Home' Trinidad and Tobago Guardian : January 26th 2017 Contents FirstCaribbean International Bank
(Trinidad and Tobago) Limited
For the year ended October 31, 2016 (Expressed in TT Dollars)
NOTES TO THE FINANCIAL STATEMENTS (continued)
24. Financial risk management (continued)
B. Credit risk (continued)
Credit risk limits
Credit limits are established for all loans (mortgages, personal and business and government) for the purposes
of diversification and managing concentration. These include limits for individual borrowers, groups of related
borrowers, industry sectors, country and geographic regions and products or portfolios.
Credit Valuation Adjustment (CVA)
A CVA is determined using the fair value based exposure we have on derivative contracts. We believe that we
have made appropriate fair value adjustments to date. The establishment of fair value adjustments involves
estimates that are based on accounting processes and judgments by management. We evaluate the adequacy
of the fair value adjustments on an ongoing basis. Market and economic conditions relating to derivative
counterparties may change in the future, which could result in significant future losses. The CVA is driven off
market-observed credit spreads or proxy credit spreads and our assessment of the net counterparty credit risk
exposure. In assessing this exposure, we also take into account credit mitigants such as collateral, master
netting arrangements, and settlements through clearing houses.
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 advanced, 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 to customers are:
The Bank's credit risk management policies include requirements relating to collateral valuation and manage-
ment, including verification requirements and legal certainty. Valuations are updated periodically depending
upon the nature of the collateral. Management monitors the market value of collateral and requests additional
collateral in accordance with the underlying agreement during its periodic review of loan accounts in arrears.
Policies are in place to monitor the existence of undesirable concentration in the collateral supporting the Bank's
The Bank only operates in the Trinidad and Tobago geographical market so all exposure on drawn and undrawn
loans and advances to customers would be in this market.
Exposures by Industry Groups
The following table provides an industry-wide break down of gross drawn and undrawn loans and advances to
customers, that is, before provisions for impairment, interest receivable and unearned fee income.
2016 Drawn Undrawn
$'000 $'000 $'000 $'000 $'000 $'000
7,803 177,470 203,431 8,946 212,377
37,598 364,550 168,329 18,138 186,467
Electricity, gas & water
-- 52,335 46,197
Health & social work
-- 45,115 16,292
Hotels & restaurants
Individual & Individual Trusts 144,298
19,323 163,621 94,567 23,695 118,262
278 66,162 41,536 5,907 47,443
Mining & quarrying
Other financial Corporations 66,496
Transport, storage &
1,515 166,447 201,438 24,574 226,012
Real estate, renting &
other business activities 1,143,441
32,943 1,176,384 1,168,786 23,150 1,191,936
99,460 2,294,422 1,952,369 104,410 2,056,779
Impaired financial assets and provision for credit losses
The Bank takes on exposure to credit risk, which is the risk that a counter party will be unable to pay amounts
in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk
accepted in relation to one counter party, borrower, or groups 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.
The exposure to any one counter party including banks and brokers is further restricted by sub-limits which
include exposures not recognised in the statement of financial position, and daily delivery risk limits in relation
to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored
Impaired financial assets and provision for credit losses (continued)
Exposure to credit risk is 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.
Exposure to credit risk is also managed in part by obtaining collateral including corporate and personal
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. At any one time the amount subject to credit risk is
limited to the current fair value of instruments that are favourable to the Bank (i.e. assets), which in relation to
derivatives is only a small 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 usually obtained for credit
risk exposures on these instruments, except where the Bank requires margin deposits from counterparties.
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 statement of financial position assets and liabilities as transactions are usually
settled on a gross basis. However, the credit risk associated with favourable contracts is reduced by a master
netting arrangement to the extent that if an event of 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 since it is affected by
each transaction subject to the arrangement.
Credit related commitments
The primary purpose of these instruments is to ensure that funds are available to a customer as required.
Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make
payments in the event that a customer cannot meet its obligations to third parties, 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 authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms
and conditions, are collateralized by the underlying shipments of goods to which they relate and therefore carry
less risk than a direct borrowing.
Commitments to extend credit represent unused portions of authorizations 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 potential-
ly 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 since most commitments to extend credit are contingent upon
customers maintaining specific credit standards. 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
Maximum exposure to credit risk
The maximum exposure to credit risk would be all statement of financial position carrying values of all financial
assets plus the off-statement of financial position contingent liabilities and commitments (these disclosures are
shown in Note 22). The gross maximum exposure would be before provisions for impairment and the effect of
mitigation through the use of master netting and collateral arrangements, plus the off-statement of financial
position contingent liabilities and commitment amounts.
The maximum exposure to credit risk within the customer loan portfolio would be all the statement of financial
position carrying values plus the off-statement of financial position loan commitment amounts (these
disclosures are shown in Note 22). The gross maximum exposure within the customer loan portfolio would be
before provision for impairment and the effect of mitigation through the use of master netting and collateral
arrangements, plus the off-statement of financial position loan commitments amount.
C. Credit rating system and credit quality per class of financial assets
A mapping between the grades used by the Bank and the external agencies is shown in the table below. As part
of the Bank's risk-rating methodology, the risk assessed includes a review of external ratings of the obligor. The
obligor rating assessment takes into consideration the Bank's financial assessment of the obligor, the industry,
and the economic environment of the country in which the obligor operates. In certain circumstances, where a
guarantee from a third party exists, both the obligor and the guarantor will be assessed.
Standards & Poors Moodys
Days past due
AAA to BBB--
Less than 30 days
BB+ to B--
CCC+ to CC
A credit scoring methodology is used to assess personal customers and a grading model is used for corporate
clients and an ageing analysis of the portfolio assists in the development of a consistent risk rating system. This
risk rating system is used for portfolio management, risk limit setting, product pricing, and in the determination
of economic capital.
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