Investment Dar Bank BSC Risk And Capital Management Basel II Pillar III Disclosures As At 30 June 2017

Transcription

1. Risk and Capital Management Basel II – Pillar III Disclosures As at 30 June 2017
2. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures Index 1. Executive summary 3 2. Group structure 4 3. Capital structure and capital adequacy ratio 4. Credit risk 4 -5 6 4.1 Capital requirements for credit risk 6 4.2 Quantitative information on credit risk 7 4.2.1 Gross and average credit exposure 7 4.2.2 Credit exposure by geography 7 4.2.3 Credit exposure by industry 8 4.2.4 Exposure by maturity 8 4.2.5 Impaired facilities and past due exposures 9 4.2.6 Exposure to connected counterparties 10 5. Market risk 10 6. Operational risk 11 7. Regulatory capital requirements for credit risk by type of Islamic financing contract 11 8. Past due Islamic financing contracts 11 8.1 Past due Islamic financing contracts by industry 11 8.2 Ageing of past due and financing contracts – Wakala & Murabaha placements 12 8.3 Ageing of past due other assets 12 8.4 Other assets provision breakup 12 8.5 Gross value of contracts netted off by provisions and collaterals 13 9. Restricted Investment Accounts 13 10. Investments in foreign subsidiaries 13 -14 11. Financial performance and position 14 12. Liquidity risk 14 13. Exposure grading policy 15 14. Other disclosures 15 -16 2 30 June 2017
3. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 1. Executive summary Investment Dar Bank B.S.C. (c) (“the Bank”) is a Bahraini closed shareholding company registered with the Ministry of Industry and Commerce in the Kingdom of Bahrain and operates under commercial registration number 66163 obtained on 8 August 2007. The “Parent Company” of the Bank is The Investment Dar K.S.C., a Kuwaiti incorporated Company listed on Kuwait Stock Exchange, which owns directly and indirectly more than 50% of the share capital of the Bank. The Bank operates as an Islamic Wholesale Bank under a license granted by the Central Bank of Bahrain (“CBB”) and accordingly activities are regulated by the CBB and supervised by a Religious Supervisory Board (“the Shari’a Board”). The principal activities of the Bank include investment banking services, which comply with the Islamic rules and principles according to the opinion of the Bank’s Shari’a Board. The CBB Basel II guidelines became effective on 1 January 2008 as the common framework for the implementation of Basel II capital adequacy framework for banks incorporated in the Kingdom of Bahrain. These semi-annual disclosures have been prepared in accordance with the CBB requirements outlined in the Public Disclosure Module (“PD”), Section PD-3.1.6: Additional Requirements for Semi Annual Disclosures, CBB Rule Book, Volume II for Islamic Banks. These semi-annual quantitative disclosure requirements follow the requirements of Basel II - Pillar 3 and the Islamic Financial Services Board’s (IFSB) recommended disclosures for Islamic banks. These disclosures should be read in conjunction with the detailed Risk and Capital Management Disclosures made in Bank’s Annual Report for the year ended 31 December 2016 and the condensed consolidated interim financial information for the six months ended 30 June 2017. This report contains a description of the Bank’s risk management and capital adequacy practices and processes, including detailed information on the capital adequacy process. As at 30 June 2017 the Bank’s CAR stood at a healthy 30.82%. The Bank is in constant discussion with its regulator in relation to its capital position & its plan to further improve its regulatory capital ratio. Basel II Framework The Basel II framework introduced by CBB with effect from 2008, provides a more risk sensitive approach to the assessment of risk and the calculation of regulatory capital i.e. the minimum capital that a bank is required to maintain. The framework intends to strengthen the risk management practices and processes within financial institutions. The Bank has accordingly taken steps to comply with these requirements. The CBB’s capital management framework, consistent with the Basel II accord, is built on three pillars:  Pillar I defines the regulatory minimum capital requirements by providing rules and regulations for measurement of credit risk, market risk and operational risk. The requirement of capital has to be covered by the Bank’s own regulatory funds.  Pillar II addresses a bank’s internal processes for assessing overall capital adequacy in relation to risks (ICAAP). Pillar II also introduces the Supervisory Review and Evaluation Process (SREP), which assesses the internal capital adequacy. 3 30 June 2017
4. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 1. Executive summary (continued) Basel II Framework (continued)  Pillar III complements the other two pillars and focuses on enhanced transparency in information disclosure, covering risk and capital management, including capital adequacy. 2. Group structure The consolidated financial information comprise the financial statements of the Bank and its subsidiaries (together referred to as the “Group”) as at 30 June 2017. As at 30 June 2017 and 31 December 2016, the Bank owned the following subsidiaries: Country of incorporation Name Darco Real Estate Investment Co. W.L.L. Al Honaniya Real Estate Co. W.L.L. North Victoria Limited * Gibson North Limited * Ownership interest Kingdom of Bahrain 100% Kuwait Jersey,Channel Islands Jersey, Channel Islands Principal activity Buying and selling properties, shares and securities, management and development of private property, investment in local industries and promotion of foreign products and services 100%- Indirect holding Real estate 100% Real estate 77.425% Real estate (*) The Bank acquired the shares of North Victoria Limited and Gibson North Limited (“these companies”) as part of a settlement of a Murabaha placement with a related party of the Parent Company during 2012. As per the settlement contract, the liabilities as on the date of settlement in the books of these companies were not transferred to the Bank. The main asset in the books of these companies was the value of islands in “The World” which have been treated as investment properties on consolidation. The value of the investment properties was restricted to the value of the Murabaha carried in the books of the Bank prior to settlement. 3. Capital structure and capital adequacy The Bank’s equity position as at 30 June 2017 and 31 December 2016 is as follows: \ Share capital Statutory reserve Property fair value reserve Investments fair value reserve Foreign currency translation reserve Accumulated losses 30 June 2017 (Solo Basis) 200,000,000 1,477,959 831,162 (340,764) (116,126,827) 85,841,530 4 30 June 2017 31 December 30 June 2016 2017 (Solo Basis) (Consolidated) 200,000,000 200,000,000 1,477,959 1,686,626 1,225,164 431,265 831,162 (376,688) (340,764) (114,761,819) (115,911,623) 86,770,717 87,490,565 USD’000 31 December 2016 (Consolidated) 200,000,000 1,686,626 1,225,164 431,265 (376,688) (114,465,090) 88,501,277
5. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 3. Capital structure and capital adequacy (continued) The Bank’s regulatory capital position at 30 June 2017 was as follows: Issued and fully paid ordinary shares Statutory reserves Accumulated losses brought forward Current interim cumulative net losses All other reserves Unrealised gains from fair valuing equities Tier 1 capital before deductions Assets revaluation reserve USD’ 000 Total CET 1 Tier 2 200,000 1,478 (114,761) (1,365) (341) 831 - - 200,000 1,478 (114,761) (1,365) (341) 831 85,842 - 85,842 - - - - - Total Tier 2 Total Capital 85,842 Risk weighted exposures Credit risk Market risk Operational risk Total risk weighted exposures Total Capital Adequacy Ratio Risk weighted exposure Capital requirement @12% 270,333 4 8,154 32,440 979 278,491 33,419 30.82% The Bank’s paid up capital consists of only ordinary shares which have proportionate voting rights. 5 30 June 2017
6. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 4. Credit risk 4.1 Capital requirements for credit risk To assess its capital adequacy requirements for credit risk in accordance with the CBB requirements, the Bank adopts the standardized approach. According to the standardised approach, on and off balance sheet credit exposures are assigned to various defined categories based on the type of counterparty or underlying exposure. The main relevant categories are claims on banks, claims on investment firms, investment in equities, holdings in real estate, claims on corporate portfolio and other assets. Risk Weighted Assets (RWAs) are calculated based on prescribed risk weights by CBB relevant to the standard categories and counterparty’s external credit ratings, where available Following is the analysis for credit risk as computed for regulatory capital adequacy purposes: Gross credit Exposures Average risk Weights Self financed assets Cash items Standard risk weights for claims on banks Preferential risk weight for claims on locally incorporated banks – BD & USD Short term claims on banks Any Exposure exceeding 15% of total capital Past due facilities where specific provision is 20% or more Listed equity investment Unlisted equity investment Holding of real estate Other assets 1 13,925 16 4 11,348 5,037 7,920 35,660 17,199 0% 20% 20% 20% 800% 100% 150% 400% 100% Total risk weighted exposure (A) 91,110 Asset categories for credit risk Total regulatory capital required (A x 12%) 2,785 3 1 90,787 5,037 11,880 142,640 17,199 270,332 32,440 6 30 June 2017 USD ‘000 Total credit risk weighted exposure
7. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 4. Credit risk (continued) 4.2 Quantitative information on credit risk 4.2.1 Gross and average credit exposure The following are gross credit risk exposures considered for Capital Adequacy Ratio calculations of the Bank classified as per disclosure in the condensed consolidated interim financial information: USD ‘000 Balance sheet items Self financed Total gross credit * Average gross exposure exposure credit exposure Cash and cash equivalents Prepayments and other assets Investment securities Investment in real estate held-for-use 16,105 68 12,957 46,392 16,105 68 12,957 46,392 16,105 68 12,957 46,392 75,522 75,522 75,522 * Average gross credit exposures have been calculated based on the average of balances outstanding on 30 June 2017. 4.2.2 Credit exposure by geography The Classification of credit exposures by geography, based on the location of the counterparty, was as follows: USD ‘000 Balance sheet items Cash and cash equivalents Mudharaba deposit Prepayments and other assets Investment securities Investment in real estate held-for-use Off-Balance sheet items Restricted Investment Accounts 7 30 June 2017 GCC Countries Europe Total 1,163 1,017 68 12,957 46,392 13,925 - 15,088 1,017 68 12,957 46,392 61,597 13,925 75,522 481,103 - 481,103
8. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 4. Credit risk (continued) 4.2.3 Credit exposure by industry The classification of credit exposures by industry was as follows: USD’000 Banks and financial institutions Real estate Others Total 15,088 1,017 243 - 12,714 46,392 68 - 15,088 1,017 68 12,957 46,392 16,348 59,106 68 75,522 - - 481,103 481,103 Balance sheet items Cash and cash equivalents Mudharaba deposit Prepayments and other assets Investment securities Investment in real estate held-for-use Off-Balance sheet items Restricted Investment Accounts 4.2.4 Credit exposure by maturity The maturity profile of exposures based on maturity was as follows: USD’000 Up to 3 months 3 to 6 months 6 to 12 months 1 to 3 years 3 to 5 years 5 to 10 years Above 10 years Overdue Total 16,105 - - - - - - - 16,105 11 - 33 - 23 - - 12,957 - - 1 - 68 12,957 16,116 33 23 - 12,957 - - 1 29,130 Accruals and other payables - - - 656 - - - 2,126 2,782 Net liquidity gap 16,116 33 23 12,957 - - (2,125) 26,348 - - - 453,907 - - 27,196 Balance sheet items Cash and cash equivalents Prepayments and other assets Investment securities Total assets Off-Balance sheet items Restricted Investment Accounts 8 30 June 2017 (656) - 481,103
9. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 4. Credit risk (continued) 4.2.5 Impaired facilities and past due exposures Movement in impairment provisions during the period: USD’000 Specific Provisions Against Investments Other assets and off-Balance sheet items General provision allocated to self investment a/c 43,775 - 611 6 - 2,484 - - 43,775 617 2,484 - Financing facilities At beginning of the year New provisions made Recoveries/write backs Balance at 30 June 2017 The movement of impairment provisions against financing facilities during the year by industry is as follows: Banks and financial institutions 44,509 - Real estate 611 6 - Others 1,750 - General Provision Allocated to Self Investment a/c - 44,509 617 1,750 - Specific Provisions Against At beginning of the year New provisions made Recoveries / Write backs Balance at 30 June 2017 Gross impaired facilities as at 30 June 2017 USD’000 Gross impaired facilities/receivables 22,286 23,239 1 to 3 Years Over 3 Years Total 45,525 Analysis of all facilities/receivables by industry Financial Other sectors Total facilities/receivables by industry 9 30 June 2017 Amount outstanding Non-performing amounts Specific Provisions 45,525 45,525 45,525 - - - 45,525 45,525 45,525
10. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 4. Credit risk (continued) 4.2.6 Exposure to connected counterparties (including off-Balance sheet items) – consolidated Claims on head office and overseas branches and offices Claims on staff Claims on senior management Exposures to the directors and their associates Exposures to unconsolidated subsidiaries Exposures to consolidated subsidiaries Exposures to bank's associates Exposures to significant shareholders 1 6,578 453,908 Total exposures to connected counterparties 5. 460,486 Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to adverse changes in profit rates, foreign exchange rates, equity, and commodity prices. Under the CBB standarised approach, market risk exposures are calculated for the five categories shown in the table below. Apart from limited foreign exchange, which is mainly transaction-driven, and long-term foreign currency exposure on private equity investments, the Bank has limited exposure to short-term market risks. The details of the Bank’s market risk capital charges and the equivalent market risk-weighted exposure as at 30 June 2017 and 31 December 2016 are: Price risk Equities position risk Sukuk risk Foreign exchange risk Commodities risk Total capital requirement for market risk Multiplier Total market risk-weighted exposure 10 30 June 2017 30 June 2017 0.28 - 31 December 2016 79 - 12.5 79 12.5 4 989
11. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 6. Operational risk – Basic Indicator Approach The Bank adopts the Basic Indicator Approach to evaluate operational risk charge in accordance with the approach agreed with the CBB. The bank’s average gross income for the last three financial years is multiplied by a fixed coefficient alpha of 15% set by CBB and a multiple of 12.5x is used to arrive at the risk weighted assets that are subject to capital charge. Average gross income Risk weighted assets Capital charge at 12% 4,349 8,154 522 Operational risk 7. Regulatory Capital requirements for Credit Risk by type of Islamic Financing Contract USD’000 Credit exposure Risk weights Credit Risk weighted asset Murabha where Specific Provision is 20% or more - 100% - Wakala where Specific Provision is 20% or more - 100% - Asset Categories for Credit Risk 8. Past Due Islamic financing Contracts 8.1 Past due Islamic financing contracts by industry USD’000 Banks & financial institutions Real estate Others Total Exposure Country Murabha Placement Provision for Impairment Murabha Kuwait Kuwait - - - - Net Murabaha Placement Kuwait - - - - Wakala Placement Provision for Impairment Wakala Kuwait Kuwait 42,522 (42,522) - - 42,522 (42,522) Net Wakala Placement Kuwait - - - - - - - - 11 30 June 2017
12. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 8. Past Due Islamic financing Contracts (continued) 8.2 Ageing of past due financing contracts – Wakala and Murabaha placements USD’000 Over 3 months Over 1 years Over 3 years Past due (gross exposure) Impaired - - 42,522 (42,522) Non-performing (net exposure) - - - 8.3 Ageing of past due other assets USD’000 Over 3 months Over 1 years Over 3 years Past due (gross exposure) - - 1,987 Impaired Nonperforming (Net exposure) - - 4,355 1,253 8.4 Other Assets Provision breakup USD’000 Amount Counterparty #1 Counterparty #2 Counterparty #3 Counterparty #4 Investment securities 1,750 734 1,150 104 617 4,355 12 30 June 2017
13. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 8. Past Due Islamic financing Contracts (continued) 8.5 Gross value of contracts netted off by provisions and collaterals USD’000 Financing Contracts Amount outstanding Specific provisions Collateral 42,522 42,522 - - - - - - 42,522 42,522 - - Wakala Murabha Total Facilities / Receivables by Sector Net General Provision on total Wakala & Murabha is USDNil. 9. Restricted Investment Accounts The Group offers Restricted Investment Accounts (RIAs) to both financial and non-financial institutions. All RIA offering documents are prepared and issued with input from the business lines and Shari’ah Assurance, Financial Control, Legal and Risk Management departments, to ensure that all investors have sufficient information to consider all risk factors allowing them to make an informed decision. The Bank has clear guidelines and procedures for the development, management and risk mitigation of its RIAs. The Bank has established a robust operational and functional infrastructure to ensure that effective internal control systems are in place, and that RIA holders’ interests are protected at all times. The Bank is fully aware of its fiduciary duties and responsibilities in managing RIAs. USD’000 2017 (6 months) 2016 (12 months) 2015 (12 months) 2014 (12 months) 2013 (12 months) 2012 (12 months) - - - - - - Historical returns over the last 5 years 10. Investments in foreign subsidiaries Nature of the related currency exposure and how it changed from year to year Nature of currency exposure Investment in real estate held for rent Fair value of the asset in 2017 8,614 Fair value of the asset in 2016 8,614 13 30 June 2017
14. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 10. Investments in foreign subsidiaries (continued) Foreign exchange translation effects Change in currency rate Effect on profit 2017 USD Effect on Equity 2017 USD Effect on profit 2016 USD Effect on Equity 2016 USD +20% 521 521 900 900 KWD 11. Financial performance and position Return on average equity Return on average assets Cost-toincome ratio 2017 (6months) 2016 (12months) 2015 (12months) 2014 (12months) 2013 (12 months) 2012 (12 months) -1.61% 9.43% -25.27% -1.68% -9.79% 0.71% -1.56% 8.92% -23.79% -1.60% -9.58% 0.69% -847.18% 19.95% 763.58% 369.32% 146.60% 68.87% 12. Liquidity Risk Management Liquidity risk is the risk that the Group will not be able to meet its current and future cash flow and collateral needs, both expected and unexpected, without materially affecting its daily operations or overall financial condition. The key features of the Group’s liquidity methodology are: • The Group Asset and Liability Committee (ALCO) is responsible for liquidity monitoring, cash flow planning, and general asset liability management. • In accordance with the Basel recommendations on liquidity management, the Group measures liquidity according to two criteria: “normal business”, reflecting day-to-day expectations regarding the funding of the Group; and “crisis scenario”, reflecting simulated extreme business circumstances in which the Group’s survival may be threatened. • The Group’s liquidity policy is to hold sufficient liquid assets to cover its committed statement of financial position requirements, plus its budgeted expenses for the liquidity horizon, and its forecast investment commitments over the liquidity horizon. The following table discloses undiscounted residual contractual maturities of the Group's assets and liabilities except in case of investments in unquoted equity securities, equipment and certain other assets and other liabilities, which are based on management's estimate of realisation. 14 30 June 2017
15. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 13. Exposure Grading Policy The Bank’s exposures grading policy is classifying exposures as per the grades listed below and the level of provisions are determined accordingly: (i) 'Standard credits 0%' are those, which are performing, as the contract requires. There is no reason to suspect that the creditor's financial condition or collateral adequacy has depreciated in any way. The bank is very likely to extend additional funds to this borrower if requested (subject to internal or legal credit restrictions); (ii) 'Substandard credits 25%' are inadequately protected by the paying capacity of the obligor or by the collateral pledged. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard assets does not have to exist in individual assets classified Substandard; (iii) 'Doubtful credits 50%' have all the weaknesses inherent in a credit classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of Loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its rating as an estimated Loss is deferred until its more exact status may be determined; and (iv) 'Loss credits 100%' are considered uncollectible and of such little value that their continuance as assets is not warranted. The rating does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. 14. Other disclosures Audit and other services fees USD Audit and other professional charges 43,951 Sensitivity analysis on rate of returns on quoted equity investments: Listed investment security Change in Profit rate Effect on profit 2017 USD Effect on equity 2017 USD Effect on profit 2016 USD Effect on equity 2016 USD +10% 152,433 152,433 202,031 202,031 15 30 June 2017
16. Investment Dar Bank B .S.C (c) Risk and Capital Management Basel II – Pillar III Disclosures 14. Other disclosures (continued) Employment of relatives of approved persons  As a policy, the recruitment of “next of kin” is not encouraged. In the event where this is permitted, these are not to be recruited to positions that interact directly with each other. In no circumstances is an employee to report indirectly or directly to a family member.  The chief executive/general manager of the Islamic bank licensees must disclose to the board of directors on an annual basis relatives of any approved persons occupying controlled functions within the Islamic bank licensee. 16 30 June 2017