RATE RISK CAPITAL CHARGE RWA Specific Risk $ 69,174 $ 86,468 General Market Risk EQUITY POSITION RISK Specific Risk 0 General Market 0 Risk 870 FOREIGN EXCHANGE RISK Capital charge COMMODITIES RISK Capital Charge 0 TOTAL MARKET RISK $ 69,290 $ 86,612 Capital requirements for operational risk The Bank opted for the standardized indicator approach to calculate the capital charge in relation to operational risk. Under this approach the Bank must hold capital for operational risk that is at least equal to the average over the previous period of three (3) years of 15% of positive annual gross income. Table No. 4 STANDARDIZED APPROACH TO OPERATIONAL RISK SEPTEMBER 2017 (IN THOSANDS) CAPITAL CHARGE RWA EQUIVALENT SA REQUIREMENT $ 14,288 $ 178,602 5

8 CREDIT RISK 3 General Disclosures Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank s investment in debt securities, loans and advances to customers, including credit cards exposures; standby letters of credit, deposits with banks and securities lending. The Banks provides credit to a variety of customers, ranging from large corporate and institutional clients to individual consumers and small businesses, as well as to any related party individual or corporate. However, loan granting is not part of the main activity of the Bank, the biggest credit exposure comes from the investment portfolio. Credit risk exposures Credit exposures are reported under IFRS guidelines, based on the following general descriptions: Deposits with Banks Deposits are carried at amortized cost, and are segregated by type of financial entity either as a brokerage account or a correspondent account. Investment in Securities The investment in securities are classified at their trade date, and are initially measured at their fair value, plus the transaction incremental related costs. Investment securities are not held for trading or held to maturity and, consequently, are classified as available for sale. This category includes securities acquired with the intention of holding them for an indefinite period, which may be sold in response to needs for liquidity, changes in interest rates, exchange rates or investments prices. These securities are measured at fair value and changes in value are recognized directly in other comprehensive income using a valuation account until the securities are sold or redeemed. Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This classification includes credit cards debts. Loans are presented net of allowances for loan losses. Increases in the allowance account are recognized in the statement of income. The Bank writes down a loan, either partially or in full, and any related allowance for loan losses, when the Bank determines that there is no realistic prospect of recovery. If in a subsequent period the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after the write-down, the writedown or allowance is reversed through the statement of income. Impairment losses are determined through two methods which indicate if there is any objective evidence of impairment, i.e. individually for loans individually material and collectively for loans not individually material. In this sense, the Bank does not maintain general allowances. Securities lending When the Bank purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date, the arrangement is accounted for as a loan or advance and recognized in the statement of financial position as a receivable from securities lending. 3 In compliance with Pillar III Disclosures Table 4 Credit Risk, pag. 12/20 of Market Discipline Guidelines September

9 The underlying asset is not recognized in the Bank s financial statements. Receivables from securities lending are measured at amortized cost and the interest income is recognized under the method of effective interest rate. Stand By - Letters of Credit (off balance sheet item) A standby letter of credit (SLOC) is a guarantee of payment issued by the Bank to Banco Occidental de Descuento (BOD) a related party, on behalf of clients that have a certificate of deposits with the Bank. Standby letters of credit are created as a sign of good faith in business transactions and are proof of a buyer's credit quality and repayment abilities without the need of use of the Certificate of deposits (CD) pledge as collateral. For BOI Bank the risk arises when BOD has a need to collect the CD before its maturity date. Undrawn credit commitments The amounts under this item correspond to approved lines of credit and credit cards that have yet to be disbursed or used. Other Assets All other receivables, including interest receivables accounts, intangible assets or any other asset that are not classified elsewhere are included in this line. As of September 30, 2017, the Bank is not engaging in loan securitization and derivative contracts. Table No. 2 presented above summarized the amount of credit exposure segregated in portfolios subject to credit standardized approach, as of September 30, Credit risk management The Bank is in the process of updating and improving a Risk Management Framework which will includes the policies, procedures and methodologies for the Management of Credit Risk. The Bank s board of directors has overall responsibility for the establishment and oversight of the Bank risk management framework. Currently the Board of Directors established the ALCO Committee as responsible for managing credit risk and the Risk Committee as responsible for monitoring and reporting on credit risk exposure. Both Committees reports regulatory to the board. Assets and Liabilities Committee Implement comprehensive investment policies that limits its exposure to credit risk. Establishing the authorization structure for the approval and renewal of credit facilities. Reviewing, assessing and approving credit risk: this Committee assesses all credit exposures before facilities are committed to customers. Renewals and reviews of facilities are subject to the same review process. Limiting concentrations of exposure to counterparties, geographies and industries, and by issuer, credit rating band, market liquidity and country (for investment securities). Risk Committee Reviewing and monitoring policies. Monitoring the Bank s risk grading s that categorize exposures according to the degree of risk of monetary loss faced and to focus management on the attendant risks. Develop and recommend policies, procedures, limits and methodologies following best market practices that will help the board of directors manage risk. Regular audits for loan and advances to customers, investment portfolio, securities lending, bank deposits and other assets are undertaken by Internal Audit. 7

10 The Bank regards any financial assets as impaired in the following circumstances: There is objective evidence that a loss event has occurred since initial recognition and the loss event has an impact on future estimated cash flows from the asset. Objective evidence that financial assets are impaired includes: - Default or extended delinquency - Restructuring of an amount - Indications that a debtor or issuer will enter bankruptcy - Adverse changes in the payment status of borrowers - The disappearance of an active market for a security because of financial difficulties - Observable data indicating that there is a measurable decrease in the expected cash flows from a financial asset or a group of financial assets. A loan is past due for 90 days or more. A loan that has been renegotiated due to deterioration in the borrower s condition is usually considered to be impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. Impairment in investment securities The Bank, through the Treasury Department, assesses at each date of the statement of financial position whether there is objective evidence that investment in securities are impaired. In the case of securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets or any other of the mention above, the cumulative loss is removed from the equity reserve account and recognized in the income statement. Allowance for Impaired Loans The individual component of the total allowance for impairment applies to financial assets evaluated individually for impairment. The Bank s evaluates a loan individually when it s book value is greater than US$300,000 or was approved without cash collateral. The impairment is estimated based on management s best estimate of the present value of the cash flows that are expected to be received, discounted with a synthetic rate that represents the credit risk of the counterparty. In estimating these cash flows, management makes judgements about a debtor s financial situation and the net realizable value of any underlying collateral. Each impaired asset is assessed on its merits, and are independently reviewed by the Risk Officer and presented to the Risk Committee. A collective component of the total allowance is established for groups of homogeneous loans that are not considered individually significant. Usually credit cards and back to back loans enter this definition. Back to Back loans don t have a credit exposure with the Bank due to its credit mitigation structure. The collective allowance for groups of homogeneous loans is established using a formula approach based on historical loss rate experience. The roll rate methodology uses statistical analysis of historical data on delinquency and recoveries of write-off loans to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at based on historical information is appropriately adjusted to reflect the economic conditions and product mix at the reporting date. In this sense, the Bank follows IFRS guidance to estimates loan allowance, hence does not recognizes a general allowance on its credit portfolios. Is also important to mention that 8

11 these policies will change starting January 2018 due to the implementation of IFRS 9. Portfolios subject to standardized approach Currently the Bank uses the standardized approach established by the FSRC to estimate the capital charge related to credit risk for the capital adequacy calculation. As of September 30, 2017, the Banks does not have any plans to move to advance methodologies. All of the Bank s assets are subject to this approach. Credit risk concentrations Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Table No. 6 in Appendix I sets out information about industry or sector of exposures, broken down by major types of credit. Credit quality of assets The table No. 7 in Appendix II set out information about credit quality of loans, credit cards and securities lending. The Table No. 8 in Appendix II sets out the credit quality of available for sale securities and deposits with banks. The analysis has been base on Moody s Analytics rating where applicable. The Table No. 9 in Appendix II sets out the charges and charge offs of the loan reserve account as of September 30, The Table No. 5 in Appendix I sets out information about geographic distribution of exposures, broken down in significant areas. Credit Risk Disclosures for portfolios subject to standardized approach 4 Following the ECAI s used by the Bank to measure credit Risk of the investment portfolio: Table No. 10 ECAI s used and its ratings The Bank uses these ratings mainly for its investment portfolio in the following manner: First rank: Moody s Second Rank: when Moody s has issued a Non-Rated or haven t performed an analysis, the Bank uses Standard & Poor s Third rank: Fitch; when there s is not a rating from Moody s and S&P 4 In compliance with Pillar III Disclosures Table 5 Credit Risk, pag. 13/20 of Market Discipline Guidelines September

12 When none of these agencies issue a rating, the Bank s regards the instrument as Non-Rated (NR). For comparable assets pertaining mainly to deposits held with depository institutions, either with correspondent Bank or brokers, the Banks uses the public rating from Moody s if available. In the case the depositary institution maintains public information, and does not have a public rating by Moody s, the Bank then uses the systematic rating estimation from Damodaran Online 5 for Financial Service Firms, calculating the interest coverage ratio of the institutions, and then follows the table presented below and updated at the beginning of each year: Table No.11 Credit Risk Alignment with ECAI s *This rating is segregated by Moody s and S&P for the year 2017 When neither of the two options mentioned above are available for depositary institutions the Bank uses the Moody s rating of the country of the institutions. When this option is not available either, the Bank then rates the deposit as NR. Credit Risk Mitigation 6 The Bank only allows two types of collaterals to be considered as part of its credit risk mitigation process: - Certificate of Deposits held with the Bank or a related party, and - Investment in debt securities Certificate of deposits pledge as collateral are measured at amortized costs and investment in debt securities at fair value. The Bank considers fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participant. Only the original amount of the certificate of deposits is considered as mitigation and for capital requirements, only the amount expose is considered for the calculation. In the case of investment in debt security, at every reporting date the value is actualized with the market value of the security. The bank only regards as collaterals instruments that are quoted in active market, hence the Bank measures the fair value of this instruments using a quoted prince in the active market of the instrument. The Bank Is not involve in netting of on and off balance sheet items. Following the portfolios with CRM as of September 30, 2017: Table No. 12 Portfolios with CRM (In millions) DESCRIPTION AMOUNT CRM FINAL EXPOSURE Claims in regulatory $ 12,246 $ 9,217 $ 3,029 retail portfolio Past Due Loans 1,188 1,188 0 Secured TOTAL 13,343 10,405 3, Capital Structure Ratings, Spreads and Interest Coverage Ratios 6 In compliance with Pillar III Disclosures Table 6 Credit Risk Mitigation, pag. 14/20 of Market Discipline Guidelines September

13 MARKET RISK 7 Market risk is the risk of loss arising from potential adverse changes in the value of the Bank s assets and liabilities resulting from changes in market variables such as interest rates, foreign exchange rates, equity prices, commodity prices, implied volatilities or credit spreads. Market Risk Exposure The Bank s market risks arise predominantly from activities from the Treasury Department. This Department decide on the purchase and sale of investment across global market participants, manage Bank s liquidity and cash flow on an everyday basis, and decide on necessary hedge or corporate decision for foreign exchange exposure as results of deposits received or held in a different currency than US dollars, functional currency of the Bank. Market Risk Management The Bank is in the process of improving and developing a Risk Management Framework which will includes the policies, procedures and methodologies for the Management of Market Risk. The Bank s board of directors has overall responsibility for the establishment and oversight of the Bank risk management framework. The Bank s objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing returns. The Bank s Treasury administers the assigned resources in the most efficient way possible according to defined perception and understanding of the markets, and the expectations about the evolution of the risk factors that are involved. The Bank s Board of Directors has determined that market risk management should be directly administered and supervised by the Assets and Liabilities Committee. This Committee is responsible for the development and proper execution of market risk policies, after they have been approved by the Board of Directors. Through its experience, knowledge and projection of the financial markets and with the objective of formulating policies to better manage market risk exposure, the Assets and Liabilities Committee has established the following: Daily measurements of the financial instruments held by the Bank, and those expected to be acquired. Monthly monitoring of unrealized gain and loss of the portfolio. Monthly measurements of the maximum established limits for investing in the various markets. Exercise control and supervision of the profitability of the financial instruments to optimize returns. In order to measure and monitor market risk, the following indicators are used: Valuation Models: Positions are considered at market value, according Bloomberg electronic system. In case these values differ from book value, loss provisions may be established to cover these differences if an impairment is determined, as explained in the credit risk section of this report. Stress Tests: These tests (including VaR) are done by applying situations of maximum volatility in risk factors observed for a determined time. This is done based upon information gathered from the fixed incomeexchange electronic systems, and it is done on a quarterly basis by the Risk Department and 7 In compliance with Pillar III Disclosures Table 9 Market Risk, pag. 17/20 of Market Discipline Guidelines September

14 presented to the Risk Committee for its monitoring. They are then reviewed by the Board of Directors. Cash Flow and Fair Value Interest Rate Risk These risks imply that future cash flows and that the value of a financial instrument will fluctuate due to changes in market interest rates. The Table No. 13 in Appendix III sets out the exposure on the balance sheet of cash flow and interest rate risk as of September 30, As of September 30, 2017, majority of financial instruments held by the Bank have fixed interest rates. Therefore, these instruments are not materially affected by interest rate fluctuation that may impact results of operations. Hence the Bank does not maintain operations to hedge in relation to this risk. Currency exchange risk Non-U.S. dollar FX risk is the risk that changes in foreign exchange rates affect the value of the Bank s assets or liabilities or future results. The Table No. 14 in Appendix IV sets out the exposure on the balance sheet of foreign exchange risk as of September 30, The Bank does not maintain transactions to hedge the currency exchange risk exposure. Capital Requirements for each type of Market Risk Table No. 3 presents the Bank s market riskbased capital and risk-weighted assets as of September 30, RWA is calculated as Risk Based Capital multiplies by 12.5; any calculation differences are due to rounding. 12

15 OPERATIONAL RISK 8 Operational risk is the risk of loss resulting from inadequate or failed processes or systems, human factors or due to external events that are neither market- nor creditrelated. Operational risk is inherent in the Bank s activities and can manifest itself in many ways, including fraudulent acts, business interruptions, inappropriate employee behavior, failure to comply with applicable laws and regulations and negative perception from client s due to failure to performed accordance with basic arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damages to the Bank. Operational Risk Management The Bank is in the process of improving and developing a Risk Management Framework which will includes the policies, procedures and methodologies for the Management of Operational Risk. The Bank s board of directors has overall responsibility for the establishment and oversight of the Bank risk management framework. The objective of the Bank is to keep operational risk at appropriate levels considering the Bank s financial strength, the characteristics of its businesses, and the markets and regulatory environments in which it operates. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business or corporate unit. Capital Requirements for Operational Risk Currently the Bank only measures operational risk using the standardized approach defined by the FSRC. Under this approach the Bank must hold capital for operational risk that is at least equal to the average over the previous three (3) years of 15% of positive annual gross income. As of September 30, 2017, the capital charge in relation to operational risk amounted to US$14MM, resulting in US$178MM in RWA. 8 In compliance with Pillar III Disclosures Table 10 Operational Risk, pag. 18/20 of Market Discipline Guidelines September

16 Non-Applicable Disclosure Statement As of September 30, 2017, the Banks is not a consolidated entity and does not maintain complex or hybrid capital instruments, counterparty credit risk due to derivative hedge, securitization operations, position in equity securities and a banking book, according to the FSRC definition set forth in its guidelines, hence Table 1, 7,8,11 and 12 of the Market Discipline Guidelines (Disclosure and Transparency Requirements Pilar III), are not applicable for the Bank. 14

17 Appendices PILLAR 3 REGULATORY CAPITAL DISCLOSURES For the quarterly period ended September 30,

18 CREDIT RISK CONCENTRATIONS Appendix I The majority of the Bank s depositors base are Venezuelan clients, since the strategy for the Banks in its begging was to capitalized Banco Occidental de Descuento (BOD) strengths, hence most of its customers are located in Venezuela. Following the analysis for concentration risk for the Bank s financial assets as of September 30, 2017: Table No. 5- Geographical Concentrations South America exposure in Investment in Securities includes predominately securities from Venezuela, Ecuador and Brazil. Table No. 6- Sector Concentrations *Represents the most significative exposure with the other assets portfolio as for capital adequacy calculations ** Presented net of authorized overdrafts *** Presented net of loan allowance 16

19 CREDIT QUALITY OF ASSETS Appendix II Table No. 7 Credit Quality of Loans As of September 30, 2017 Loan, Credit Cards y SL* Neither past due nor impaired Grade 1: Pass 22,031,655 Total 22,031,655 Table No. 8 Credit Quality of deposits and Investments Past due with Collateral 1-30 days 383, days 122, days 204, days 437, days 318, ,064 Total 1,473,315 Past due without Collateral 1-30 days 877, days 113, days 1, days 178, days 30, ,229 Total 1,387,832 Individually impaired Grade 2: Special Mention 10,724,005 Total 10,724,005 Total Loan Portfolio 35,616,808 Allowance for impairment Individual 301,554 Collective 723,889 Total allowance for impairment 1,025,443 Total Loan Portfolio, net 34,591,365 *Deposits with Banks are presented net of authorized overdrafts 17

20 Appendix III MARKET RISK EXPOSURE ON INTEREST RATE RISK Table No.13 Exposure on the balance sheet of cash flow and interest rate risk Up to 1 From 1 From 3 to Over As of September 30, 2017 Year to 3 years 5 years 5 years Total Assets: Cash and deposits with banks 20,774,012 20,774,012 Loans, net 24,729, ,766 24,846,365 Investment in securities * 31,740,750 89,636, ,163, ,996,148 1,029,537,088 Securities lending 9,475,000 9,475,000 Restricted deposits with banks 1,500,000 1,500,000 Total 88,219,361 89,753, ,163, ,996,148 1,086,132,464 Liabilities: Demand deposits 16,327,643 16,327,643 Savings deposits 266,908, ,908,263 Time deposits 466,192,039 9,100, ,292,039 Other liabilities 5,696,063 5,696,063 Total 755,124,009 9,100, ,224,009 Total interest sensitivity gap (666,904,648) 80,653, ,163, ,996, ,908,456 The Bank s assets and liabilities are shown at book value, and they are classified by categories of whichever occurs first: the repricing or the due date. *As mentioned above, investment in securities are classified as available for sale, this category includes securities acquired with the intention of holding them for an indefinite period, which may be sold in response to needs for liquidity, changes in interest rates, exchange rates or investments prices. Because management does not have an specific date for the sale of investments, it has been classified with its maturity date, however it can be sold at a gain or loss, at any moment depending on market conditions. 18

21 Appendix IV MARKET RISK EXPOSURE ON CURRENCY EXCHANGE RISK Table No. 14 Currency Exchange Risk Exposure As of September 30, 2017 Euros East Caribbean Dollars Dominican Pesos British Pound Total Demand deposits with banks 249,018 9, ,784 Total 249,018 9, ,784 Due to depositors 1,373, ,373,455 Accrued interest payable 4, ,893 Other liabilities 334, ,928 Total 1,713, ,713,276 Net position in the statement of financial position (1,464,238) 9, (20) (1,454,492) 19