BBK Annual Report 2011

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For the year ended 31 December 2011Basel II Pillar III disclosures contineudBBK Annual Report 201168Basel II Pillar III disclosures1. Executive SummaryThis report has been prepared in accordance with Pillar III disclosurerequirements prescribed by the Central Bank of Bahrain, herein referred toas (CBB).CBB Basel II guidelines became effective on 1st January 2008 as thecommon framework for the implementation of the Basel Committeeon Banking Supervision’s (Basel Committee) Basel II capital adequacyframework for banks incorporated in the Kingdom of Bahrain.The disclosures in this report are in addition to the disclosures set out inthe consolidated financial statements for the year ended 31 December2011 presented in accordance with the International Financial ReportingStandards (IFRS).2. Introduction to the Basel II frameworkThe CBB’s Basel II framework is based on three pillars, consistent with theBasel II framework developed by the Basel Committee, as follows:-Pillar I: calculation of the Risk Weighted Assets (RWAs) and capitalrequirement. The capital requirement has to be covered by ownregulatory framework.Pillar II: the supervisory review process, including the Internal CapitalAdequacy Assessment Process (ICAAP).Pillar III: rules for the disclosure of risk management and capitaladequacy information.Pillar IPillar I prescribes the basis for the calculation of the regulatory capitaladequacy ratio. Pillar I sets out the definition and calculations of the RWAs,and the derivation of the regulatory capital base. The capital adequacyratio is calculated by dividing the regulatory capital base by the totalRWAs.The resultant ratio is to be maintained above a predetermined andcommunicated level. Under the previously applied Basel I Capital Accord,the minimum capital adequacy ratio for banks incorporated in Bahrainwas 12 per cent compared to the Basel Committee’s minimum ratioof 8 per cent.The CBB also requires banks incorporated in Bahrain to maintain abuffer of 0.5 per cent above the minimum capital adequacy ratio. In theevent that the capital adequacy ratio falls below 12.5 per cent additionalprudential reporting requirements apply, and a formal action plan settingout the measures to be taken to restore the ratio above the target levelis to be formulated and submitted to the CBB. Consequently, the CBBrequires BBK to maintain an effective minimum capital adequacy ratioof 12.5 per cent. No separate minimum tier 1 ratio is required to bemaintained under the CBB’s Basel II capital adequacy framework.Under the CBB’s Basel II capital adequacy framework, the RWAs arecalculated using more sophisticated and risk sensitive methods thanunder the previous Basel I regulations. Credit Risk and Market Risk aretwo essential risk types that were included under Basel I, while OperationalRisk has been introduced as a new risk type in the CBB’s Basel II capitaladequacy framework.The table below summarises the approaches available for calculatingRWAs for each risk type in accordance with the CBB’s Basel II capitaladequacy framework:Approaches for determining regulatory capital requirementsas per CBB guidelinesCredit Risk Market Risk Operational RiskStandardised Approach Standardised Approach Basic Indicator ApproachFoundation InternalRatings Based Approach(FIRB)Internal Models ApproachThe approach applied by BBK for each risk type is as follows:i) Credit RiskStandardised ApproachFor regulatory reporting purposes, BBK is using the StandardisedApproach for Credit Risk. The standardised approach is similar to thebasis under the previous Basel I capital adequacy regulations, except forthe use of external ratings to derive RWAs and the ability to use a widerrange of financial collaterals. The RWAs are determined by multiplyingthe credit exposure by a risk weight factor dependent on the type ofcounterparty and the counterparty’s external rating, where available.ii) Market RiskFor the regulatory Market Risk capital requirement, BBK is using theInternal Model Approach based on Value-at-Risk (VaR) model. The use ofthe Internal Model Approach for the calculation of regulatory Market Riskcapital has been approved by the CBB.iii) Operational RiskUnder the CBB’s Basel II capital adequacy framework, all banksincorporated in Bahrain are required to apply the Basic Indicator Approachfor Operational Risk unless approval is granted by the CBB to use theStandardised Approach. The CBB’s Basel II guidelines do not currentlypermit the use of the Advanced Measurement Approach (AMA) forOperational Risk. For regulatory reporting purposes, BBK is currentlyusing the Basic Indicator Approach. Under the Basic Indicator Approach,the regulatory capital requirement is calculated by applying an alphaco-efficient of 15 per cent to the average gross income for the precedingthree financial years.Pillar IIPillar II defines the process of supervisory review of an institution’s riskmanagement framework and, ultimately, its capital adequacy.Under the CBB’s Pillar II guidelines, all banks incorporated in Bahrain arerequired to maintain a 12 per cent minimum capital adequacy ratio.Pillar II comprises of two processes:an Internal Capital Adequacy Assessment Process (ICAAP), anda supervisory review and evaluation process.The ICAAP incorporates a review and evaluation of risk managementand capital relative to the risks to which the bank is exposed. BBK hasdeveloped ICAAP document and it addresses all components of BBK’srisk management, from the daily management of more material risks to thestrategic capital management of the Group.The supervisory review and evaluation process represents the CBB’sreview of the Group’s capital management and an assessment of internalcontrols and corporate governance. The supervisory review and evaluationprocess is designed to ensure that institutions identify their material
isks and allocate adequate capital, and employ sufficient managementprocesses to support such risks.The supervisory review and evaluation process also encouragesinstitutions to develop and apply enhanced risk management techniquesfor the measurement and monitoring of risks in addition to the credit,market and Operational Risks addressed in the core Pillar I framework.Other risk types which are not covered by the minimum capitalrequirements in Pillar I include Liquidity Risk, Interest Rate Risk in thebanking book, business risk and concentration risk. These are coveredeither by capital, or risk management and mitigation processes underPillar II.Pillar IIIIn the CBB’s Basel II framework, the third pillar prescribes how, when, andat what level information should be disclosed about an institution’s riskmanagement and capital adequacy practices.The disclosures comprise detailed qualitative and quantitative information.The purpose of the Pillar III disclosure requirements is to complementthe first two pillars and the associated supervisory review process.The disclosures are designed to enable stakeholders and marketparticipants to assess an institution’s risk appetite and risk exposuresand to encourage all banks, via market pressures, to move toward moreadvanced forms of risk management.Under the current regulations, partial disclosure consisting mainly ofquantitative analysis is required during half year reporting, whereas fulldisclosure is required to coincide with the financial year end reporting.3. Group structureThe Group’s financial statements are prepared and published ona full consolidation basis, with all subsidiaries being consolidatedin accordance with IFRS. For capital adequacy purposes, allsubsidiaries are included within the Group structure. However,the CBB’s capital adequacy methodology accommodatesboth normal and aggregation forms of consolidation.4. Capital components - consolidatedFor the year ended 31 December 2011Tier one capital is defined as capital of the same or close to the characterof paid-up capital and comprises share capital, share premium, retainedearnings and eligible reserves. Eligible reserves include general reserve,statutory reserve, and unrealised losses arising from revaluation of equitiesclassified as available-for-sale, and excludes unrealised losses arising fromrevaluation of debt securities classified as available-for-sale.Tier two capital comprises interim profits, qualifying subordinated termfinance, collective impairment provisions, and unrealised gains arising fromrevaluation of equities classified as available-for-sale, though limited to 45per cent. It excludes unrealised gains arising from valuing debt securitiesclassified as available-for-sale.The subordinated term financing facilities, amounting to USD 22.570million (initial amount raised USD 275 million), are part of its US $ 1 billionEuro Medium Term Deposits Notes Programme. These are issued for 10years with a call option which can only be exercised starting 2012. Thesubordinated financing facilities have been approved for inclusion in tiertwo capital for regulatory capital adequacy purposes by the CBB.The CBB applies various limits to elements of the regulatorycapital base. The amount of innovative tier one securities cannotexceed 15 per cent of total tier one capital; qualifying tier twocapital cannot exceed tier one capital; and qualifying subordinatedterm finance cannot exceed 50 per cent of tier one capital. Thereare also restrictions on the amount of collective impairmentprovisions that may be included as part of tier two capital.In accordance with the CBB’s Basel II capital adequacy framework,certain assets are required to be deducted from regulatory capitalrather than included in RWAs. At 31st December 2011, BD 5.926million (2010: BD 8.79 million) was deducted from regulatorycapital in relation to securitisation exposures that were ratedbelow BB- or were unrated. In accordance with the CBB’s BaselII capital adequacy framework, the deductions are applied 50per cent from tier one and 50 per cent from tier two capital.Basel II Pillar III disclosures contineudThe principal subsidiaries, associates and joint ventures and basis ofconsolidation for capital adequacy purposes are as follows:SubsidiariesDomicileOwnershipConsolidationbasisCrediMax B.S.C. (c) Kingdom of Bahrain 100% Full ConsolidationInvita B.S.C. (c) Kingdom of Bahrain 100% Full ConsolidationCapinnova InvestmentBank B.S.C. (c) Kingdom of Bahrain 100% AggregationGlobal Payment ServicesW.L.L. (GPS) * Kingdom of Bahrain 55% Full ConsolidationAssociatesEBLA ComputerConsultancy K.S.C.C. ** State of Kuwait 36% AggregationDiyaar Al HarameenAl Ola Limited ** Cayman Islands 35% AggregationSaudi MAIS Company forMedical Products ** Kingdom of Saudi Arabia 24% AggregationBahrain Commercial FacilitiesCompany B.S.C. (c) Kingdom of Bahrain 23% AggregationThe Benefit CompanyB.S.C. (c) Kingdom of Bahrain 22% AggregationJoint ventureSakana Holistic HousingSolutions B.S.C. (c) *** Shareholding through CrediMax subsidiary** Shareholding through Capinnova Investment BankKingdom of Bahrain 50% AggregationThere are no investments in subsidiaries that are treated as a deductionfrom the Group’s regulatory capital. There are no restrictions on thetransfer of funds or regulatory capital within the Group.There are no impediments on the transfer of funds or regulatory capitalwithin the Group other than restrictions over transfers to ensure minimumregulatory capital requirements are met for subsidiary companies.Tier 1 capitalDecember2011December2010BD ’000 BD ’000Share capital 80,691 81,393General reserves 36,000 27,000Statutory reserves 42,568 39,001Share premium 39,919 39,919Retained earnings and others 22,895 20,273Non-controlling interest 351 281Unrealised losses arising from fair valuing equities (3,571) (4,872)Deductions from tier 1 capital (40,225) (40,304)Total tier 1 capital 178,628 162,691Tier 2 capitalCurrent year profit 31,789 39,14245% of unrealised gains arisingfrom fair valuing equities 2,796 1,870Collective impairment provisions 15,556 13,733Subordinated term debt 8,509 61,029Deductions from tier 2 capital (40,225) (40,304)Total tier 2 capital 18,425 75,470Total available capital (tier 1 + tier 2) 197,053 238,161Aggregation 74,525 71,576Total eligible capital 271,578 309,737BBK Annual Report 201169
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Annual Report 2011peopleheritagecom
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June 1999Inauguration ofBBK Pedestr
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Our visionBBK will be the premier r
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2007 2008 2009 2010 2011Income stat
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Corporate Governance reportCorporat
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Page 32 and 33: Executive ManagementAbdulkarim Ahme
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Page 50 and 51: 31 December 2011Notes to the consol
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BBK Annual Report 2011

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