Note 37. Financial risk management.
Main purpose of the risk management system of JSC “Credit Optims Bank ”is maintenance of stable conditions of its activity for which the Bank remains capable in time and full to carry out of all obligations. Such orientation of system of risk-management of Bank serves achievement of the purpose of protection of interests of its investors, creditors, counterpartners and shareholders.
Process ofRisk ManagementinJSC Credit Optima Bank is under control of the SupervisoryCounciland the Board of the Bank. For the operative control over risks of the Bank directors has created corresponding profile committees: the Loan Committee, the Committee of Assets and Liabilities Management, the Financial Committee.
JSC “Credit Optima Bank” manage risks through identification, evaluation, control and monitoring of all types of risk that can significantly affect its activity. For itself the Bank has advanced such essential risks: the credit risk, liquidity risk, an interest risk, an exchange risk, market risk, operational-technological risk that risk of reputation.
At an estimation of risks JSC “Credit Optima Bank” considers changes of external and internal bank operation environments, a consequence from introduction of new services and processes and operational plans of Bank for the future. On the basis of the made estimations JSC “Credit Optima Bank” limits risks with the help of:
1An establishment of limits on essential risky items of Bank - credit, currency, percentage, monetary, etc.;
2Diversifications of risk by its distribution between the counterparts, different areas and regions;
3Passings of risk to third persons through insurance..
The important role in a control system of risks of JSC “Credit Optima Bank” plays regular and careful check of observance of the established limits and procedures of the control over risks, adequacy of methods of valuation of risks by comparison of the estimated and reached risk levels.
The credit risk.
The credit risk - risk of default by the borrower (the counterpart of Bank) obligations behind credit transactions (i.e. risk of that payment by the borrower of percent and the basic debt for credit transactions will be conducted with deviations from conditions of business deal or it will not be conducted at all).
Management of the credit risk is a process with which help Bank finds out risk, carries out its estimation and monitoring, supervises the credit items, and also considers interrelations of the credit risk with other risks. The bank operates the credit risk through such components:
1Internal normative acts (to the policy from management of the credit risk, position, procedures, techniques and other) from management of the credit risk which are approved to Boards;;
2Internal audit of lending procedures and management of the credit risk;
3Information base which saves and processes the data for the previous periods and ensures to bank of administration and monitoring of credit transactions;
The bank supervises the credit risk:
4By division of functions of credit injection, a credit risk estimation, administration and returning of problem credits;
5Through system of authorities from decision-making concerning acceptance of operations which have the credit risk. .
The bank uses such instruments of management of the credit risk::
6An establishment and regular revision of limits;
7Acceptance of maintenance and regular check of its condition;
8Formation of reserves, sufficient potential loss for a cover from active operations
9Insurance of credit risks, in particular, maintenance;
10Diversifications of the credit indebtedness behind counterpartners, products and branches.
National bank of Ukraine the established economic specifications for the control of the credit risk of banks which have been observed by Bank throughout an accounting period:
- R7 - the Specification of the maximum size of the credit risk on one counterpart
- R9 - the Specification of the maximum size of credits, warranties and the guarantees granted one insider;
- R10 – the Specification of the maximum cumulative size of credits, warranties and the guarantees granted to insider;
- R11 – the investment Specification in securities separately behind each institution;
- R12 – the Specification of a total sum of investment..
As on 01.01.2009 standards were:
R7 = 20,69% ofregulatorycapital;
R8 = 117,92% ofregulatorycapital;
R9 = 3,67% ofstatutorycapital;
R10 = 3,84% ofstatutorycapital;
R11 = 0,00% ofregulatorycapital;
R12 = 0,00% ofregulatorycapital.
Market risk
Market risk
Market risk is a risk of that fair cost or the future cash flows from a derivative instrument will fluctuate owing to technical declines.
Market risk covers risk of change of the interest rate, an exchange risk and other price risks which will be tested by bank. Among price risks that the bank recognises as essential in the activity, is: currency and percentage. The bank considers other price risks for itself insignificant in connection with insignificant volumes of portfolios in bank assets.
The bank has not changed approaches to an estimation of risks which he tested in 2008. The basic method of valuation of market risk is method Value-at-Risk which is intended for account with the set fixed probability of the maximum size of possible change of cost of a portfolio of financial instruments (and-or the separate instrument) in the certain future and allows by means of one size to display the information on risk of a portfolio.
Currency risk
Currencyis a risk of that fair cost or the future cash flows from a financial instrument will fluctuate owing to currency exchange alterations in rates. Financial circumstances of Bank and movement of funds come under influence of rate fluctuations of an exchange of leading world currencies.
Management of an exchange risk in Bank is a process with which help bank finds out an exchange risk, carries out its estimation and monitoring, supervises the open currency items and considers interrelations of an exchange risk with other risks. The bank operates an exchange risk through such components:
1To the Politician from management of an exchange risk;
2The Software for storage and data processing for the previous periods, in particular for forecasting of exchange rates of currencies and bank metals, and also for an estimation of size of an exchange risk under risk.
For management of an exchange risk the Bank carries out such procedures:
1Financial planning and drawing up of the budget of bank which advances the general (behind all currencies) an open currency item of bank on quarters;
2The Analysis of terms of closing of currency ruptures;
3The Control over liquidity of the currency market of Ukraine;
4Estimation of cost under risk – potential size of losses of the capital in connection with adverse changes of exchange rates of currencies and bank metals;
5The Establishment and revision of limits on an open currency item;
6Check of adequacy of models by comparison of look-ahead and actual levels of an exchange risk.
Positions of JSC «Credit Optima Bank» for currency risks are presented in the table
Table 37.1. Analysis of the exchange rate risk
Line / Currency / At the reporting date for the year / At reporting date the previous yearmonetary assets / monetary liabilities / derivative financial instruments / net position / monetary assets / monetary liabilities / derivative financial instruments / net position
1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10
1 / U.S. Dollars / 39482 / 36824 / 0 / 2658
2 / Euro / 1486 / 1132 / 0 / 354
3 / Pound / 0 / 0 / 0 / 0
4 / Other (Russian Ruble) / 1 / 0 / 0 / 1
5 / Total / 40969 / 37956 / 0 / 3013
In the reporting year long open currency position of the bank amounted to 3 013 thousands UAH. that is 4.51% of regulatory capital at 31.12.2008.
Table 37.2. Changing the financial result and equity as a result of possible changes in exchange rates that are installed on the balance sheet date, provided that all other variables remain fixed characteristics
(thousands UAH)
Line / Name / At the reporting date for the year / At reporting date the previous yearimpact on profit / (loss) / impact on equity / impact on profit / (loss) / impact on equity
1 / 2 / 3 / 4 / 5 / 6
1 / Strengthening of the U.S. dollar by 5 % / 133 / 133
2 / Weakening of the U.S. dollar by 5 % / (133) / (133)
3 / Strengthening of the Euro by 5 % / 18 / 18
4 / Weakening of the Euro by 5 % / (18) / (18)
5 / Strengthening of the Pound by 5 % / 0 / 0
6 / Weakening of the Pound by 5 % / 0 / 0
7 / Strengthening ofother currencies (Russian Ruble) / 0 / 0
8 / Weakeningofother currencies (Russian Ruble) / 0 / 0
The calculation for the cash balances was held in currencies that differ from the functional currency.
Table 37.3. Changing the financial result and equity as a result of changes in exchange rate that is established as the average exchange rate, provided that all other variables remain fixed characteristics
Averege currency rate in the reporting year / Averege currency rate in the previous yearimpactupon profit / (loss) / impactupon own Capital / impactupon profit / (loss) / impactupon own Capital
1 / 2 / 3 / 4 / 5 / 6
1 / Strengthening of the U.S. dollar by 5 % / 91 / 91 / 0 / 0
2 / Weakening of the U.S. dollar by 5 % / (91) / (91) / 0 / 0
3 / Strengthening of the Euro by 5 % / 13 / 13 / 0 / 0
4 / Weakening of the Euro by 5 % / (13) / (13) / 0 / 0
5 / Strengthening of the Pound by 5 % / 0 / 0 / 0 / 0
6 / Weakening of the Pound by 5 % / 0 / 0 / 0 / 0
Interest risk
Interest risk - a risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Interest risk is inherent in the process of the Bank in the market and directly associated with the financial results of its work.
Managementinterestriskinbank-is a process with whichhelp the Bankrevealsthe risk, makes its assessmentandmonitoring, controlsinterestdiscontinuities, andalsoconsiders interdependence ofpercent risk with otherrisks. The Bank is administeringinterestriskthrough such components:
3Policy rate risk management, approved by the Board of the Bank;
4procedures and controls for percentage of risk, including interest discontinuities that review once a year to ensure their relevance;
5Informationsystemsforstorageandоprocessing of dataforpreviousperiodsforcalculation of interestgaps;
6set of reporting on the percentage of risk, including reports of interest gaps.
To manage the interest risk the Bank fulfills the following procedure:
7FinancialPlanningand Budgeting that definesexpectedlevelsofnet interestincomeonquarters;
8Interestgaps evaluation
9Control of volumesandprospects of cheapandstablefinancing sourcesuse
10Putting price on Banking products.
Table 37.4.General analysis of interest risk
Line / Name / Uponrequestіandless than 1 month. / 1 to 6 months. / 6 to 12 months / 1 year and more / No monetary / Total1 / 2 / 3 / 4 / 5 / 6 / 7 / 8
Previous year
1 / Totalfinancialassets on whichinterests by fixedrates are charged(inthousands.UAH) / 0 / 0 / 0 / 0 / 0 / 0
2 / TotalfinancialLiabilities on whichinterests by fixedrates are charged(inthousands.UAH) / 0 / 0 / 0 / 0 / 0 / 0
3 / Net gap according to interestratesat theend of December 31st of the previousyear / 0 / 0 / 0 / 0 / 0 / 0
Reportingyear
4 / Totalfinancialassets on whichinterests by fixedrates are charged(inthousands.UAH) / 60739 / 4155 / 21423 / 33699 / 0 / 120016
5 / TotalfinancialLiabilities on whichinterests by fixedrates are charged(inthousands.UAH) / 50204 / 144 / 1788 / 38 / 0 / 52174
6 / Net gap according to interestratesat theend of December 31st of the reportingyear / 10535 / 4011 / 19635 / 33661 / 0 / 67842
Table37.5. Monitoring of interest rates on financial instruments.
(%)
Line / Name / 2008 / 2007UAH / USD / Euro / Other / UAH / USD / Euro / Other
1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10
Assets
1 / Funds to other banks / 16,46 / 5,00 / 1,00 / - / - / - / - / -
2 / Credits and clients debts / 21,89 / 13,37 / 13,5 / - / - / - / - / -
Commitment / - / - / - / - / -
3 / Bank funds / 22,54 / 9,28 / 0,00 / - / - / - / - / -
4 / Funds of clients:: / 16,89 / 12,70 / 10,50 / - / - / - / - / -
4.1 / Current accounts / 16,65 / 13,00 / 0,00 / - / - / - / - / -
4.2 / Instant money / 17,12 / 12,39 / 10,50 / - / - / - / - / -
5 / Subordinated debt / - / - / - / - / - / - / - / -
Table 37.6.Analysis of the geographical concentration of financial assets and liabilities for 2008
(thousands UAH)
Line / Name / Ukraine / OECD / Other countries / Total1 / 2 / 3 / 4 / 5 / 6
Assets / 6098 / 6098
1 / Cash and equivalents
2 / Trading securities
3 / Other financial assets, which accounted at fair value with recognition of the revaluation of financial results
4 / Funds to other banks / 54122 / 54122
5 / Loans and debt clients / 57198 / 57198
6 / Securities in bank portfolios for sale
7 / Securities portfolio to repay the bank
8 / Other financial assets / 2069 / 2069
9 / Total financial assets
10 / Nonfinancial assets
11 / Total assets / 119487 / 119487
Liabilities
12 / Banks funds / 36862 / 36862
13 / Client Funds / 15018 / 15018
14 / Debt securities issued by the Bank
15 / Other Fundraising
16 / Other financial liabilities / 622 / 622
17 / Subordinated debt
18 / Total financial liabilities / 52502 / 52502
19 / Nonfinancial liabilities
20 / Total liabilities / 52502 / 52502
21 / Net assets position / 66985 / 66985
22 / Obligations of credit / 398 / 398
Table 37.8.Analysis of financial liabilities by maturities for the reporting year
(thousands UAH)
Line / Name / Uponrequestіandless than 1 month. / 1 to 3 months. / 3 to 12 months / 12 mon. to 5 years / More then 5 years / Total1 / 2 / 3 / 4 / 5 / 6 / 7 / 8
1 / Funds to other banks / 36862 / 36862
2 / Client Funds: / 13048 / 116 / 1816 / 38 / 15018
2.1 / Individuals / 10985 / 116 / 1714 / 38 / 12853
2.2 / Other / 2063 / 102 / 2165
3 / Debt securities issued by the Bank
4 / Other Fundraising
5 / Subordinated debt
6 / Other financial liabilities / 493 / 2 / 127 / 622
7 / Supply forward contracts, total
8 / Supply forward contracts, net
9 / Financial guarantees
10 / Other liabilities of credit
11 / Total potential future payments for financial obligations
Table 37.10.Analysis of financial assets and liabilities of maturity based on the expected maturity of the current fiscal year as at 31 Dec, 2008
(thousands UAH)
Line / Name / Upon request and less than 1 month. / 1 to 3 months. / 3 to 12 months. / 12 months to 5 years / More than 5 years / Total1 / 2 / 3 / 4 / 5 / 6 / 7 / 8
Assets
1 / Cash and equivalents / 6098 / 6098
2 / Trading securities
3 / Other financial assets, which accounted at fair value with recognition of the revaluation of financial results
4 / Funds to other banks / 54134 / 54134
5 / Loans and debt clients / 25 / 25554 / 28272 / 4035 / 57886
6 / Securities in bank portfolios for sale
7 / Securities portfolio to repay the bank
8 / Other financial assets / 507 / 1391 / 1898
9 / Total financial assets / 60739 / 25 / 25554 / 29663 / 4035 / 120016
Liabilities
10 / Funds to other banks / 36862 / 36862
11 / Client Funds / 13048 / 116 / 1816 / 38 / 15018
12 / Debt securities issued by the Bank
13 / Other Fundraising
14 / Other financial liabilities / 294 / 294
15 / Subordinated debt
16 / Total financial liabilities / 50204 / 116 / 1816 / 38 / 52174
17 / Net liquidity gap at the end of the day on December 31st / 10535 / -91 / 23738 / 29625 / 4035 / 67842
18 / Cumulative liquidity gap at the end of the day on December 31st / 10535 / 10444 / 34182 / 63807 / 67842 / 0
Executor V. Yaremenko, tel.: 569 05 14