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Commercial Bank Management Risk Analysis of ICICI Bank

Submitted by: Himanshu Porwal (PGP01/015)
As a financial intermediary, ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk. ICICI Bank has a central Risk, Compliance and Audit Group with a mandate to identify, assess, monitor and manage all of ICICI Bank’s principal risks in accordance with well-defined policies and procedures. The Head of the Risk, Compliance and Audit Group reports to the Executive Director responsible for the Corporate Centre, which does not include any business groups, and is thus independent from ICICI Bank’s business units. The Risk, Compliance and Audit Group coordinate with representatives of the business units to implement ICICI Bank’s risk methodologies. As shown in the following chart, the Risk, Compliance and Audit Group is organized into six subgroups: Credit Risk Management, Market Risk Management, Analytics, Internal Audit, Retail Risk Management and Credit Policies and Reserve Bank of India Inspection. The Analytics Unit develops proprietary quantitative techniques and models for risk measurement

Managing Director& CEO

Audit/Risk/Credit/Agriculture & Small Enterprises Business Committee of the Board

Executive Director, Corporate Centre

Head, Risk, Compliance and Audit Group

Credit Risk Management C

Market Risk Management

Analytics

Internal Audit (Including Subsidiaries)

Retail Risk Management

Credit Policies, Reserve Bank of India Inspection

and Certain industry financials. exchange rate risk on foreign currency positions and credit spread risk. The credit rating for every borrower is reviewed at least annually and is typically reviewed on a more frequent basis for higher risk credits and large exposures. principally the failure to make required payments on loans due to bank. its financial flexibility in terms of ability to raise capital and its cash flow adequacy the borrower's relative market position and operating efficiency. ICICI Bank is exposed to as a financial intermediary which arises on account of ICICI Bank asset liability management activities. ICICI Bank assesses a variety of risks relating to the borrower and the relevant industry. the Credit Risk Management Group assigns a credit rating to the borrower. In order to assess the credit risk associated with any financing proposal. ICICI Bank determines the desired credit risk spread over its cost of funds by considering the borrower's credit rating and the default pattern corresponding to the credit rating. Credit rating is a critical input for the credit approval process. its past financial performance. cyclicality and government policies relating to the industry. ICICI Bank has a scale of 10 ratings ranging from AAA to B and an additional default rating of D. Market Risk: Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates. ICICI Bank are exposed to other elements of market risk such as liquidity or funding risk. ICICI Bank also 63 reviews the ratings of all borrowers in a particular industry upon the occurrence of any significant event impacting that industry. payment record and financial conservatism. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. the competitiveness of the industry. ICICI Bank reviews the loan arrangement and the credit rating of the borrower and takes a decision on continuation of the arrangement and changes in the loan covenants as may be necessary. . The approval process for non-fund facilities is similar to that for fund based facilities. Working capital loans are generally approved for a period of 12 months. Industry risk is evaluated by considering:     certain industry characteristics. Borrower risk is evaluated by considering the financial position of the borrower by analyzing the quality of its financial statements. and the quality of management by analyzing their track record. At the end of 12 months.Credit Risk: Credit risk is the risk of loss that may occur from the failure of any party to abide by the terms and conditions of any financial contract with institution. The prime source of market risk for the Bank is the interest rate risk. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. After conducting an analysis of a specific borrower's risk. In addition to interest rate risk. its growth outlook. operating margins and earnings stability. price risk on trading portfolios. such as the importance of the industry to the economy. including return on capital employed. exchange rates and other asset prices.

ICICI Bank prepared interest rate risk reports on a fortnightly basis in fiscal 2003. The difference in the amount of assets and liabilities maturing or being repriced in any time period category. ICICI Bank use the duration of ICICI Bank government securities portfolio as a key variable for interest rate risk management. Our portfolio of traded and other debt securities and ICICI Bank loan portfolio are negatively impacted by an increase in interest rates. These loans are generally funded with floating rate foreign currency funds. The loans generally are repaid more gradually. would then give an indication of the extent of exposure to the risk of potential changes in the margins on new or re-priced assets and liabilities. Interest Rate Risk: Since ICICI Bank’s balance sheet consists predominantly of rupee assets and liabilities. ICICI Bank has a mix of floating and fixed interest rate assets. The Asset Liability Management Committee is responsible for approving policies and managing interest rate risk on the banking book and liquidity risks reflected in the balance sheet. a large proportion of ICICI Bank foreign currency loans are floating rate loans. An interest rate gap report is prepared by classifying all assets and liabilities into various time period categories according to contracted maturities or anticipated repricing date. In contrast to ICICI Bank rupee loans. ICICI Bank increase or decrease the duration of government securities portfolio to increase or decrease ICICI Bank interest rate risk exposure. The Committee of Directors is responsible for setting policies and approving risk controls for the trading portfolio. The same were reported to the Reserve Bank of India on a monthly basis. Housing loans are primarily floating rate loans where the rates are reset every quarter. . ii) Interest rate/currency risk: Mark to market risks arising on account of interest rate/currency fluctuations. Exposure to fluctuations in interest rates is measured primarily by way of gap analysis. under the Risk Committee of the Board. providing a static view of the maturity and re-pricing characteristics of balance sheet positions. Interest rate risk is further monitored through interest rate risk limits approved by the Asset Liability Management Committee. ICICI Bank seeks to eliminate interest rate risk on undisbursed commitments by fixing interest rates on rupee loans at the time of loan disbursement. movements in domestic interest rates constitute the main source of interest rate risk. with principal repayments being made over the life of the loan. Market Risk Management Procedures: The board of directors of ICICI Bank reviews and approves the policies for the management of market risk. The board has delegated the responsibility for market risk management on the banking book to the Asset Liability Management Committee and the trading book to the Committee of Directors.Market risk: i) Liquidity risk: Risk arising on account of lack of secondary market to provide ready exit options to the investors/participants.

40 13.60 54.792.612.40 Gap Net Interest Margin Squeeze if -11. ICICI Bank actively use cross currency swaps.780.539.544. Trading activities in the foreign currency markets expose ICICI Bank to exchange rate risks.615.112.520.25.42.627.702.131. and engaging in exception reporting. through available cash flows or through sale of assets at fair market value.90 -10.209.53.20 Investment Securities 35.88.10 2.126.20 97.379.30 -5. trading and investment activities and in the management of trading positions.70 1.28.97. and options to hedge against exchange risks arising out of these transactions.80. which are primarily banks and highly rated corporate customers.40 6.60 -1.001.30 1. and currency options to clients.74. forwards.00 Exchange Rate Risk: ICICI Bank offer foreign currency hedge instruments like swaps.606.Maturity Pattern: Maturity pattern of assets and liabilities of the Bank at March 31.543.70 1.17.00 4.60 1.20 1.40 87.50 3.10 3.50 13. The goal of liquidity management is to be able. This risk is mitigated by setting counterparty limits. 2012.90 44.88.622.50 Deposits 19.70 95.90 1.89.60 2.889. the risk of unexpected increases in the cost of funding an asset portfolio at appropriate maturities as well as the risk of being unable to liquidate a position in a timely manner at a reasonable price. It is the current and prospective risk to the Bank’s earnings and equity arising out of inability to meet the obligations as and when they become due.43.50 3.191.40 3.90.543.467.52.06.49.73.34.88.40 Borrowings 1.90 2.254.40 10.10 -4.937.041.64.23.50 4.45.550.80 -61.723.50 77.284.404.883.841. Liquidity Risk: Liquidity risk is the risk of inability to meet financial commitments as they fall due.60 1. Maturity Bucket Day 1 2 to 7 days 8 to 14 days 15 to 28 days 29 days to 3 months 3 to 6 months 6 months to 1 year 1 year to 3 year 3 year to 5 year Above 5 years Loans and advances 7.888.534.80 80.60 26. stipulating daily and cumulative stop-loss limits. Liquidity risk arises in the funding of lending.466.84.70 2. It includes both.469.00 39.52.923.00 4.828.30 1.505.36.73.744. even .695.729.30 Interest Rate increases Interest Rate increases Interest Rate increases Interest Rate decreases Interest Rate decreases Interest Rate decreases Interest Rate increases Interest Rate increases Interest Rate increases 2.41.80 2.134.408.70 1.60 49.738.392.15. forwards.146.50 2.809.40 1.749.

74 169.59 3.17 Fiscal 2012 335. Net interest margin of overseas branches improved from 0. to meet all liability repayments on time. .48 51.0 13.65 90.07 (0.4 14.5 (94.73% 2.25% 3. ICICI Bank also borrows in the short-term inter-bank market. Loan maturities. Operating results: Following table represents the operational result of the bank for the year 2011-12: Fiscal 2011 259.73% in fiscal 2012.13) 8.168.86 64.8 25.51 2.5% Net interest income and spread analysis: Following is the Interest income and Spread for the bank Fiscal 2011 Fiscal 2012 % change Average interest-earning assets Average interest-bearing liabilities Net interest margin Interest spread 3.19 (2.64% in fiscal 2011 to 2.59 3. and fund all investment opportunities.603.08 107.51 67.08 182.under adverse conditions.88% for fiscal 2011 to 1. ICICI Bank maintains diverse sources of liquidity to facilitate flexibility in meeting funding requirements.15) 4.1% 34. The higher increase in average interest-earning assets compared to increase in average interestbearing liabilities led to an increase in net interest margin.26 2.42 228.34 % change 29.64% 2. and sale of investments also provide liquidity.65 4. ICICI Bank operations are funded principally by accepting deposits from retail and corporate depositors and through public issuance of bonds.0) 82.932.44 156.0 Interest income Interest expense Net interest income Non-interest income Fee income Treasury income Lease and other income Operating income Operating profit Profit after tax 64.20% 15.7% Interest margin increased from 2.0 16.23% for fiscal 2012 primarily due to increase in yield on overseas advances. securitization of assets and loans.418.57 90.36 103. to meet contingent liabilities.5 19.

Billion I.5% 12.87 5.19 397.96 26.60% . Billion 505.66 248.Capital adequacy ratios: At 31 March 2012 Tier I capital Tier II capital Total Capital Credit risk-Risk weighted assets(RWA) Market Risk –RWA Operational Risk-RWA Total RWA Total capital adequacy ratio Tier I capital adequacy ratio Tier II capital adequacy ratio in Rs. Capital required for operational risk Total capital requirement (I+II+III) Total capital funds of the Bank Total risk weighted assets Capital adequacy ratio 339. Capital required for credit risk for portfolio subject to standardised approach for securitisation exposure II. Capital required for market risk for interest rate risk for foreign exchange (including gold) risk for equity position risk III.13 3468.34 865.95 738.7% 5.86 18.06 0.11 31.08 1.19 4414. market and operational risks In Rs.00% for credit.18 232.46 3985.8% Capital Requirement for Risk: Minimum capital required to be held at 9.03 26.19 338.88 19.74 268.