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) (c) Market risks Market risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk arise from open positions in interest rates, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, equity prices, foreign exchange rates and credit spreads. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The group separates exposures to market risk into either trading or non-trading portfolios. Trading portfolios include those positions arising from market-making transactions where the group acts as principal with clients or with the market. Non-trading portfolios mainly arise from the interest rate management of the entity’s retail and commercial banking assets and liabilities. Management of market risks Overall responsibility of managing market risk rests with the Asset and Liability Committee. The Treasury department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation. The board of directors sets limits on the level of mismatch of interest rate repricing that may be undertaken which is monitored daily. i) Interest rate risk The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The ALCO is the monitoring body for compliance with these limits and is assisted by Treasury Department in its day-to-day monitoring activities. The table below summarises the group’s exposures to interest rate risks. Included in the table are the group’s assets and liabilities at carrying amounts, categorised by the earlier of the contractual repricing or maturity dates. The group does not bear an interest rate risk on off balance sheet items. 31 December 2015 Up to 1 month Sh’000 1 – 3 months Sh’000 4 – 12 months Sh’000 1-5 years Sh’000 Over 5 years Sh’000 Non-interest bearing Sh’000 Total Sh’000 Financial assets Cash in hand - - - - - 2,779,634 2,779,634 Balances with CBK - - - - - 3,387,458 3,387,458 Balances due from banks 4,687,834 - - - - 204,524 4,892,358 Government securities 420,055 3,370,425 294,998 63,167 3,541,138 - 7,689,783 Loans and advances to customers 55,853,882 - - - - - 55,853,882 Corporate bonds - - 727,438 840,888 - - 1,568,326 ___________ _________ _________ _________ __________ __________ ___________ 60,961,771 3,370,425 1,022,436 904,055 3,541,138 6,371,616 76,171,441 ___________ _________ _________ _________ __________ __________ ___________ Financial liabilities Balances due to banks 131,643 - - - - - 131,643 Customer deposits 5,101,986 6,806,558 14,884,748 4,718,018 - 31,199,548 62,710,859 Borrowings - - 135,284 3,442,571 2,009,920 - 5,587,720 ____________ ___________ _____________ ____________ ___________ _____________ ____________ 5,233,629 6,806,558 15,020,032 8,160,589 2,009,920 31,199,548 68,430,222 ____________ ____________ _____________ ____________ ___________ _____________ ____________ Interest sensitivity gap 55,728,142 (3,436,133) (13,997,596) (7,256,534) 1,531,218 (24,827,932) 7,741,219 ========= ========= ========== ========= ======== ========= ======== 70
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) (c) Market risks (Continued) (i) Interest rate risks (continued) 31 December 2014 Up to 1 month Sh’000 1 – 3 months Sh’000 4 – 12 months Sh’000 1-5 years Sh’000 Over 5 years Sh’000 Non-interest bearing Sh’000 Total Sh’000 Total financial assets 38,085,222 8,961,840 1,179,910 437,240 3,807,702 5,670,236 58,142,150 Total financial liabilities (3,417,470) 4,277,319) (9,474,796) (6,108,907) - (26,967,613) (50,246,105) __________ __________ _________ _________ _________ __________ __________ Interest rate sensitivity gap 34,667,752 4,684,520 (8,294,886) (5,671,667) 3,807,702 (21,297,377) 7,896,045 ========= ========= ======== ======== ======== ========= ========= (ii) Currency Risk The group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions which are monitored daily. USD GBP EURO TOTAL As at 31 December 2015 Sh’000 Sh’000 Sh’000 Sh’000 Financial assets Deposits and balances due from banking institutions 310,724 30,342 43,383 384,449 ======= ====== ====== ======= As at 31 December 2014 Financial assets Deposits and balances due from banking institutions 14,840 92,071 49,512 156,423 ________ _______ _______ ________ Financial liabilities Borrowings (381,976) - - (381,976) ________ _______ _______ ________ Sensitivity gap (367,136) 92,071 49,512 (225,553) ======= ====== ====== ======= Market Risks - Sensitivity Analysis A principal part of the group’s management of market risk is to monitor the sensitivity of projected net interest income under varying interest rate scenarios (simulation modelling) and the sensitivity of future earnings and capital to varying foreign exchange rates. Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The group aims, through its management of market risk, to mitigate the impact of prospective interest rate movements and foreign exchange fluctuations which could reduce future earnings and capital. For simulation modelling, the group uses a combination of scenarios relevant to local businesses and local markets. These scenarios are used to illustrate the effect on the group’s earnings and capital. 71
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Annual REPORT

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