Annual REPORT

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ANNUAL <strong>REPORT</strong> AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 NOTES TO THE FINANCIAL STATEMENTS (Continued) 4 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) (a) Credit risk (Continued) Risk limit control and mitigation policies (Continued) The primary purpose of acceptances, letters of credit and guarantees is to ensure funds are available to a customer as required. Guarantees and standby letters of credit carry the same risk as loans. Documentary and commercial letters of credit which are written undertakings by the group on behalf of a customer authorising a third party to draw drafts on the group up to a stipulated amount under specific terms and conditions are collateralised by the underlying goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorisation to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The group has no significant concentration of credit risk, with exposure spread over a diversity of personal and commercial customers. Maximum exposure to credit risk before collateral held Credit Exposures On – balance sheet items 2015 2014 Sh’000 % Sh’000 % Balances with Central Bank of Kenya 3,387,458 5 3,235,391 6 Balances due from other banking institutions 4,892,358 6 7,378,051 13 Government securities 7,689,783 10 6,051,181 10 Loans and advances to customers 55,853,882 74 37,925,476 65 Corporate bonds 936,410 1 554,830 1 Commercial Paper 631,916 1 700,000 1 _________ ____ __________ ____ 73,391,807 97 55,844,929 96 _________ ____ __________ ____ Off-balance sheet items Guarantees 2,324,101 3 2,737,651 4 _________ ____ __________ ____ 75,715,908 100 58,582,580 100 ======== ==== ========= ==== 64
ANNUAL <strong>REPORT</strong> AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 NOTES TO THE FINANCIAL STATEMENTS (Continued) 4 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) (a) Credit risk (Continued) The table represents the worst case scenario of credit exposure for 31 December 2015 and 31 December 2014, without taking into account any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures, set out above are based on net carrying amount as reported on the statement of financial position. Loans and advances to customers comprise of 67% (2014 - 65%) of the total maximum exposure. While collateral is an important mitigant to credit risk, the group’s policy is to establish that loans are within the capacity of the customer to repay, as the primary way out. The group holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. The group is confident that its policies and procedures provide sufficient safeguards against exposure on credit risk as shown on the table below. Classification of loans and advances Loans and advances to customers 2015 2014 Carrying amount Sh’000 Sh’000 Individually impaired Grade 6: Impaired (substandard) 749,416 553,755 Grade 7: Impaired (doubtful) 1,147,330 961,407 Grade 8: Impaired (loss) 982,479 874,512 ________ ________ Gross amount 2,879,225 2,389,674 Allowance for impairment (1,486,206) (1,298,423) _________ ________ Carrying amount 1,393,019 1,091,251 _________ _______ Collectively impaired (Past due but not impaired) Grade 4-5: Watch list 1,765,454 1,117,466 Allowance for impairment (52,964) (33,524) ___________ ________ Carrying amount 1,712,490 1,083,942 __________ _________ Neither past due nor impaired Grade 1-3: Normal 52,748,373 35,750,283 __________ _________ Total carrying amount 55,853,882 37,925,476 ========= ======== 65
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Annual REPORT

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