Monitoring and controlling risks is primarily performed based on limits established by the Group and the Bank. These limits reflect the business strategy and market environment of the Group and the Bank as well as the level of risk that the Group and the Bank are willing to accept, with additional emphasis on selected industries. In addition, the Group’s and the Bank’s policy is to measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.
Information compiled from all the businesses is examined and processed in order to analyse, control and identify risks on a timely basis. This information is presented and explained to the Board of Directors, the Risk Committee and the Head of each business division. The report includes aggregate credit exposure, hold limit exceptions, liquidity ratios and risk profile changes. Senior management assesses the appropriateness of the allowance for credit losses on a monthly basis.
Concentrations of credit risk arise when several distinct counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risk, a number of controls and measures to minimise undue concentration of exposure in the Bank’s portfolio have been implemented. The Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Any identified concentrations of credit risks are controlled and managed and in line with the Risk Appetite Framework.
Credit risk is the risk of suffering financial loss should any customers or counterparties fail to fulfil their contractual obligations to the Bank. The Bank’s main income generating activity is advancing credit to customers thereby making credit risk a principal risk factor whose effective management is of critical importance. Credit risk arises principally from direct lending, trade finance, participation in syndicated credit advances, trade finance, investment in debt securities but also from other products such non fund based facilities including but not limited to guarantees, derivatives and letters of credit. The Group and the Bank take a holistic approach with credit risk management by considering all elements of credit risk exposure such as counterparty default risk, geographical, political and industry risk for an effective risk management approach.
The Bank’s approach to credit risk management comprises of three main pillars which includes i) Policies ii) Risk Methodologies iii) Processes, systems and reports. The systematically driven credit risk management framework involves maintaining a culture of responsible lending complemented by a well defined credit risk appetite and internal policies duly supported by robust control systems. Independently of the business functions, it is ensured that there is expert scrunity and approval of credit risk with ongoing monitoring of exposure relative to the set appetite, limits and quality of assets and counterparty. It is also ensured that there is independent oversight and reporting the governance committees in respect of breaches of limits, policies/procedures and compliance the approved risk appetite. The credit risk management framework is further supported by the policies and procedures in place to appropriately maintain and validate models to assess and measure ECL.
The Bank uses a combination of credit rating (internal and external) and statistical regression analysis to determine the probability of default. Internal credit ratings are mapped to S&P table on default rates to arrive at the Bank’s PD for each customer. Statistical Regression is derived using an analysis of historical data, whereby the Bank has estimated relationships between macro-economic variables, credit risk and credit losses. Country rating is also factored in our ECL computation for non-resident counterparties.
All customers and counterparties of the Bank are assigned a credit rating by CRISIL system based on quantitative and qualitative information received and fed into the model thereby providing a Through The Cycle (TTC) ratings based on historical data. Ratings are revised based on updated information on a frequent basis.
As the credit risk increases, the difference in risk of default between grades changes. Each exposure is allocated to a credit risk grade at initial recognition, based on the available information about the counterparty. All exposures are monitored and the credit risk grade updated to reflect current information. The monitoring procedures followed are both general and tailored to the type of exposure. The following data are typically used to monitor the Bank’s exposures:’- Payment record and ageing analysis;
The Bank uses credit risk grades as a primary input into the determination of the term structure of the PD for exposures. The Bank collects performance and default information about its credit risk exposure analysed by type of products and borrower as well as by credit risk grading. The information used is both internal and external depending on the portfolio assessed. The subsequent table provides a mapping of the Bank’s internal credit risk grades to external ratings.
| Internal Rating |
External Rating Equivalent |
Description | Average 1YR PD Range |
|---|---|---|---|
| - | AAA | Prime | 0.04% ‐ 0.04% |
| AAA | AA‐ | High Grade | 0.04% ‐ 0.04% |
| AA+ | A+ | Upper Medium Grade | 0.06% ‐ 0.06% |
| AA | A‐ | 0.07% ‐ 0.07% | |
| AA‐ | BBB | Lower Medium Grade | 0.18% ‐ 0.18% |
| A+ | BB+ | Non‐Investment Grade Speculative |
0.38% ‐ 0.38% |
| A | BB | 0.48% ‐ 1.02% | |
| A‐ | |||
| BBB+ | BB‐ | 1.15% ‐ 1.92% | |
| BBB | |||
| BBB‐ | B+ | Highly Speculative | 1.98% ‐ 4.21% |
| BB+ | B | 3.76% ‐ 6.65% | |
| BB | |||
| BB- | B- | 7.82% ‐ 13.04% | |
| B+ | |||
| B | |||
| B- | |||
| CCC/C | CCC/C | Highly Vulnerable | 28.30% |
| D | D | In Default | 100% |
| Internal Rating |
External Rating Equivalent |
Description | Average 1YR PD Range |
|---|---|---|---|
| AAA | AAA | Prime | 0.04% ‐ 0.04% |
| AA+ | A+ | Upper Medium Grade | 0.06% ‐ 0.06% |
| AA | |||
| AA- | BBB | Lower Medium Grade | 0.20%‐0.20% |
| A+ | BB+ | Non‐Investment Grade Speculative |
0.33% ‐ 0.43% |
| A | BB | 0.54%‐1.09% | |
| A- | |||
| BBB+ | BB- | 1.09%‐1.95% | |
| BBB | |||
| BBB- | B+ | Highly Speculative | 2.41%‐4.24% |
| BB+ | B | 3.91%‐6.85% | |
| BB | |||
| BB- | B | 3.91%‐6.85% | |
| B+ | |||
| B | |||
| B- | |||
| CCC/C | CCC/C | Highly Vulnerable | 27.08% |
| D | D | In Default | 100% |
| Internal Rating |
External Rating Equivalent |
Description | Average 1YR PD Range |
|---|---|---|---|
| AAA | AAA | Prime | 0.03%‐0.03% |
| AA+ | A+ | Upper Medium Grade | 0.05%‐0.05% |
| AA | |||
| AA- | BBB | Lower Medium Grade | 0.16%‐0.16% |
| A+ | BB+ | Non‐Investment Grade Speculative |
0.32%‐0.33% |
| A | BB | 0.53%‐0.99% | |
| A- | |||
| BBB+ | BB- | 0.95%‐0.98% | |
| BBB | |||
| BBB- | B+ | Highly Speculative | 2.01%‐3.74% |
| BB+ | B | 3.41%‐4.22% | |
| BB | |||
| BB- | B | 6.75%‐7.07% | |
| B+ | |||
| B | |||
| B- | |||
| CCC/C | CCC/C | Highly Vulnerable | 34.44%‐34.44% |
| D | D | In Default | 100% |
The Bank monitors all financial assets that are subject to impairment requirements to assess whether there has been a Significant Increase In Credit Risk (SICR) since initial recognition. The Bank recognises lifetime ECL on SICR assets.
At each reporting date, the Bank assesses whether the credit risk on financial instruments have increased significantly as follows:
In addition, the Bank has developed a number of objective and subjective factors to consider when evaluating whether an account exhibits SICR as follows:
The Bank has implemented adequate procedures for monitoring and control to ensure effectiveness of the qualitative and quantitative criteria used to identify signs of SICR, thereby increasing probability of identifying signs of SICR assets prior to default or asset turning 30 days past due.
Loan commitments are assessed along with the category of loan the Bank is committed to provide, i.e. commitments to provide corporate loans are assessed using similar criteria to corporate loans.
The Bank has monitoring procedures in place to make sure that the qualitative and quantitative criteria used to identify significant increases in credit are effective, meaning that significant increase in credit risk is identified before the exposure is defaulted or when the asset becomes 30 days past due.
The Bank incorporates forward looking information that is available without undue cost and effort into both its assessment of whether the credit risk of an instrument has increased significantly since its intial recognition and its measurement of ECL.
The Bank asset book is split into two segments, namely Segment A for local exposures and Segment B for cross-border exposures.
The Segment A portfolio is further segregated into 2 distinct homogenous group namely Mid-Corporate and Large-Corporate, whereby clients fall into either one of the 15 sectors, based on a Bank of Mauritius classification criteria. Marginal PDs for each facility are generated through the respective PD function built upon the logistic regression equation of each sector/sub-sector. Via these econometric models, the relationships between movements in macroeconomic variables and default behaviours of our clients are investigated and where evidence could be found, relevant PDs are derived embedding forward looking information. A wide array of Macroeconomic variables have been considered in assessing for significant predictive power within the PD models; these include GDP, Inflation, PPI as well as key market indicators such as the SEMDEX and DEMEX. For clients belonging to sectors with no internal default experience, PDs are derived based on the internal rating models as assessments support that movements in the macroeconomic variables do not have a significant impact on default behaviours. The Segment B portfolio on the other hand is segregated by country of risk. The PD attached to each facility, derived from the Bank’s rating based approach is subsequently adjusted to incorporate forward-looking information based on the movements of Sovereign Credit Default Swap (CDS) curves.
In light of COVID-19, ABL revised its ECL framework so as to cater for the higher level of uncertainty in markets, both local and across borders. The bank ensured that in doing so, it remains in line with the many guiding principles released by local and international body on IFRS9 in a COVID-19 context. Adjusting for forward looking information during this unprecedented event, the bank has adopted a probabilistic approach based on forward looking scenarios, as prescribed in the IFRS9 framework, given uncertainties prevailing across markets. As such, the bank has defined 3 scenarios (upside, baseline/most likely and downside) and assigned weights suggesting the likelihood of such event occurring based on economic and market conditions assessments in the context of COVID-19. The scenarios assumed are very bearish, so as to properly reflect the current and projected global economic environment. The baseline scenarios for both Segment A and B are determined by means of the CDS curves movement of the different countries, capturing the market information and investors sentiment arising from the crisis effect brought on by the pandemic; CDS Proxies have been derived and used on exposures residing in countries where no adequate CDS curves are available.
The Bank has also factored in post‐model adjustments to take into account the unlikeliness to pay criteria on certain sectors impacted by COVID‐19. The adjustment is based on borrowers’ non‐payment behaviors observed in the current economic environment which may result in an increasing amount of balances becoming past due and having a higher probability of default in the future. Such overlays include the “early recognition” of lifetime ECL on assets in highly impacted sectors, COVID‐19 restructured facilities or clients with overdue ratings, without changes in stage classification.
The key inputs into the measurement of ECL are the following:
(i) probability of default (PD);
(ii) loss given default (LGD);
(iii) exposure at default (EAD).
These parameters are derived as detailed below and they are adjusted to reflect forward-looking information as described above.
The IFRS 9 ECL is calculated every quarter, or as frequently as required. Separate IFRS9 ECL calculation is done for Stage 1, Stage 2 and Stage 3 accounts.
The ECL for all accounts in Stage 1 is calculated by multiplying the PD, LGD and EAD. For Stage 2 accounts, lifetime ECL is calculated on the contractual maturity. Lastly, ECL for Stage 3 accounts is calculated simply by multiplying the EAD and LGD, given that the account is in default (i.e. the PD is 100%).
PD is an estimate of the likelihood of default over a given time horizon. PDs are estimated considering the contractual maturities of exposures and the estimation is based on current conditions, adjusted to take into account estimates of future conditions that will potentially impact PD.
The PD of the domestic accounts is derived either through the econometric models where available or alternatively, based on the Bank’s internal rating models (as explained above). For international accounts, the PD is determined based on the external rating of the counterparty if available. Otherwise, the Bank uses the internal rating models, capped to the respective country rating. The PDs are thereafter duly adjusted to include any forward looking premium as required.
LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from any collateral. LGD for performing accounts is dependent on the collateral held against the exposure. The Bank derives the LGD based on the type of collateral rather than the estimated collateral value, as prescribed by BASEL. The LGD for non-performing accounts is prudently calculated under the assumption that the Bank will take possession of the collateral and liquidate.
EAD represents the expected exposure that a bank may be exposed to in the event of default. The EAD of a financial asset is the amount of risk at the time the Bank expect the default to occur. For overdraft, credit card and financial guarantees, the EAD includes the current outstanding amount, as well as potential future amounts that may be drawn under the contract. The Bank measures ECL considering the risk of default over the maximum contractual period over which it is exposed to credit risk. The maximum contractual period extends to the date at which the Bank has the right to require repayment of an advance or terminate a loan commitment or guarantee.
The Bank measures ECL considering the risk of default over the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if contact extension or renewal is common business practice. However, for financial instruments such as credit cards, revolving credit facilities and overdraft facilities that include both a loan and an undrawn commitment component, the Bank’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the Bank’s exposure to credit losses to the contractual notice period. For such financial instruments the Bank measures ECL over the period that it is exposed to credit risk and ECL would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. These financial instruments do not have a fixed term or repayment structure and have a short contractual cancellation period. However, the Bank does not enforce in the normal day-to-day management the contractual right to cancel these financial instruments. This is because these financial instruments are managed on a collective basis and are canceled only when the Bank becomes aware of an increase in credit risk at the facility level. This longer period is estimated taking into account the credit risk management actions that the Bank expects to take to mitigate ECL, e.g. reduction in limits or cancellation of the loan commitment.
When ECL are measured on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics, such as:
The groupings are reviewed on a regular basis to ensure that each group is comprised of homogenous exposures.
The Group and the Bank determine the allowances to be appropriate for each facility assessed on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support, the realisable value of collateral and the timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.
Regulatory provision is conducted in accordance with the Bank of Mauritius Guideline on ‘Credit Impairment Measurement and Income Recognition (April 2016)’ and ‘Additional Macroprudential Measures For the Banking Sector (January 2015)’ which require the Bank to take a minimum portfolio provision of 1% on standard credits and an additional portfolio provision as a macro prudential policy measure ranging between 0.5% to 1% depending on the sectors. The Bank has reversed the regulatory provision of MUR 146m in portfolio reserve during the year since the stage 1 and 2 provision for loans and advances was higher than the minimum portfolio provision.
Country risk is the uncertainty whether obligors will be able to fulfil financial obligations given political or economic conditions in the country in question. The Bank make a thorough evaluation of risks, which may be associated with their cross-border operations and which have the potential to adversely affect its risk profile. These risks can be elaborated below:
Transfer Risk - Where a country suffers economic, political or social problems, leading to a drainage in its foreign currency reserves, the borrowers in that country may not be able to convert their funds from local currency into foreign currency to repay their external obligations.
Sovereign Risk - This risk denotes a foreign government’s capacity and willingness to repay its direct and indirect (i.e., guaranteed) foreign currency obligations. It arises as a result of a bank having any type of lending, extension of credit, or advance to a country’s government.
Currency Risk - The risk that a borower’s domectic currency holdings and cash flow become inadequate to service its foreign currency obligations because of devaluation.
Contagion Risk - The risk that adverse developments in one country may, for instance, lead to a downgrade of rating or credit squeeze not only for that country but also for other countries in the region, notwithstanding the fact that those countries may be more creditworthy and that the adverse developments do not apply.
Indirect Country Risk - The risk that the repayment ability of a domestic borrower is endangered owing to the deterioration of the economic, political or social conditions in a foreign country where the borrower has substantial business relationship or interest.
Macroeconomic Risk - The risk that the borrower in a country may, for example, suffer from the impact of high interest rates due to measures taken by the government of that country to defend its currency.
According to the Bank of Mauritius guideline on country risk management, the Bank is required to prudently make provisions on country risk. A provision of MUR 50M was raised for the year ended 30 June 2017. No incremental provisioning was required for the year ended 30 June 2018, 30 June 2019, 30 June 2020 and 30 June 2021. This is posted in the general banking reserve, which comprises amounts set aside for general banking risks, including future losses and other unforeseen risks. Country risk is also embeded in the IFRS 9 framework of the Bank.
Conferring to ABL’s country risk policy, the Bank would set exposure limits for individual countries to manage and monitor Country risk. Country exposure limits should apply to all on and off balance sheet exposures to foreign borrowers. While it is the responsibility of the Board Risk Committee (BRC) to approve the proposed structure of limits, investment strategy and the related limits with regards to the Bank risk appetite , the Board of Directors is also responsible for setting the Bank’s tolerance for country risks
Risk concentrations: Maximum exposure to credit risk without taking account of any collateral and other credit enhancements
The Group’s and the Bank’s concentrations of risk are managed by client/counterparty (excluding government), by geographical region and by industry sector. The maximum credit exposure to any client or counterparty as of 30 June 2021 was MUR 13.9bn (2020: MUR 17.6bn and 2019: MUR 18.5bn) before taking account of collateral or other credit enhancements. The following table shows the maximum exposure to credit risk for the components of the statement of financial position, including derivatives, by geography and by industry before the effect of mitigation through the use of master netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
The Group’s and the Bank’s financial assets before taking into account any collateral held or other credit enhancements, can be analysed as follows by the following geographical regions:
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows:
The Group and the Bank also request for personal guarantees from promoters, directors, shareholders and also corporate and cross guarantees from parent and sister companies.
The value of collateral and other credit enhancements received on loans and advances as at 30 June 2021 is MUR 17.4bn (2020: MUR 18.4bn and 2019: MUR 14.7bn). All other financial assets are unsecured except for collateralised placements.
See Note 16 for more detailed information with respect to the allowance for impairment losses on loans and advances to customers.
The fair value of the collaterals that the Group and the Bank hold relating to loans that were past due but not impaired and loans individually determined to be impaired at 30 June 2021 amounts to MUR 307.7m (2020: MUR 507m and 2019: MUR 665m) and MUR 659.9m (2020: MUR 810m and 2019: MUR 658m) respectively.
To meet the financial needs of customers, the Group and the Bank enter into various irrevocable commitments and contingent liabilities. Even though these obligations may not be recognised on the statements of financial position, they do contain credit risk and are therefore part of the overall risk of the Group and the Bank.
Financial guarantees and unutilised commitments are assessed and provision made in similar manner as for loans.
The table below shows the Group’s and the Bank’s maximum credit risk exposure for commitments and guarantees.
The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Group and the Bank could have to pay if the guarantee is called on. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognised as a liability in the statement of financial position.
The allowance for impairment losses on off balance sheet items has been calculated on financial guarantees, letters of credit and undrawn commitments. The loss allowance has been classified under other liabilities. Revolving credit facilities amounting to MUR 3bn has been included in the IFRS 9 disclosure below but not included in the undrawn commitments balance.
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s external credit rating system and year-end stage classification. The amounts presented are gross of impairment allowances.
An analysis of changes in the gross carrying amount and the corresponding ECLs is, as follows:
Liquidity risk is the risk that the Group and the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.
Sources of liquidity risk include unforseen withdrawal of demand deposit, restricted access to new funding with appropriate maturity and interest rate characteristics, inability to liquidate a marketable asset in a timely manner with minimum risk of capital loss, unpredicted non payment of a loan obligation and a sudden increased demand for loans.
The Bank’s Asset and Liability Manegement Committee (ALCO) is responsible for managing the bank’s liquidity risk via a combination of policy formation, review and governance, analysis, stress testing, limit setting and monitoring.
The Group and the Bank maintain a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Group and the Bank also have committed lines of credit that they can access to meet liquidity needs. In addition, the Group and the Bank maintain a statutory deposit with the Bank of Mauritius. The liquidity position is assessed and managed under a variety of scenarios giving due consideration to stress factors relating to both the market in general and specifically to the Group and the Bank.
The tables below summarise the maturity profile of the Group’s and the Bank’s financial assets and liabilities based on contractual repayment obligations. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group and the Bank expect that many customers will not request repayment on the earliest date the Group and the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Group’s and the Bank’s deposit retention history
The Group and the Bank do not expect all the contingent liabilities or commitments to be drawn before expiry of commitments.
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates and foreign exchange rates. The Group and the Bank classify exposures to market risk into either trading or non trading portfolios and manage these portfolios separately. Except for the concentrations within foreign currency, the Group and the Bank have no significant concentration of market risk.
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. Management has established limits on the maximum adverse volatility on its future net interest income.
The Bank’s main exposure to interest rate risk stems from a variety of sources: Yield curve risk, which refers to changes in the level, slope and shape of the yield curve; Repricing risk, which arises from timing differences in the maturity and repricing of balance-sheet items; Basis risk that is caused by imperfect correlation between different yield curves.
The following table demonstrates the sensitivity to a Day 1 100 basis points shock (2020: 100 basis points; 2019: 50 basis points) on the Bank’s net interest income. The net interest income sensitivity is the effect of the assumed changes in interest rates, based on the financial assets and financial liabilities held at 30 June
The table below analyses the Group’s and the Bank’s interest rate risk exposure on non–trading financial assets and liabilities. The Group’s and the Bank’s assets and liabilities are included at carrying amount and categorised by the earlier of contractual re–pricing or maturity dates.
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Management has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits.
The table below indicates the currencies to which the Group and the Bank had significant exposure at 30 June on all its monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the MUR, with all other variables held constant on the statements of profit or loss (due to the fair value of currency sensitive non trading monetary assets and liabilities). A negative amount in the table reflects a potential net reduction in the statement of profit or loss, while a positive amount reflects a net potential increase.