Home' Trinidad and Tobago Guardian : December 18th 2014 Contents C39
First Citizens Bank Limited And Its Subsidiaries
(A Subsidiary of First Citizens Holdings Limited)
Consolidated Financial Statements
30 September, 2014
(Expressed in Trinidad and Tobago dollars)
3 Financial Risk Management (Continued)
Risk management framework (continued)
The Group Enterprise Risk Unit, headed by the Group Chief Risk Officer (CRO), reports to both Sub-
Committees of the Board of Directors through the Senior Management Committees. This unit is
responsible for the management, measurement, monitoring and control of operational, market and
credit risk for the Group through the Group Operational Risk Unit, Group Credit and Risk Administration
Unit, Group Market Risk Unit and Group Business Continuity Planning Unit. The Group Enterprise Risk
Unit reports into the Senior Management Risk Committee to allow monitoring of the adherence to risk
limits and the impact of developments in the aforementioned risk areas on strategy and how strategy
should be varied in light of the developments.
The Asset Liability Committee (ALCO) was established to manage and monitor the policies and
procedures that address financial risks associated with changing interest rates, foreign exchange rates
and other factors that can affect the Group's liquidity. The ALCO seeks to limit risk to acceptable levels
by monitoring and anticipating possible pricing differences between assets and liabilities across the
Bank and the Group's various companies via the Treasury and International Trade Centre. The Treasury
and International Trade Centre's primary role and responsibility is to actively manage the Group's
liquidity and market risks. The ALCO is also supported in some specific areas of activity by the Bank's
Market Risk Committee.
As part of its mandate, the Board establishes written principles for overall risk management, as well as
ensuring that policies are in place covering specific areas of risk, such as foreign exchange risk, interest
rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments.
In addition, the Group Internal Audit Department is responsible for the independent review of risk
management and the control environment, and reports its findings and recommendation to the Board
The most important types of risk are credit risk, liquidity risk, market risk and other operational risk.
Market risk includes currency risk, interest rate and other price risk.
3.1 Credit risk
Credit exposures arise principally in lending activities that lead to loans and advances and in investment
activities that bring debt securities and other bills into the Group's asset portfolio. Credit risk also occurs
in off balance sheet financial instruments such as loan commitments. This risk relates to the possibility
that a counter party will cause a financial loss to the Group by failing to discharge an obligation. All the
Group's lending and investment activities are conducted with various counter parties and it is in pursuing
these activities that the Group becomes exposed to credit risk.
It is expected that these areas of business will continue to be principal ones for the Group in the future
and with loans and advances currently comprising a significant portion of the Group's assets and being
responsible for a substantial portion of the revenue generated, it is anticipated that the Group will
continue to be exposed to credit risk well into the future. The management of credit risk is therefore
of utmost importance to the Group and an appropriate organisational structure has been put in place
to ensure that this function is effectively discharged for the Group's business; management therefore
carefully manages its exposure to credit risk. Exposure to credit risk is managed through appropriate
credit policies, procedures, practices and audit functions, together with approved limits. Exposure is also
managed by obtaining collateral and corporate and personal guarantees.
3.1.1 Credit risk management
In its management of credit risks, the Group has established an organisational structure which
supports the lending philosophy of the Group. This structure comprises the Board of Directors, the
Board Credit Committee (BCC), Senior Management Enterprise - Risk Committee (SMERC), the Chief
Risk Officer (CRO), the Credit Administration Department and the Internal Audit Department. The
Board of Directors maintains general oversight to ensure that policies and procedures are consistent
with the strategic direction and credit philosophy of the Group and that they serve to bring the
required level of protection over assets that are exposed to credit risks. To facilitate day to day decision
making and timely implementation of decisions, the Board has delegated authority for specific areas
to specific committees and/or officers with an appropriate reporting system to the Board. The BCC
focuses primarily on credit risk appetite and in so doing sanctions amendments to credit policies,
delegation of lending authority to senior management and credit requests exceeding the authority of
management. The SMERC together with the CRO monitors the effectiveness of credit procedures and
policies and may direct changes to strategies to improve the effectiveness of policies. The major focus
of the Credit Administration Department is to formulate credit policies, monitor compliance with them
and on a continuous basis to assess their relevance to the changing business environment. Most of
these policies are established and communicated through the Group's written Credit Policy Manual.
This document sets out in detail the current policies governing the lending function and provides a
comprehensive framework for prudent risk management of the credit function. Major areas of focus
are General Credit Criteria, Credit Risk Rating, Controls Risk Mitigants over the Credit Portfolio and
Credit Concentration among others.
As part of the on-going process of prudent risk management, the Group's policy is to risk rate credit
facilities at the time of approval and on a regular basis. The rating process partitions the portfolio
into un-criticised (higher quality loan assets) and criticised sections (the lower quality/impaired assets
evaluated under the Credit Classification System). The Credit Classification System is in place to assign
risk indicators to credits in the criticised portfolio and engages the traditional categories utilised by
3.1.3 Credit classification system
(a) Loans to customers
The Group's Credit Classification System is outlined as follows:
(b) Debt securities and other bills
The Group utilises external ratings such as local and international credit rating agencies or their
equivalent in managing credit risk exposures for debt securities and other bills.
(c) Other loans and receivables
In measuring credit risk of debt securities and receivables at a counterparty level, the Group assesses
the probability of default of individual counterparties using internal rating tools tailored to the
various categories of counterparty. Securities of the Group are segmented into three rating classes
or grades. The Group's rating scale, which is shown below, reflects the range of default probabilities
defined for each rating class. This means that, in principle, exposures migrate between classes as
the assessment of their probability of default changes. The rating tools are kept under review and
upgraded as necessary.
Group's internal ratings scale and mapping of external ratings
Description of the grade
External rating: Standard &
AAA, AA, A, BBB
BB, B, CCC, C
The ratings of the major rating agency shown in the table above are mapped to our rating classes
based on the long-term average default rates for each external grade. The Group uses the external
ratings where available to benchmark our internal credit risk assessment.
3.1.4 Risk limit control and mitigation policy
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk
accepted in relation to one borrower, or groups of borrowers, industry and country segments. The
Group monitors its concentration of credit exposure so that no single borrower or industry default
will have a material impact on the Group. These limits are implemented and monitored by the Credit
Administration Department via the stipulations of the Group Credit Policy Manual. In instances where it
is strategically beneficial and adequately documented, the Group would seek approval on an exception
basis for variation to its standard approved limits from the Board of Directors.
(a) Single borrower and borrower group exposure limits
Limits established by regulatory authorities have been incorporated into the credit policies where
concentration is restricted by limiting credit amounts to a fraction of the capital base. This is supported
by a stringent reporting requirement and is further enhanced by policies requiring periodic review of
all commercial credit relationships.
(b) Industry exposure limits
These limits have been established based on a ranking of the riskiness of various industries. The
ranking is guided by a model developed for the Group for this purpose. The model utilises a scale
incorporating scores of 1 to 8 with 1 being the least risky. These have been consolidated into four (4)
bands of exposure limits which have been set in relation to the total credit portfolio with a smaller
limit being assigned to the more risky industries.
(c) Country exposure limits
Exposure limits have been established for selected countries which are considered to be within the
Group's off-shore catchment area and/or target market. Five risk categories have been developed
and the selected countries have been assigned to these categories based either on ratings issued by
acceptable rating agencies or the Group's own internal assessment of the economic and political
stability of the target. Maximum cross border exposure has been limited to a pre-determined portion
of total assets and this amount is allocated to the various risk categories with a larger share being
allocated to the more highly rated categories.
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