Annual Report Risk Management Analysis Sabma Bank Pakistan By Saad Bin Mehmood

7/29/2019 Annual Report Risk Management Analysis Sabma Bank Pakistan By Saad Bin Mehmood

1/16

Risk Management Practices among Pakistani Banks Samba Bank Limited

IM Sciences Page 1

FRM Assignment 2

Risk Management Practices among Pakistani banks

Samba Bank Limited

(2009-2011)

Submitted To:Dr.Attaullah Shah

Final AssignmentMBA B&F

Final Semester

Submitted By:

Saad Bin Mehmood


2/16


IM Sciences Page 2

Contents

1. Risk: ....................................................................................................................................................... 3

2. Risk Management Responsibilities: ...................................................................................................... 3

3. Risk Management Group in Samba Bank: ............................................................................................ 4

4. Credit Risk: ............................................................................................................................................ 4

5. How samba Bank Manage Credit Risk? ................................................................................................ 4

6. Sovereign Risk: ...................................................................................................................................... 5

7. Country Risk: ......................................................................................................................................... 6

8. Counter Party Credit Risk: ..................................................................................................................... 6

9. Portfolio Risk Measurement Model & Diversification: ......................................................................... 7

10. Early Warning System: ...................................................................................................................... 8

11. Management of Non Performing Loans ........................................................................................... 8

12. Market Risk: ...................................................................................................................................... 9

13. Market Risk Management: ............................................................................................................... 9

14. Risk Pertaining to Trading Book: ..................................................................................................... 10

15. Equity Position Risk: ........................................................................................................................ 10

16. Equity Price Risk: ............................................................................................................................. 10

17. Concentration Risk: ......................................................................................................................... 10

18. Duration Gap Analysis: .................................................................................................................... 11

19. Market Risk Capital Charge: ............................................................................................................ 12

20. Market risk arising from Foreign Exchange Risk: ............................................................................ 12

21. Liquidity Risk: .................................................................................................................................. 13

22. Liquid risk Management: ................................................................................................................ 13

23. Maturities of Assets and Liabilities: ................................................................................................ 14

24. OPERATIONAL RISK ......................................................................................................................... 14

25. Capital requirements for operational risk since 2009 to 2011 are as follows: ............................... 16

26. Off Balance sheet exposures: ......................................................................................................... 16

27. Letter of Credit: ............................................................................................................................... 16

28. Derivatives: ..................................................................................................................................... 16


3/16


IM Sciences Page 3

1. Risk:Risk is basically the uncertainty factor, that in the sense of investment and finance Risk means

that its is the deviation between the expected and actual return. The probability of loss that the

investor has to face while investing his finance in a project or business.

In modern era where every economy is supported by the pillars of financial institutions, the risk

has become a very prominent factor for the sake of strong and healthy economy. Although on

one side of picture the Risk is consider something harmful but its not completely true, it actually

too much risk that can be harmful for a business or investor because the other thing that is

attached to the other end of the risk is Return. This moves in the same direction as risk. As you

cannot earn return if you dont take the risk while investing. This phenomenon makes the risk a

very important factor as well.

2. Risk Management Responsibilities:The Risk management framework means to identify what sort of risk can be arise in your

investment and to create a proper map which from the financial institution point of view contains

various policies and procedures in order to cope Risk.

As we are discussing about the Risk Management of Samba Bank Limited so the Risk

management of Samba Bank seems very efficient as per its annual report says.

According the annual reports samba bank has an independent Risk Management Organizational

unit, whose task is to manage Risk on various levels. This unit is independent and has authority

to directly report to the chief executive officer & president of Bank. As a bank samba bank also

has to deal various types of Risk. The final responsibility Risk Management function is given to

the Board of Directors in the Samba bank. As we know the Risk Management is very serious


4/16


IM Sciences Page 4

factor for the any bank so this is the reason that the Board of Director of samba bank create a

separate committee to keep focus and monitor the Risk Management function, tools and policies

that the bank is following this committee has further created more committees whose

responsibility is to monitor and manage different types of risks and different levels time to time,

these committees are Integrated Risk Management Committee (IRMC), Management Credit

Committee (MCC) and Asset and Liability Committee (ALCO). All these committees keep

monitor all those activities which can put an adverse effect over the bank performance including

the credit risk, Liquid Risk, Market Risk, Operational Risk and all other events that are harmful

for the bank performance and profitability.

3. Risk Management Group in Samba Bank:Risk Management Group in samba bank works under the supervision of integrated Risk

management committee and directly monitor and focus on credit risk, consumer Risk, Market

Risk, and the operational Risks that arise to the Bank.

4. Credit Risk:The Risk of loss that is attached to the repayment capacity of borrower. In other words the risk of

loss that the borrower will not be able to pay the obligation of bank on time is called as Credit

risk. This obligation can include the failure of borrower to payback the principle amount, any

installment or any other obligation with bank. Such risks usually related to loans, Advances and

contingent services that bank provide to its customer.

5. How samba Bank Manage Credit Risk?The credit risk management structure is very healthy in samba bank, the effect of credit risk

have an huge impact on entire organization therefore its the responsibility of manager and the


5/16


IM Sciences Page 5

related officer to make sure that the risk they are creating by taking credit risk is under the limits

of banks or not. More over there is a credit approval authority who follows the standardized

procedure of Credit Risk management at samba bank. Every approval of credit risk is require to

be approve by the related credit officer even though it passes through various standardized and

an independent riskmanagement system. The bank has made the policy to observe and to grant

the credit exposure limits according to the credit rating of the person or group the main reason to

assign these limits is avoid the excessive concentration from portfolio. Samba Bank has its own

standardized credit risk rating policy therefore the bank demand the risk rate according to that

credit rating in which customer comes. The Banks credit management policy include the

complete procedure of credit disbursement its standards while granted, the policy explains which

documents are essential while disbursing the exposure and how to maintain these documents and

how to recognize the problematic credit risk and which type of procedure to be follow in case of

identification of problem credit. According to the bank policy all the problematic credits will be

represent to the Board of director in every quarter and all the classification and the decisions

about the provisions and the criteria about write off these problematic credit are takes place

quarterly according to directions given by Board of Directors

6. Sovereign Risk:Although the Sovereign nations cannot collapse but there is probability that they refuse to pay

the obligation due to some specific reason like change in national policy etc to the bank so we

may say that the Risk related to the sovereign Government that they will fail or refuse to pay the

obligation to the bank is called as sovereign risk. Its very difficult task for bank to recover such

amounts.


6/16


IM Sciences Page 6

There is not much information given in the documents available about samba bank but according

to the annual report the samba bank manage such Risk by using Standardized approach given

under Basel II. In 2011 the amount outstanding on sovereign was Rs 9,641,623 in 2010 it was Rs

11,068,514 and in 2009 it was Rs 320,071. According to the Tier II of Samba bank the bank has

capital requirement for Public sector entities (PSEs) was Rs 186,593 and Risk Adjusted value

was Rs 1,865,926 in 2011. Whereas capital requirement in 2010 was Rs 75,513 and Risk

Adjusted value was Rs 755,132 and in 2009 it was Rs 79,844 & Rs 798,443 Respectively.

7. Country Risk:A variety of Risks concerning investing in a foreign country. such risks contain , exchange rate

risk, ,political risk and transfer risk, economic risk that is the risk of investment being stuck or

capture by government activity.

8. Counter Party Credit Risk:In Samba bank the counter parties limits are basically determined as per the size of their rating,

better the rating will be the more better the limit will be assign to counter party. Now question is

how bank determine this rating, well the answer is samba bank determine the ratings of its

counter party by using its internal credit rating model named as Financial Analysis and Risk

management system (FARAS). The FARAS use the internal information of the counter party and

after analyzing various levels execute a particular rating along with minor other one. These

ratings normally vary from time to time. The FARAS takes decision by using Quantitative and

Qualitative information of counter party. it usually assign the rating between 2 to 7 under the

performing category. So Counter party credit Risk is managed on the basis of Obligor Risk


7/16


IM Sciences Page 7

Rating of counter party. the judgment given by FARAS is also examined again as the experts

judgment is also an essential process.

9. Portfolio Risk Measurement Model & Diversification:The samba bank always tries to give best services to its customers. And ensure that its customers

are getting almost similar services as promised in the credit policy. the bank specially observe

each and every investment in the portfolio that either any investment of an individual or

company is creating undue concentration of risk or not. The portfolio of Samba bank in 2011

was composed of following sectors

Chemical and pharmaceuticals Agriculture, forestry, hunting and fishing Textile Cement Sugar Footwear and leather garments Automobile and transportation services Financial Insurance Electronics and electrical appliances Construction Power (electricity), gas, water and sanitary Individuals Manufacturing Wholesale and retail trade Transport, storage and communication Services Paper and allied Oil marketing companies Oil refinery Others

The tool that Samba bank use to manage the Portfolio Risk is called as Rapid port folio Review

(RFR). Even in bad economic situations where Pakistan was facing so many troubles this tool

helped the bank to properly manage the portfolio. The RPRs performed throughout the year

based on the influence of the current inter-circular debt, currency wear and tear, gas supply


8/16


IM Sciences Page 8

curtailment, enhancement in cotton prices and pursuing decreasing cotton prices resulting in

inventory losses on the financial wellness of textile sector obligors. More over a remedial asset

committee Risk manager and CEO & president of samba bank also review the various aspect of

portfolio and recommended the proper plans to make it efficient time to time under the head of

institutional Remedial management department.

The corporate portfolio was given the capital requirement and risk adjusted values in 2011 were

17,215 172,154 and in 2010 they were 44,085 440,845 whereas in 2011 they were about 294,181

& 2,941,806.

10. Early Warning System:As per reports of Samba Bank, the bank has developed an efficient credit policy which contains

the proper procedures of early warning mechanisms. The Business managers are well instructed

that which procedure they must have to follow according to situation

As stated above the tool that Samba bank used to manage to manage different type of credit risk

especially in the portfolio risk was Rapid Portfolio Review which contentiously analyzed the

daily economic factor and predict according to situation like in case of early warning situation

the bank can demand additional collateral or some sort of other procedures to make its self safer.

11. Management of Non Performing LoansThe non performing loans are those loans which are already defaulted or near to default, the

borrower has not paid the scheduled amounts at least from 90 days such loans are declare as Non

performing loans or NPLS also called as bad debts.


9/16


IM Sciences Page 9

If we observe Samba bank Non performing loans management performance it seems better as

compare to other as per its annual reports. Although credit situation in our current economy is

declining due to which the banking sector is facing a huge problem of nonperforming loans

which are increasing day by day but if we discuss the situation of samba bank than we can found

that samba bank is still performing well as compare to other bank in economy its Nonperforming

loans as on December 31st

in 2009 werw 2,558,842 and in 2010 Rs 2,621,849 which becomes

2,582,094 in December 1st 2011. There was reducing tend from 18% to 14% in 2011

where 2012 data is yet to be publish.

12. Market Risk:The probability that an investor will suffer loss because of aspects that influence the entire

functionality of the markets. Market risk, also identified as "systematic risk," they can't be wiped

out via diversification, although it is often hedged against market factors.

According the Samba bank the risk that arise from market such as fluctuation in the price levels,

foreign exchange rates variations, movements of interest rates etc that can affect the off balance

sheet and on balance sheet items adversely and the bank has to incur loss due to such market

fluctuations than all these types of risk comes under the head of Market Risk, such types of risk

causes the loss to earnings and the capital of bank and badly effect not only the banking book but

the trading book as well.

13. Market Risk Management:As stated earlier that the market risk can affect the banks balance sheet adversely there for

samba bank has made a proper and efficient Market Risk management policy. in order to

measure the


10/16


IM Sciences Page 10

14. Risk Pertaining to Trading Book:the Market risk is basically the risk that affect the trading book as well as the bank book in a

bank. Trading book contains short term positions means that normally the securities that are to

sold with the period of 90 days from the date of purchase are included in trading book. Another

reason why trading book affect more due to market risk is its feature of Mark to Market (MTM).

The Profit & Loss account of Bank suffers by any difference or fluctuation in Mark to Market in

trading book. In Samba Bank the trading Book is managed by the stating the value at Risk limits

(VAR method), the factor sensitivity and associated limits and the trading action triggers. All

these ways are use to control the trading book that affected due to the fluctuation in Market

variables.

15. Equity Position Risk:This type of risk usually comes in the trading books because of price fluctuations in the equity

indices level or the fluctuation in the stock prices in Samba Bank the risk is only related to the

available for sale portfolio which is managed with the view of medium terms capital gains and

the dividend income.

16. Equity Price Risk:Equity price risk according to the samba bank annual reports is the chance of loss due to the

change in the prices level of equity due to fluctuation of interest rates or exchange rates. The

price risk is also affect the trading book as well as the bank book both.

17. Concentration Risk:The concentration risk is the risk which can be simply define as the possibility of loss as a result

of intensely uneven lending to a specific group of counterparties or sector.


11/16


IM Sciences Page 11

In samba bank the limits about the exposure about the concentration of industry sector are clearly

given in the credit policy of bank. These limits are monitored under the supervision of integrated

risk management committee. The integrated risk management committee further discusses these

concentrations in their meetings of portfolio composition and in case of concentrations found

they make the future strategies and a complete plan of action to prevent such type of

concentration risk.

18. Duration Gap Analysis:A technique of Managing the asset & liability which can be utilized to evaluate interest rate

related risk or liquidity risk eliminating credit risk in other words we can also say that this is the

analysis in which the bank observe the Gap between the interest sensitive Assets and liabilities to

assess different types of risk and then perform assets liability management.

In Samba Bank the tool that is use to determine the Gap in various occasion is a Report that is

called as Market Access Report this report monitors the current liquidity position of the bank. the

Business daily and cumulative gaps a analyzed in Market access reprt the tenor bucket gap

shows the assets and liabilities that are expected to mature or need to mature in market. This

report Market Access Report provide a set up for what amount of incremental funds are suitable,

for the financial position and market capacitys statement size.

Moreover the Samba Bank use different types of tools to manage the market risk mainly it

contain generating different type of maturity gap analysis reports, uses review factor sensitivity,

the methodologies like ICAAP framework stress testing and VAR (value at risk) are prominently

use in samba bank to calculate the risk at different stages.


12/16


IM Sciences Page 12

19. Market Risk Capital Charge:The capital requirement thats samba bank kept in 2009 as market risk were the foreign exchange

Risk & Interest risk whose capital requirement were Rs 21546 & Rs 33231 respectively and

their Risk Adjusted value was Rs 269325 & Rs 415388

Whereas the Capital requirement and Risk Adjusted value for 2010 & 2011 are also given below

Risk Capital Requirement Risk Adjusted value

Market Risk 2009 Rs in thousands Rs in thousands

Foreign exchange Risk 21546 269325

Interest rate risk 33231 415388

Market Risk 2010

Interest risk 24450 244500

Foreign exchange Risk 77713 777125Market Risk 2011

Interest risk 64426 644263

Foreign exchange Risk 69323 693230

20. Market risk arising from Foreign Exchange Risk:The foreign exchange is the risk that can define as the probability of loss to banks financial

assets due to the fluctuation in the foreign exchange rates in the market. Its is the possibility of

fluctuation in the value of bank instruments because of fluctuation in foreign exchange rates in

market.

The Samba Bank in order to cope with these type of market risk uses various tools out which the

tools that are more frequently use are State Bank of Pakistans hedging instruments and the

forward covers. The other tools and techniques to prevent the Foreign exchange risks are that

normally samba bank deal in the currencies that are authorized. Samba bank has devised

different matrices authority for different transactions of foreign currencies; moreover the bank

has also introduced the floor and ceiling criteria to the counter parties to avoid the foreign


13/16


IM Sciences Page 13

exchange risk the capital requirement and risk adjusted values for foreign exchange risk are

stated above for 3 years.

21. Liquidity Risk:There are two dimensions of the liquidity risk one when the bank or financial institution unable

meet its commitment when due whereas from the other dimension it is the risk when you

business wants to sell its assets and no one is able to buy it one of the reason of such risk from

the second dimension can be the difference between the price and true value of assets. However

Samba Bank defines the Liquidity risk from the first dimensions point of view.

22. Liquid risk Management:The Samba bank designed its risk management procedures in such a way that the transparency

against the liquid risk activities remains visible and comparability factor also remain. This is the

reason that standards that samba bank has made to prevent such risk easily identify, define and

monitor the liquid risk.

The techniques that samba bank use for this purpose are Gap analysis to monitor the Gap

between the Liquidity sensitive assets and liabilities and to manage them efficiently

An efficient tool that samba bank use to cope with liquidity risk is stress testing technique which

test the effects of a specific event for the period of three months on the balance sheet and the net

potential cumulative Gap. The purpose of this stress testing is to find out the additive funding

that will be require if similar scenario occur as of stress testing with the approval of board of

directors this scenario of stress testing is support by the treasurer if samba bank and held at least

one in a year.


14/16


IM Sciences Page 14

Other tools that Samba Bank uses for monitoring the liquidity in bank are liquidity ratio, MAR,

significant fund sources and the contingency funding plans in case of liquidity risk arise

23. Maturities of Assets and Liabilities:In samba bank the maturities of assets and liabilities means their contractual maturities these

maturities are measure on the difference between the time of their date of reporting and the date

of contractual maturity. These maturities basically shows the the values that are carrying or

possess by these assets and liabilities in the balance sheet in other words these values are those

values on the basis of which they report their financial position in statements.

the position of Net assets at Maturities of Assets and Liabilities statement of samba bank for 3

years are as follows:

year Amount in Rs in thousand

Net Assets 2009 7,075,660

Net Assets 2010 7,925,678Net Assets 2011 8,182,267

24. OPERATIONAL RISKThe operational risk is the risk of loss to the bank or business due to such event, that negatively

affect the system under which the company performs its operations these risks can be failure of

infrastructure, technology, fraud , hacking, legal Risks.

According to Basel II, the operation risks are those risks that arise due to failed or inadequate

internal processes; failed systems inability of people and the events that incur externally this is

the reason that Act of God and terrorism are also included in such type of risks.


15/16


IM Sciences Page 15

As these risks are really very critical in nature so therefore the samba bank has normally try to

manage such risks by following its policies, procedures, and tools that the bank normally use to

identify and cope with this type of risk.

Specifically Samba bank has created a complete operational Risk management policy which

contain the detailed guidelines to manage operation risk moreover samba bank also has

implemented a complete risk management framework which is obtained through its parent

company that is Samba financial Group. Samba bank has established a separate department to

monitor and cope the operation risks that arise to bank this department is known as operational

Risk and control department which is a part of risk management group as well and worked under

the supervision of integrated risk management committee that reviews all the risk areas of bank

including operation risk management. The parent company samba financial Group of samba

bank has also implemented an efficient Business continuity plan in bank which contain detailed

practices to avoid the operation risks and also working to implement such plans on departmental

basis.

Samba bank is using the standardized approach explained as per Basel II that is Basic indicator

approach in order to measure the operational charge that is use to calculate the minimum capital

requirement as according to the procedure explained in Basel II. Other tools and procedures that

samba bank uses are Key Risk Indicator (KRI), Risk & Control Assessment Regime (RCSA) &

Internal control over financial reporting (ICFR). The Samba bank also follows not only its well

explained policies and procedure under the head of CORMID and Country compliance

Department. Beside all these procure the samba bank also conducts various types of workshops

and training programs for its employees to educate them about operation risk management skills.


16/16


IM Sciences Page 16

25. Capital requirements for operational risk since 2009 to 2011are as follows:

year Capitalrequirements

Rs in Thousands

Risk AdjustedvaluesRs In

thousands

2009 Capital requirements for operational risk 99337 1241713



26. Off Balance sheet exposures:Off balance sheet items includes the Guarantees and Commitments that bank conduct on the

behalf of their customer and charge the fee after the fulfillment of obligation.

27. Letter of Credit:A letter originating from a bank guaranteeing that a purchaser's payment to a seller will be

received in time. In case if the purchaser is incapable to pay within due date, than the bank will

be liable to pay on the behalf of purchaser to the seller

In Samba Bank the outstanding forward foreign exchange agreements are unveiled at the rates as

per agreements. Whereas the Contingent liabilities or commitments for letters of credit and

letters of guarantee valued in foreign currencies are stated in PKR at the current exchange rate of

reporting date. Samba bank mention all the details about the provisions against the letter of credit

and guarantees in the notes of annual report to remove discrepancies.

28. Derivatives:The Samba bank identifies the derivative assets as per their fair value. The derivative which

posses the positive value are included in the head of other Assets as unrealized profit where are

the negatively valued assets are entered in the other liabilities head as unrealized loss.

Documents

Annual Report Risk Management Analysis Sabma Bank Pakistan By Saad Bin Mehmood