BBK Annual Report 2011

31 December 2011The credit quality of other financial assets is managed by the Group usingexternal credit ratings. The table below shows the credit quality by class ofthe financial assets.31 December2011Neither past due nor impairedHighgradeStandardgradeSubstandardgradePast due orindividuallyimpairedTotalBD ’000 BD ’000 BD ’000 BD ’000 BD ’000Deposits and duefrom banks andother financialinstitutions 209,377 34,103 - - 243,480Non-trading investment securitiesBonds 288,897 209,102 - 61,084 559,083Equities 67,344 925 - 1,468 69,737Managed funds 5,786 - - 754 6,540362,027 210,027 - 63,306 635,360Total 571,404 244,130 - 63,306 878,84031 December2010Neither past due nor impairedHighgradeStandardgradeSubstandardgradePast dueorindividuallyimpairedTotalBD ’000 BD ’000 BD ’000 BD ’000 BD ’000Deposits and duefrom banks andother financialinstitutions 130,955 40,082 - - 171,037Non-trading investment securitiesBonds 294,045 62,739 714 56,888 414,386Equities 57,535 3,118 176 1,465 62,294Managed funds 8,886 1,766 - 754 11,406360,466 67,623 890 59,107 488,086Total 491,421 107,705 890 59,107 659,123Deposits and due from banks and other financial institutions understandard grade are unrated deposits which are rated based on theGroup’s internal ratings.The following table shows the parameters used for classification ofinvestments:S&P/ FitchMoody’sHigh grade Range from AAA to A- Range from Aaa to A3Standardgrade Range from BBB+ to B- Range from Baa1 to B3Sub-standardgrade Range from CCC+ to CCC- Range from Caa1 to Caa3High grade includes unrated investments amounting to BD 85,401thousand (2010: BD 69,676 thousand). These mainly comprise of Sukuksissued by GCC governments and corporates.33. Carrying amount of financial assets whose termshave been renegotiatedThe table below shows the carrying amount for renegotiated financialassets, by class.Loans and advances to customers2011 2010BD ’000 BD ’000Commercial loans 136,760 104,333Consumer loans 3,156 2,88834. Market Risk139,916 107,221Market Risk is defined as the risk of potential loss that may arise fromadverse changes in the value of a financial instrument or portfolio offinancial instruments due to movements in interest rates, foreign exchangerates, equity, commodity prices and derivatives. This risk arises fromasset - liability mismatches, changes that occur in the yield curve, foreignexchange rates and changes in volatilities/implied volatilities in the marketvalue of derivatives.The Group has clearly defined policies for conducting investment (includingtrading investments) and foreign exchange business which stipulateslimits for these activities. Investments are made strictly in accordancewith investment acceptance criteria. The Group does not undertake anycommodity trading activities. For management of Market Risk arising frommovement in interest rates, refer note 35.The Group uses an internal Value-at-Risk (VaR) model for measuringgeneral Market Risk in the trading book of the Group and all foreignexchange positions. The internal model was approved by the CentralBank of Bahrain. VaR is calculated using a 99 per cent confidence levelfor a 10 day holding period. This implies a 1 per cent possibility of the lossexceeding the VaR amount calculated by the model. As at 31 December,VaR calculated based on the above parameters was as follows:2011 2010BD ’000 BD ’000Foreign exchange 75 93Interest rate - 275 95The Bank’s Risk Management Department conducts backtesting inaccordance with the Market Risk Capital Adequacy Regulations issuedby the Central Bank of Bahrain to ensure that the VaR model andassumptions used for computing VaR numbers are reliable. Backtestingof 1 day VaR as per actual profit and loss (comparing 1 day VaR with theaverage actual daily profit and loss) and also hypothetical back testing(comparing 1 day VaR with derived profit and loss of static positions) iscarried out on a daily basis as stipulated in the Central Bank of BahrainRule book. The objective is to ensure that the assumptions used forcomputing VaR are reasonable and provide a VaR number that is a goodindicator of possible losses in trading positions. During the year, thebacktesting produced satisfactory results.Notes to the consolidated financial statements contineudThe Group also conducts stress testing to identify events or influences thatcould greatly impact material trading positions taken by the Group. As perthe Central Bank of Bahrain requirements, validation of the internal modelis conducted by the Internal Audit Department of the Bank as well as bythe External Auditors.BBK Annual Report 201163