Investor Presentaiton
NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
46
RISK MANAGEMENT (CONTINUED)
D.
Credit Risk (continued)
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RISK MANAGEMENT (CONTINUED)
D.
Credit Risk (continued)
Credit risk management (continued)
Model risk management and independent validation (continued)
The Framework establishes a systematic approach to manage the development, validation, approval,
implementation and on-going use of the models. It sets out an effective management structure with
clearly defined roles and responsibilities, policies and controls for managing model risk. The Framework is
reviewed on a regular basis to ensure it meets regulatory standards and international practices. Any major
change to the Framework must be approved by the Board of Directors or the BRC.
The Group has an independent Group Model Validation (GMV) function that performs independent
model validation. It provides Fit-for-Purpose (FFP), Conditional Approval (CA) or Not Fit-for-Purpose (NFFP)
recommendation for the BRC or an appropriately delegated authority to approve the use of the new risk
quantification/valuation models. In addition to new model validation, the validation function also evaluates
the performance of existing models through an annual validation process. The independency of the team
enables it to serve as an effective second line of defence for the bank.
Credit approving authorities
BCIC has delegated credit approving authorities to the MCC, MIC, RCC and members of senior management to
facilitate and effectively manage the business. However, BCIC has retained the ultimate authority to approve
credits beyond MCC authority.
Credit risk measurement
The estimation of credit risk for risk management purpose is complex and requires use of models,
as the exposure varies with changes in market condition, expected cash flows and the passage of time.
The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood
of defaults occurring and of the associated loss ratios. The Group measures credit risk using PD,
EAD and LGD. This is similar to the approach used for the purpose of measuring ECL under IFRS 9.
Credit risk grading
The Group uses internal credit risk grading that reflects its assessment of the probability of default of individual
counterparties. The Group uses internal rating models tailored to various categories of counterparty.
Borrower and loan specific information collected at the time of facility application (such as disposable income,
and level of collateral for retail exposure; and turnover and industry type considerations which may not be
captured as part of the other data inputs into the model.
The credit grades are calibrated, such that the risk of default increases exponentially at each higher risk
grade. For example, the difference in the PD between a 1A and 2A rating grade is lower than the difference in
the PD between a 3A and 4A rating grade.
Credit risk measurement (continued)
The following are additional considerations for each type of portfolio held by the Group:
Retail:
After the date of initial recognition, for retail business, the payment behaviour of the borrower is monitored
on a periodic basis to develop a behavioural score. Any other known information about the borrower which
impacts their credit worthiness such as: unemployment and previous delinquency history is also incorporated
into the behaviour score. This score is mapped to a PD.
Corporate and Institutional Banking, Business Banking and Private Banking:
Ratings are determined at the borrower level for these segments. A relationship manager incorporates any
updated or new information/credit assessment into the credit system on an ongoing basis. In addition, the
relationship manager also updates information about the credit worthiness of the borrower every year from
sources such as public financial statements. This will determine the updated internal credit rating and PD.
Treasury:
For debt securities in the Treasury portfolio, external rating agency credit grades are used. These published
grades are continuously monitored and updated. The PDS associated with each grade are determined based
on realised default rates over the prior 12 months, as published by the rating agency.
The Group's rating method comprises 24 rating levels for instruments not in default (1 to 24) and 4 default
classes (25 to 28). The Group's internal rating scale are mapped with external ratings. The master scale
assigns each rating category a specified range of probabilities of default, which is stable over time. The rating
models are reviewed for recalibration so that they reflect the latest projections in the light of all actually
observed defaults.
ECL Measurement
IFRS 9 outlines a 'three-stage' model for impairment based on changes in credit-quality since initial recognition
as summarised below:
A financial instrument that is not credit-impaired on initial recognised is classified in stage 1 and has its
credit risk continuously monitored by the Group.
If a significant increase in credit risk ('SICR) since initial recognition is identified, the financial instrument is
moved to 'Stage 2' but is not yet deemed to be credit-impaired.
If the financial instrument is credit-impaired, the financial instrument is then moved to Stage 3.
Financial instrument in stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL
that results from default events possible within the next 12 months. Instruments in Stages 2 or 3 have
their ECL measured based on a lifetime basis.
ECL is measured after factoring forward-looking information.
ECL on Purchase or originated credit-impaired financial assets is measured on a lifetime basis.
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EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021
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