Organization of Governance and Risk Management
The Risk Management Policy document, approved by the Board provides the necessary information on risk management approach, objectives, management and organization structure. The risk management policies and procedures are constantly reviewed and where necessary, modified and enhanced to reflect changes in products and the market.
The Bank has constituted a Board Risk Committee (BRC) for enhancing the effectiveness of the Board’s monitoring of risk issues facing the Bank and to submit periodic reports to the Board of Directors as appropriate. The BRC provides oversight of the Bank’s Risk Management on a holistic basis and ensures the autonomy and independence of the Risk function of the Bank. BRC reviews high risk credits which are more than 10% of the Bank’s capital or as deemed appropriate by the Committee. The Risk Management Department is headed by the Chief Risk Officer (CRO) who reports to the Board Risk Committee. The Bank has also constituted an Executive Risk Committee (ERC), co-chaired by the Chief Executive Officer (CEO) and the Chief Risk Officer (CRO), which is the apex committee for Risk Governance at the Senior Management level. The Risk Management Department of the Bank provides regular reports to the BRC and ERC so that the committee members are well informed of all risk exposures of the Bank.
The organization of risk management, roles and responsibilities of the various committees are included in Note 24 of the financial statements.
Gulf Bank under the leadership of its Chairman and Board of Directors has implemented the new rules on Corporate Governance 2012 as announced by the CBK. The Bank also endeavors to adopt global best practices which are vital to its financial and communal well being. The Bank has constituted four major committees - Board Risk Committee, Board Audit Committee, Board Corporate Governance Committee and Board Nomination & Remuneration Committee for implementation of Corporate Governance of the Bank.
Risk Appetite and Portfolio Strategy
The Bank maintains a strong risk management culture and manages the risk/reward relationship within and across each of the Bank’s lines of business. The Bank continuously reviews its risk management policies and practices to ensure that the Bank is not subject to material asset valuation and earnings volatility.
The Bank has a Risk Appetite document, which enables close monitoring of various risks on an ongoing basis against the internally set thresholds. On a quarterly basis, the risk dashboard is presented and discussed with the Executive Risk Committee and Board Risk Committee. The Risk Appetite document is periodically reviewed and amended in line with market and economic factors. The Bank has a detailed credit policy approved by the Board and periodically revised in response to changes in risk and market conditions.
The Credit Policy Manual sets out the guiding principles and credit risk standards governing extension of credit to provide a structure around which the banking business must be based and ensure a consistent approach to all its lending activities. It also defines the policy on acceptable country credit risk exposure. The individual country limits are approved and reviewed by the Board Credit and Investment Committee (BCIC) which is the highest credit approving committee delegated by the Board of Directors within CBK guidelines.
The Bank classifies its exposure as per North American Industry Classification System (NAICS) Code. Such classification is in addition to the classification based on purpose codes as defined by CBK. This allows the Bank to classify its portfolio into various sub-segments so as to facilitate analysis and improve management of concentrations, if any. The Bank computes a weighted average Risk Rating through which the overall portfolio quality is assessed at regular intervals and deliberated upon in the ERC as well as in the BRC. This rating has been extended down to the relationship manager level and risk measures are introduced for business performance appraisal. This leads to strengthening the first line and further improvement in asset quality.
RAROC (Risk Adjusted Return on Capital) Model is in use in the Bank to assess the net value created in the account after taking into account the cost of capital. The Model helps to make right credit decisions and create shareholder value.
The Internal Capital Adequacy Assessment Process (’ICAAP’)
The Internal Capital Adequacy Assessment Process (’ICAAP’) identifies, measures, aggregates and monitors the Bank’s risks and enables the Bank to maintain an appropriate level of internal capital in relation to the Bank’s overall risk profile and business plan. The Bank carries out an assessment of material risks such as Credit, Market, Operational, Credit Concentration (sector and name concentration) risk, Interest Rate risk, Liquidity risk, Legal risk, Reputational risk etc., as part of the ICAAP process. The Bank also runs a Stress Testing analysis to measure the impact on the value of collateral, income streams, downgrades of lending portfolio etc. over a one year horizon for three plausible stress scenarios (mild, medium and severe).
The capital allocation for each of the risks and stress testing results are reviewed and discussed at ERC and BRC meetings to ensure sufficient capital is allocated for each risk, keeping in view both macro and micro economic factors.
The Capital Adequacy Ratio under Pillar 1 (Basel III) as on 31 December 2018 is 17.53% (2017: 17.80%) and the corresponding Capital Adequacy Ratio under ICAAP is 16.03% (2017: 16.30%).
Credit risk is the risk that financial loss arises from the failure of a customer or counterparty to meet its obligations under a contract. It arises principally from lending, trade finance and treasury activities. The Bank has comprehensive policies and procedures to control and monitor all such risks. The Board of Directors has delegated all authority (except credit facilities to Board of Directors and related names) for credit decisions to Board Credit and Investment Committee (“BCIC”) who in turn can delegate its authority to Executive Credit Committee (“ECC”) as stipulated by the Board of Directors within the CBK guidelines. Note 24 (A) to the financial statements explains credit risk in detail and also outlines Bank’s policy and framework to manage it.
Market risk is the risk that movements in market values or prices, including currency rates, interest rates and credit spreads will reduce the Bank’s income or the value of its portfolios (assets and financial instruments).
The Bank is exposed to market risk through its trading activities, which are carried out both for customers and on a proprietary basis, as well as its holdings of financial assets and liabilities. The Treasury group manages the Bank’s foreign exchange, interest rate risk and liquidity risks. The Investments group monitors the equity market risk for proprietary investment portfolio. Individual dealer position and trading limits are set for each portfolio, product and risk type to ensure that the Bank’s market risk is managed within the overall CBK regulatory guidelines, internal limits set by the Bank’s Risk Appetite and the market risk profile set by Asset and Liability Committee (ALCO). Interest rate, currency and liquidity mismatches are monitored constantly by the treasury group and regularly reviewed by ALCO.
The Bank’s primary treasury business involves foreign exchange transactions on behalf of corporate customers. Customer transactions are mostly undertaken on a back-to-back basis. The treasury group undertakes a limited amount of proprietary foreign exchange trading, mainly in the G7 currencies but also in the regional and other minor currencies. The risks are limited since the open foreign exchange positions are very small and in strict adherence with the open currency position limits set by CBK. The Bank does not trade in fixed income or equity securities.
Money Market activities are restricted to meeting the funding requirements of the Bank’s domestic and international foreign currency assets and investing any surpluses. As a matter of general policy, these positions do not contain material interest rate risk.
Bank’s treasury group also maintains a portfolio of Kuwait Government treasury bonds and CBK bonds to meet the CBK statutory liquidity requirements as well as a portfolio of mostly GCC sovereign bonds denominated in USD to manage surplus liquidity.
The Kuwaiti Dinar is the Bank’s functional currency and almost all of the Bank’s assets and liabilities are denominated in either KD or USD and are match funded in the same currency. As a result, there is limited structural cross currency foreign exchange exposure.
Currency risk is the risk that the fair value of a financial instrument will fluctuate due to changes in foreign exchange rates. Note 24 (C) to the financial statements explains currency risk in detail.
Interest Rate Risk (Banking Book)
Interest rate risk for the Bank arises from the possibility that changes in the interest rates will affect the fair value or future cash flows of the financial instruments. The Bank monitors the impacts on the net interest income for a 12 month period as well as the change in economic value of the assets and liabilities under various interest rate scenarios. Note 24 (B) to the financial statements outlines the sensitivity of the Bank’s net interest income to interest rate changes.
Equity Risk (Banking Book)
The Investments group is responsible for managing the proprietary investment securities portfolio in the Banking (i.e. non-trading) book. The Bank complies with all Investment related limits mandated by CBK.
In accordance with IFRS 9, equity investments are classified as ‘Fair value through other comprehensive income’ (‘FVOCI’) (previously classified as ‘available-for-sale’). The accounting classifications and fair value measurements are disclosed in the significant accounting policies note to the financial statements. The types and accounting classifications of investments are disclosed in Note 13 of the financial statements.
Liquidity risk is the risk arising from the inability of the Bank to meet its financial obligations on time without incurring significant costs. Liquidity risk arises in the general funding of a bank’s activities. The Bank has maintained a balance in liquid assets over and above the CBK’s minimum requirements. Note 24 (D) to the financial statements explains liquidity risk in detail and also outlines Bank’s policy and framework to manage it.
Operational risk is the risk of loss arising out of the failure of people, processes or technology or the impact of external events. It includes fraud, unauthorised activities, errors, omissions, inefficiencies, systems failures and external events.
The Bank’s Operational Risk Management framework is intended to identify, assess, monitor, mitigate and control operational risk effectively in the Bank in a consistent manner and, in the long run, to ensure that the Bank gets compensated for the risks assumed.
The Bank’s Operational Risk Management framework encompasses Risk and Control Self Assessment (RCSA) and Key Risk Indicators (KRI's). The framework is being implemented in each operating unit of the Bank. Besides, the Bank has an Incident reporting mechanism, whereby any deviations from the standard operation are internally reported, the root causes identified and appropriate remedial measures are implemented in a timely manner. The Bank collates internal operational loss information and the data facilitates the Bank to put in place appropriate controls to prevent incidence of such losses in future. The Bank uses the RiskNucleus Operational Risk solution for the purpose of monitoring operational risk. Note 24 (E) to the financial statements provides additional information on the Bank’s operational risk management framework.
Credit Risk Exposure
The Bank uses the Moody’s Risk Rating system for risk rating its credit exposures. Note 24 (A) to the financial statements explain Bank’s internal grading process in detail.
Gross Credit Risk Exposure
The summary of the Bank’s gross credit risk exposure (before credit risk mitigation) as of 31 December 2018 and 31 December 2017 are shown below. The unfunded (i.e. off-balance-sheet) amounts represent the gross credit risk exposure before the credit conversion factor (‘CCF’) adjustments, since the gross amounts reflect the Bank’s ultimate credit risk in the event of default by the counterparties.
Funded gross credit risk exposure as of 31 December 2018 is 81.2% (2017: 80.3%) of the total gross credit risk exposure.
Gross credit risk exposure divided between funded and unfunded on the basis of standard portfolio is detailed in the credit risk exposure section.
Average Credit Risk Exposure
Average credit risk exposure as at 31 December 2018 and 31 December 2017 are detailed below:
Funded and Unfunded credit facilities (Average) as at 31 December
Average funded gross credit risk exposure for 2018 is 80.18% (2017: 79.23%) of the total average gross credit risk exposure. The full year average amounts are calculated using a 13-point average of the month end figures from 31 December 2017 to 31 December 2018 inclusive.
Geographical Distribution of Gross Credit Risk Exposures
The geographical distribution of the total gross credit risk exposure (after specific provisions), broken down by standard credit risk portfolio as at 31 December 2018 and 31 December 2017 are shown below. The geographical distribution is based on the primary purpose of the credit facilities.
Total gross credit risk exposures as at 31 December 2018 - Region wise
Total gross credit risk exposure as at 31 December 2017 - Region wise
The majority of the Bank’s credit exposure is in Kuwait which comprises KD 6.27 billion (81.2% of total gross credit exposure) at 31 December 2018, compared with KD 6.02 billion (82.1% of total gross credit exposure) at 31 December 2017.
Geographical Distribution of Average Credit Risk Exposures
The average gross credit risk exposure for 2018 and 2017, broken down by geographical region and standard credit risk portfolio are shown below:
Total gross credit risk exposures as at 31 December 2018 (Average) - Region wise
Total gross credit risk exposures as at 31 December 2017 (Average) - Region wise
Industry Segment Distribution of Gross Credit Risk Exposures
The industry segment split of the gross credit risk exposure (after specific provisions), broken down by standard credit risk portfolio, as at 31 December 2018 and 31 December 2017 are shown below:
Total gross credit risk exposures as at 31 December 2018- Industry wise
Total gross credit risk exposures as at 31 December 2017- Industry wise
Residual Maturity Distribution of Gross Credit Risk Exposures
The residual maturity of the gross credit risk exposure (after specific provisions), broken down by standard credit risk portfolio, as at 31 December 2018 and 31 December 2017 are shown below:
Total gross credit risk exposures as at 31 December 2018
Total gross credit risk exposures as at 31 December 2017
Impaired Loans and Provisions
Impaired Loans and Provisions by Industry Segments
The Bank has adopted IFRS 9: Financial Instruments with a date of application of 1 January 2018, with the exception of the measurement and disclosure requirements in respect of expected credit loss (“ECL”) on credit facilities. These regulations require ECL to be measured at the higher of the ECL on credit facilities computed under IFRS 9 in accordance to the CBK guidelines or the provisions as required by CBK instructions; the consequent impact on related disclosures; and the adoption of all other requirements of IFRS as issued by the International Accounting Standards Board.
Impaired loans and provisions (by industry segment) as at 31 December 2018
The industry segments split of impaired loans (past due portion and balance outstanding) and the associated provisions (specific and general) as at 31 December 2018 and 31 December 2017 are shown below:
Impaired loans and provisions (by industry segment) as at 31 December 2017
Non-performing loans (‘NPL's’) have decreased by KD 28 million in 2018 (for details refer Note 12 and 24 (A) of the financial statements and the following table).
Provision Charge by Industry Segments
The industry segments split of the provision charges and write-offs are shown below:
Provision Charges and Write - offs during 2018 (by Industry Segments)
Provision Charges and Write - offs during 2017 (by Industry Segments)
Specific charge mentioned above excludes KD 59.9 million (2017: KD 127.6 million) amounts written off during the year.
Impaired Loans and Provisions by Geographical Segments
The geographical split of impaired (i.e. non-performing) loans and the associated provisions cover as at 31 December 2018 and 31 December 2017 are shown below:
Impaired loans and provisions (by Geographical Region) as at 31 December 2018
Impaired loans and provisions (by Geographical Region) as at 31 December 2017
The total credit exposure after applying the relevant Basel III standardised approach credit conversion factor (‘CCF’) but before CRM as at 31 December 2018 and 31 December 2017, broken down by standard credit risk portfolio, are shown below:
Gross credit risk exposure before CRM as at 31 December 2018
Gross credit risk exposure before CRM as at 31 December 2017
Credit Risk Mitigation and
Credit Risk-Weighted Assets
Under the Basel III standardized approach for credit risk, CRM techniques are used to reduce the risk-weighted amount of credit risk exposures for capital adequacy purposes. Note 24 (A) to the financial statements explains credit risk in detail and also outlines Bank’s policy and framework to manage it. As per Basel III real estate as collateral will be derecognized in five years with effect from 31 December 2014, with an additional hair cut of 10% in each year. At 31 December 2018, 100% (2017: 90%) hair cut is applied on real estates. Therefore, at 31 December 2018, real estate has been completely de-recognised as an eligible CRM for capital computation purposes.
As per Credit Policy of the Bank, collateral requirement, coverage and top up, if any, will be decided upon by the Credit Committee who approves the credit facilities based on various factors including financial strength of the borrower, cash flows sources for repayment, track record, group support, volatility, etc. Wherever the share collateral is the main source of repayment , a top up clause must be maintained. When the value of the collateral held in respect of a particular loan falls below the initial prescribed collateral coverage ratio and reaches the top up ratio threshold, the customer is requested to provide additional collateral or partially settle exposure to increase the coverage. Quoted shares are valued daily by using Boursa Kuwait prices and recognised stock exchanges and real estate collateral is valued once a year by two independent real estate valuers (the lower of the two valuations is used).
In certain cases, personal/corporate guarantees from high net worth individuals or companies are also used to help secure credit facilities. The CRM treatment of these guarantees for capital computation is strictly as stipulated under Basel guidelines.
Consumer loans are generally not secured, but the credit risk is minimised by the ‘assignment of salary’ condition that requires the customer’s employer (normally a Government Ministry) to pay their salary directly to their Gulf Bank account. Collateral or security, normally in the form of a blocked customer deposit with the Bank, the assignment of an employment ‘End of Service Benefit’ or a personal guarantee, is taken on some occasions when consumer loans are granted without an assignment of salary.
Total Credit Exposure after Credit Risk Mitigation and Resulting Credit Risk Weighted Assets
The exposure after CRM, as at 31 December 2018 and 31 December 2017 and the resulting credit risk-weighted assets are further divided into rated and unrated exposures as given below:
Credit Risk Exposure after CRM; risk-weighted assets ('RWAs) as at 31 December 2018
Credit Risk Exposure after CRM; risk-weighted assets ('RWAs) as at 31 December 2017
Most of the CRM takes the form of eligible financial collateral, mainly equities listed on the Kuwait stock exchange and cash deposits.
Trading portfolio is limited to a modest amount of open currency position in the course of Bank’s Balance Sheet management.
The Bank uses standardised approach for determining the capital required for market risk. The trading book is marked to market on a daily basis and the Bank uses a structure of limits to manage and control the market risk exposures from trading activities. The Bank also uses trading Value at Risk (VAR) to track and observe foreign exchange risks. As per Basel III, total market risk weighted assets is determined by multiplying the market risk capital charge by 12.5.
The details of the market risk capital charge for the Bank as at 31 December 2018 and 31 December 2017 are shown in the following table:
On 31 December 2018, total market risk weighted assets were KD 1 million (2017: KD 2.3 million) and total capital requirement was KD 132 thousand (2017: KD 304 thousand).
The Bank’s business activities are mapped into the following three business lines: trading and sales, commercial Banking and retail Banking. The Bank’s internal funds transfer pricing methodology is used to allocate interest income and interest expense between the above business lines.
The details of the operational risk capital charge for the Bank as at 31 December 2018 and 31 December 2017 are shown in the following table:
Operational Risk as at 31 December 2018
Operational Risk as at 31 December 2017
As per Basel III, the total operational risk capital charge is calculated by multiplying the three year average gross income of the business lines by a pre-defined beta factor. The total operational risk weighted exposure is determined by multiplying the operational risk capital charge by 12.5. Gross income includes net interest income and net non-interest income, but excludes realised profits from the sale of securities in the banking book. At 31 December 2018 operational risk-weighted exposure was KD 324.6 million (2017: KD 307.3 million) and total operational risk capital requirement at 13% was KD 42.2 million (2017: KD 40.0 million).
Equity Risk in the Banking Book
The Bank does not trade in equities. All of the Bank’s equity i nvestments are held in the Banking (i.e. non-trading) book and are classified as ‘FVOCI’ (previously classified as ‘available-for-sale’) financial assets, i.e. they represent assets acquired to be held for an indefinite period of time which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices . The fair values of quoted instruments are based on the quoted closing bid prices or by using the current market rate for the instrument. The fair values of unquoted instruments estimated by using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published bid price/net asset values. The Bank uses external valuation services when necessary.
As on 1 January 2018, the Bank has adopted IFRS 9. The Bank’s management has irrevocably elected to designate an equity investment at FVOCI. The Bank’s policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. W hen this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to income statement, including on disposal. Such classification is determined on an instrument by instrument basis. Upon disposal cumulative gains or losses are reclassified from fair valuation reserve to retained earnings in the statement of changes in equity.
The fair value of the investment securities-equity held at 31 December 2018 and 31 December 2017 are shown below, along with the cumulative unrealised gains in the fair valuation reserve in equity and the regulatory capital implications
Information related to the licensed Bank's equity position in the banking book as at 31 December 2018
Information related to the licensed Bank's equity position in the Banking book as at 31 December 2017
The Bank has a significant investment in a financial institution which is classified as investments in financial Institutions below the deduction threshold.
Interest Rate Risk in the Banking Book
Future net interest income is affected by movements in interest rates and a principal part of the Bank’s management of market risk in the banking (i.e. non-trading) book is to manage the sensitivity of the Bank’s net interest income to changes in market interest rates. The sensitivity of net interest income to interest rate changes is provided in note 24 (B) to the financial statements.
Counter Party Credit Risk
The Bank has put in place risk policies and processes to identify, measure, monitor and report on counter party credit risk. These policies are integrated into credit risk management and have been applied in determining the internal limits for maximum exposures based on the counterparty’s credit rating. High grade counter parties will attract higher limits exposures while low credit grade customers will be restricted lower level exposures. These limits have been determined based on the probability of default associated with each risk grade of borrowers. Based on the probability of default the Bank seeks to minimize the unexpected losses.
For foreign exchange contracts the limits structure have been set up are based on the tenor of the contract and the risks which are the function of the volatility of the underlying. Counterparty limits structures are in place, by product, including limits for daily maximum delivery risk.
Refer to "Corporate Governance" section.
Leverage ratio common disclosure template
In accordance with the CBK guidelines (CBK circular No.2/BS/342/2015), Kuwait banks must maintain minimum leverage ratio of 3% effective from 31 December 2015. Leverage ratio is calculated as a ratio of Tier 1 capital as per Basel III to the total exposure. Total exposure is the sum of on balance sheet exposures and off balance sheet exposures after adjusting the credit conversion factor.
Following is the reconciliation of on balance sheet assets as per the published financial statements along with the total exposure amount in the leverage ratio measure.
SUMMARY COMPARISON OF ACCOUNTING ASSETS VS LEVERAGE RATIO EXPOSURE MEASURE