Home' Trinidad and Tobago Guardian : December 27th 2013 Contents B39
Consolidated Financial Statements
30 September 2013
3 Financial Risk Management (continued)
3.1 Credit risk (continued)
3.1.3 Credit classification system (continued)
(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
Group's rating Description of the grade External rating: Standard & Poor's equivalent
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.
The principal collateral types for loans and advances are:
The Group does not take a second or inferior collateral position to any other lender on advances
outside the lending value calculated as per the Group's stipulated guidelines. The Group recognises
that the value of items held as collateral may diminish over time resulting in loans being less
protected than initially intended. To mitigate the effect of this, margins are applied to security
items in evaluating coverage. The Group assesses the collateral value of credits at the point of
inception and monitors the market value of collateral as well as the need for additional collateral
during periodic review of loan accounts in arrears as per the Credit Policy.
Liquidity Support Agreement
It was agreed inter alia, in the Liquidity Support Agreement dated May 15, 2009 made between
the Government of the Republic of Trinidad and Tobago (GORTT), the Central Bank of Trinidad
and Tobago and the First Citizens Bank Limited (the Bank), that the GORTT would provide certain
assurances to the Bank so that the acquisition of the shares of Caribbean Money Market Brokers
Limited, now First Citizens Investment Services Limited (FCIS), would not reduce the capital
adequacy ratio of the Bank below 10% for the five years from the date of completion of the said
acquisition of the shares.
The terms of the agreement under which the Bank acquired FCISL included certain financial
assurances by the GORTT that provide for the indemnification of the Bank against various claims,
losses or liabilities if incurred by FCIS within a stipulated period of time after the date of acquisition
in relation to obligations existing or default on assets owned by FCIS at the date of the acquisition
as set out in the provisions of the Liquidity Support Agreement.
All reasonable claims by the Bank in respect of such losses are expected to be settled once the
Bank has made all reasonable efforts to recover or resist such claims, losses or liabilities.
Losses which are covered under the Liquidity Support Agreement include the following:
relevant statute of limitation;
enforceability of the share sale agreement, corporate good standing of FCIS and the Group,
compliance with laws, possession of requisite permits and consents, breaches of any of the
material provisions of existing contracts between FCIS and the Group and third parties other
than employee contracts and ownership of underlying assets of FCIS and the Group. The
limitation of such claims is 20 years after the date of completion of the share transfer to the
capitalised interest accruing from the date the Company was acquired by the Bank to the
greater of the maturity date of the obligation or 6 years from the date of completion of the
share transfer to the Bank; and
limitation of such claims is 2 years after the date of completion of the share transfer to the
(e) 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 carry the same credit risk as loans. Documentary
customer authorising a third party to draw drafts on the Group up to a stipulated amount under
they relate and therefore carry less risk than a direct loan.
3.1.5 Impairment and provisioning policies
The Group impairment provision policy is covered in detail in Note 2.7.
The Group's policy requires the review of individual financial assets that are above materiality thresholds
at least annually or more regularly when individual circumstances require. Impairment allowances on
individually assessed accounts are determined by an evaluation of the incurred loss at the year end on
a case-by-case basis, and are applied to all individually significant accounts. The assessment normally
encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts
for that individual account.
Collectively assessed impairment allowances are provided for: (i) portfolios of homogenous assets
that are individually below materiality thresholds; and (ii) losses that have been incurred but have not
yet been identified, by using the available historical experience, experienced judgment and statistical
(expressed in Trinidad and Tobago dollars)
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