The Risk Group (RG) provides independent oversight and support in the establishment of the enterprise risk management (ERM) framework across the organization. RG proactively assists in recognizing potential adverse events and establishes appropriate risk responses. This reduces costs or losses associated with unexpected business disruptions. The Group works to identify, measure, monitor, control and report risk exposure against limits and tolerance levels and reports to senior management and the Board of Directors.
Risk Group’s strong disciplined framework has been essential in withstanding the uncertain economic environment in Egypt. As a result, CIB was able to deliver strong results, serve our clients and maintain our reputation as a market leader, despite economic challenges.
Risk Group Objectives
•Implement a robust enterprise risk management (ERM) framework that meets regulatory requirements and international best practices.
•Work closely with business and support groups in order to monitor portfolios and operations in order to provide independent risk analysis.
•Raise efficiency to reduce expected losses, while maintaining adequate impairments coverage.
•Provide projections of unexpected losses in order to maintain capital adequacy.
•Review business decisions, adjusted for risk, in order to optimize capital utilization and return on shareholders' value.
The Chief Risk Officer (CRO) manages the Risk Group and has the overall day-to-day accountability for functions for the following key areas: credit and investment exposure management, consumer credit risk, credit and investment administration, credit information, risk management, and remedials and recoveries. The CRO reports directly to the Chairman and has oversight of the enterprise risk management framework and fosters a strong risk management culture throughout the organization
Key Management Risk Committees
The CRO and other risk officers are key members of all credit, asset and liability management, and consumer and operational risk committees.
•The High Lending and Investment Committee (HLIC) is composed of senior executives of the Bank. The primary mandate is to manage the asset side of the balance sheet, while ensuring compliance with the Bank’s credit policies and CBE directives and guidelines. The HLIC reviews and approves the Bank’s credit facilities and equity investments, as well as focuses on the quality, allocation and development of assets and the adequacy of provisions coverage.
•The objective of the Asset & Liability Committee (ALCO) is to optimize the allocation of assets and liabilities, given the expectations of future and potential impact of interest rate movements, liquidity constraints, foreign exchange exposures and capital adequacy. ALCO monitors the Bank’s liquidity and market risks, economic developments, market fluctuations and risk profile to ensure ongoing activities are compatible with the risk/ reward guidelines approved by the Board of Directors.
•The Consumer Risk Committee (CRC)’s overall responsibility is managing, approving, and monitoring all aspects related to the quality and growth of the consumer and business banking portfolio. CRC decisions are guided first and foremost by the current risk appetite of the Bank, as well as the prevailing market trends, while ensuring compliance with the stipulated guidelines set by the Consumer Credit Policy Guide, as approved by the Board of Directors.
•The Operational Risk Committee (ORC) supports the Bank in fulfilling its responsibility to oversee the operational risk management functions and processes. The objective of the ORC is to oversee, approve and monitor all aspects pertaining to the Bank’s compliance with the operational risk framework and regulatory requirements.
Credit & Investment Exposure Management Group (Institutional Banking)
Credit Risk is a loss from a borrower or counterparty that fails to meet its obligation. The Bank is exposed to credit risk via a diversified client base, consisting of large corporate, institutional and individual customers. Management and the Board of Directors have established key committees to review credit risk and concur with overall policy. Under the Risk Group, credit risk is managed by the Credit and Investment Exposure Management Group and Consumer Credit Risk Group. These groups actively monitor and review exposure to ensure a well-diversified portfolio in terms of customer base, geography, industry, tenor, currency and product.
The Credit & Investment Exposure Management Group’s primary objective is to evaluate the lending and investment portfolios, using qualitative and quantitative analysis to properly build a quality portfolio, enhance the Bank’s seniority, and establish adequate protection, control and a solid provisioning process to ensure portfolios are adequately covered. This is achieved through continuous analysis, monitoring and close follow-up of portfolios, in addition to conducting periodic performance assessments to detect early signals of possible distress or deterioration and to set corrective measures for mitigation.
The above measures, backed by the high portfolio quality, enabled the Bank to maneuver safely through a difficult period, reflected in a slight increase in default ratio to 3.63% in 2012 as compared to 2.82% in 2011, coupled with a coverage ratio of 134.4% in 2012 as compared to 136.04% in 2011, confirming the Bank’s solid financial position.
On the Correspondent Banking side, turbulence across Europe continues. However, the Bank continues to adopt a strategy of limiting exposures to counterparties in the affected countries, while confining exposures to financially strong and stable institutions that are able to emerge from the crisis.
Going forward in 2013, CIB will continue to support business growth through adoption of a prudent strategy built on risk mitigation and sound risk assessment.
Credit and Investment Administration / Credit Information Group
The Credit & Investment Administration function ensures administrative control over institutional and investment exposures as well as compliance with both the Credit Policy Guidelines and CBE directives. Credit and Investment Administration Department represents a strong back-up to the Institutional Banking Group by maintaining a quality control system that ensures CIB seniority, protection and control, which is processed through verification of assigned collateral related to approved facilities prior to disbursement of funds, in addition to robust reporting that facilitates effective decision-making.
The Credit Information Department compiles comprehensive client-specific market information reports, from various sources, for all corporate and mid-cap clients, and is responsible for extracting all regulatory reports, in order to assist in the approval decision.
Consumer Credit Risk Group
Consumer Credit Risk Group is an independent governance group that manages the centralized risk function for all consumer asset products. The purview of this unit extends across the entire consumer credit cycle, including policy formulation, underwriting and credit assignment, collection and repayment, portfolio monitoring and analytics and application fraud. The overall objective is to maintain a quality portfolio, which is monitored through a robust analytics unit that facilitates effective decision-making. The group also ensures compliance with the Consumer and Business Banking Policy Guidelines and Central Bank of Egypt directives.
The Bank’s Consumer Asset portfolio consists primarily of Credit Cards, Auto Loans, Personal Loans, Secured Overdrafts, Residential Property Finance and the newly launched Business Banking Segment. The Bank has now assumed a market leadership position in the Consumer Asset business. The Consumer Asset portfolio has exhibited relatively strong growth throughout the year with an increase of EGP 1.5 billion, representing a growth rate of 29%.
This growth can be attributed to the introduction of new programs and policy changes that give the Bank a definite competitive edge in the market. The Consumer Credit Risk Group, in conjunction with the business units, have deepened the product line by rolling out multiple programs and product variants to attract the target segment envisaged to facilitate the growth. Over the past four years, CIB has built a sizeable Consumer Asset portfolio of more than EGP 6.8 billion with an enviable portfolio quality carrying loss rate of 0.4%. This portfolio size and quality provides a high loss-absorption capacity to the Consumer Asset portfolio, which has facilitated the launch of multiple programs to attract high-yield segments to further enhance the profitability of the Consumer Asset business.
Furthermore, a dedicated Business Banking set-up has been institutionalized to attract the previously untapped segment of customers in the EGP 5-50 million turnover range. This new business line should address the specific needs of this segment, and consequently, separate product programs have been launched. Also, a dedicated risk structure has been set-up to specifically address the associated risks of this segment and fulfill the different skill-set required to venture into it.
The aggressive portfolio growth was achieved while improving portfolio quality – after the increases seen in 2011 – to levels witnessed prior to the Egyptian Revolution. The portfolio has exhibited a healthy trend with non-performing assets at 2.1% (compared to 3.3% in 2011 and 2.4% in 2010) and loss rates of 0.4% (compared to 0.6% in 2011 and 0.5% in 2010). The portfolio quality has been sustained by ensuring the right portfolio mix (with concentration caps across comparatively riskier segments) and a very rigorous portfolio management approach that identifies opportunities for growth and defines corrective actions that are then executed subsequently. There are multiple coincident and lagged indicators instituted across the consumer credit life cycle to monitor and maintain the optimal portfolio quality. Portfolio monitoring begins with a rigorous review of all early warning indicators, such as Through-The-Door (TTD) analysis, First Payment Defaults (FPD) and non-starters coupled with key coincident indicators, such as delinquencies, bucket movements and consequent flow rates, and Was-Is analysis across key segments. Segmented vintages and Month-On-Book (MOB) analysis are also employed to identify different customer repayment patterns and provide the fundamental base for all policy formulations and collection strategies. Loss recognition and provisioning methodologies have been implemented along IFRS guidelines, which ensure that the Bank is pragmatic in its current risk assessment and forecasting of future potential losses.
Remedials & Recoveries Department
The Remedials & Recoveries Department aims to achieve the maximum recovery rate from the Bank’s institutional write-offs by building solid remedial strategies.
Comprehensive analysis is conducted with all concerned departments to avoid recurrence, including setting guidelines to avoid future write-offs, and to develop viable strategies to maximize recovery prospects. The department further manages and reviews the remedial accounts’ performance and financial standing through a framework that entails active involvement in the management of turnaround potentials via committees or Board representations.
In addition, it seeks reactivation of relationships with stagnant accounts and proposes settlements or turnaround plans. These tasks are accomplished while ensuring continuous update and renewal of the documentation, supports, and other collaterals to maintain CIB’s seniority and control.
Despite difficult market conditions, recoveries amounted to EGP 19.2 million in 2012 versus EGP 15.7 million in 2011.
Consolidated Portfolio Quality & Provisioning
Total IFRS based Impairment Charges reached EGP 1.93 billion in December 2012, as opposed to EGP 1.45 billion in 2011, despite write-off of EGP 186.3 million in 2012. The Bank’s General Ratio for Direct Exposure decreased from 1.77% as of December 2011 to 2.32% in 2012.
|Gross Loans (000's of EGP)||28,981,189||36,716,652||42,933,133||22,350,975|
|Charge Offs to Date (000's of EGP)||1,609,105||1,714,960||1,870,898||2,057,209|
|Recoveries to Date (000's of EGP)||338,928||368,095||383,835||403,031|
|General Ratio (Direct Exposure only)||2.32%||2.19%||1.77%||2.32%|
|recoveries to date/Charge-Offs to Date||21.06%||21.46%||20.52%||19.59%|
Risk Management Department
The Risk Management Department (RMD) identifies, measures, monitors and controls the asset and liability management (ALM), and market and operational risk via the Bank’s policies and ensures that the Basel II and risk analytics requirements are adequately managed and that the status is regularly reported to management and the Board of Directors.
Liquidity Risk is the risk that the Bank would find itself unable to meet its normal business obligations and regulatory liquidity requirements. CIB has a comprehensive Liquidity Policy and Contingency Funding Plan that supports the diversity of funding sources and maintains an adequate liquidity buffer with a substantial pool of liquid assets, as well as having less reliance on wholesale funding. To measure and control liquidity, CIB uses gaps, stress testing, net stable funding and liquidity coverage ratios, and regulatory and internal liquidity ratios. In 2012, the Bank maintained strong liquidity ratios and there was no need to execute the Contingency Funding Plan.
Interest Rate Risk is defined as the potential loss from unexpected changes in interest rates, which can significantly alter the Bank’s profitability and economic value of equity. Interest Rate Risk primarily arises from the re-pricing maturity structure of interest-sensitive assets and liabilities and off-balance sheet instruments. CIB uses a range of complementary technical approaches to measure and control Interest Rate Risk including: Interest Rate Gaps, Duration, Duration of Equity, and Earnings-at-Risk (EaR).
In 2012, the balance sheet was strategically positioned to benefit from the interest rate environment and CIB proactively managed this sensitivity to safeguard against adverse shocks.
Market Risk is the risk of loss resulting from adverse movements in the value of financial instruments arising from changes in the level or volatility of interest rates, foreign exchange rates, commodities, equities and other securities, including derivatives. The Bank classifies market risk exposure into traded and non-traded activities. The Bank uses various measurement techniques including Value-at-Risk (VaR), stress testing and non-technical measures, such as asset cap and profit and loss versus stop loss limits to monitor and control market risks. Despite the volatility in 2012, CIB maintained adequate market risk appetite levels.
Operational Risk is the loss resulting from inadequate or failed internal processes, people and systems or from external events. CIB maintains an Operational Risk Framework and comprehensive policies and processes designed to provide a sound and well-controlled environment. The Framework uses the following approaches to measure and control Operational Risk: Loss Database, Risk Control Self-Assessment (RCSA), and Key Risk Indicators (KRIs). In 2012, Operational Risk losses were at minimum tolerance levels and proactively monitored and managed.
In 2012, CIB continued to participate in Basel II quantitative impact studies with the Central Bank of Egypt, and is well positioned to be compliant with the new regulations.
•Embedded the understanding of our risk appetite across the enterprise and increased risk transparency
•Diligently monitored action plans that led to preservation of portfolio quality, evidenced by the NPL ratio of 3.63% in 2012 and a coverage ratio of 134.40% in 2012. •Recoveries amounted to EGP 19.2 million, despite difficult conditions. •Exceptional consumer portfolio quality with non-performing asset rates at 2.1% and loss rates of 0.4%. •Enhanced portfolio monitoring with roll-out of Concierge Automated Risk Monitoring tool. •Launch of varied innovative programs to facilitate asset growth through extensive usage of the Credit Bureau. •Set-up of dedicated and independent business banking risk structure. •Independent quality assurance checks and subsequent process improvements to improve efficiencies and additional controls. •Enhanced collection efficiencies through building greater coverage and reach •Re-engineered underwriting to achieve cost-saves and processing efficiencies, which resulted in credit assessment of greater numbers of applications during the year despite head-count saves. •Enhanced liquidity measurement models. •Conducted Basel II Quantitative Impact Studies for the CBE and in position to be fully compliant with the new regulations. •Encouraged continuous learning by our Risk Group professionals by designing and offering educational training programs.