BBK Annual Report 2011

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Basel II Pillar III disclosures contineud5. Capital adequacyThe Group’s policy is to maintain a strong capital base so as to preserveinvestor, creditor and market confidence and to sustain the futuredevelopment of the business. The impact of the level of capital onshareholders’ return is also recognized as well as the need to maintain abalance between the higher returns that might be possible with greatergearing and the advantages and security afforded by a sound capital position.The Group manages its capital structure and makes adjustments to thestructure taking account of changes in economic conditions and strategicbusiness plans. The capital structure may be adjusted through the dividendpayout, and the issue of new shares, and subordinated term finance.BBK aims to maintain a minimum total capital adequacy ratio in excessof 15 per cent. The CBB’s current minimum total capital adequacy ratiofor banks incorporated in Bahrain is set at 12 per cent. The CapitalAdequacy ratio of the Group at 31 December 2011 was 14.85 per cent(2010: 18.57 per cent).Strategies and methods for maintaining a strongcapital adequacy ratioBBK prepares multi-year strategic projections on a rolling annual basiswhich include an evaluation of short term capital requirements and aforecast of longer-term capital resources.Capital ratios - consolidated and subsidiaries above 5 per centof Group capitalDecember 2011 December 2010TotalcapitalratioTier 1capitalratioTotalcapitalratioTier 1capitalratioBBK - Group 14.85% 13.84% 18.57% 14.04%CrediMax 84.19% 67.81% 82.85% 55.14%Capinnova Investment Bank 75.58% 75.58% 110.03% 110.03%6. Credit Risk – Pillar III disclosuresThis section describes the BBK’s exposure to Credit Risk and providesdetailed disclosures on Credit Risk in accordance with the CBB’s Basel IIframework in relation to Pillar III disclosure requirements.Definition of exposure classesBBK has a diversified on and off balance sheet credit portfolio, theexposures of which are divided into the counterparty exposure classesdefined by the CBB’s Basel II capital adequacy framework for thestandardised approach for Credit Risk. A high-level description of thecounterparty exposure classes, referred to as standard portfolios in theCBB’s Basel II capital adequacy framework, and the generic treatments,i.e. the risk weights to be used to derive the RWAs, are as follows:Sovereigns portfolioThe sovereigns portfolio comprises exposures to governments and theirrespective central banks. The risk weights are zero per cent for exposuresin the relevant domestic currency, or in any currency for exposures to GCCsovereigns. Foreign currency claims on other sovereigns are risk weightedbased on their external credit ratings.Certain multilateral development banks as determined by the CBB may beincluded in the sovereigns portfolio and treated as exposures with a zeroper cent risk weighting.Public Sector Entities (PSE) portfolioClaims on Bahraini PSEs, and claims on PSEs on domestic currency -which are assigned a zero per cent risk weight by their respective countryregulator, can be assigned a zero per cent risk weight. All other PSEs arerisk weighted according to their external ratings.For the year ended 31 December 2011tenor of three months or less. The Bank’s portfolio also includes claims oninvestment firms, which are risk weighted based on their external creditratings, though without any option for preferential treatment for short termexposures.Corporates portfolioClaims on corporates are risk weighted based on their external creditratings. A 100 per cent risk weight is assigned to exposures to unratedcorporates. A preferential risk weight treatment is available for certaincorporates owned by the Government of Bahrain, as determined by theCBB, which are assigned a zero per cent risk weight.Regulatory retail portfolioClaims on retail portfolio are risk weighted at 75 per cent, except for pastdue portfolio.Mortgage portfolioClaims which are fully secured by first mortgages on residential propertythat is or will be occupied by the borrower, or that is leased, must carry arisk weighting of 75 per cent. Claims secured mortgages on commercialreal estate are subject to a minimum of 100 per cent risk weight. If theborrower is rated below BB-, the risk-weight corresponding to the rating ofthe borrower must be applied.Equities portfolioThe equities portfolio comprises equity investments in the banking book,i.e. the available-for-sale securities portfolio. A 100 per cent risk weight isassigned to listed equities while unlisted equities are weighted at 150 per cent.In addition to the standard portfolios, other exposures are assigned to thefollowing exposure classes:Investments in funds portfolioThe risk weight for claims on corporate will be used to determine the riskweight for investments in rated funds. Unrated funds will be assigned arisk weight of 100 per cent if listed, and 150 per cent if not listed.Past due exposuresThis includes claims, for which the repayment is overdue for more thanninety days. The risk weighting for such loans is either 100 per cent or150 per cent is applied depending on the level of provisions maintainedagainst the loan.Holding of real estateAll holding of real estate by banks (owned directly or by the way ofinvestments in real estate companies, subsidiaries or associatedcompanies or other arrangements such as trusts, funds or REITS) mustbe risk weighted at 200 per cent. Premises occupied by the bank areweighted at 100 per cent.Other assets and holdings of securitisation tranchesOther assets are risk weighted at 100 per cent. Securitisation tranches arerisk weighted based on their external credit ratings. Risk weightings rangefrom 20 per cent to 350 per cent. Exposures to securitisation tranches thatare rated below BB- or are unrated are deducted from regulatory capitalrather than subject to a risk weight.All BBK’s holding of securitisations is part of the bank’s investment portfolio.External rating agenciesBBK uses ratings issued by Standard & Poor’s, Moody’s and Fitch toderive the risk weightings under the CBB’s Basel II capital adequacyframework. Where ratings vary between rating agencies, the highest ratingfrom the lowest two ratings is used to represent the rating for regulatorycapital adequacy purposes.BBK Annual Report 201170Banks portfolioClaims on banks are risk weighted based on their external credit ratings.A preferential risk weight treatment is available for qualifying short termexposures. Short term exposures are defined as exposures with an original
Credit Risk presentation under Basel IIThe Credit Risk exposures presented in most of this report differ from theCredit Risk exposures reported in the consolidated financial statements.Differences arise due to the application of different methodologies, asillustrated below:Under the CBB’s Basel II framework, off statement of financial positionexposures are converted into credit exposure equivalents by applyinga credit conversion factor (CCF). The off statement of financialposition exposure is multiplied by the relevant CCF applicable to theoff statement of financial exposure position category. Subsequently,the exposure is treated in accordance with the standard portfolios asreferred to above in this report in the same manner as on statement offinancial position exposures.7. Capital requirement for risk weighted exposureFor the year ended 31 December 2011Credit Risk exposure reporting under Pillar III is frequently reportedby standard portfolios based on the type of counterparty. Thefinancial statement presentation is based on asset class ratherthan the relevant counterparty. For example, a loan to a bankwould be classified in the Banks standard portfolio under thecapital adequacy framework although is classified in loansand advances in the consolidated financial statements.Certain eligible collateral is applied to reduce exposure under theBasel II capital adequacy framework, whereas no such collateral nettingis applicable in the consolidated financial statements.Based on the CBB’s Basel II guidelines, certain exposures are eitherincluded in, or deducted from, regulatory capital rather than treatedas an asset as in the consolidated financial statements, e.g. unratedsecuritisation tranches.Basel II Pillar III disclosures contineud31 December 2011Gross creditexposures (beforerisk mitigation)EligiblefinancialcollateralCredit Riskafter riskmitigationRiskweightedassetRegulatorycapital required12%BD ’000 BD ’000 BD ’000 BD ’000 BD ’000Sovereign 734,536 - 37,478 20,875 2,505Public sector entities 181,107 - 36,456 14,869 1,784Banks 595,683 1,009 594,127 250,715 30,086Corporates 1,069,177 48,823 959,911 957,280 114,874Regulatory retail 169,755 17,111 152,644 114,483 13,738Mortgage 71,636 3,203 68,433 51,576 6,189Equity 45,443 - - 48,226 5,787Investment in funds 3,892 - 3,892 5,839 701Past due 20,903 1 20,901 26,134 3,136Real estate 31,787 - - 52,589 6,311Securitisation 3,151 - 3,151 3,151 378Other assets 44,995 - 44,995 44,995 5,399Cash items 15,213 - - 466 56Total 2,987,278 70,147 1,921,988 1,591,198 190,944Aggregation 69,804 - 69,804 69,804 8,376Total Credit Risk 3,057,082 70,147 1,991,792 1,661,002 199,320Market Risk - - - 4,560 547Operational Risk - - - 163,610 19,633Total Risk Weighted Exposure 3,057,082 70,147 1,991,792 1,829,172 219,50031 December 2010Gross creditexposures (beforerisk mitigation)EligiblefinancialcollateralCredit Riskafter riskmitigationRiskweightedassetRegulatorycapital required12%BD ’000 BD ’000 BD ’000 BD ’000 BD ’000Sovereign 739,638 - 53,567 26,298 3,156Public sector eEntities 175,861 - 6,771 5,233 628Banks 414,166 1,087 410,954 171,037 20,524Corporates 1,056,193 53,272 960,305 942,571 113,109Regulatory retail 163,014 19,510 143,504 107,628 12,915Mortgage 66,694 2,904 63,789 48,295 5,795Equity 44,224 - - 45,857 5,503Investment in funds 4,099 - 4,099 6,148 738Past due 612 - 612 612 73Real estate 33,354 - - 54,663 6,560Securitisation 3,436 - 3,436 3,436 412Other assets 36,569 - 36,569 36,569 4,388Cash items 11,164 - - 156 19Total 2,749,024 76,773 1,683,606 1,448,503 173,820Aggregation 58,389 - 58,389 58,389 7,007Total Credit Risk 2,807,413 76,773 1,741,995 1,506,892 180,827Market Risk - - - 4,982 598Operational Risk - - - 156,152 18,738Total Risk Weighted Exposure 2,807,413 76,773 1,741,995 1,668,026 200,163Collateral valuation policyThe Bank has detailed policies and procedures for valuing collateral/securities offered for various credit facilities. The collateral is valued, at minimum,quarterly or annually based on the type of security.More frequent valuations are also considered if warranted by market volatility and declining trend in valuations are observed. The basis of valuation fordifferent types of securities such as equity, debt, and real estate is also clearly defined in the policies.BBK Annual Report 201171
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Annual Report 2011peopleheritagecom
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June 1999Inauguration ofBBK Pedestr
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Contents03 04 06 10 11 14 22 32 37
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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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Message from the ChairmanI am pleas
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Board of Directors(left to right)Mu
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Board of Directors' report continue
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Corporate Governance reportCorporat
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Corporate Governance report continu
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Corporate Governance report continu
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Page 26 and 27: BBK’s respectablefinancial perfor
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Page 30 and 31: Management Review continuedCredit M
Page 32 and 33: Executive ManagementAbdulkarim Ahme
Page 34 and 35: Organisation informationBOARD OF DI
Page 36 and 37: Financial ReviewThis review incorpo
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Page 44 and 45: Consolidated statement of financial
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Page 48 and 49: Consolidated statement of cash flow
Page 50 and 51: 31 December 2011Notes to the consol
Page 72 and 73: For the year ended 31 December 2011
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BBK Annual Report 2011

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