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A.

Introduction Part
Origin of the Report
Now-a-days, education is not just limited to books and classrooms. In todays world,
education is a tool to understand the real world and apply knowledge for the
betterment of the society as well as business. From education the theoretical
knowledge is obtained from courses of study, which is only the half way of the
subject matter. Practical knowledge has no alternative. The perfect coordination
between theory and practice is of paramount importance in the context of the
modern business world in order to resolve the problem between these two areas.
Therefore, an opportunity is offered by Mahmood Osman Imam sir.
Objective of the Report
The objective of the report is to evaluate the potential impact on a bank (or a
group of entities) of a specific event &/ or movement in a set of financial or macro
variable. Thats why we try to find out the following risk:

Credit risk

Interest rate risk

Exchange rate risk

Equity price risk

Liquidity risk
Scope of the Report

The report may be classified in three broad sections:


Introduction part
Pre-Analysis part
Analysis part
Limitations of the Study
In preparing the report, some problem is found, affected the presentation of the
report. The acute problems are-

39

Stress testing of NCCBL

a) Lack of information or data:


Bank is sophisticated business sector. So they are not interested to provide the
confidential data. As a result in the report there is a confidential data limitation.
Moreover, the bank has no organized product publicity, documents or leaflets for all
the products.
b) Time constraint:
It is something like impossible to cover the entire stress testing procedure
exploiting a this time period while an employee or an officer is awarded with one or
two year probationary period to do his or her particular job. Moreover, it is not
assigned for a specific task in each day. So it is not able to understand these
activities deeply.
In spite of all the drawbacks faced, everything has been managed well at the end.
Thats why it can be thought; the report is a quality report. So readers are requested
to consider these limitations while reading and justifying any part of study.

Sources of Information

Annual Reports

DSE Library

News paper.

Bangladesh Bank Website

39

Stress testing of NCCBL

B. Pre Analysis Part


Historical background of the NCCBL

National Credit & Commerce Bank limited


National Credit & Commerce Bank limited is a public limited banking company
incorporated in Bangladesh with primary objective to carry on all kinds of banking
business in and outside Bangladesh. It carries out all banking activities through it
branches in Bangladesh. The Bank went for Initial Public Offering in 1999 and its
share is listed with Dhaka and Chittagong Stock Exchange Limited as a publicly
traded company for its general class of shares.
NCCBLs Vision:
To become the Bank of choice in serving the Nation as a progressive and Socially
Responsible financial institution by bringing credit & commerce together for profit
and sustainable growth.
NCCBLs Mission:

To mobilize financial resources from within and abroad

To contribute to Agriculture's, Industry & Socio-economic development of the


country

To play a catalytic role in the formation of capital market.


Stress testing

Extreme market movements or crises in the past reveal the inadequacy of


managing risks based only on normal business conditions and historical trends. In
particular, crises in the 1990s (e.g. Asian Crisis) and current financial turmoil have
augmented the importance of better understanding of potential vulnerabilities in
the financial system and the measures to assess these vulnerabilities for both the
regulators and the bankers. The regulators and managers of the financial system
around the globe have developed a number of quantitative techniques to assess the
potential risks to the individual institutions as well as financial system. A range of
quantitative techniques that could serve the purpose is widely known as stress

39

Stress testing of NCCBL

testing. IMF and Basel Committee on banking supervision have also suggested for
conducting stress tests on the financial sector.
Stress testing is a simulation technique, which are used to determine the reactions
of different financial institutions under a set of exceptional, but plausible
assumptions through a series of battery of tests. At institutional level, stress testing
techniques provide a way to quantify the impact of changes in a number of risk
factors on the assets and liabilities portfolio of the institution. For instance, a
portfolio stress test makes a rough estimate of the value of portfolio using a set of
exceptional but plausible events in abnormal markets.
However, one of the limitations of this technique is that stress tests do not account
for the probability of occurrence of these exceptional events. For this purpose, other
techniques, for example VAR (value at risks) models etc, are used to supplement
the stress tests. These tests help in managing risk within a financial institution to
ensure optimum allocation of capital across its risk profile.
At the system level, stress tests are primarily designed to quantify the impact of
possible changes in economic environment on the financial system. The system
level stress tests also complement the institutional level stress testing by providing
information about the sensitivity of the overall financial system to a number of risk
factors. These tests help the regulators to identify structural vulnerabilities and the
overall risk exposure that could cause disruption of financial markets. Its
prominence is on potential externalities and market failures.

Technique for stress testing

Simple Sensitivity Analysis (single factor tests) measures the change in


the value of portfolio for shocks of various degrees to different independent
risk factors while the underlying relationships among the risk factors are not
considered. For example, the shock might be the adverse movement of
interest rate by 100 basis points and 200 basis points. Its impact will be
measured only on the dependent variable i.e. capital in this case, while the
impact of this change in interest rate on NPLs or exchange rate or any other
risk factor is not considered.

Scenario Analysis encompasses the situation where a change in one risk


factor affects a number of other risk factors or there is a simultaneous move
in a group of risk factors. Scenarios can be designed to encompass both
movements in a group of risk factors and the changes in the underlying
relationships between these variables (for example correlations and
volatilities). Stress testing can be based on the historical scenarios, a

39

Stress testing of NCCBL

backward looking approach, or the hypothetical scenario, a forwardlooking


approach.

Extreme Value/ Maximum Shock Scenario measures the change in the


risk factor in the worstcase scenario, i.e. the level of shock which entirely
wipes out the capital.

Framework for regular stress testing


The stresstesting framework involves the scope of the risks covered and the
process/procedure to carry out the stress test. This framework should be flexible
enough to adopt advanced models for stress testing. It involves:

A well constituted organizational structure defining clearly the roles and


responsibilities of the persons involved in the exercise. Preferably, it should be
the part of the risk management functions of the bank/FI. The persons involved
should be independent from those who are actually involved in the risk taking
and should directly report the results to the senior management.
Defining the coverage and identifying the data required and available.
Identifying, analyzing and proper recording of the assumptions used for stress
testing
Calibrating the scenarios or shocks applied to the data and interpreting the
results.
An effective management information system that ensures flow of information to
the senior management to take proper measures to avoid certain extreme
conditions.
Setting the specific trigger points to meet the benchmarks/standards set by
Bangladesh Bank
Ensuring a mechanism for an ongoing review of the results of the stress test
exercise and reflecting in the policies and limits set by management and board
of directors.
Taking this stress test as a starting point and developing inhouse stress test
model to assess the bank/FIs specific risks
Scope of stress testing

As a starting point the scope of the stress test is limited to simple sensitivity
analysis. Five different risk factors namely; interest rate, forced sale value of
collateral, nonperforming loans (NPLs), stock prices and foreign exchange rate have
39

Stress testing of NCCBL

been identified and used for the stress testing. Moreover, the liquidity position of
the institutions has also been stressed separately. Though the decision of creating
different scenarios for stress testing is a difficult one, however, to start with, certain
levels of shocks to the individual risk components have been specified considering
the historical as well as hypothetical movement in the risk factors.
Stress test shall be carried out assuming three different hypothetical scenarios:

Minor Level Shocks: These represent small shocks to the risk factors. The
level for different risk factors can, however, vary.
Moderate Level Shocks: It envisages medium level of shocks and the level is
defined in each risk factor separately.
Major Level Shocks: It involves big shocks to all the risk factors and is also
defined separately for each risk factor.
Assumptions behind each Scenario: The stress test at this stage is only a
single factor sensitivity analysis. Each of the five risk factors has been given
shocks of three different levels. The magnitude of shock has been defined
separately for each risk factor for all the three levels of shocks.

C. Analysis Part

Methodology and Calibration of Shocks:

Credit Risk:
The bank is exposed to credit risk in its lending operation. Credit risk is the risk of
loss that may occur from the failure of any counterparty to make required payments
in accordance with agreed terms and conditions. Management of credit risk in the
bank is governed by a Credit Policy Manual which contains the principles for
identifying, measuring, approving and managing credit risk. These policies are
established by the Board of Directors and are designed to meet the organizational
requirements that exist today, and to provide flexibility for future. These policies
represent the minimum standards for credit extension and are not a substitute for
experience and good management.
The bank has adopted a framework for credit risk management, setting up of an
independent Credit Risk Management Team to establish better control and check, to
reduce conflict of interest in the business units.

39

Stress testing of NCCBL

The stress test for credit risk assesses the impact of increase in the level of
nonperforming loans of the bank/FI. This involves six types of shocks:
1. The first deals with the increase in the NPLs and the respective provisioning.
The three scenarios shall explain the impact of 1%, 2% and 3% of the total
performing loans directly downgraded to bad/loss category having 100%
provisioning requirement.
Here we have shown the effect of increase in NPL in 2010, 2009 and 2008. We have
increased the NPL by 1%, 2%, and 3%. As a result the provision increased by the
same amount and reduced the capital base and risk weighted asset and thus the
CAR. The below table shows that NCC Bank was more exposed to the risk of
increased in NPLs in 2009 and 2010 consecutively .Because its CAR have reduced
by a larger percentage for different shocks.

Increase in NPL

Total loan

Total performing
Loan
Total NPLs

NPLs to Loans
Increase in NPLs

1%
632
301
416
28
606
341
716
28
259
597
000
0
4.1
1%
606
341
716

Increaase in
Provision

606
341
716

Revised Capital

942
764
456

2010
2%
632
301
416
28
606
341
716
28
259
597
000
0
4.1
1%
121
268
343
3
121
268
343
3
882
130
284

3%
632
301
416
28
606
341
716
28
259
597
000
0
4.1
1%
181
902
514
9
181
902
514
9
821
496
113

1%
503
876
832
03
488
602
592
03
152
742
400
0
3.0
3%
488
602
592
488
602
592
583
381
602

2009
2%
503
876
832
03
488
602
592
03
152
742
400
0
3.0
3%
977
205
184
.1
977
205
184
.1
534
521
343

0.2
9%
442
653
795

0.2
9%
885
307
589

442
653
795

885
307
589

399
760
141

355
494
761

3%
443
944
973
10
442
653
794
64
129
117
846
0.29
%
132
796
138
4
132
796
138
4
311
229
382

39

Stress testing of NCCBL

3%
503
876
832
03
488
602
592
03
152
742
400
0
3.0
3%
146
580
777
6
146
580
777
6
485
661
084

2008
1%
2%
443 4439
944 4497
310
973
10
442 442
653 653
794 794
64
64
129 129
117 117
846 846

Revised Risk
Weigted Asset
Revised CAR
Fall in CAR(% age
points)
Revised NPL

Revised NPLs to
Loans(%)

4
913
232
582
84
10.
32
%
5.4
2%
320
231
171
6
5.0
6%

7
907
169
165
67
9.7
2%

1
901
105
748
51
9.1
2%

10.
91
%
380
865
343
3
6.0
2%

16.
48
%
441
499
514
9
6.9
8%

4
461
633
974
08
12.
64
%
6.7
5%
201
602
659
2
4.0
0%

2
456
747
948
16
11.
70
%
13.
65
%
250
462
918
4
4.9
7%

0
451
861
922
24
10.
75
%
20.
69
%
299
323
177
6
5.9
4%

0
414
060
462
05
9.6
5%

6
409
633
924
11
8.6
8%

1
405
207
386
16
7.68
%

9.0
1%

18.
21
%
101
442
543
5
2.2
9%

27.6
1%

571
771
641
1.2
9%

145
707
923
0
3.28
%

2. The second deals with the negative shift in the NPLs categories and hence
the increase in respective provisioning. The three scenarios shall explain the impact
of 50%, 80% and 100% downward shift in the NPLs categories.

Downward shift in NPLs Categories

Weighted Amount
of provision
Provision after
shift in
Catagories
Increase in
Provision
Revised Capital

50
%
207
898
880
0
789
676
956
3
581
778
076
3
421
620
551
7

2010
80
%
207
898
880
0
116
625
500
50
958
356
125
0
450
425
029
.5

100
%
207
898
880
0
141
730
703
76
120
940
815
76
206
009
529

50
%
185
790
315
0
652
325
069
5
466
534
754
5
165
707
107
1

2009
80
%
185
790
315
0
950
528
865
7
764
738
550
7
132
496
689

50
%
207
023
260
0
636
265
604
6
429
242
344
6
147
831
758
.6

100
%
207
023
260
0
110
236
523
93
895
341
979
3
451
316
458

39

Stress testing of NCCBL

100
%
185
790
315
0
114
933
139
66
963
541
081
6
331
299
220

2008
80
%
207
023
260
0
915
925
385
4
708
902
125
4
264
876
604

Revised RWA

Revised CAR(%)

861
118
192
37
4.9
0%

823
460
387
50
0.5
5%

6
798
355
184
24
2.5
8%

419
866
524
55
3.9
5%

1
390
046
144
93
3.4
0%

0
370
165
891
84
8.9
5%

375
562
765
54
0.3
9%

9
347
596
787
46
7.6
2%

8
328
952
802
07
13.7
2%

Here, for the first level of shock 50% of the SMA shall be categorized under
substandard, 50% of the substandard shall be categorized under doubtful and 50%
of the doubtful shall be added to the bad/loss category. Then the provision has been
calculated. The capital base and RWA has been then reduced by the amount of
increase in provision which lowers its CAR. The table shows that it CAR has reduced
by a larger amount in 2008. But all the case and year its CAR has been remained
below CAR mentioned by the BB (9%).
3. The third deals with the increase of the NPLs in particular 1 or 2 sector i.e.
garments & Textiles and the respective provisioning. The three scenarios shall
explain the impact of 5%, 7.5% and 10% performing loans of particular 1 or 2
sectors directly downgraded to bad/loss category having 100% provisioning
requirement.

Increase in NPLs under B/L Category in 1 0r 2 sector

Loans to
Industrial Sectors

258
449
873
54

2010
7.5
0%
258
449
873
54

Increase in NPLs

129
224
936
8
129

193
837
405
2
193

5%

Increase in

10
%
258
449
873
54
258
449
873
5
258

210
814
940
00

2009
7.5
0%
210
814
940
00

10
%
210
814
940
00

105
407
470
0
105

158
111
205
0
158

210
814
940
0
210

5%

172
711
800
00.0
0
863
559
000
863

10
%
172
711
800
00

129
533
850
0
129

172
711
800
0
172

39

Stress testing of NCCBL

5%

2008
7.5
0%
172
711
800
00

Provision
Revised Capital

Revised RWA

Revised CAR(%)

224
936
8
874
173
691
2
906
373
506
32
9.6
4%

837
405
2
809
561
222
8
899
912
259
48
9.0
0%

449
873
5
744
948
754
5
893
451
012
65
8.3
4%

407
470
0
526
834
391
6
455
979
253
00
11.
55
%

111
205
0
474
130
656
6
450
708
879
50
10.
52
%

814
940
0
421
426
921
6
445
438
506
00
9.4
6%

559
000
357
669
620
5
409
851
410
00
0.08
726
812

533
850
0
314
491
670
5
405
533
615
00
0.0
775
500
87

711
800
0
271
313
720
5
401
215
820
00
0.0
676
228
87

In 2010, NCC has given more than 9% of its loan to industrial sector. Increase in
NPLs has increased the provision by the same amount and thus decrease the
Capital base and RWA. NCC has been more exposed this risk of increase in NPLs in
the specific category in 2010.

Interest Rate Risk


Interest rate risk is the potential that the value of the onbalance sheet and the offbalance sheet positions of the bank/DFI would be negatively affected with the
change in the interest rates. The vulnerability of an institution towards the adverse
movements of the interest rate can be gauged by using duration GAP analysis.
We have followed the following steps in carrying out the interest rate stress tests:
First we have estimated the market value of all onbalance sheet rate sensitive
assets and liabilities of the bank/DFI to arrive at market value of equity
Then we have calculated the durations of each class of asset and the liability of
the onbalance sheet portfolio Arrive at the aggregate weighted average
duration of assets and liabilities
Then we have calculated the duration GAP by subtracting aggregate duration of
liabilities from that of assets.
Then the changes in the economic value of equity due to change in interest rates
on onbalance sheet positions along the three interest rate changes has been
estimated.
Then the impact of the net change in the market value of equity on the capital
adequacy ratio (CAR) has been estimated.

39

Stress testing of NCCBL

Market value of the asset or liability has been assessed by calculating its present
value discounted at the prevailing interest rate. The outstanding balances of the
assets and Liabilities have been taken along with their remaining maturity period.

Interest Rate Risk


1%
Fall in
MVE
Tax
adjusted
Loss
Revised
Regulat
ory
Capital
Revised
Risk
weighte
d Asset
Revised
CAR
Fall in
CAR

2010
2%

3%

1%

2009
2%

3%

1%

2008
2%

3%

319,
638,
958,
337,
675,8
1,013, -213,6 -427,2 -640,9
383,
767,
150,
929,
59,28
788,9
43,74 87,49 31,24
564
127
691
644
7
31
9
8
8
1836 3672 5509 1943 38861 58292
4554 9109 3664 0954
9090.
8635. 12284 24569 36853
9.1
8.2
7.4
5.2
3
5 5155. 0311. 5467.
8
6
3
9850 9666 9483 6128 59337
45631 46859 48087
3407 6951 0496 1090 99526 5,739, 00361 45517 90672
31
82
33
71
489,9
80.53
9174 9156 9137 4645
41971 42094 42217
5954 2308 8663 7690 46,26
46,06
54515 39031 23546
451
902
353
455 3,380, 9,071,
6
2
7
909.6
364.5
9
3
10.7
10.5
10.3
13.1
12.83
12.46 10.87 11.13 11.39
4%
6%
8%
9%
%
%
%
%
%
1.63
3.27
4.92
2.67 5.36% 8.07%
%
%
%
%
2.47% 4.92% 7.35%

As NCCs market value of Equity has been much increased from 2008 to 2019 side
by side with its capital base and RWA, the impact of fall in market value of equity on
CAR has been decreased. The percentage fall in CAR is much lower in 2008 in
comparison to 2009 and 2010 due to fall in market value of equity.

Exchange Rate Risk


The stress test for exchange rate assesses the impact of change in exchange rate
on the value of equity. Here we have taken the Banks balance with Bangladesh
Bank in foreign currency and the net amount of Letter of Credit. To assess foreign
exchange risk the overall net open position of the bank/FI including the onbalance
sheet and offbalance sheet exposures has been charged by the weight age of 5%,

39

Stress testing of NCCBL

10% and 15% for minor, moderate and major levels respectively. The impact of the
respective shocks has been calibrated in terms of the CAR. The taxadjusted loss if
any arising from the shocked position will be adjusted from the capital. The revised
CAR has been calculated after adjusting total loss from the riskweighted assets of
the bank/FI.

5%
Net on
Balance
position
and off B/S
currency
exposure
Exchange
Rate loss

Tax
adjusted
loss
Revised
Capital

Revised risk
weighted
asset

Revised
CAR
Fall in CAR

27
32
69
87
8
13
66
34
93.
9
78
56
50
8.9
93
10
02
61
29
77
1
91
92
17
43
49
1
10.
91
%
0.0
70
%

Exchange
2010
10 15
%
%
27 27
32 32
69 69
87 87
8
8
27
32
69
87.
8
15
71
30
17.
99
10
01
82
73
26
2
91
91
38
86
98
2
10.
90
%
0.1
40
%

40
99
04
81.
7
23
56
95
26.
98
10
01
04
16
75
3
91
90
60
30
47
3
10.
89
%
0.2
09
%

Rate Risk
2009
5% 10
%
50 50
08 08
32 32
88 88
9
9

27
40
58
16
7

2008
10
%
27
40
58
16
7

15
%
27
40
58
16
7

15
%
50
08
32
88
9

5%

25
04
16
44.
45
14
39
89
45.
56
63
08
01
96
70

50
08
32
88.
9
28
79
78
91.
12
62
93
62
07
25

75
12
49
33.
35
43
19
68
36.
68
62
79
22
17
79

13
70
29
08.
35
78
79
17
2.3
01
44
32
37
60
33

27
40
58
16.
7
15
75
83
44.
6
44
24
49
68
60

41
10
87
25.
05
23
63
75
16.
9
44
16
61
76
88

46
63
76
01
05
4
13.
53
%
0.2
0%

46
62
32
02
10
9
13.
50
%
0.3
9%

46
60
88
03
16
3
13.
47
%
0.5
9%

41
84
08
20
82
8
10.
59
%
0.1
6%

41
83
29
41
65
5
10.
58
%
0.3
2%

41
82
50
62
48
3
10.
56
%
0.4
8%

2007
10%

15%

330
628
983

330
628
983

330
628
983

165
314
49.1
5

330
628
98.3

495
943
47.4
5

950
558
3.26
1

190
111
66.5
2

285
167
49.7
8

3,31
7,02
3,59
7.74

3,30
7,51
8,01
4.48

3,29
8,01
2,43
1.22

31,3
50,5
72,4
16.7
4
10.5
8%

31,3
41,0
66,8
33.4
8
10.5
5%

31,3
31,5
61,2
50.2
2
10.5
3%

0.28
%

0.54
%

0.79
%

39

Stress testing of NCCBL

5%

The table shows that the bank has been less exposed to the risk of fall in CAR due
to change in exchange rate in 2010. Because its off-balance sheet and on balance
sheet exposure has been lower in 2010

Equity Price Risk


The stress test for equity price risk assesses the impact of the fall in the stock
market index. Here we have taken the market value of the portfolio of the bank.
Appropriate shocks have been absorbed to the respective securities if the current
market value of all the on balance sheet and off balance sheet securities listed on
the stock exchanges including shares, NIT units, mutual funds etc falls at the rate of
10%, 20% and 40% respectively. The impact of resultant loss has been calibrated in
the CAR.

Total
Exposure
in Stock
market
Fall in
Stock
prices
Tax
adjusted
loss
Revised
Capital
Revised
risk
weighted
asset
Revised
CAR
Fall in
CAR (%
age
points)

10%
7185
0134
9
7185
0135

2010
20%
7185
0134
9

Equity Price Risk


2009
40% 10% 20% 40%
7185 4833 4833 4833
0134 4791 4791 4791
9
4
4
4

4131
3828

1437
0027
0
8262
7655

9992
6724
52
9188
8286
172

9951
3586
25
9184
6972
345

2874
0054
0
1652
5531
0
9868
7309
70
9176
4344
690

10.8
7%
0.37
%

10.8
3%
0.73
%

10.7
5%
1.47
%

4833
4791

9666
9583

2779
2505

5558
5010

6294
6261
11
4662
4207
495

6266
8336
06
4659
6414
990

1933
3916
6
1111
7002
0
6211
2485
96
4654
0829
980

13.5
0%
0.38
%

13.4
5%
0.76
%

13.3
5%
1.52
%

10%
3300
9081
7

2008
20%
3300
9081
7

3300
9082

6601
8163

1898
0222

3796
0444

1320
3632
7
7592
0888

4421
2749
83
4182
9719
778

4402
2947
61
4181
0739
556

4364
3343
17
4177
2779
112

10.5
7%
0.38
%

10.5
3%
0.76
%

10.4
5%
1.53
%

40%
3300
9081
7

We know that in 2010, Bank has been invested their excess liquidity in the stock
market. Investment this sector has been on an average same over the three years.

39

Stress testing of NCCBL

Liquidity Risk
The stress test for liquidity risk evaluates the resilience of the banks towards the fall
in liquid liabilities. The ratio liquid assets to liquid liabilities has been calculated
before and after the application of shocks by dividing the liquid assets with liquid
liabilities.
Liquid assets are the assets that are easily turned into cash without the threat of
loss. They include cash, balances with Bangladesh Bank and balances with banks,
call money lending, lending under repo and investment in government securities.
Liquid liabilities include the deposits and the borrowings. In these case, the deposits
and borrowing which have maturities up to 12 month has been taken.
Appropriate shocks have been absorbed to the liquid liabilities if the current
liquidity position falls at the rate of 10%, 20% and 30% respectively. The ratio of
liquid assets to liquid liabilities has been recalculated under each scenario.

Liquid
Asset
Liquid
Liabilities
Liquidity
Ratio
Fall in
Liquid
Liabilities
Revised
Liquid
Asset
Revised
Liquid
Liabilities
Revised
Liquidity
Ratio

10%

2010
20%

Liquidity Risk
2009
30% 10% 20%

1777
9741
366
6879
6893
093
25.8
4%
6879
6893
09

1777
9741
366
6879
6893
093
25.8
4%
1375
9378
619

1777
9741
366
6879
6893
093
25.8
4%
2063
9067
928

1394
4673
901
5499
9851
621
25.3
5%
5499
9851
62

1090
0052
057

4020
3627
47

6191
7203
784

5503
7514
474

2859
3265
62
4815
7825
165

0.17
6042
382

0.07
3047
68

17.6
0%

7.30
%

30%

10%

2008
20%

30%

1394
4673
901
5499
9851
621
25.3
5%
1099
9970
324

1394
4673
901
5499
9851
621
25.3
5%
1649
9955
486

9979
0247
70
4878
0827
352
20.4
6%
4878
0827
35

9979
0247
70
4878
0827
352
20.4
6%
9756
1654
70

9979
0247
70
4878
0827
352
20.4
6%
1463
4248
206

8444
6887
39

2944
7035
77

5100
9420
35

2228
5929
9.6

4949
9866
459

4399
9881
297

2555
2815
85
3849
9896
135

4390
2744
617

3902
4661
882

4655
2234
36
3414
6579
146

0.05
9374
08

0.17
0600
233

0.06
6925
262

0.06
6371
129

0.11
6187
315

0.00
5710
73

0.13
6330
595

5.94
%

17.0
6%

6.69
%

6.64
%

11.6
2%

0.57
%

13.6
3%

39

Stress testing of NCCBL

In the above table liquidity risk highest in year 2010 and 2009 compare to 2008
Reporting to Bangladesh Bank
Some of the assumption we considered in the Duration calculation.
For Treasury Bond, 2010
For 20 years Bond 16 Years
For 15 Years Bond 10 Years
For 10 Years Bond5 Years
For 5 Years Bond 2 Years
Investment with other Bank 1 year
Loan and Advances
one month to three month
0.25
three month to one year 0.5
year
one year to five year 1 year
above five year 3
Borrowing from other Bank and FI
one month to three month 0.25
year
three month to one year 0.5
year
one year to five year 1 year
above five year3 years
Deposits
Current Deposits and other accounts is 0
year
Savings Deposits 0.5 year
Fixed Deposits 1 year
Term Deposits 1 year
Bills Payable 0 year
Besides, we assumed that YTM and coupon rate are same most of the
calculation.

39

Stress testing of NCCBL

Stress Testing
NCC Bank Limited

39

Stress testing of NCCBL

For The Year Ended 2010

Capital Base

10,033,986,280.00

Risk weighted Asset


capital Adequacy Ratio

91,929,600,000.00
10.91%

1. Interest Rate Risk- Increase in Interest Rate


Scenario 1
Scenario 2
Magnitude of Shock
1%
2%
Fall in MVE
319383564
638767127
Tax adjusted Loss
183645549
367291098
Revised Regulatory Capital
9850340731
9666695182
Revised Risk weighted Asset
91745954451 91562308902
Revised CAR
10.74%
10.56%
Fall in CAR
1.63%
3.27%

Scenario 3
3%
958150691
550936647
9483049633
91378663353
10.38%
4.92%

2.Exchange Rate Risk Adverse Movement in Exchange Rate :


Magnitude of Shock
Net currency exposure
Exchange Rate loss
Tax adjusted loss
Revised Capital
Revised risk weighted asset
Revised CAR
Fall in CAR

5%
273269878
13663493.9
7856508.993
10026129771
91921743491
10.91%
0.07%

10%
273269878
27326987.8
15713017.99
10018273262
91913886982
10.90%
0.14%

15%
273269878
40990481.7
23569526.98
10010416753
91906030473
10.89%
0.21%

3. Credit Risk increase in NPLs :


Magnitude of Shock
Total loan
Total performing Loan

1%
63230141628
60634171628

2%
63230141628
60634171628

39

Stress testing of NCCBL

3%
63230141628
60634171628

Stress Testing
Eastern Bank Limited
For The Year Ended 2008

Capital Base
Risk weighted Asset
capital Adequacy Ratio

6,322,418,616.00
46,652,000,000.00
13.55%

39

Stress testing of NCCBL

1. Interest Rate Risk- Increase in


Scenario 1
Magnitude of Shock
1%
Fall in MVE
337929643.7
Tax adjusted Loss
194309545.2
Revised Regulatory Capital
6128109071
Revised Risk weighted Asset
46457690455
Revised CAR
13.191%
Fall in CAR
2.67%

Interest Rate
Scenario 2
2%
675859287.5
388619090.3
5933799526
46263380910
12.826%
5.36%

Scenario 3
3%
1013788931
582928635.5
5739489981
46069071365
12.458%
8.07%

2.Exchange Rate Risk Adverse Movement in Exchange Rate :


Magnitude of Shock
Net currency exposure
Exchange Rate loss
Tax adjusted loss
Revised Capital
Revised risk weighted asset
Revised CAR
Fall in CAR

5%
500832889
25041644.45
14398945.56
6308019670
46637601054
13.53%
0.20%

10%
500832889
50083288.9
28797891.12
6293620725
46623202109
13.50%
0.39%

39

Stress testing of NCCBL

15%
500832889
75124933.35
43196836.68
6279221779
46608803163
13.47%
0.59%

3. Credit Risk increase in NPLs :


Magnitude of Shock
Total loan
Total performing Loan
Total NPLs
NPLs to Loans
Increase in NPLs
Increaase in Provision
Revised Capital
Revised Risk Weigted Asset
Revised CAR
Fall in CAR(% age points)
Revised NPL
Revised NPLs to Loans(%)

1%
50387683203
48860259203
1527424000
3.03%
488602592
488602592
5833816024
46163397408
12.64%
6.75%
2016026592
4.00%

2%
50387683203
48860259203
1527424000
3.03%
977205184
977205184
5345213432
45674794816
11.70%
13.65%
2504629184
4.97%

3%
50387683203
48860259203
1527424000
3.03%
1465807776
1465807776
4856610840
45186192224
10.75%
20.69%
2993231776
5.94%

4. Credit Risk Downward shift in NPLs Categories :


Magnitude of Shock
Weighted Amount of provision
Provision after shift in Catagories
Increase in Provision
Revised Capital
Revised RWA
Revised CAR(%)

50%
1857903150
6523250695
4665347545
1657071071
4198665245
5
3.95%

80%
100%
1857903150
1857903150
9505288657 11493313966
7647385507
9635410816
-1324966891 -3312992200
3900461449
3 37016589184
-3.40%
-8.95%

5. Credit Risk Increase in NPLs under B/L category in 1 or 2 sectors :


Magnitude of Shock
Loans to Industrial Sectors
Increase in NPLs
Increase in Provision
Revised Capital
Revised RWA
Revised CAR(%)

5%
21081494000
1054074700
1054074700
5268343916
45597925300
11.55%

7.50%
21081494000
1581112050
1581112050
4741306566
45070887950
10.52%

39

Stress testing of NCCBL

10%
21081494000
2108149400
2108149400
4214269216
44543850600
9.46%

6. Credit Risk Increase in NPLs due to top Borrowers :


Magnitude of Shock
5%
7.50%
10%
Loan to Top Borrowers
7441100000
7441100000
7441100000
Increase in NPLs
372055000
558082500
744110000
Increase in Provision( after
adjustment of eligible securities;if
any)
Revised Capital
Revised RWA
Revised CAR(%)

372055000
5950363616
4627994500
0
12.86%

558082500
5764336116
4609391750
0
12.51%

744110000
5578308616
45907890000
12.15%

7. Credit Risk Increase in NPLs up to that position in which whole capital will be
wiped out :
2009
Total NPLs
1527424000
NPL/Total Loan(%)
3.03%
Total Capital
6322418616
Increase in NPL
6322418616
Increase in Provision
6322418616
Revised Capital
0
Revised risk weighted asset
40329581384
Revised CAR
0
fall in CAR
100.00%
Revised NPL
7849842616
Revised NPL(%)
15.58%

8. Equity price Risk Fall in Stock Prices :


Magnitude of Shock
10%
20%
Total Exposure in Stock market
483347914
483347914
Fall in Stock prices
48334791
96669583
Tax adjusted loss
27792505
55585010
Revised Capital
6294626111
6266833606
Revised risk weighted asset
46624207495 46596414990
Revised CAR
13.50%
13.45%
Fall in CAR (% age points)
0.38%
0.76%

39

Stress testing of NCCBL

40%
483347914
193339166
111170020
6211248596
46540829980
13.35%
1.52%

A. Capital After One or More Cumulative Shoks:

Cumulative Impacet of Credit Shocks (Aggregate


of all types of Credit Shocks)
Tax Adjusted Provision
Revised Capital
Revised RWA
Revised CAR (%)
Cumulative Impact of All Shocks (Credit, Interest
Rate, FE, & Equity Prices)
Tax Adjusted Provision/ Loss
Revised Capital
Revised RWA
Revised CAR (%)

i. Liquidity Shock Fall in Liquid Liabilities :


10%
Liquid Asset
13944673901
Liquid Liabilities
54999851621
Liquidity Ratio
0.253540209
Fall in Liquid Liabilities
5499985162
Revised Liquid Asset
8444688739
Revised Liquid Liabilities
49499866459
Revised Liquidity Ratio
17.06%

Scenari
o1
6580079
837
6580079
837
2576612
21.3
4007192
0163
0.00642
9969
0
6816580
833
6816580
833
4941622
17.1
3983541
9167
-1.24%

Scenari
o2
1076378
5242
1076378
5242
4441366
626
3588821
4758
0.12375
5574
0
1123678
7233
1123678
7233
4914368
617
3541521
2767
-13.88%

20%
13944673901
54999851621
0.253540209
10999970324
2944703577
43999881297
6.69%

30%
13944673901
54999851621
0.253540209
16499955486
-2555281585
38499896135
-6.64%

39

Stress testing of NCCBL

Scenari
o3
1395347
7992
1395347
7992
7631059
376
3269852
2008
0.23337
6278
0
1469077
3484
1469077
3484
8368354
868
3196122
6516
-26.18%

Duration Calculation 2009


Assets

Face
Value

Coup
on

Repri YT
cing
M
Perio
d
0
0
0

Cash

wig
hte
d
YTM

treasury bonds
20 year treasury
bond
15 year treasury
bond
10 year traesury
Bond

6%

6
%

0.3
480 3,825,2
8% 79,842

9.10
%

17

8.69
%

11

0.0
468
5%
0.0
909
7%

8.75
%

7.80
%

9.
1
%
8.
6
9
%
8.
7
5
%
7.
8
0
%

4.61
%

4.
6
1
%

7.50
%

7.
5
0
%

3,825,2
79,842.
00

339,494
,901.00
690,275
,214.00
5,738,6
87,445.
00
2,153,7
43,989.
00

margin on
treasury bills

weight
ed
Durati
on

447,86
4,005

5 year Bond

treasury bills
5 years treasury
bills
364 days
treasury bills

Durati
on
0

447,864
,005.00
Balances with
other bank

Market
Value

0.058
01373

8.89

0.045
77228
5
0.081
65531
6

339,49
4,901
7.8
690,27
5,214

0.7
615 5,738,6
3% 87,445

4.92

0.428
19861
1

0.2
547 2,153,7
7% 43,989

2.79

0.091
13094
2

0.0
147 210,37
1% 9,398

0.003
19058
8

0.0
046 40,975,
6% 651

0.000
62143
2

8.77

0.000
87358
1

210,379
,398.00

409756
51

treasury bonds
Prize Bonds
15 years ICB
Debenture (5%
p.a)

805750
0
656804
2

8,057,5
00
5%

11

5
%

0.0
005 6,568,0
0% 42

39

Stress testing of NCCBL

Stress Testing
NCC Bank Limited
For The Year Ended 2008

Capital Base

4,440,255,205.00

Risk weighted Asset

41,848,700,000.00

capital Adequacy Ratio

10.61%

1. Interest Rate Risk- Increase in Interest Rate


Scenario 1
Scenario 2
Magnitude of Shock
1%
2%

Scenario 3
3%

Fall in MVE

(213,643,749)

(427,287,498)

(640,931,248)

Tax adjusted Loss


Revised Regulatory
Capital
Revised Risk weighted
Asset
Revised CAR
Fall in CAR

(122,845,156)

(245,690,312)

(368,535,467)

4,563,100,361

4,685,945,517

4,808,790,672

41,971,545,156
42,094,390,312
42,217,235,467
10.87%
11.13%
11.39%
-2.47%
-4.92%
-7.35%

39

Stress testing of NCCBL

2.Exchange Rate Risk Adverse Movement in Exchange Rate :


Magnitude of Shock
Net currency exposure
Exchange Rate loss
Tax adjusted loss
Revised Capital
Revised risk weighted asset
Revised CAR
Fall in CAR

5%
274058167
13702908.35
7879172.301
4432376033
41840820828
10.59%
0.16%

10%
274058167
27405816.7
15758344.6
4424496860
41832941655
10.58%
0.32%

15%
274058167
41108725.05
23637516.9
4416617688
41825062483
10.56%
0.48%

3. Credit Risk increase in NPLs :


Magnitude of Shock
Total loan
Total performing Loan
Total NPLs
NPLs to Loans
Increase in NPLs
Increaase in Provision
Revised Capital
Revised Risk Weigted Asset
Revised CAR
Fall in CAR(% age points)
Revised NPL
Revised NPLs to Loans(%)

1%
44394497310
44265379464
129117846
0.29%
442653794.6
442653794.6
3997601410
41406046205
9.65%
9.01%
571771640.6
1.29%

2%
44394497310
44265379464
129117846
0.29%
885307589.3
885307589.3
3554947616
40963392411
8.68%
18.21%
1014425435
2.29%

3%
44394497310
44265379464
129117846
0.29%
1327961384
1327961384
3112293821
40520738616
7.68%
27.61%
1457079230
3.28%

4. Credit Risk Downward shift in NPLs Categories :


Magnitude of Shock
Weighted Amount of provision
Provision after shift in Catagories
Increase in Provision
Revised Capital
Revised RWA
Revised CAR(%)

50%
2070232600
6362656046
4292423446
147831758.6
3755627655
4
0.39%

39

Stress testing of NCCBL

80%
100%
2070232600
2070232600
9159253854 11023652393
7089021254
8953419793
-2648766049 -4513164588
3475967874
6 32895280207
-7.62%
-13.72%

5. Credit Risk Increase in NPLs under B/L category in 1 or 2 sectors :


Magnitude of Shock
Loans to Garments and Textile Sectors

5%
172711800
00

Increase in NPLs

863559000

Increase in Provision

863559000
357669620
5
409851410
00
9%

Revised Capital
Revised RWA
Revised CAR(%)

7.50%
172711800
00
129533850
0
129533850
0
314491670
5
405533615
00
8%

10%
1727118000
0
1727118000
1727118000
2713137205
4012158200
0
7%

6. Credit Risk Increase in NPLs due to top Borrowers :


Magnitude of Shock
5%
7.50%
10%
Loan to Top Borrowers
11292300000
11292300000
11292300000
Increase in NPLs
564615000
846922500
1129230000
Increase in Provision( after
adjustment of eligible
securities;if any)
Revised Capital
Revised RWA
Revised CAR(%)

564615000
3875640205
41284085000
9.39%

846922500
3593332705
41001777500
8.76%

1129230000
3311025205
40719470000
8.13%

7. Credit Risk Increase in NPLs up to that position in which whole capital will be
wiped out :
2008
Total NPLs
129117846
NPL/Total Loan(%)
0.29%
Total Capital
4440255205
Increase in NPL
4440255205
Increase in Provision
4440255205
Revised Capital
0
Revised risk weighted asset
42211744795
Revised CAR
0
fall in CAR
100%
Revised NPL
4569373051

39

Stress testing of NCCBL

Revised NPL(%)

10.29%

8. Equity price Risk Fall in Stock Prices :


Magnitude of Shock
Total Exposure in Stock market
Fall in Stock prices
Tax adjusted loss
Revised Capital
Revised risk weighted asset
Revised CAR
Fall in CAR (% age points)

10%
330090817
33009081.7
18980221.98
4421274983
41829719778
10.57%
0.38%

20%
330090817
66018163.4
37960443.96
4402294761
41810739556
10.53%
0.76%

40%
330090817
132036326.8
75920887.91
4364334317
41772779112
10.45%
1.53%

A. Capital After One or More Cumulative Shoks:

Cumulative Impacet of Credit Shocks


(Aggregate of all types of Credit Shocks)
Tax Adjusted Provision
Revised Capital
Revised RWA
Revised CAR (%)
Cumulative Impact of All Shocks (Credit,
Interest Rate, FE, & Equity Prices)
Tax Adjusted Provision/ Loss
Revised Capital
Revised RWA
Revised CAR (%)

Scenario
1
6163251
241
6163251
241
1722996
036
3568544
8759
-4.8%

Scenario
2
1011658
9844
1011658
9844
5676334
639
3173211
0156
-17.9%

Scenario
3
1313772
9177
1313772
9177
8697473
972
2871097
0823
-30.3%

6067265
480
6067265
480
1627010
275
3578143
4520
-4.55%

9924618
321
9924618
321
5484363
116
3192408
1679
-17.18%

1286875
2114
1286875
2114
8428496
909
2897994
7886
-29.08%

39

Stress testing of NCCBL

i. Liquidity Shock Fall in Liquid Liabilities :

Liquid Asset
Liquid Liabilities
Liquidity Ratio
Fall in Liquid Liabilities
Revised Liquid Asset
Revised Liquid Liabilities
Revised Liquidity Ratio

10%
9979024770
48780827352
20.46%
4878082735
5100942035
43902744617
11.62%

20%
9979024770
48780827352
20.46%
9756165470
222859299.6
39024661882
0.57%

39

Stress testing of NCCBL

30%
9979024770
48780827352
20.46%
14634248206
-4655223436
34146579146
-13.63%

Duration Calculation 2008


Assets

Face
Value

Cash

432819
168

Balances with
other bank
treasury bonds
20 year
treasury bond
15 year
treasury bond

10 year
traesury Bond

Coupon

Reprici
ng
Period

Market
Value

Durat
ion

weigh
ted
Durati
on
0

432,81
9,168
6%

6
%

0.2
844 2,719,
% 386,94
1

0.047
4045
52

12.14%

12

0.0
892 421,63
% 1,290.
00

6.91

0.050
7878
6

11.72%

0.5
383 2,635,
% 037,77
1.00

5.14

0.236
1016
38

10.60%

1
2.
1
4
%
1
1.
7
2
%
1
0.
6
0
%

0.1
000 541,41
% 0,819.
00

3.461

0.032
6646
17

421,63
1,290.0
0
2,635,0
37,771.
00
541,41
0,819.0
0

364 days
treasury bills

wig
hte
d
YT
M

2,719,3
86,941.
00

5 year Bond

treasury bills
5 years
treasury bills

YT
M

6.50%

8.58%

149,17
4,366.0
0
2,183,9
80,803.
00

6.
5
0
%
8.
5
8
%

0.0
169 149,17
% 4,366

2.76

0.3
267 2,183,
% 980,80
3

0
0.007
1771
55
0.038
0713
13

margin on
treasury bills
89,520,
240.00

89,520
,240

152,20
0,000.0
0
103415

152,20
0,000

treasury bonds

Prize Bonds

39

Stress testing of NCCBL

D. Findings

NCC Bank was more exposed to the risk of increased in NPLs in 2009 and
2010 consecutively because its CAR have reduced by a larger percentage
for different shocks.
Increase in NPLs has increased the provision by the same amount and
thus decrease the Capital base and RWA. NCC has been more exposed this
risk of increase in NPLs in the specific category in 2010.
The percentage fall in CAR is much lower in 2008 in comparison to 2009
and 2010 due to fall in market value of equity.
Analyzing the negative shift in the NPLs categories all the case and year
its CAR has been remained below CAR mentioned by the BB (9%).
In case of Exchange rate risk the bank has been less exposed to the risk of
fall in CAR due to change in exchange rate in 2010. Because its offbalance sheet and on balance sheet exposure has been lower in 2010.
In case of equity price risk Bank has been invested their excess liquidity in
the stock market. Investment this sector has been increased by a larger
amount from 2008. As a result its CAR has been reduced by a larger
percentage in 2010 in comparison to 2008
In case of Liquidity risk appropriate shocks have been absorbed to the
liquid liabilities if the current liquidity position falls at the rate of 10%, 20%
and 30% respectively. In the year 2010 and 2009 liquidity has increased.
The duration of asset exceeds the duration of Liabilities for 2008 (Duration
of Asset is 0.86, Duration of Liability is 1.37 and the Gap is -0.42), 2009
(Duration of Asset is 1.184, Duration of Liability is 1.27 and the Gap is

39

Stress testing of NCCBL

0.574) and 2010 (Duration of Asset is 1.03, Duration of Liability is 0.69


and the Gap is 0.421)
Duration of the Bank signifies that asset are more price sensitive than that
of Liabilities for the year 2009 and 2010 and certain raise in interest rate
would cause in greater decrease in the value of asset leading to decrease
in the market value of equity.

E. Conclusion

Now bank is playing a vital role in our economy. Very recently we have observed
some weakness of bank in different segment. Some of these are interest rate risk,
liquidity risk, credit risk. So stress testing now becomes a crucial part of our banking
industry in Bangladesh. At institutional level, stress testing techniques provide a
way to quantify the impact of changes in a number of risk factors on the assets and
liabilities portfolio of the institution.
Financial Institution around the world are increasingly employing stress testing to
determine the impact on the financial institution under a set of exceptional, but
plausible assumption through a series of battery of tests. Sensitively and scenario
analysis considering only credit risk and market risk is incorporated to develop to a
more comprehensive approach in the stress testing.

39

Stress testing of NCCBL

39

Stress testing of NCCBL