Annual Report and Accounts 2004 - National Bank of Kuwait

Treasury‘Best Foreign Exchange Bank in the Middle East’…NBK is an important player in the local moneyand foreign exchange markets. The Bank’sTreasury group plays the role of market maker forthe Kuwaiti dinar both domestically andinternationally. In the local interbank moneymarket, NBK is a net lender, providing other localbanks with cash management facilities for theirshort-term and medium-term cash flowrequirements. In 2004, Global Finance presentedNBK with the ‘Best Foreign Exchange Bank inKuwait and the Middle East’ award.The Bank offers a wide range of treasury, assetand liquidity management services to ourcustomers. The Treasury team works closely withother areas in the Bank, including ourinternational branches in the world’s majorfinancial centres, providing timely, innovative andcost-effective solutions to corporate customers.Risk ManagementDiscipline and prudence…Efficient Risk Management is a core NBK discipline to maintain its stabilityand quality of assets. The comprehensive global Risk Managementframework adopted by the Bank has continued to evolve in light of theGroup’s expanding activities, and has once again proven its effectiveness.This framework is designed to produce an accurate and timely evaluation ofthe Bank’s risk exposure in addition to ensuring risk is effectively controlledand mitigated. The system allows NBK to manage the Group’s exposure tocredit, market, liquidity and operational risks. NBK continually modifies andenhances its Risk Management policies and systems to reflect changes inmarkets and products and in best practice.Credit Risk Management at the Bank is based on two tenets: ‘FocusedDiversification’ and ‘Prudent Lending’. Risk is thus managed at both theindividual transaction and portfolio levels. Processes in place aim to ensurethat credit risks are adequately assessed, properly approved, continuallymonitored and actively managed. Domestic and International Credit Controlconstantly monitor the quality of the Bank’s credit portfolio and ensure theBank’s adherence to the credit policies and regulators’ directives. Our practicesare designed to preserve the independence and integrity of the risk assessmentprocess. This has enabled NBK to maintain the highest asset quality.The Bank actively manages Market Risk arising from the mismatch betweenassets and liabilities and their sensitivity to adverse movements in interestrates, exchange rates and equity prices; striving to make the Group’s riskprofile transparent to senior management, the Board of Directors and theregulator. The Bank employs both statistical and non-statistical measuresincluding, but not limited to, value-at-risk (VAR) from any adverse marketmoves in an ordinary market environment, as well as measures of positionsize and sensitivity limits, mainly pertaining to its non-traded book.Liquidity Risk is monitored and evaluated daily. In addition to ensuring thatthe Bank’s balance sheet profile complies with regulatory requirements, theTreasury team is actively involved in cash flow management and in meetingthe Bank’s funding requirements at all times. In doing so, managementconsiders a variety of liquidity risk measures as well as market conditions,prevailing interest rates, liquidity needs and the desired maturity profile ofits liabilities.Management of Operational Risk also receives high priority and is controlledby the Bank’s Operational Risk and Compliance functions. Operational Risk ismeasured across a number of processes based on the probability and impactof risks, together with the potential mitigating effects of controls and insurance.To monitor and control Operational Risk, the Group maintains a system of23