Ecobank Nigeria Annual Report 2014

Financial risk management
The Bank’s business involves taking on risks in a targeted manner and managing them professionally. The core functions of the Bank’s risk
management are to identify all key risks for the Bank, measure these risks, manage the risk positions and determine capital allocations. The
Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice. The Bank’s
aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance.
The Bank defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors.
Risk management is carried out by the Bank Risk Management under policies approved by the Board of Directors. Bank Risk Management
identifies, evaluates and hedges financial risks in close co-operation with the operating units of the Bank. The Board provides written
principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk,
credit risk, use of derivative financial instruments and non-derivative financial instruments. In addition, the Internal Audit and Compliance is
responsible for the independent review of risk management and the control environment.
The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest
rate risk and other price risk.
3.1 Credit risk
Credit risk is the risk of suffering financial loss, should any of the Bank’s customers, clients or market counterparties fail to fulfil their
contractual obligations to the Bank. Credit risk arises mainly from commercial and consumer loans and advances, credit cards, and loan
commitments arising from such lending activities, but can also arise from credit enhancement provided, financial guarantees, letters of credit,
endorsements and acceptances.
The Bank is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities
(‘trading exposures’), including non-equity trading portfolio assets, derivatives and settlement balances with market counterparties and
reverse repurchase loans.
Credit risk is the single largest risk for the Bank’s business; the directors therefore carefully manage the exposure to credit risk. The credit risk
management and control are centralized in a credit risk management team, which reports to the Board of Directors and head of each business
unit regularly.
3.1.1 Credit risk measurement
(a) Loans and advances (including loan commitments and guarantees)
The estimation of credit exposure is complex and requires the use of models, as the value of a product varies with changes in market
variables, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to
the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties.
The Bank has developed models to support the quantification of the credit risk. These rating and scoring models are in use for all key credit
portfolios and form the basis for measuring default risks. In measuring credit risk of loan and advances at a counterparty level, the Bank
considers three components: (i) the ‘probability of default’ (PD) by the client or counterparty on its contractual obligations; (ii) current
exposures to the counterparty and its likely future development, from which the Bank derive the ‘exposure at default’ (EAD); and (iii)
the likely recovery ratio on the defaulted obligations (the ‘loss given default’) (LGD). The models are reviewed regularly to monitor their
robustness relative to actual performance and amended as necessary to optimise their effectiveness.
(i) Probability of default
The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of
counterparty. They have been developed internally and combine statistical analysis with credit officer judgement. They are validated, where
appropriate, by comparison with externally available data. The Bank’s rating method comprises 4 rating levels for loans. The rating methods
are subject to an annual validation and recalibration so that they reflect the latest projection in the light of all actually observed defaults.
The Bank’s internal ratings scale and mapping of external ratings as supplemented by the Bank’s own assessment through the use of internal
rating tools are as follows:
The Bank utilizes an internal risk system rating based on a scale of 1 to 10. A risk rating of «1» identifies obligors or transactions of the
highest quality or lowest risk. A risk rating of «10» is assigned to obligor’s or transactions of lowest quality or highest risk. The table below
provides a grid showing comparisons between the risk rating system of Ecobank and the rating scale used by Standard & Poor’s
Financial risk management
Investment quality
Investment Grade
Non Investment Grade
Ecobank
S&P
Definition
1
2
3
4
5
6
7
8
9
10
AAA
AA
A
BBB
BB
B
CCC
CC
C
D
Largely risk free
Exceptional credit / Minimal risk
Excellent credit / very low risk
Good credit quality / low risk
Satisfactory credit quality
Acceptable credit quality but less stable
Risk factors deteriorating
Special mention
Substandard credit quality
Doubtful / Loss
Obligors risk rated 1 to 4 are considered low risk («investment grade»). Those risk rated 5 and 6 are considered as medium risk, while those
risk rated 7 through 10 are considered high risk. Medium and high risk obligors are also commonly categorized as «non-investment grade».
Risk rating are assigned to individual obligors (obligor risk ratings) and to individual credit facilities (facility risk rating). They are also assigned
total facilities extended to an obligor (approval risk rating), to all the facilities extended to a group or related obligors (economic group rating),
or to an entire portfolio (portfolio risk rating).
(ii) Exposure at default (“EAD”)
EAD is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a
commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default,
should it occur.
(iii) Loss given default / Loss severity
Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as a
percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or
other credit mitigation.
The measurement of exposure at default and loss given default is based on the risk parameters standard under Basel II.
(b) Debt securities and other bills
For debt securities, external rating such as Standard & Poor’s rating or their equivalents are used by Bank Treasury for managing of the credit
risk exposures as supplemented by the Bank’s own assessment through the use of internal ratings tools.
3.1.2 Risk limit control and mitigation policies
The Bank manages, limits and controls concentrations of credit risk wherever they are identified - in particular, to individual counterparties
and Banks, and to industries and countries.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or
Banks of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or
more frequent review, when considered necessary. Limits on the level of credit risk by product, industry sector and by country are approved
quarterly by the Board of Directors.
The exposure to any one borrower including banks and other non-bank financial institutions is further restricted by sub-limits covering onand off-statement of financial position exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange
contracts. Actual exposures against limits are monitored daily.
Lending limits are reviewed in the light of changing market and economic conditions and periodic credit reviews and assessments of
probability of default. Some other specific control and mitigation measures are outlined below:
Financial risk management
(a) Collateral
The Bank takes in addition to the debtor’s covenant to repay, tangible assets and/or assurances as security for the loan. The
qualities the Bank looks out for in a good collateral are:
(i) It should have assurance of title and an ascertainable value which is stable and not subject to undesirable downward valuation.
(ii) It should also be marketable, readily realizable without undue cost or difficulties as well as be devoid of all cases of encroachment or
encumbrance and lastly, there should be a good margin between the value of the security provided and the amount of facility being
sought.
(iii) There should be a good margin between the value of the security provided and the amount of facility being sought.
Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and
capital repayment obligations and by changing these lending limits where appropriate.
Some other specific control and mitigation measures are outlined below:
The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds
advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk
mitigation. The principal collateral types for loans and advances are:
• Mortgages over residential properties.
• Charges over business assets such as premises, inventory and accounts receivable.
• Charges over financial instruments such as debt securities and equities.
Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument.
Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In
addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators
are identified for the relevant individual loans and advances.
(b) Lending limits (for derivative and loan books)
The Bank maintains strict control limits on net open derivative positions (that is, the difference between purchase and sale contracts) by
both amount and term. The amount subject to credit risk is limited to expected future net cash inflows of instruments, which in relation
to derivatives are only a fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk
exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements.
Collateral or other security is not always obtained for credit risk exposures on these instruments, except where the Bank requires margin
deposits from counterparties.
Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in
cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising
from the Bank’s market transactions on any single day.
(c) Master netting arrangements
The Bank further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it
undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of assets and liabilities of
the statement of financial position, as transactions are either usually settled on a gross basis or under most netting agreements the right of
set off is triggered only on default. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement
to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Bank’s overall exposure
to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected
by each transaction subject to the arrangement.
(d) Financial covenants (for credit related commitments and loan books)
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters
of credit carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on
behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are
collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of
credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total
unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit
Financial risk management
are contingent upon customers maintaining specific credit standards (often referred to as financial covenants).
The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit
risk than shorter-term commitments.
3.1.3 Impairment and provisioning policies
The internal and external rating systems described in Note 3.1.1 focus on expected credit losses – that is, taking into account the risk of future
events giving rise to losses. In contrast, impairment allowances are recognised for financial reporting purposes only for losses that have
been incurred at the reporting date based on objective evidence of impairment. Due to the different methodologies applied, the amount of
incurred credit losses provided for in the financial statements is usually lower than the amount determined from the expected loss model that
is used for internal operational management and banking regulation purposes.
The impairment allowance shown in the statement of financial position at year-end is derived from each of the four internal rating grades.
• Current - The facility is deemed current if the payment of both principal and interest are up to date with the agreed terms
• Watchlist - Principal and interest repayments are overdue between 1 and 90 days
• Substandard - Principal and interest repayments are overdue by more than 91 days but less than 180 days
• Loss - Principal and interest repayments are overdue by more than 360 days
However, the largest component of the impairment allowance comes from the default grade. The table below shows the percentage of the
Bank’s on- and off-balance sheet items, like financial guarantees, loan commitments and other credit related obligations, relating to loans and
advances and the associated impairment allowance for each of the Bank’s internal rating categories.
2014
Loans and advances
Amount
1. Current
1A. Watchlist
II. Substandard
III. Doubtful
IV. Loss
%
Impairment provision
Amount
%
834,799
52,543
7,181
5,806
30,627
89.7%
5.6%
0.8%
0.6%
3.3%
9,479
4,402
24,354
24.8%
0.0%
0.0%
11.5%
63.7%
930,956
100%
38,235
100%
2013
Loans and advances
Amount
1. Current
1A. Watchlist
II. Substandard
III. Doubtful
IV. Loss
%
Impairment provision
Amount
%
574,175
47,368
4,964
20,835
13,388
86.8%
7.2%
0.8%
3.2%
2.0%
6,636
1,682
13,695
12,810
19.1%
0.0%
4.8%
39.3%
36.8%
660,730
100%
34,823
100%
Financial risk management
3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements
Financial instruments whose carrying amounts do not represent the maximum exposure to credit risk without taking account of any collateral
held or other credit enhancements are disclosed in Note 35(c).
Concentration of risks of financial assets with credit risk exposure
Maximum exposure
2014
2013
Credit risk exposures relating to on-balance sheet assets are as follows:
Loans and advances to banks
Loans and advances to customers:
Corporate Bank
- Overdrafts
- Term loans
- Others
Domestic Bank
- Overdrafts
- Credit cards
- Term loans
- Mortgages
Trading assets
- Debt securities
Derivative financial instruments
Investment securities
- Debt securities
Other assets
94,430
62,117
90,782
438,526
-
78,130
283,233
-
118,179
892
240,957
3,384
80,236
816
179,388
4,104
52,519
22,435
17,881
-
382,388
30,676
404,743
55,600
392,311
307,602
1,867,479
1,473,850
Contingent liabilities and commitments are as follows:
Loan commitments and other credit related liabilities
At 31 December
3.1.5 Loans and advances
Loans and advances are summarised as follows:
31 December 2014
Loans and advances to
Loans and advances to banks
customers
31 December 2013
Loans and advances to
Loans and advances to banks
customers
Neither past due nor impaired
Past due but not impaired
Impaired
94,430
-
834,799
52,543
43,614
62,117
-
574,175
47,368
39,187
Gross
Less: allowance for impairment
94,430
-
930,956
(38,235)
62,117
-
660,730
(34,823)
Net
94,430
892,721
62,117
625,907
Financial risk management
(a) Loans and advances neither past due nor impaired
The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal
rating system adopted by the Bank.
31 December 2014
Corporate Bank
Over drafts
Term loans
1. Current
IA. Watchlist
Total
86,495
3,385
89,880
446,246
446,246
Fair value of collateral
81,705
222,263
8,175
223,983
Amount of under/(over) collateralization
Loans and advances to customers
Domestic Bank
Others
Over drafts Credit cards Term Loans
-
-
Mortgages
Total
58,124
48,703
106,827
447
455
902
240,032
240,032
3,454
3,454
834,799
52,543
887,342
226,073
-
229,243
4,366
763,649
(119,246)
902
10,789
(912)
123,692
Mortgage loans in the sub-standard class were considered not to be impaired after taking into consideration the recoverability from collateral.
31 December 2013
Grades:
Corporate Bank
Over drafts
Term loans
Loans and advances to customers
Domestic Bank
Others
Over drafts Credit cards Term Loans
Over drafts Credit cards Term Loans
40,501
424
175,026
39,734
392
80,235
816
175,026
Mortgages
Mortgages
4,104
4,104
Total
Total
574,175
47,368
621,543
1. Current
IA. Watchlist
Total
70,888
7,242
78,130
283,232
283,232
Fair value of collateral
53,940
195,538
-
55,393
-
120,833
4,925
430,629
Amount of under/(over) collateralization
24,190
87,694
-
24,842
816
54,193
-821
190,914
(b) Loans and advances past due but not impaired
Late processing and other administrative delays on the side of the borrower can lead to a financial asset being past due but not impaired.
Therefore, loans and advances less than 90 days past due are not usually considered impaired, unless other information is available to
indicate the contrary. Gross amount of loans and advances by class to customers that were past due but not impaired were as follows:
31 December 2014
Corporate Bank
Over drafts
Term loans
Loans and advances to customers
Domestic Bank
Others
Over drafts Credit cards Term Loans
Mortgages
Total
Past due up to 30 days
Past due 30-60 days
Past due 60-90 days
Total
2,570
815
3,385
-
-
650
7,363
40,690
48,703
455
455
-
-
650
10,388
41,505
52,543
Fair value of collateral
18,542
-
-
23,412
-
-
-
41,954
(15,157)
-
-
25,291
455
-
-
10,589
Loans and advances to customers
Domestic Bank
Others
Over drafts Credit cards Term Loans
Mortgages
Total
1,698
-
2,267
10,388
41,505
47,368
Amount of under\(over) collateralisation
31 December 2013
Corporate Bank
Over drafts
Term loans
Past due up to 30 days
Past due 30-60 days
Past due 60-90 days
Total
40
12
7,190
7,242
-
-
2,227
1,686
39,734
392
-
Fair value of collateral
6,743
-
-
17,517
-
-
-
24,260
499
-
-
22,217
392
-
-
23,108
Amount of under collaterization
-
Financial risk management
c) Loans and advances individually impaired
(i) Loans and advances to customers
The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is N28.9 billion
(2013: N39.2 billion).
The breakdown of the gross amount of individually impaired loans and advances by class are as follows:
31 December 2014
Corporate Bank
Over drafts
Term loans
Loans and advances to customers
Domestic Bank
Others
Over drafts Credit cards Term Loans
Mortgages
Total
Individual impaired loans
Impairment allowance
Fair value of collateral
5,494
4,593
2,644
7,720
-
-
33,712
22,359
13,174
5
15
-
4,403
3,478
5,108
70
-
43,614
38,235
20,926
31 December 2013
Individual impaired loans
Impairment allowance
Fair value of collateral
1,334
2,055
92
3,214
1,198
4,918
-
27,554
20,730
6,579
38
49
-
7,049
6,980
7,429
91
-
39,189
34,823
15,298
(ii) Loans and advances to banks
The total amount of individually impaired loans and advances to banks as at 31 December 2014 was nil (2013: nil).
(d) Industry sectors
The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by industry sector as of 31
December 2014. For this table, the Bank has allocated exposures to industry based on the sector of industry of our counterparties.
Agriculture
Oil and gas
Capital market
Consumer credit
Trade
Services & Others
Manufacturing
Mining and quarrying
Mortgage
Real estate and construction
Finance and insurance
Government
Power
Public Utilities
Transportation
Communication
Education
2014
N'millions
2013
N'millions
76,069
163,893
18,295
55,903
152,235
27,323
102,184
17,579
3,462
46,060
19,992
58,487
34,088
89,900
27,060
36,289
2,136
49,131
197,000
7,072
44,790
41,317
18,712
61,132
11,167
7,884
47,603
39,706
42,347
23,616
19,074
48,141
2,038
930,956
660,730
(e) Geographical sectors
The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by geographical region as of 31
December 2014. For this table, the Bank has allocated exposures to regions based on the location of our counterparties.
Financial risk management
Nigeria
South south
South west
South east
North west
North central
North east
Outside Nigeria
2014
N'millions
2013
N'millions
112,480
673,302
13,619
15,689
76,337
1,516
38,013
72,071
444,800
10,976
8,721
49,808
1,122
73,233
930,956
660,730
1,113
2,673
11,289
620
2,302
4,386
4,352
103
10,279
3,144
77
3,217
59
437
6,048
848
870
2,218
432
1,796
69
27
23,315
70
107
2,624
327
1
43,614
39,189
582
40,002
114
198
2,657
61
-
177
36,181
20
142
2,610
59
-
43,614
39,189
Impaired loans and advances by Industry
Agriculture
Oil and gas
Capital market
Consumer credit
Trade
Services & Others
Manufacturing
Mining and quarrying
Real estate and construction
Finance and insurance
Government
Power
Transportation
Communication
Education
Impaired loans and advances by Geography
Nigeria
South south
South west
South east
North west
North central
North east
Outside Nigeria
Financial risk management
(e) Quality of credit
The Bank’s internal rating scale and mapping of external ratings as supplemented by the Bank’s own assessment through the use of internal
rating tools to determine the quality of risk assets as follows:
2014
Total exposure
Rating
2013
Total exposure
AAA
A
BBB
BB
B
CCC
CC
C
D
2,624
115,515
55,802
81,679
538,181
42,814
50,727
7,181
36,433
AAA
A
BBB
BB
B
CCC
CC
C
D
4,486
32,294
52,152
61,583
369,812
54,964
46,250
8,497
30,692
Grand Total
930,956
Rating
660,730
3.1.7 Repossessed collateral
The Bank obtained assets by taking possession of collateral held as security. The nature and carrying amounts of such assets at the reporting
date are as follows:
Nature of assets
Residential property
Commercial property
Vehicle and equipment
Others
2014
Carrying amount
Collateral
Related Loan
2013
Carrying amount
Collateral
Related Loan
95
7
-
67
61
-
7
-
45
-
102
128
7
45
Repossessed properties are sold as soon as practicable, with the proceeds used to reduce the outstanding indebtedness. Repossessed property
is classified within ‘other assets’.
3.2 Market risk
Market risk is the risk of losses in on and off-balance sheet positions arising from movements in market prices. It is the risk that the value
of assets and liabilities will be adversely affected by the movement in the value of financial instruments. These movements arise from
fluctuations in interest rates, foreign exchange rates, equities and commodities prices. This risk is inherent in financial instruments associated
with our operations and/or activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and
liabilities, and derivatives. Market-sensitive assets and liabilities are generated through loans and deposits associated with our traditional
banking business, customer and proprietary trading operations, ALM process and credit risk mitigation activities. In the event of market
volatility, factors such as underlying market movements and liquidity have an impact on the results of the Bank.
Our traditional banking loan and deposit products are non-trading positions and are reported at amortized cost for assets or the amount owed
for liabilities (historical cost). However, these positions are still subject to changes in economic value based on varying market conditions,
primarily changes in the levels of interest rates. The risk of adverse changes in the economic value of our non-trading positions is managed
through our Asset & Liability Management and Market Risk activities. Our trading positions are reported at fair value with changes currently
reflected in income. Trading positions are subject to various risk factors, which include exposures to interest rates and foreign exchange rates,
as well as issuer and market liquidity risk factors. We seek to mitigate these risk exposures by using techniques that encompasses a variety of
financial instruments in both the cash and derivatives markets.
3.2.1 Market risk management and control framework
Ecobank Nigeria Limited (ENG) has put in place a robust and clearly defined market risk management framework, which essentially provides
the Board of Directors and Management with guidance on market risk management processes. All teams involved in the management and
control of market risk are required to fully comply with the policy statements to ensure the Bank is not exposed to market risk beyond the
qualitative and quantitative risk tolerances.
The Management Risk Committee (MRC) ensures that all market and liquidity risk management decisions by the Board are implemented by
Financial risk management
Management. They also recommend to the Board, approvals for amendments to the market & liquidity risk policies when necessary.
The Asset & Liability Committee (ALCO) manages market and liquidity risk across the Bank and meets monthly to review, approve and make
recommendations concerning the risk profile including limits and utilization. The Bank’s liquidity management framework is designed in
accordance with regulatory requirements. While the Asset & Liability Management (ALM) Team ensures that the Bank is liquid at all times
to meet funding requirements and payment obligations as they fall due under normal and unusual markets situations without incurring
additional cost.
A dedicated market risk team, independent of the trading and business units, is responsible for implementing the market risk control
framework and assumes day-to-day responsibility for market risk management. A limit framework is set within the context of the approved
market risk appetite while daily market risk dashboard and stress testing reports are generated.
The control framework covers the following principles:
• Clearly defined responsibilities and authorities for the primary groups involved in market risk management in the Bank;
• Daily monitoring, analysis and reporting of market risk exposures against approved limits;
• Clearly defined limit structure and escalation process in the event of a market risk limit excess;
• A market risk measurement methodology that captures diversification effects and allows aggregation of market risk across risk types,
markets and business lines;
• Use of VaR at 99% confidence Interval as a measure of the one-day market risk exposure of all trading positions;
• Use of non-VaR based limits and other controls such as duration limit;
• Use of stress testing and scenario analysis to support the market risk measurement and risk management process by assessing how
portfolios perform under extreme market conditions;
• Use of back-testing as a diagnostic tool to assess the accuracy of the VaR model and other risk management techniques; and
• A product approval process that requires market risk teams to assess and quantify market risks associated with proposed new products.
3.2.2 Trading Risk Management
Trading-related revenues represent the amount earned from trading activities, which are taken in a diverse range of financial instruments
and markets. Trading account assets and liabilities positions are reported at fair value. Trading-related revenues can be volatile and are largely
driven by general market conditions and customer demand. Trading-related revenues are dependent on the volume and type of transactions,
the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment.
The ALCO is the primary governance authority for Trading Risk Management and it takes a forward-looking view of the market risks impacting
the Bank and prioritize those that need a proactive risk mitigation strategy.
The graph below depicts the daily level of net trading (inclusive of sales) income for the 12 months ended December 31, 2014 as compared
with the 12 months ended December 31, 2013. During the 12 months ended December 31, 2014, net positive trading income was recorded
during the year even though the markets experienced increased volatility towards the end of the year driven by rising macro-economic risk
levels.
2014 - Net Trading Income (N’MM)
5 000
4 000
3 000
2 000
1 000
0
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
2014
Jul-14
2013
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Financial risk management
The objective of market risk measurement is to manage and control market risk exposures within acceptable limits while optimizing the
return on risk. The Bank does not trade in commodities and equities, but is exposed to risks arising from the assets in transactions where
these have been used as collateral for credit transactions. The latter is covered under credit risk management
(a) Value at risk
To evaluate risk in our trading activities, we focus on the actual and potential volatility of individual positions as well as portfolios. VaR is a key
technique used by the Bank to measure market risk and it represents the worst loss the portfolio is expected to experience based on historical
trends and under normal conditions. Our VaR model uses a historical simulation approach based on minimum three years of historical data
and assumes a 99 percent confidence level. Statistically, this means that losses will exceed VaR, on average, 1 out of 100 trading days, or two
to three times each year. The Bank’s VaR measurements are not additive as there are both correlation and diversification effects included in
the model.
The VaR model is an effective tool in estimating ranges of potential gains and losses on our trading portfolios. There are however many
limitations inherent in a VaR model as it utilizes historical results over a defined time period to estimate future performance. Historical results
may not always be indicative of future results and changes in market conditions or in the composition of the underlying portfolio could have a
material impact on the accuracy of the VaR model. As such, from time to time, the assumptions and historical data underlying our VaR model
is updated.
The table below shows the trading VaR of the Bank during the 2014 FY. During the year, treasury bills recorded the highest VaR driven by the
Bank’s strategy of maintaining more of the lower duration assets in view of the highly volatile nature of the nation’s financial markets.
One-Day Daily Trading VaR at 90% Confidence Interval
2014
Average
Risk categories
Bond
Tbill
FX
100,788
217,303
5,602
2013
Average
Risk categories
Bond
Tbill
FX
47,855
124,092
3,395
High
Figures in thousands of Naira
470,479
713,608
12,064
High
Figures in thousands of Naira
182,062
378,012
8,259
Low
Actual*
4,583
19,084
391
30,990
42,098
12,064
Low
Actual*
1,167
2,001
158
15,346
80,442
1,224
*This represents actual one-day VaR as at 31 December, 2013
In order to verify that the results acquired from VaR calculations are consistent and reliable, the model is always backtested. Backtesting is an
integral part of VaR reporting in ENG’s risk Management processes. Backtesting is a procedure where actual profits and losses are compared to
projected VaR estimates aimed at ensuring that the model yields accurate risk estimates.
(b) Stress tests
Since the very nature of a VAR model suggests results can exceed our estimates, we also “stress test” our portfolio. Stress testing estimates
the value change in our trading portfolio that may result from abnormal market movements. Historical scenarios simulate the impact of
price changes which occurred during a set of extended historical market events. Hypothetical scenarios simulate the anticipated shocks from
predefined market stress events. These stress events include shocks to underlying market risk variables, which may be well beyond the
shocks found in the historical data used to calculate the VAR. In addition to the value afforded by the results themselves, this information
provides senior management with a clear picture of the trend of risk being taken given the relatively static nature of the shocks applied.
The results of stress scenarios are reported to Senior Management and reviewed by the Board of Directors.
3.2.3 Foreign exchange risk
Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in other
currencies. The types of instruments exposed to this risk include foreign currency-denominated loans and securities, future cash flows in
foreign currencies arising from foreign exchange transactions, foreign currency-denominated debt and various foreign exchange derivative
instruments whose values fluctuate with changes in the level or volatility of currency exchange rates or foreign interest rates. Hedging
instruments used to mitigate foreign exchange risk in the balance sheet include currency swaps, forwards as well as foreign currency
denominated debt and deposits.
Concentrations of currency risk – on- and off-balance sheet financial instruments
Financial risk management
As at 31 December 2014
Dollar
Euro
CFA
Naira
Gh. Cedi
Others
Total
Assets
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities
Derivative financial instruments
Pledged assets
Other assets
4,828
52,829
407,895
30,264
22,436
16,476
497
9,434
59
-
60
530
232
2
246,180
28,133
484,530
52,519
138,029
191,659
14,024
4
19
691
3,502
5
155
252,256
94,432
892,721
52,519
168,293
22,436
191,659
30,676
Total financial assets
534,727
9,990
824
1,155,073
23
4,353
1,704,991
Dollar
Euro
CFA
Naira
Gh. Cedi
Others
Total
91,225
490,491
3,221
86,221
26,440
697,598
16,575
1,117
17,692
16
735
15
766
19,959
738,819
60,432
31,725
850,935
6
6
4,396
454
4,850
111,200
1,251,016
3,221
146,653
59,757
1,571,847
(162,871)
171,899
(7,702)
7,756
58
-
304,139
99,749
17
-
(497)
42
133,142
279,446
312,794
242,108
6,931
9,987
284
-
1,073,977
1,047,285
9
-
595
3,069
1,394,590
1,302,449
70,686
(21,321)
(3,056)
5,513
284
-
26,692
88,148
9
-
(2,474)
-
92,141
72,341
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
Total financial Liabilities
Net on-balance sheet financial position
Net off-balance sheet financial position
As at 31 December 2013
Total financial assets
Total financial liabilities
Net on-balance sheet financial position
Net off-balance sheet financial position
3.2.4 Foreign exchange risk sensitive analysis
The foreign currency risk sensitivity analysis reflects the expected financial impact in Naira equivalent resulting from a 5% adverse movement
in exchange rates. The foreign exchange rate sensitivity analysis reflects a potential loss of N0.39 billion and gain of N2.8 million for USD and
Euro Aggregate Net Open Positions respectively. The aggregate FX position for the Bank was $44.8million, which is the equivalent of about
4.3% of shareholders’ funds.
3.2.5 Interest rate risk
Interest rate risk represents one of the most significant market risk exposure to our non-trading exposures. Our overall goal is to manage
interest rate risk so that movements in interest rates do not adversely affect net interest income. Interest rate risk is measured as the
potential volatility in our net interest income caused by changes in market interest rates. Client facing activities, primarily lending and deposittaking create interest rate sensitive positions on our balance sheet. Interest rate risk from these activities, as well as the impact of changing
market conditions, is managed through our ALM and Market risk activities.
Simulations are used to estimate the impact on net interest income using numerous interest rate scenarios. These simulations enable the
Bank to estimate its Interest Rate Risk in the Banking Book (IRRBB) in line with Basel II/III requirements. A key aspect of the IRRBB is the
Economic Value of Equity (EVE), which is used to show the effect of different interest rate changes on the Bank’s capital.
We continually monitor our balance sheet position in an effort to maintain an acceptable level of exposure to interest rate changes. We
prepare forward-looking forecasts of net interest income, measure and evaluate the impact that alternative interest rate scenarios have on
the static baseline forecasts in order to assess interest rate sensitivity under varied conditions
Financial risk management
The repricing gap analysis as of December 2014 is presented below:
Up to 1 month
1-3 months
3-12 months
1-5 years
Over 5 years
Non-interest
bearing
Total
Assets
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities
Derivative financial instruments
Pledged assets
Other assets
36,855
94,430
288,284
14,262
803
14,000
-
81,745
52,519
59,013
10,873
114,929
1,228
236,177
17,541
10,759
4,130
29,448
193,079
47,327
38,076
-
93,436
30,150
20,525
-
215,402
-
252,256
94,430
892,721
52,519
168,293
22,436
191,659
30,676
Total financial assets
448,634
320,306
298,055
278,482
144,111
215,402
1,704,989
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
29,123
443,082
3,176
-
8,356
153,928
45
49,206
73,721
128,474
2,342
8,934
3,321
24,921
1,617
119,390
-
522,210
-
111,200
1,251,015
3,221
146,653
59,756
Total financial liabilities
475,381
211,535
213,471
29,859
119,390
522,210
1,571,846
Total interest repricing gap
(26,747)
108,771
84,584
248,623
24,721
As at 31 December 2013
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities-available-for-sale
Derivative financial instruments
Pledged assets
Other assets
78,161
60,026
187,207
5,044
69,476
275
1,654
136,467
5,044
8,751
57,881
583
437
53,386
12,837
91,236
23,144
54,227
156,613
45,421
19,739
515
92,234
72,906
11,145
-
150,180
-
228,341
62,117
625,907
17,881
223,358
181,386
55,600
Total financial assets
400,189
210,380
235,268
222,288
176,285
150,180
1,394,589
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
38,674
641,094
12,266
23,245
97,536
66
23,484
531
41,643
2,150
1,089
10,032
56,502
-
354,137
-
61,919
1,118,401
58,122
64,007
Total financial liabilities
692,034
120,847
65,658
56,502
354,137
1,302,449
(291,845)
89,533
169,609
13,271
`
209,017
As at 31 December 2014
Total interest repricing gap
119,783
3.2.6 Interest rate sensitivity
A parallel 100 basis points (1%) interest rate increase in the yield curve would increase net interest income by N0.56billion, while a parallel
decrease in the yield curves would decrease net interest income by the same amount.
3.3 Liquidity risk
Liquidity risk is the risk that the Bank is unable to accommodate liability maturities and deposit withdrawals, fund asset growth and business
operations and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity risk management
involves forecasting funding requirements and maintaining sufficient capacity to accommodate fluctuations in asset and liability levels due
to changes in our business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding,
wholesale market-based funding etc.
Financial risk management
Liquidity risk is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but
not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters. Name-specific or systemic risk may lead to
reductions in levels of interbank lending and may restrict the Bank’s access to traditional sources of liquidity or increase the costs of accessing
such liquidity.
3.3.1 Liquidity risk management process
The Bank’s Asset & Liability Committee (ALCO) is responsible for establishing our liquidity policy as well as approving operating and
contingency procedures, and monitoring liquidity on an ongoing basis. Corporate Treasury is responsible for planning and executing our
funding activities and strategy. In order to ensure adequate liquidity through the full range of potential operating environments and market
conditions, the Bank conducts its liquidity management and business activities in a manner that will preserve and enhance funding stability,
flexibility, and diversity. Key components of this operating strategy include a strong focus on customer-based funding, maintaining direct
relationships with wholesale market funding providers, and maintaining the ability to liquefy certain assets when, and if, required. ALCO
determines prudent parameters for wholesale market-based borrowing and regularly reviews the funding plan for the Bank to ensure
compliance with these parameters
The Bank maintains a Liquidity Contingency Funding Plan that is approved annually by ALCO. This plan evaluates our liquidity position under
various operating circumstances with the objective of ensuring that the Bank would be able to operate through a period of stress when
access to normal sources of funding is constrained. The LCFP is tested every six months and the results form part of inputs that are utilized for
liquidity stress testing. The Bank maintains a cushion of excess liquidity that would be sufficient to fully fund its operations for an extended
period during which funding from normal sources may be disrupted.
3.3.3 Non-derivative financial liabilities and assets held for managing liquidity risk
The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity
risk by remaining contractual maturities at the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flows
as of reporting date.
Financial risk management
As at 31 December 2014
Up to 1 month
1 -3 months
3 - 12 months
1 - 5 years
Over 5 years
Total
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
Current income tax liabilities
Deferred income tax liabilities
29,285
442,607
3,176
-
10,846
159,882
45
51,104
-
74,725
130,561
2,344
8,934
-
3,343
67,896
1,617
2,683
6,989
522,210
74,552
-
114,856
1,258,603
3,221
144,792
61,655
2,683
6,989
Total liabilities (contractual maturity)
475,068
221,877
216,564
82,528
596,762
1,592,799
Total assets
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities
Derivative financial instruments
Pledged assets
Other assets
36,854
100,551
204,456
36,854
803
14,151
92,978
52,472
59,558
10,873
116,173
57,057
18,482
10,759
4,174
386,040
49,507
38,488
215,402
167,394
30,316
20,747
252,256
100,551
907,925
52,472
194,717
22,436
193,733
-
1,228
29,451
-
-
30,679
Total assets (expected maturity dates)
393,669
333,282
119,923
474,035
433,859
1,754,768
38,745
997,682
11,966
-
23,455
98,904
118
-
24,820
1,677
41,702
-
2,273
57,603
11,558
1,734
-
62,200
1,123,679
59,280
65,344
1,734
1,048,393
122,477
68,199
73,168
-
1,312,237
Total assets
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities - available-for-sale
Derivative financial instruments
Pledged assets
Other assets
78,161
60,215
189,670
5,093
70,146
275
1,674
140,285
5,125
54,107
59,557
583
437
58,968
13,989
60,615
25,861
54,227
169,831
126,025
22,057
515
150,180
100,019
12,453
-
228,341
62,326
658,773
19,114
245,840
190,074
55,600
Total assets (expected maturity dates)
403,560
261,331
214,097
318,428
262,652
1,460,068
As at 31 December 2013
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
Current income tax liabilities
Total liabilities (contractual maturity)
Financial risk management
The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity
risk by behavioral maturities at the reporting date. The amounts disclosed in the table are the behavioral undiscounted cash flows as of
reporting date.
As at 31 December 2014
Up to 1 month
1 -3 months
3 - 12 months
1 - 5 years
Over 5 years
Total
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
Current income tax liabilities
Deferred income tax liabilities
29,285
329,877
3,176
-
10,846
230,431
45
51,930
-
74,725
201,110
2,344
8,958
-
426,636
67,896
1,617
1,826
6,989
70,549
74,552
-
114,856
1,258,603
3,221
144,792
62,505
1,826
6,989
Total liabilities (contractual maturity)
362,339
293,252
287,137
504,964
145,101
1,592,792
Total assets
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities
Derivative financial instruments
Pledged assets
Other assets
36,854
100,551
204,456
36,854
803
14,151
-
92,978
24,104
59,558
10,873
116,173
12,899
57,057
18,482
10,759
4,174
30,287
386,040
58,460
38,488
-
215,402
167,394
52,120
20,747
-
252,256
100,551
907,925
24,104
225,473
22,435
193,733
43,186
Total assets (expected maturity dates)
393,669
316,585
120,759
482,988
455,662
1,769,663
38,745
343,404
11,966
-
23,455
171,601
118
-
97,518
1,677
41,702
-
365,760
57,603
11,558
1,743
-
145,395
-
62,200
1,123,678
59,280
65,344
1,743
-
Total liabilities (contractual maturity)
394,115
195,174
140,897
436,664
145,395
1,312,246
Total assets
Cash and balances with central banks
Cash and balances with other banks
Loans and advances to customers
Trading assets
Investment securities - available-for-sale
Derivative financial instruments
Pledged assets
Other assets
78,161
60,215
189,670
5,093
70,146
275
1,674
140,285
5,125
54,107
59,557
583
437
58,968
13,989
60,615
25,861
54,267
169,831
126,025
22,057
515
150,180
100,019
12,453
-
228,341
62,326
658,773
19,114
245,840
190,074
55,640
Total assets (expected maturity dates)
403,560
261,331
214,138
318,428
262,652
1,460,108
As at 31 December 2013
Liabilities
Deposits from banks
Due to customers
Derivative financial instruments
Borrowed funds
Other liabilities
Current income tax liabilities
3.3.4 Assets held for managing liquidity risk
The Bank holds a diversified portfolio of cash and high-quality highly-liquid securities to support payment obligations and contingent funding
in a stressed market environment. The Bank’s assets held for managing liquidity risk comprises, amongst others:
• Cash and balances with central banks;
• Government bonds and other securities that are readily acceptable in repurchase agreements with central banks; and
• Secondary sources of liquidity in the form of highly liquid instruments in the Bank’s trading portfolios.
Financial risk management
3.3.6 Contingent liabilities and commitments
(a) Loan commitments
The dates of the contractual amounts of the Bank’s contingent liabilities that it commits to extend credit to customers and other facilities
(Note 38.2) are summarised in the table below.
(b) Other financial facilities
Other financial facilities (Note 38.2) are also included in the table below, based on the earliest contractual maturity date.
(c) Capital commitments
Capital commitments for the acquisition of buildings and equipment (Note 38.1) are summarised in the table below.
As at 31 December 2014
Not later than 1 Year
Over one year
Total
708,584
2,111
141,732
-
850,316
2,111
710,695
141,732
852,427
Not later than 1 Year
Over one year
Total
335,292
1,563
71,994
-
407,286
1,563
336,855
71,994
408,849
Guarantees, acceptances and other financial facilities
Capital commitments
As at 31 December 2013
Guarantees, acceptances and other financial facilities
Capital commitments
3.4. Fair value of financial instruments
(a) Financial instruments not measured at fair value
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s
statement of financial position at their fair value:
Assets
Loans and advances to banks
Loans and advances to
customers
Liabilities
Deposits from banks
Due to customers
Borrowed funds
2014
Carrying value
2013
2014
Fair Value
2013
94,430
930,956
62,117
660,730
94,430
892,721
62,149
625,907
111,200
1,251,015
146,653
61,919
1,118,401
58,122
111,200
1,251,015
146,653
60,175
1,124,835
59,280
(i) Loans and advances to bank
Loans and advances to banks include inter-bank placements and items in the course of collection.
The carrying amount of floating rate placements and overnight deposits is a reasonable approximation of fair value.
The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for
debts with similar credit risk and remaining maturity.
(ii) Loans and advances to customers
Loans and advances are net of charges for impairment. The estimated fair value of loans and advances represents the discounted amount of
estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.
(iii) Investment securities
The fair value for loans and receivables and held-to-maturity financial assets is based on market prices or broker/dealer price quotations.
Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield
characteristics.
Financial risk management
Investment securities (available-for-sale) disclosed in the table above comprise only those equity securities held at cost less impairment. The
fair value for these assets is based on estimations using market prices and earning multiples of quoted securities with similar characteristics.
All other available-for-sale financial assets are already measured and carried at fair value.
(iv) Deposits from banks and customers
The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand.
The estimated fair value of fixed interest-bearing deposits not quoted in an active market is based on discounted cash flows using interest
rates for new debts with similar remaining maturity.
(v) Off-balance sheet financial instruments The estimated fair values of the off-balance sheet financial instruments are based on markets
prices for similar facilities. When this information is not available, fair value is estimated using discounted cash flow analysis.
(b) Fair value hierarchy
IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the group’s market
assumptions. These two types of inputs have created the following fail value hierarchy:
• Level 1 – Level 1 - Quoted prices (adjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and
debt instruments on exchanges.
• Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is as
prices) or indirectly (that is derived from prices).
• Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity
investments and debt instruments with significant unobservable components.
This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its
valuations where possible.