confidence - Investing In Africa

Management Discussions & AnalysisOperation Review (cont’d)82Personal Banking exposure has grown by 19% year on year, increasing its shareof the credit portfolio by 2%. A range of innovative products has been launchedduring the year, requiring enhancements to be made to Transact, which nowcaters for 12 products, each with their own specific policy rules to manage theapproval decision. Credit scoring in Transact started in August 2002 and therisk profile for the Group has been built on the assumption that the samplerated is a fair representation of the total personal banking risk portfolio. As atJune 30, 2005, 41% of personal banking exposures were rated throughExperian Transact.Given the non-availability of historical data in Mauritius and at the Bank, theBank is using Moody’s data and probability of default based on NorthAmerican parameters in order to calculate expected losses. On a worst casescenario, using actual exposures and with unrated companies defaulted to arisk rating of 10, expected losses amount to Rs358M. However, when using riskweighted exposures and by defaulting unrated companies to the averageportfolio financial risk rating, the expected losses are reduced to Rs193M.Historical information on the Bank’s own experience of defaults and recoveryrates is being collected as recommended by Basel II and adequate portfolioprovisions have been made during the year. As at end of 2005, the Group hasa portfolio provision of Rs216.5M, which is satisfactory and is also aboveregulatory requirements.Monitoring, Recovery and Work OutThe Bank continuously monitors its credit portfolios, with particular focus on highriskaccounts. Depending on the credit risk rating of the customer, the size of theexposure and past arrears, accounts demonstrating early signs of weakness areidentified and separately monitored through a watch list at the ManagementCredit Sanction Forum or are eventually transferred to the Intensive Care Unit if theaccount status cannot be improved. InMatrix Optimist, an analytical tool, is usedby Business Analysts in determining the key drivers for the current performance ofpoor performers and in creating financial projections and forecast based oncurrent data, which is useful in assisting customers to address their financialweaknesses. When accounts cannot be nurtured back to health, they are referredto the Recovery and Work Out team for exit and recovery action.Assets are classified as impaired as per the Bank of Mauritius guidelines, in linewith International Accounting Standards (IAS) 39. Specific provision is providedon the irrecoverable amounts in excess of the net realisable value of collateralsand future cash flows, in accordance with IAS and regulatory directives.MARKET RISKSMarket risks include the following :• Interest rate risk•Foreign currency risk•Liquidity risk•Price riskInterest Rate RiskInterest rate risk is a normal part ofbanking and can be an importantsource of profitability and shareholdervalue. However, excessive interestrate risk can pose a significant threatto a bank's earnings and capital base.A combination of gap analysis,earnings at risk and simulationmodels are used for interest raterisk measurement. Gap analysismeasures the difference betweenthe amount of interest earning assetsand interest bearing liabilities thatre-price in a particular period and alimit is set at a percentage of assetsover a time period to assessreasonableness of mismatches.Simulation is used to measureinterest rate risk by estimating theimpact that changes in interest rateswill have on net interest income.At 30 June 2005, SBM Mauritiusoperations were within theprudential limits set by the Board forinterest rate gap for Mauritian Rupeeand US Dollar denominated assetsand liabilities. Earnings at Risk areestimated to be Rs2.4M at 30 June2005 compared to Rs16M at 30June 2004.