The Bank is operating in a highly competitive and dynamic environment. From a risk management perspective, year 2017 was characterised by changes in regulatory frameworks and reporting guidelines with the phased in implementation of Basel III Framework and SLFRS 9, worldwide spread of ransom ware to unprecedented levels targeting financial institutions in particular, significant investments for enhancing system and process capabilities arising from the above, and ripple effects of natural disasters throughout the year. Banks were seen approaching shareholders by way of rights issue of shares and capital markets by way of Basel III compliant debentures for augmenting increased levels of capital requirements. Further, competition for stable funding intensified with the implementation of new liquidity regulations in terms of Basel III and aggressive pricing for deposits is expected in the near future.
Credit growth continued at an accelerated phase in the first half of the year, but tightening of the monetary policy saw it slow down during the second half of the year. Despite a growth in non-performing loans and receivables by Rs. 19 Bn. during the year, banking sector asset quality remained more or less at the same levels of those reported at end 2016. Liquidity too remained at levels above optimum throughout the year. Interest margins continued to be under pressure.
Nevertheless, as evident from the risk profile (refer Table 05 below) and the operating results posted for the year, the rigorous risk management framework in place enabled the Bank to successfully manage its risk exposures, strengthen its stability and enhance profitability during the year. Overall risk profile did not undergo any significant changes during the year.
Key initiatives during the year in this regard include:
Risk category and parameter | Description | Policy parameter | Actual position | |||
31.12.2017 | 31.12.2016 | |||||
Credit risk | ||||||
Quality of lending portfolio | Gross NPA Ratio | 4% – 5% | 1.88% | 2.18% | ||
Net NPA Ratio | 2.5% – 3.5% | 0.92% | 1.09% | |||
Provision Cover | 30% – 40% | 51.02% | 50.11% | |||
Weighted Average Rating Score of the overall lending portfolios to be above | 35% – 40% | 57.63% | 56.84% | |||
Concentration | Loans and Advances by Product – Highest exposure to be maintained as a percentage of the total loan portfolio | 30% – 40% | 21.46 | 40.39% | ||
Advances by Economic sub-sector (using HHI) | 0.015 – 0.025 | 0.016 | 0.0158 | |||
Exposures exceeding 5% of the Eligible Capital (using HHI) | 0.05 – 0.10 | 0.0071 | 0.0061 | |||
Exposures exceeding 15% of the Eligible Capital (using HHI) | 0.10 – 0.20 | 0.0095 | 0.0075 | |||
Exposure to any sub-sector to be maintained at | 4% – 5% | 4.04% | 3.97% | |||
Aggregate of exposures exceeding 15% of the Eligible Capital | 20% – 30% | 24.71% | 20.55% | |||
Cross border exposure | Rating of the highest exposure of the portfolio on S&P Investment Grade – AAA to BBB- | AA | AAA | AAA | ||
Market risk | ||||||
Interest rate risk | Interest Rate Shock: (Impact to NII as a result of 100bps parallel rate shock for LKR and 25bps for FCY) | Maximum of Rs. 1,300 Mn. | Rs. 1,243.61 Mn. | Rs. 670.86 Mn. | ||
Re-pricing Gaps (RSA/RSL in each maturity bucket – upto one year period) | <1.5 Times (Exemption < 2.5 times for 1 Month bucket) | 0.89 Times (2.34 times for 1 Month bucket) | 0.96 Times (2.03 times for 1 Month bucket) | |||
Strategic risk | ||||||
Capital Adequacy Ratio | ||||||
CET1 | Over 10% | 12.11% | 10.37% | |||
Total Capital | Over 14% | 15.75% | 14.87% | |||
ROE | Over 20% | 17.88% | 19.52% | |||
Creditworthiness – Fitch Rating | AA (lka) | AA (lka) | AA (lka) |
Besides the conventional risks the Bank is faced with, it paid attention to several emerging risks and uncertainties with potential to disrupt banking business models in the future, arising from certain global developments and deliberated on the strategic responses thereto. A detailed review of these risks and mitigation measures is given in the Section on “Managing Risk: An Overview”.
Other developments and outcomes in relation to the risk profile and risk management initiatives during the year included:
The Bank will continue to strengthen the Risk Management Framework further by taking into account the evolving regulatory requirements and conventional as well as emerging risks and uncertainties. Specific initiatives in this regard will include: