Pillar 3 Disclosures - Industrial and Commercial Bank of...

ICBC (London) plc

Pillar 3 Disclosures

31 December 2015

Contents

1. Overview ...................................................................................................................................... 1 1.1 Background ............................................................................................................................... 1 1.2 Regulatory requirements for Pillar 3 disclosures ...................................................................... 1 1.3 Scope of disclosure requirements .............................................................................................. 1

1.3.1 Disclosure policy ........................................................................................................... 2 1.4 Non-materiality, proprietary or confidential information ......................................................... 2 1.5 Scope of application .................................................................................................................. 2 1.6 Basis and frequency of disclosure ............................................................................................. 2 1.7 Means of disclosure and verification......................................................................................... 3 2. Governance & risk management framework ................................................................................ 3 2.1 Governance – board and committees ........................................................................................ 3 2.2 Risk management ...................................................................................................................... 5

2.2.1 Risk governance ............................................................................................................ 5 2.2.2 The Three Lines of Defence Model .............................................................................. 6 2.2.3 Risk Policy and Procedure ............................................................................................ 7

3. Capital Resources ......................................................................................................................... 7 3.1 Background ............................................................................................................................... 7 3.2 Own Funds ................................................................................................................................ 7 4. Capital requirements ................................................................................................................... 10 5. Unencumbered assets ................................................................................................................. 11 6. Credit risk ................................................................................................................................... 12 6.1 Credit risk management objectives and policies ..................................................................... 12 6.2 Strategies and processes to manage credit risk ....................................................................... 13 6.3 Structure and organisation of credit risk function ................................................................... 13 6.4 Measurement and reporting of credit risk ............................................................................... 14 6.5 Policies, strategies and processes for hedging, mitigating and monitoring credit risk ............ 15 6.6 Risk Statement for credit risk .................................................................................................. 16 7. Use of external credit assessment institutions ............................................................................ 16 8. Exposure to Counterparty Credit Risk (‘CCR’) ......................................................................... 20 9. Credit risk adjustments ............................................................................................................... 21 9.1 Specific impairment and collective and provision .................................................................. 21 10. Exposure to market risk ........................................................................................................... 24 10.1 Objective and policy market risk management ................................................................... 24 10.2 Definition and source of market risk ................................................................................... 24 10.3 Measurement of market risk ................................................................................................ 24

10.3.1 Position risk ............................................................................................................. 24 10.3.2 Foreign exchange risk ............................................................................................. 24

10.4 Monitoring and management of market risk ....................................................................... 25 10.5 Risk statement for market risk ............................................................................................ 25 11. Operational risk ....................................................................................................................... 26 11.1 Approach for the assessment of own funds requirements for operational risk ................... 26 11.2 Objective and policy of operational risk management ........................................................ 26 11.3 Definition and source of operational risk ............................................................................ 26 11.4 Risk management and monitoring of operational risk ........................................................ 26 11.5 Risk statement for operational risk ...................................................................................... 27 12. Exposure to interest rate risk in the Banking Book ................................................................. 27 12.1 Objective and policy of interest rate risk management ....................................................... 27 12.2 Definition and source of interest rate risk ........................................................................... 27 12.3 Measurement and management of interest rate risk ............................................................ 27 12.4 Monitoring and mitigation of interest rate risk ................................................................... 28 12.5 Risk Statement for interest rate risk .................................................................................... 28 13. Other Risks .............................................................................................................................. 29

14. Remuneration .......................................................................................................................... 30 14.1 Overview ................................................................................................................................. 30 14.2 Decision-making process used for determining the Remuneration Policy ............................. 30 14.3 Information on link between pay and performance ............................................................. 31 14.4 Quantitative Information ..................................................................................................... 31

Pillar 3 Disclosures 2015 ICBC (London) plc

1 | P a g e

1. Overview

1.1 Background

ICBC (London) plc (‘the Bank’), formed in 2003, is a UK-registered bank (4552753) authorised by the Prudential Regulation Authority (‘PRA’) and regulated by the Financial Conduct Authority (‘FCA’) and the PRA. The Bank is a wholly-owned subsidiary of Industrial and Commercial Bank of China Limited (‘ICBC Ltd’ or ‘the Parent Bank’). The Bank is primarily a wholesale bank although it also offers a range of retail banking services to individuals and small businesses, particularly where there is a connection to China.

1.2 Regulatory requirements for Pillar 3 disclosures

The European Union implemented the Basel III framework through the new Capital Requirements Directive and Regulation (‘CRD IV’). Implementation of the Directive in the UK was by way of rules introduced by the PRA and the FCA and through the CRR from the European Banking Authority (‘EBA’) and became effective from 1 January 2014. The rules on disclosure requirements applicable to investment firms are known as Disclosure by Institutions - Part Eight of Capital Requirements Regulation (‘CRR’), Articles 431 to 455.

This framework replaced Basel II and introduced a revised definition of capital resources including additional capital and disclosure requirements.

The Basel framework comprises three complementary pillars, designed to promote market discipline by providing market participants with key information on a firm’s risk exposures and risk management processes:

� Pillar 1 – sets out the minimum capital requirements required to meet for credit, market and operational risk.

� Pillar 2 – requires firms and supervisors to take a view on whether a firm should hold additional capital against risks considered under Pillar 1.

� Pillar 3 – aims to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm’s capital, risk exposures, risk assessment process and hence the capital adequacy of the firm.

1.3 Scope of disclosure requirements

The disclosure set out in this report has been prepared by ICBC (London) plc in accordance with the requirements set out in Part Eight of Capital Requirements Regulation. The Bank’s policy is to meet all required Pillar 3 disclosure requirements as detailed in the CRR.

The regulatory capital ratios are based solely on ICBC (London) plc’s balance sheet and off-balance sheet items. Unless otherwise stated, all figures are in stated in thousands (‘000) of USD, which is the reporting currency of ICBC (London) plc. The reporting date is 31/12/2015, the Bank’s financial year-end.

The disclosures included in this document refer to the Bank’s overall risk management and its approach to assessing the adequacy of its capital and liquidity.


2 | P a g e

1.3.1 Disclosure policy

The Bank has adopted a formal policy, the Pillar 3 Disclosure Policy, to comply with the disclosure requirements as per Article 431 (3) of CRR and as relevant to the scale of the operations of ICBC (London) plc. This policy sets out the contents of the Pillar III Disclosure document, includes considerations of materiality, proprietary or confidentiality information, frequency of disclosure and verification.

The Bank reviews annually its policy and disclosures in conjunction with the preparation and publishing of its annual audited accounts. The latest version of this policy was approved by the Board on 21/04/2016.

1.4 Non-materiality, proprietary or confidential information

The Bank does not seek any exemption from disclosure on the basis of materiality or on the basis of proprietary or confidential information.

1.5 Scope of application

ICBC (London) plc has no subsidiaries. Industrial and Commercial Bank of China Limited was granted a banking license to establish a branch in London in September 2014 (‘ICBC London Branch’ or ‘the Branch’). The information disclosed in this document is solely related to ICBC (London) plc (‘the Subsidiary’). Therefore, the Branch is outside of scope of this document. However, all transactions between the Branch and the Subsidiary are at ‘arm’s length’.

1.6 Basis and frequency of disclosure

This Pillar 3 disclosure document has been approved by the Board on 21/04/2016, which has verified that it is consistent with formal policies adopted regarding its production and validation.

Information in this report has been prepared solely to:

� Meet the disclosure requirements under CRD IV

� Disclose specific information about capital and other risks

� Provide details about the management of those risks

� And for no other purpose

These disclosures do not constitute any form of financial statement on the business nor do they constitute any form of contemporary or forward-looking record or opinion about the business. Unless indicated otherwise, information contained within this document has not been subject to external audit and there is no difference in information disclosed between this report and the Annual Report and Financial Statements. This disclosure document should be read in conjunction with the ICBC (London) plc Annual Report and Financial Statements for the year ended 31/12/2015.

Disclosure will be made annually and published as soon as practicable after publication of the Annual Report. ICBC (London) plc will reassess the frequency of disclosure in light of any material change in approach used for the calculation of capital, business structure or regulatory requirements.


3 | P a g e

1.7 Means of disclosure and verification

The Bank’s Pillar 3 Disclosures document has been reviewed by the Board of Directors and approved on 21/04/2016 and is published on the Bank’s corporate website (www.icbclondon.com). These disclosures explain how the Board has calculated its capital requirements and provide information relating to risk management.

2. Governance & risk management framework

2.1 Governance – board and committees

The Board of Directors have established a number of Board-level committees including an Audit Committee, a Governance and Compliance Committee, and a Risk Committee to ensure a very strong focus on risk in the Bank.

The Board has ultimate responsibility for setting the Bank’s strategy, risk appetite and control framework, and measures performance against targets. It normally meets a minimum of four times a year. The Board is also responsible for discharging the Bank’s responsibilities under the Remuneration Code; approving the appointment of senior executives; and agreeing authority levels and the delegation of authority. To assist it in discharging these responsibilities, the Board has instituted the high-level committees mentioned above, governed by clear terms of reference.

In addition, controls are regularly tested by Internal Audit, Risk & ALM (‘Asset Liability Management’), Compliance & Legal and Credit Management departments. These departments’ reports are presented to the Board-level committees.

The Bank’s governance policies are set by the Board and implemented by the management team. The chart below illustrates the Organisation structure of the Bank.

Chart 1 – Management


4 | P a g e

Audit Committee – Chaired by an Independent Non-Executive Director. Members of this Committee comprise of Non-Executive directors. The Executive Directors, other Senior Management, the Head of Financial Control and the Head of Compliance & Legal are invited to attend as observers. The Head of Internal Audit is secretary to the Committee. The Committee, which normally meets a minimum of four times a year, is responsible for the effectiveness of financial reporting and review of financial statements. The committee also considers the nature and scope of audit reviews and the effectiveness of the systems of internal control and risk management arising. The Bank’s external auditors normally attend Audit Committee meetings.

Governance and Compliance Committee – Chaired by a Non-Executive Director. Members of this Committee comprise of Non-Executive Directors, the CEO and the Deputy CEO. The Senior Manager for Risk oversight and the Head of Internal Audit attend as observers. The Head of Compliance & Legal is secretary to the Committee. It normally meets four times a year and is responsible for examining all aspects of governance and compliance matters in the Bank, i.e. ensuring clarity of the relationship between the UK Subsidiary and the UK Branch and reviewing the organisation structure to ensure it remains fit for purpose. This committee also monitors the mix of staff, particularly at management level, between expatriate and locally recruited staff.

Risk Committee – Chaired by an Independent Non-Executive Director. Members of this Committee comprise of Non-Executive Directors, the CEO and the Senior Manager responsible for Risk & ALM. Other Senior Management and some Heads of Departments are invited to attend as observers. The Head of Risk & ALM is secretary to the Committee. It normally meets four times a year and is responsible for advising the Board on risk management and making recommendations where action or improvement is required. This committee also reviews and makes recommendations on: regulatory, financial, operational and legal risks, other risks such as concentration risk, strategic risk, political risk, key person risk and reputational risk.

At the Executive level there are four major committees concerned with risk management issues: Executive Committee, Asset and Liability Committee, Credit Committee and the Financial Crime Risk Committee.

Executive Committee – Chaired by the CEO, this Committee comprises the Senior Management and is responsible for the development and implementation of strategy, operational plans, procedures and budgets. This committee also assumes overall responsibility for the functions of emergency planning and disaster recovery in the Bank. Department heads are also invited to join discussions when relevant. The Committee meets monthly.

Asset and Liability Management Committee – Chaired by the Senior Manager for Treasury, this committee comprises the all Senior Management, the Head of Risk & ALM, the Head of Financial Control, the Deputy Head of Corporate Banking Department and the Head of Treasury. The Asset and Liability Committee is set at the executive management level to serve the purpose of assisting the executive management with the oversight and management of the Bank’s assets and liabilities; to ensure that business lines are aligned to the Bank’s overall objectives; and to ensure that all ALM-related risks remain within the risk appetite set by the Board. The Committee meets quarterly; a sub-committee meets monthly.

Credit Committee – Chaired by the Senior Manager responsible for Credit Management, this Committee comprises Senior Management, the Head of Risk & ALM, the Head of Treasury, the Head of Credit Management and the Deputy Heads of Corporate Banking. The


5 | P a g e

CEO is not a member of Credit Committee, but can, as an Authorised Approver, exercise a veto over Committee decisions. However, if a credit proposal is declined by the Committee, the CEO cannot change that decision. The Committee is the principal forum below Board level for discussing lending proposals. Currently, all credit limits must be supported by Credit Committee. The Committee also makes recommendations on credit policy issues, monitors loan quality, asset mix, possible concentration risk and makes recommendations on provisions for doubtful loans. The Head of Credit Management is secretary to the Committee but may delegate to a suitably-qualified member of his team. The Committee meets weekly.

Financial Crime Risk Committee - Chaired by the CEO, this committee comprises the Deputy CEO, the Senior Manager responsible for Risk & ALM and Compliance & Legal, the Senior Management of the front offices, the Head of Compliance & Legal and the Money Laundering Reporting Officer (‘MLRO’). This committee is responsible for reviewing financial crime issues including Anti-Money Laundering (AML) risk, Counter Terrorist-Financing (CTF) risk, fraud and sanctions risk. It also reviews business-critical CDD, AML and CTF issues and assesses the Bank’s risk appetite in respect of AML, Sanctions, Fraud and Bribery. The Committee meets at least quarterly.

The Bank has an independent internal audit function with a reporting line to the Chairman of the Audit Committee. Internal Audit Department is responsible for carrying out a risk-based programme of work to ensure that appropriate controls are in place and working effectively in accordance with the Bank’s policies and with local regulations. The Audit Committee and the parent bank approve an annual audit plan and receive regular reports on audit work.

On a cyclical basis, Internal Auditors from the Parent Bank undertake full or partial scope audits of the Bank.

2.2 Risk management

Since its inception in 2003, the Bank has maintained a strong risk management culture. It has well-documented procedures; a range of committees to ensure that at least ‘four eyes’ are involved in all major policy and operating decisions; clear decision-making processes and criteria; an appropriate degree of segregation of duties in the Bank’s operations; and produces accurate and timely management information.

2.2.1 Risk governance

Every member of staff has some responsibility for risk management:

Board and Senior Management

The Board is responsible for overseeing Senior Management and for establishing sound business practices and strategic plans, setting risk appetite and risk tolerance. The Board has the ultimate responsibility for Enterprise-Wide Risk Management.

The Board, or a Board-level Committee, approves:

� Strategies, policies, processes and systems relating to the management of Enterprise-Wide risk.

The Board, or a Board-level Committee, reviews regularly (and not less frequently than annually):

� Risk reports;

� Assumptions, scenarios and the results of stress testing.


6 | P a g e

A number of committees have been established to oversee and control risk as detailed in the previous section.

The Executive Directors have a full understanding of their areas of responsibility and an adequate understanding of those areas of business undertaken by the Bank for which they are not directly accountable.

Senior Management is responsible for:

� Development and implementation of Enterprise-Wide Risk Management strategy in accordance with the Bank’s risk tolerance;

� Determining the structure, responsibilities and controls for managing risk;

� Communicating the risk strategy, key policies for implementing the strategy and the risk management structure throughout the Bank;

� Closely monitoring current trends and potential market developments that may present significant, unprecedented and complex challenges for managing risk, so that they can make appropriate and timely changes to the risk strategy as needed;

� Defining the specific procedures and approvals necessary for exceptions to policies and limits, including the escalation procedures and follow-up actions to be taken for breaches of limits.

2.2.2 The Three Lines of Defence Model

The Bank has adopted the Three Lines of Defence Model to enhance the understanding of risk management and control by clarifying roles and duties. Its underlying premise is that, under the oversight and direction of Senior Management and the Board of Directors, three separate groups within the Bank are necessary for effective management of risk and control. The responsibilities of each of the Lines are:

� The First Line of Defence lies with the business and process owners whose activities create and/or manage the risks that can facilitate or prevent the Bank’s objectives from being achieved. This includes taking appropriate risks. The First Line owns the risk, and the design and execution of the organisation’s controls to respond to those risks.

� The Second Line is put in place to support management by bringing expertise, process excellence, and management monitoring alongside the First Line, to help ensure that risks and controls are effectively managed.

The Bank has established independent risk management functions (Risk & ALM Department, Credit Management Department, Compliance & Legal Department) under the direct responsibility of the Senior Management. These departments in the Second Line of Defence help to build a risk awareness culture in the organisation by keeping up-to-date with current risk management theory and practice and disseminating information through the organisation. The Second Line of Defence functions report on these matters to the Risk Committee with a frequency agreed by the Committee. All Second Line functions report to the Senior Manager for Risk oversight independently of the First Line of Defence.

� The Third Line provides assurance to Senior Management and the Board over both the First and Second Lines’ efforts consistent with the expectations of the Board of Directors and Senior Management. This is provided by the Internal Audit function. The Internal Audit function is responsible, inter alia, for providing independent assessment and assurance that key controls and governance processes are functioning effectively and are appropriate to monitor, manage and mitigate the risks inherent in the business.


7 | P a g e

2.2.3 Risk Policy and Procedure

The Bank’s overall risk policy is commensurate with its business strategy, budget and financial conditions. It is regularly reassessed and revised to ensure that it remains appropriate.

The Bank adopts a cautious and prudent approach to the management of risk and, at all times, seeks to eliminate unnecessary risks and minimise losses from avoidable risks. In adopting this approach to the management of risk, the Bank also considers the costs involved and seeks to minimise risk in a cost-effective manner.

3. Capital Resources

3.1 Background

The initial capital of ICBC (London) plc was $100 million when it was formed in 2003. This Tier 1 capital was increased to $200 million in October 2007. On 28/10/2013, a contract for a 10-year subordinated loan was signed between ICBC Ltd and the Bank. This replaced the previous 5-year subordinated loan with ICBC Ltd from 22/2/2010, which had the same notional value of $100 million.

3.2 Own Funds

Throughout 2015, the Bank complied fully with the Capital Requirements set out by the regulators. The Bank’s capital as of 31/12/2015 is follows:

Table 1 – Own Funds Units in ‘000 USD

*The subordinated loan of $100 million qualifies as lower Tier 2 capital and is subject to amortisation on a straight line basis from 2018.

Particular 2015 2014

Paid up capital 200,000 200,000 Retained earnings 156,551 121,620 Available for Sale Reserve 724 831 Common Equity Tier 1 Capital 357,275 322,451 Regulatory Adjustment - -

Common Equity Tier 1 Capital 357,275 322,451 Additional Tier 1 Capital - -

Tier 1 Capital 357,275 322,451 Subordinated Debt* 100,000 100,000

Collective Loan Impairment 2,079 3,000

Tier 2 Capital 102,079 103,000

Total Capital 459,354 425,451

Total Risk Weighted Assets 1,953,629 2,387,347

Capital Ratio

Common Equity Tier 1 Ratio (%) 18.29% 13.51%

Tier 1 Capital Ratio (%) 18.29% 13.51%

Total Capital Ratio (%) 23.51% 17.82%


8 | P a g e

Table 2 – Reconciliation between Regulatory Own Fund and Audited Financial Statements as of 31/12/2015 Units in ‘000 USD

Particular Audited Financial Statements

Regulatory Own Fund

Regulatory Adjustment

Paid up capital 200,000 200,000 - Retained earnings 156,551 156,551 - Available for Sale Reserve 724 724 -

Common Equity Tier 1 Capital 357,275 357,275 - Tier 1 Capital 357,275 357,275 - Subordinated Debt 100,000 100,000 Collective Loan Impairment 2,079 2,079

Tier 2 Capital 102,079 102,079 - Total Capital 459,354 459,354 -

The main features of the capital instruments included in ICBC London plc's own funds are also required to be disclosed in accordance with a template prescribed by the European Banking Authority (‘EBA’) – see Table 3 below.

Table 3 – Capital Instrument Main Features

1 Issuer ICBC (London) plc ICBC (London) plc

2 Unique identifier N/A N/A

3 Governing law(s) of the instrument English English

Regulatory treatment

4 Transitional CRR Rules Tier 1 Tier 2

5 Post- Transitional CRR Rules Tier 1 Tier 2

6 Eligible at solo/(sub-) consolidated/ solo and (sub-) consolidated

Solo Solo

7 Instrument type Share Capital Subordinated debt

8 Amount recognized in regulatory capital USD 200,000,000 USD 100,000,000

9 Nominal amount of instrument USD 200,000,000 USD 100,000,000

9a Issue price 1 USD 100,000,000

9b Redemption price 1 USD 100,000,000

10 Accounting classification Equity Liability- Amortized

cost

11 Original date of issuance* 19/05/2003 and

01/10/2007 28/10/2013

12 Perpetual or dated N/A 27/10/2023

13 Original maturity date N/A 27/10/2023

14 Issuer call subject to prior supervisory approval No No

15 Optional call date, contingent call dates and redemption amount

N/A N/A

16 Subsequent call dates, if applicable N/A N/A

coupons/dividend

17 Fixed or floating coupon N/A Floating

18 Coupon rate and any related index N/A Libor + 1.3 %


9 | P a g e

19 Existence of dividend stopper No No

20a Fully discretionary, partially discretionary or mandatory (in terms of timing)

Fully Discretionary Mandatory

20b Fully discretionary, partially discretionary or mandatory (in terms of amount)

Fully Discretionary Mandatory

21 Existence of step up or other incentive to redeem No No

22 Noncumulative or cumulative N/A N/A

23 Convertible or non-convertible N/A Non- Convertible

30 write-down features No No

35 Position in subordination hierarchy in Liquidation ( specify instrument type immediately senior to instrument)

N/A N/A

36 Non-compliant transitioned features N/A N/A

37 If yes, specify non-compliant features N/A N/A

*The bank issued USD 100 million Common Shares at each time.

A detailed summary of own funds is required to be disclosed using an EBA-specified template. Annex VI of the Commission Implementing Regulation 1423/2013 provides the relevant format during the transitional period – see Table 4 below.

Table 4 – Transitional Own Fund Disclosure

Units in ‘000 USD

Particular Amount at Disclosure

Date

Transitional Adjustment

End Point CRD IV

Common Equity Tier 1 (CET1) capital: Instruments and reserves - - -

Capital Instruments and the related share premium accounts 200,000 - 200,000

of which: Instrument Type 1 - - -

Retained Earning 156,551 - 156,551

Available for Sale Reserve 724 - 724

Common Equity Tier 1 (CET1) capital before regulatory adjustment

357,275 - 357,275

Common Equity Tier 1 Capital: Regulatory Adjustment - - -

Common Equity Tier 1 (CET1) capital 357,275 - 357,275

Additional Tier 1 Capital: Instruments - - -

Tier 1 Capital

357,275 - 357,275

Tier 2 Capital: Instruments and provisions - - -

Capital Instruments and the related share premium accounts 100,000 - 100,000

Collective Loan Impairment 2,079 - 2,079

Tier 2 Capital 102,079 - 102,079

Total Capital ( Tier 1 + Tier 2 ) 459,354 - 459,354

Total Risk Weighted Assets 1,953,629 - 1,953,629

Capital Ratios and Buffers -

Common Equity Tier 1 Ratio (%) 18.29% - 18. 29%

Tier 1 Capital Ratio (%) 18.29% - 18.29%

Total Capital Ratio (%) 23.51% - 23.51%


10 | P a g e

4. Capital requirements

The Board of Directors has the ultimate responsibility for capital management. Responsibility for oversight on a day-to-day basis has been delegated to the CEO who has, in turn, delegated responsibility for the management, review and reporting of capital management to the Deputy General Manager (‘DGM’) for Financial Control. The use of the Bank’s capital to support current and future activities is monitored on a continuous basis through management information produced by Financial Control and sent to the senior management team and reported at Executive Committee when major decisions are taken.

The Bank has adopted the Standardised Approach to credit and market risk and the Basic Indicator Approach (‘BIA’) to operational risk in order to calculate the Pillar 1 capital requirement.

The Bank produces an Internal Capital Adequacy Assessment Process document (‘ICAAP’) annually, based upon the year-end results. The ICAAP includes an assessment of the Bank’s capital needs based upon the minimum regulatory requirements and additional capital charges that the Bank deems prudent to include. These additional capital charges take account of factors such as: the current quality of the credit book; the risks associated with any concentrations in particular geographical areas or industry sectors; risks identified from stress testing and scenario analysis, particularly in the area of treasury products; risks associated with the Bank’s view of how potential economic changes might affect the banking industry or its customers; and capital charges for planned new business projects.

The process also includes an analysis of the Pillar 2 capital that would be required under both stressed and unstressed conditions and includes appropriate ‘add-ons’ to required capital to reflect Pillar 2 risks.

The minimum amount of regulatory capital required is determined in accordance with the relevant rules and the Individual Capital Guidance (‘ICG’) received from the PRA.

The minimum capital requirement (8%) for the Bank under the Standardised Approach as at 31/12/2015 is as follows:


11 | P a g e

Table 5 – Minimum Capital Requirements (Pillar 1) Units in ‘000 USD

Exposure class

2015 2014

Risk-weighted assets USD

Minimum Capital

Requirement (8%)

Risk-weighted

assets USD

Minimum Capital

Requirement (8%)

Credit Risk

Central governments or central banks - - - -

Multilateral Development Banks (MDBs) - - - -

Institutions 165,754 13,260 145,132 11,611

Corporates 1,368,873 109,510 1,463,504 117,080 Secured by Mortgage on immovable properties

110,775 8,862 71,650 5,732

Exposure at Default 27,000 2,160 7,500 600

Institutions and corporates with a short-term credit assessment

83,975 6,718 577,253 46,180

Other Items 55,278 4,422 - -

Total Credit Risk 1,811,655 144,932 2,265,039 181,203

Operational Risk 107,701 8,616 93,946 7,516

Market risk (Position Risk) 90 7 72 6

Credit Valuation Adjustment 34,183 2,735 28,290 2,263

Grand Total 1,953,629 156,290 2,387,347 190,988

Total Capital Resources - 459,354 - 425,451 Headroom over Minimum capital requirement

- 303,063 - 234,463

It is the Bank’s policy to maintain a degree of headroom above the minimum required capital level.

5. Unencumbered assets

Asset encumbrance is the process whereby assets are pledged as collateral in order to secure funding or credit-enhance a financial transaction from which they cannot be freely withdrawn. The Bank undertakes certain financial transactions such as repurchase agreements and derivatives that result in certain assets being encumbered.

The Bank is not required to report on Template B collateral received as per the threshold criteria under PRA supervisory statement SS11/14 (CRD IV: Compliance with the European Banking Authority’s Guidelines on the disclosure of encumbered and unencumbered assets). Moreover, the data is presented as a median calculation for 2015 rather than point in time (31/12/2015) according to the regulation.


12 | P a g e

Table 6 – Assets (template A) Units in ‘000 USD

Carrying amount of

encumbered assets

Fair value of encumbered

assets

Carrying amount of

unencumbered assets

Fair value of unencumbered

assets

010 040 060 090

010 Assets of the reporting institution

- - 3,363,027 -

030 Equity instruments - - -

040 Debt securities - - 493,465 493,465

120 Other assets - - 76,696 -

Table 7 – Encumbered assets/collateral received and associated liabilities (template C) Units in ‘000 USD

Matching liabilities,

contingent liabilities or securities lent

Assets, collateral received and own debt securities

issued other than covered bonds and ABSs

encumbered 010 030

010 Carrying amount of selected

financial liabilities - -

These asset encumbrance disclosures are prepared on a regulatory basis and as such will differ to the asset encumbrance disclosures presented in the Annual Report and Accounts.

As at 31/12/2015, none of the Bank’s assets were encumbered.

6. Credit risk

6.1 Credit risk management objectives and policies

Credit risk exposes the Bank to losses caused by financial or other problems experienced by its clients. Credit risk is defined as the risk arising from an obligor’s (typically a company, financial institution or issuer of financial instrument) failure to meet the terms of any agreement and obligations. Credit risk arises when funds are extended, committed, invested or otherwise exposed through contractual agreements, whether reflected on-or off-balance sheet. Credit and counterparty risk arises primarily from three types of transactions:

� Lending transactions through loans and advances to clients and counterparties creates the risk that an obligor will be unable or unwilling to repay capital and/or interest on loans and advances granted to them. This category also includes bank placements, where funds have been placed with other financial institutions.

� Issuer risk on financial instruments where payments due from the issuer of a financial instrument will not be received.

� Trading transactions, giving rise to settlement risk.


13 | P a g e

ICBC (London) plc places great emphasis on credit risk management and recognises it as a key risk in the operation of the Bank. Default triggers a total or partial loss of money lent to a counterparty and the main objective is avoid and minimise such losses. The Bank has put in place procedures, detailed in the Credit Policy, Credit Manual and elsewhere, to manage and strengthen credit risk management.

6.2 Strategies and processes to manage credit risk

The Bank has a clear strategy of its target markets. Although Europe and China are its two main markets, the Bank periodically accepts credit exposures in other geographical locations such as North America (USA) and Africa, in line with the Parent Bank’s cross border lending policy and procedures. The cross border policy and procedures ensure that there is mutual and close cooperation between the domestic unit of ICBC where the borrower is located and the overseas unit of ICBC taking credit exposures on the borrower located in that jurisdiction.

Counterparty credit risk is assessed using quantitative and qualitative analysis, as articulated in the Bank’s Credit Policy, Credit Manual and other documents. The assessment of the clients’ profiles includes consideration of their character and integrity, core competencies, track record and financial strength. A strong emphasis is placed on the historic and on-going stability of income and cash flow streams generated by the clients. The Bank’s primary assessment method is therefore the ability of the client to meet their payment obligations.

The Bank is exposed to credit risk in its on and off-balance sheet activities and daily settlements. The Bank manages credit risk by establishing individual counterparty limits, industry sector limits and country limits for counterparties with which it undertakes business within the terms of the Bank’s credit policies and procedures. A credit analysis is performed on all new and existing counterparties and related credit exposures to assess the counterparty’s ability to repay and meet its obligations. These analyses are undertaken by Credit Analysts within Credit Management Department.

The Bank also uses and relies on External Credit Assessment Institutions (‘ECAIs’) of two credit rating agencies, namely Standard & Poor’s (‘S & P’) and Fitch in the exercise of evaluating credit risk and building counterparty risk profiles of all exposure classes.

The Bank also employs the Parent Bank’s internal rating system, located within the Global Credit Management System (‘GCMS’), to grade entities that are not rated by the external credit agencies and to facilitate monitoring of asset quality at portfolio as well as counterparty level. The rating model focuses mainly on quantitative data and financial ratios and a rating is assigned based on ICBC Group methodology.

6.3 Structure and organisation of credit risk function

The Relationship Managers (Corporate Banking and Institutional Banking Departments) and Traders (Treasury Department) are the originators of deals and transactions, which are then examined and assessed independently by the Credit Analysts. After evaluation and assessment of risks, the Credit Analysts make their recommendations and present the credit applications to the Credit Committee for consideration and approval. Relationship Managers and traders operate within these limits. The Board of Directors and Senior Management of the Bank are ultimately responsible for credit risk and overall risk management.

Approvals are granted according to the Annual Operation and Management Authorisation and Credit Policy of the Bank, with a documented hierarchy. Credit approval authority is


14 | P a g e

delegated under the Annual Operation and Management policy document to Authorised Approvers, supported by the Credit Committee.

The Bank also undertakes annual reviews of loans and assets in the bond portfolio to monitor and assess the quality of the overall portfolio. Asset quality of overall portfolio is monitored and the results of the analysis are reviewed by the Credit Committee and Risk Committee on a quarterly basis.

It is the Bank’s policy and practice that credit limits for counterparties are reviewed at least annually and limits are then approved by the Credit Committee and Authorised Approvers.

Post-lending management: Monitoring of credit exposures against approved limits for counterparties, industries and countries on a regular basis is a key function of post-lending management to maintain a healthy loan portfolio. Requests for waivers and amendments of existing credit facilities, where it is judged that their approval will result in higher credit risk than when the deal was originally sanctioned, are submitted to Credit Committee and Authorised Approvers. The Bank documents and maintains a record either in forms of credit proposals or memoranda of all counterparties for whom forbearance is applied, and material waiver requests are taken into account in the categorisation of asset quality. Financial covenants are monitored by Credit Analysts to ensure compliance.

6.4 Measurement and reporting of credit risk

The asset book comprises mainly syndicated and bilateral loans to corporates and banks. There is also an active portfolio of trade finance deals, normally of short tenor, involving discounting and re-financing of letters of credit issued by banks in emerging-market as well as developed countries. The Bank also undertakes structured commodity trade finance for selected counterparties. Commercial real estate in the UK is a new area for lending activities that are collateralised by property. Commercial real estate loan transactions are supported by first legal mortgages or charges over property. The following characteristics of the property are considered: the type of property, its location, tenant mix, sponsor and the ease with which the property could be re-let and/or re-sold. Commercial real estate lending generally takes the form of good quality property often underpinned by strong third party leases. However, the primary consideration in all cases is debt serviceability. The Bank’s exposure to the property market is well diversified, with a strong bias towards prime locations and focus on quality of tenants for commercial assets. The loan-to-value ratio, interest cover ratio and debt service ratio are key parameters set to assess risks in commercial real estate lending. All of the Bank’s commercial real estate transactions are located in the UK and, notwithstanding the improved UK market, particularly in London, the Bank’s underwriting criteria in this sector have remained tight.

The Bank issues guarantees and stand-by letters of credit from time-to-time, where the counterparty in the UK or Europe has business in China. The Bank adds its confirmation to letters of credit and undertakes participation risks, on a funded or unfunded basis, in relation to trade finance transactions. The Bank also invests in high quality liquid assets financial instruments primarily for management of liquidity. The Bank has a small number of MiFID investment products; these are predominantly OTC derivatives including FX and Interest Rate Swaps (‘IRS’).

Credit limits are established for all transactions which give rise to credit risk. In case of loans and advances, the amount at risk is the maximum exposure less any collateral and realisable assets in the event of default. In the case of bond investment, the exposure at risk is the maximum amount of the debt related to issuer risk of the financial instrument where


15 | P a g e

payments due from the issuer will not be received in the event of default. Financial instruments are marked to market and any impairment or gains are adjusted through profit and loss account, categorised as ‘financial instruments available for sale’.

Table 8 below shows the gross credit risk exposures (before credit risk mitigation or ‘CRM’) on 31/12/2015 and the average exposures during 2015.

Table 8 –Gross and Average Exposures by Exposure Class Units in ‘000 USD

Exposure class Average Gross

Exposure

Gross exposure (before CRM)

Central governments or central banks 296,741 284,497 Multilateral Development Banks 211,305 224,418 Institutions 754,058 1,208,846 Corporates 2,103,461 2,083,762 Secured by Mortgage on immovable properties 90,730 110,775 Exposure at Default 15,400 18,000 Institutions and corporates with a short-term credit assessment 963,359 188,081 Retail 23 22 Other Items 44,565 55,475 Total 4,479,642 4,173,877

6.5 Policies, strategies and processes for hedging, mitigating and monitoring

credit risk

ICBC (London) plc considers credit risk mitigation techniques as part of the credit assessment of a potential client or business proposal and not as a separate consideration of mitigation of risk. Credit risk mitigants include any collateral item over which the Bank has a pledge of security first legal charges over property, netting agreements, cash, or terms and conditions imposed on a borrower with the aim of reducing the credit risk inherent to that transaction.

The Bank has adopted a number of techniques to mitigate credit risk. The Bank takes collateral whenever the need arises. It is a requirement that valuation of collateral is updated on a regular basis and more so when the credit risk of counterparty starts to deteriorate. The types of credit risk mitigation in the Bank’s books are listed below.

� Cash collateral: this type of collateral and risk mitigation is insignificant in the Bank’s loan portfolio.

� Netting Agreement: ICBC (London) plc has entered into a netting agreement (‘Netting Agreement’) with its Parent Bank in Beijing and a number of other ICBC Group entities. The primary purpose of the Netting Agreement is to reduce our large exposure to the ICBC Group. The largest credit risk mitigation in the Bank’s portfolio is the Netting Agreement covering exposures to ICBC entities (ICBC Group) that have formally acceded to the Agreement, enabling those exposures to be offset by deposits and funds received from ICBC Group and placed with ICBC (London) plc. In the event of default or termination event, the credit exposures can be netted off against the funds in the Bank’s books. In summary, the Netting Agreement ensures that the Bank’s net exposure to ICBC Group is maintained within the regulatory large exposure threshold.


16 | P a g e

� Risk Participation Agreements: the Bank uses industry standard Risk Participation Agreements to mitigate credit risk. Some of the risk participation agreements are either on funded or unfunded basis.

� Guarantees and stand-by letters of credit: The Bank also participates in lending activities against the support and collateral of guarantees and stand-by letters of credit. In such cases the Bank regards its credit risk as being to those guarantee providers rather than the underlying borrower. The Bank uses strong investment-grade guarantors, including corporates and international financial organisations rated A or above (i.e. Moody’s: A1/A2/A3, Standard & Poor’s: A+/A/A-). The Bank also uses guarantees from strong and reputable insurance companies to support credit facilities extended to corporate clients.

� Lending collateralised by property: The Bank’s commercial real estate lending in UK is collateralised by mortgages or charges over the property. Other considerations such as the loan-to-value ratio, debt service ratio and interest cover ratio, as set out in the Bank’s policy and guidelines for this sector, are taken into account.

� In the Bank’s commodity and structured trade finance portfolio, some of the loan transactions are collateralised by assignment of inventory and receivables and cash paid into collection account by the borrowers are pledged to the agent bank in syndicated loan transactions on behalf of all participating banks.

� Covenants: Mitigation also takes the form of covenants such as compliance with certain key financial ratios and linkage to credit downgrades or other performance obligations embedded into loan documentation.

6.6 Risk Statement for credit risk

The Bank’s credit risk profile is deemed to be low-to-medium. Credit risks are prudent, manageable and under control, in line with Risk Appetite Policy and key indicators such as the NPL (Non-Performing Loan) ratio and the counterparty ratings floor level, as well as various credit policies, procedures in place governing the whole credit lending process. The Bank is prepared to accept low-to-medium risk in order to enhance returns. The Bank’s growth strategy is moderate with higher long term returns, as opposed to an aggressive approach. Generally we take a conservative approach to credit risk management. With regard to credit risk profile and strategy, the Bank concludes that its credit risk management systems and controls put in place are adequate.

7. Use of external credit assessment institutions

The Bank uses the following external credit assessment institutions (‘ECAIs’) for credit risk and counterparty credit risk calculations purposes throughout the reporting period:

� Standard & Poor’s (‘S&P’)

� Fitch.

Table 9 below shows that the gross exposure amount as at 31/12/2015 subject to the use of ECAIs was $4,118 million. The exposures apply to on- and off-balance sheet items. In the case of off-balance sheet exposures, the Bank applies a Credit Conversion Factor (‘CCF’) as prescribed under CRD IV and using the Standardised Approach to credit risk.


17 | P a g e

Table 10 below shows exposures after credit risk mitigation. As at 31/12/2015, 32% are those counterparties with Credit Quality Steps 1 to 3. Credit Quality Steps (‘CQS’) 1-3 represent investment grades AAA to BBB- of S&P and Fitch. A substantial proportion of the Bank’s counterparties, mainly corporates and commercial real estate exposures, are unrated although asset quality is good. The Bank considers the asset quality of the unrated counterparties as good on the basis of their financial standing, credit profiles and low probability of default, underpinned by well-structured credit and identified source of repayment such as cash flow and liquidity. The assets must also be marketable, with no impairment or assets past due in this segment.

Table 9 – Exposure amounts subjected to the use of ECAIs Units in ‘000 USD

Exposure class Gross Exposure

Central governments or central banks

284,497

Multilateral Development Banks 224,418

Institutions 1,208,846

Corporates 2,083,762

Secured by Mortgage on immovable properties

110,775

Exposure at Default 18,000


188,081

Retail 22

Total 4,118,402

Table 10 – Exposures amounts by CQS Units in ‘000 USD

Credit Quality Step (CQS)

Gross Exposure

Exposure after CRM

1 405,782 405,782

2 606,911 435,923

3 293,699 258,110

4 326,765 298,671

5 46,201 37,598

6 46,201 37,598

Unrated 2,388,887 1,364,943

Total 4,118,402 2,832,719


18 | P a g e

Table 11 summarises loans and advances to banks and corporates and financial investments by geographical area.

The Bank manages concentration risk by counterparty, industry sector and country. The Bank has geographical risk concentration in Europe (which includes UK) and China (Asia & Pacific), reflecting its business focus and markets. North American exposures are mainly in the USA, the largest of which are US Treasury investments held as High Quality Liquid Assets (‘HQLA’).

The biggest single credit risk concentration within credit risk mitigation relates to the above-mentioned Netting Agreement with ICBC Group. The exposures in China under Asia & Pacific reflect the application of the Netting Agreement which reduces the large exposures.

Table 11 – Geographic Distribution by Exposure Class Units in ‘000 USD

Exposure class Asia and Pacific

Europe Middle

East North

America South

America Africa Total


- 31,072 - 253,425 - - 284,497

Multilateral Development Banks

- 15,002 34,806 89,582 - 85,029 224,418

Institutions 200,849 797,019 - 120,978 20,000 70,000 1,208,846

Corporates 160,220 1,591,384 - 157,248 12,500 162,410 2,083,762


- 110,775 - - - - 110,775

Exposure at Default

- 15,000 - 3,000 - - 18,000


17,104 170,977 - - - - 188,081

Retail - 22 - - - - 22

Other Items - 55,475 - - - - 55,475

Total 378,173 2,786,726 34,806 624,233 32,500 317,439 4,173,877


19 | P a g e

Table 12 summarises credit exposures by industry. For the reporting period of 2015, 29% of credit exposures relate to financial institutions, 9.9% to commodity trading companies and 7.7% to mining companies. Overall the asset portfolio reflects a good diversification of industries as the Bank lends across a broad range of industry segments.

Table 12 – Industry type by Exposure Class Units in ‘000 USD

Exposure class Industry Gross Exposure

Central governments or central banks Sovereign 284,497

Multilateral Development Banks 224,418

Institutions 1,208,846

Corporates Commodity Trading 412,515 Manufacturing Industry 146,513 Mining 321,049 Oil & Gas 115,499 Utilities 109,850 Food & Beverage 178,667 Wholesale & Retail 133,811 Shipping 60,000 Tobacco 40,000 Telecommunication 50,665 Transportation 12,225 Aircraft Financing 80,297 Others 422,672 Subtotal 2,083,762 Secured by Mortgage on immovable properties

110,775

Exposure at Default Mining 15,000 Oil & Gas 3,000 Subtotal 18,000 Institutions and corporates with a short-term credit assessment

Corporate 0

Institutions 188,081 Subtotal 188,081

Retail 22

Other Items 55,475

Total 4,173,877

Exposure at Default in the oil and gas and mining industries refers to two corporate loans with gross exposure of $30 million and specific impairment provision of $12 million made against the loans.


20 | P a g e

Maturity profile of loans

The Bank’s exposures on 31/12/2015 by maturity dates and time horizons are shown in Table 13 below.

Table 13 – Residual Maturity by Exposure Class Units in ‘000 USD

Exposure class 0-3 months 3 months –

1 year 1-5 years Over 5 years Total


284,497 - 284,497

Multilateral Development Banks 224,418 - 224,418

Institutions 785,405 423,441 1,208,846

Corporates 127,861 1,679,753 276,148 2,083,762


110,775 110,775

Exposure at Default 3,000 15,000 18,000


188,081 - - 188,081

Retail 22 - - 22

Other Items 55,475 - - 55,475

Total 246,578 913,266 2,737,885 276,148 4,173,877

8. Exposure to Counterparty Credit Risk (‘CCR’)

Derivative instruments are used to hedge exposures to interest rate risk in the Banking Book and foreign exchange risks (market risk). Counterparty credit risk is the risk that a counterparty to a derivative instrument could default prior to the maturity of the contract. Counterparty credit exposures are subject to credit limits on the same basis as other credit exposures. Counterparty credit exposure is measured using the CCR mark-to-market method.

The Bank has no wrong-way risk exposures.

Generally, collateral is not received or placed for derivative contracts. Where collateral is taken, this is done on a case-by-case basis. We have derivatives exposures on a corporate client and the entire exposures are collateralised by a guarantee from a highly-rated bank with external credit ratings of AA- by S&P and A+ by Fitch.

The Bank has not used credit default swaps as protection against asset quality deterioration.

The Bank has not taken advantage of any netting benefits under an ISDA Master Agreement1 (or similar) during the period. ICBC (London) plc itself does not have an external credit rating.

1 The ISDA Master Agreement permits the netting of payments due under the same transaction so that only a single amount is exchanged between the parties, rather than numerous payments involving the same transactions.


21 | P a g e

Table 14 – Counterparty Credit Risk for Derivative Contracts Units in ‘000 USD

Exposure Class Notional Value of Derivatives

Credit exposure

Collateral held

Net Derivatives Credit Exposure


Multilateral Development Banks

Institutions 936,330 74,679 74,679

Real Estate - - - -

Corporates 852,264 70,570 -4,800* 70,570

Covered Bonds - - - -

Total 1,788,594 145,248 - 145,248

*Note: The Bank holds as collateral a guarantee from a bank rated AA- by S&P and A+ by Fitch.

9. Credit risk adjustments

9.1 Specific impairment and collective and provision

Past Due but not impaired loans

Contractual payments of either principal or interest being past due up to 89 days are defined as past due but not impaired. Under this category, past due loans but not impaired as at 31/12/2015 were nil (2014: Nil).

Past due and impaired loans

According to the Bank’s Impairments Policy, a financial asset or group of assets is impaired and impairment losses are recognised only if there is objective evidence as a result of one or more events that occurred after the initial recognition of the assets. At each balance sheet date, the Bank assesses whether there is objective evidence of impairment in the books. If evidence exists, then we carry out a detailed impairment calculation to determine if an impairment loss should be recognised. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated cash flows discounted at the financial asset’s original effective interest rate.

Objective evidence of past due and impaired assets is based on main criteria summarised below:

� Significant financial difficulty of the issuer or obligor.

� Breach of contract such as clear evidence of event of default.


22 | P a g e

� Payments of either principal or interest exceeding 90 days or more have not been received.

� The issuer or obligor will enter bankruptcy proceedings.

� The primary sources of repayment are insufficient to service the remaining contractual principal and interest amounts, and the bank has to rely on secondary sources for repayment.

� The asset is no longer traded publicly or there is no market to trade the assets.

� Clear evidence of measurable data indicating that actual and future cash flow will be insufficient to service interest and principal.

The Bank’s accounting policy for determination of impairments is set out in Note 1 to the 2015 Financial Statements under ‘Impairment of financial assets’. A summary of the main provisions of the policy is set out below:

Loans and advances to banks and customers

For loans and advances to banks and customers carried at amortised cost, the Bank assesses individually and collectively whether there is objective evidence of impairment. For the purpose of collective evaluation of impairment, which is intended to reflect incurred losses that have not yet been specifically identified, financial assets may be grouped on the basis of similar credit risk characteristics (e.g. asset type, industry, geographical risk etc.) and should reflect global risk factors that are difficult to quantify.

Objective evidence of impairment may include loss events and other changes such as:

� Significant financial difficulty of the borrower or obligor.

� Breach of contractual obligations such as non-payment or partial payment of interest or principal.

� Higher probability that the borrower will enter administration, liquidation or other financial reorganisation.

� Shrinkage or disappearance of an active secondary market for that financial asset.

� For collectively-assessed assets, reduced estimates of future cash flows consistent with related observable data such as unemployment, property prices, international sanctions and any other factors indicating a higher probability of default. Changes in historical loss experience should also result in reassessment of collective impairments.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Profit and Loss Account. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank.

All impaired loans are reviewed for changes to the recoverable amount. If, in a subsequent year, the amount of estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is


23 | P a g e

increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the Profit and Loss Account.

The present value of the estimated cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

In 2014 the Bank raised $12 million of specific provisions for two individual impaired assets (in 2015 there were no new specific provisions). The Bank is taking appropriate remedial action in each case.

The collective impairment provision as at 31/12/2015 was $2.079 million (2014: $3.0 Million) which reflects the fact that losses, although not yet specifically identified, are known from experience to exist within the Bank’s portfolio.

Table 15 – Impairment Allowance Units in ‘000 USD

Financial investment

Loans and advances –

banks

Loans and advances – customers

Total

Balance at 01/01/2015 - 240 14,760 15,000

Charge to profit and loss account - - - -

Amounts reversed during the year - -240 -681 -921

Balance 31/12/2015 - - 14,079 14,079

Financial instruments available for sale

For financial instruments available for sale, the Bank assesses at each balance sheet date whether there is objective evidence that an instrument or a group of instruments is impaired.

Impairment is assessed based on the same criteria as financial assets carried at amortised cost. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset and is recorded as part of ‘interest receivable’. If, in a subsequent year, the fair value increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the Profit and Loss Account, the impairment loss is reversed through the Profit and Loss Account.

Impairment is assessed based on the same criteria as financial assets carried at amortised cost. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset and is recorded as part of ‘interest receivable’. If, in a subsequent year, the fair value increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the Profit and Loss Account, the impairment loss is reversed through the Profit and Loss Account.


24 | P a g e

10. Exposure to market risk

10.1 Objective and policy market risk management

The Bank’s objective of Market risk management is to maintain a low risk profile. The Bank has established and maintained Market Risk Management Policy which defined market risk management strategy, process, criteria, and arrangement. This policy has been communicated to all relevant department and staff, and saved in the Public folder.

10.2 Definition and source of market risk

Market risk is defined as the risk of losses arising from movements in market prices. The risks subject to the market risk measurement frameworks are:

� Interest rate risk, credit spread and default risk, equity risk, foreign exchange risk and commodities risk for covered instruments; and

� Foreign exchange risk and commodities risk for Banking Book instruments.

Currently the Bank does not undertake proprietary trading or market making. Trading Book exposures only result from client servicing through the following products: FX spot, FX forwards, FX swaps, and Interest Rate Swaps. In most cases, client servicing positions are back-to-back squared2.

FX Banking Book risk exposures mainly originate from positions on interest income, financial and tax expenses, and impairment provisions.

10.3 Measurement of market risk

10.3.1 Position risk

COREP C 18.00 (standardised approach for traded debt instruments) is used to measure position risk.

Table 16 below shows own funds requirement and total risk exposure amount as at 31/12/2015 for traded debt instruments (FX forward, FX swap and IRS) which is the evidence that the position risk faced by the Bank is quite small.

Table 16 – Position risk exposure Units in USD

Own funds requirements

Total risk exposure amount

7,215 90,181

10.3.2 Foreign exchange risk

Foreign currency exposure is used to measure foreign exchange risk on a daily basis. The foreign currency positions as at 31/12/2015 are shown below:

2 Back-to-back Squared – back-to-back hedged, i.e. fully offsetting a position to reduce the risk of adverse price movements in an asset


25 | P a g e

Table 17 – Foreign exchange exposure Units in USD

Foreign Exchange Exposure

Currency Exposure CHF 112,881 EUR -55,020 GBP -1,442,084 RMB 297,212 ZAR 290,937

Throughout 2015, the foreign currency exposure was within limits at all times. At the end of 2015, the total FX exposure (shorthand3) was negative $1.47 million. The largest individual currency exposure was GBP. The market risk capital requirement requires 8% of FX exposure; therefore the foreign currency PRR was $118,000 as at 31/12/2015.

Table 18 – FX Sensitivity Analysis Units in USD

FX Sensitivity Analysis (USD)

USD appreciates 200 basis points 20,302



USD depreciates 200 basis points -20,302



10.4 Monitoring and management of market risk

In accordance with the Parent Bank’s guidance, the Bank sets market risk limits to control market risk. These limits are monitored by the Risk & ALM Department, which is independent from Treasury Department. The Risk & ALM Department submits regular reports to the Bank’s Asset and Liability Committee and Risk Committee, which reviews major market risk indicators and makes any necessary decisions. Risk & ALM Department also submits monthly reports on foreign currency exposures and trading products to the Parent Bank, which in turn provides the Bank with regular guidance on market risk management.

10.5 Risk statement for market risk

The Bank’s market risk profile is considered to be low, and in line with its risk tolerance. With regard to its market risk profile and strategy, the Bank concludes that its market risk management systems put in place are adequate.

3 Shorthand method is a way to measure the Bank's overall foreign exchange exposure, by using the greater of the sum of the short positions and the long positions.


26 | P a g e

11. Operational risk

11.1 Approach for the assessment of own funds requirements for operational

risk

The Bank has adopted the Basic Indicator Approach for the assessment of own funds requirements for operational risk; therefore the Bank’s operational risk capital requirement (‘ORCR’) is equal to 15% of the three-year average of the sum of the Bank’s Net Interest and Non-Interest Income. The operational risk charge at 31/12/2015 was $13,613,340.

11.2 Objective and policy of operational risk management

As operational risk is inherent in the Bank’s processes, the objective of operational risk management is not to remove operational risk altogether but to manage and control operational risk in a cost-effective manner consistent with the Bank’s risk appetite. In achieving this, the Bank seeks:

� To minimise the impact of losses suffered in the normal course of business (expected losses) and avoid or reduce the likelihood of suffering a large extreme (or unexpected) loss; and

� To improve the effective management of operations and thus strengthen the Bank’s reputation.

The Bank has established and maintained Operational Risk Management Policy which defines operational risk and its composition; sets out the governance and responsibilities for controlling the risks; articulates risk appetite and limits; specifies the tools and processes of operational risk management; details the operational risk capital allocation method; and details the extent of public disclosure. The policy has been communicated to all relevant department and staff, and saved in the Public folder.

11.3 Definition and source of operational risk

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, employees and IT systems, or from external events, including legal risk, but excluding strategic and reputational risk. It is a pervasive risk that involves all aspects of the business as well as other people with whom the Bank deals. When such risks materialise, they have not only immediate financial consequences for the Bank but also an effect on its business objectives, customer service and regulatory responsibilities.

Operational risk is one of the principal risks in the overall Risk Management Framework. There are many major types of operational risks faced by the Bank, including internal fraud, external fraud, clients, products, business practice, execution, delivery and process management, employment system and workplace safety, damage to physical assets, and IT events.

11.4 Risk management and monitoring of operational risk

The Bank’s operational risk management framework consists of the following key components:

� Identification and categorisation of the key operational risks faced by the business areas, including defining risk appetite;


27 | P a g e

� Risk assessments, including financial and non-financial impact assessments for each of the key risks to which the Bank is exposed;

� Control assessments, evaluating the effectiveness of the control framework covering each of the key risks to which the Bank is exposed;

� Loss and incident management;

� The development of Key Risk Indicators (‘KRIs’) for management;

� Scenarios for estimation of potential loss exposures for material risks;

� Purchases of insurance to mitigate certain operational risk events.

11.5 Risk statement for operational risk

The Bank’s operational risk profile is considered to be low, and in line with its risk tolerance. The operational losses incurred in 2015 were $39,780. With regard to its operational risk profile and strategy, the Bank concludes that its operational risk management systems put in place are adequate.

12. Exposure to interest rate risk in the Banking Book

12.1 Objective and policy of interest rate risk management

The Bank’s objective of interest rate risk management (in the Banking Book) is to decrease the sensitivity of the Bank’s earnings and economic value to market rate fluctuations, and maintain a medium-low risk profile. The Bank has established and maintained Interest Rate Risk Management Policy which defined interest rate risk management strategy, process, criteria, and arrangement. This policy has been communicated to all relevant department and staff, and saved in the Public folder.

12.2 Definition and source of interest rate risk

Interest rate risk is defined as the risk of a negative impact on profitability and/or equity as a result of interest rate movements. The different forms of interest rate risk are re-pricing risk, basis risk, yield curve risk and option risk. At present, re-pricing risk, which is the risk resulting from a maturity mismatch between on-balance-sheet assets and liabilities and off-balance-sheet instruments, is one of the principal forms of interest rate risk faced by the Bank.

12.3 Measurement and management of interest rate risk

Interest rate risk is constantly measured and analysed. The Bank adopts Gap analysis, Duration analysis and Scenario analysis for the measurement of interest rate risk in the Banking Book, and views risk from the perspective of earnings and economic value. In the case of the earnings perspective, the focus is on the impact of interest rate movements on the Net Interest Income (‘NII’) over a time horizon of one year. The economic value perspective focuses on the potential impact of interest rate movements on the market values of the Bank’s assets, liabilities and off-balance-sheet instruments over a longer term.

On a quarterly basis, the interest rate gap is calculated on the contractual maturity of the underlying investments. There are no assumptions made on loan prepayments and deposit


28 | P a g e

pre-withdrawal. There is a particular time bucket for non-maturity deposit (mainly the Bank’s capital) named as non-specific re-pricing column in FSA017 (interest rate gap report).

The table below shows the impact of a 100/200 basis point increase/decrease in the base rate on Net Interest Income at 31/12/2015.

Table 19 – Sensitivity analysis of 1Y Net Interest Income (NII) Units in USD

Sensitivity analysis of 1Y NII (Net Interest Income)

Parallel shift in interest rate Net Interest Income

sensitivity

+100/-100 basis points -316,000 / 316,000

+200/-200 basis points -663,000 / 663,000

The table below shows the impact of a 200 basis points increase in the base rate on economic value at 31/12/2015.

Table 20 – Sensitivity analysis of economic value Units in USD

Sensitivity analysis of economic value

Amount/Ratio

The impact of 200 basis point change of interest rate on the economic value

-14,535,000

Changes of the economic value / capital 3.42%

12.4 Monitoring and mitigation of interest rate risk

Sensitivity limit of economic value (changes of the economic value / capital limits) and Sensitivity limit of 1Y NII are set to control interest rate risk on the Banking Book, analysed and monitored by the Risk & ALM Department on a quarterly basis. The Risk & ALM Department submits regular reports to the Bank’s Asset and Liability Committee and Risk Committee, which reviews interest rate risk on the Banking Book using major risk indicators including, but not limited to, the following:

� Cumulative re-pricing gap within 1year / interest bearing assets;

� Gap Sensitivity analysis in relation to interest income and capital; and

� Scenario analysis: non parallel movements of interest rate.

The Risk & ALM Department also submits quarterly interest rate risk reports to the Parent Bank, which in turn provides regular guidance on interest rate risk in the Banking Book.

12.5 Risk Statement for interest rate risk

The Bank’s interest rate risk profile is considered to be low, and in line with its risk tolerance. With regard to its market risk profile and strategy, the Bank concludes that its interest rate risk management systems put in place are adequate.


29 | P a g e

13. Other Risks

� Liquidity risk – The Bank is exposed to the risk that it may be unable to meet its obligations as they fall due, arising from the differing maturity profiles of its assets and liabilities.

� Under the PRA’s liquidity rules, the Bank is expected to produce an Internal Liquidity Adequacy Assessment Process (‘ILAAP’) document in line with the EBA guidelines on common procedures and methodologies for the Supervisory Review and Evaluation Process (‘SREP’) and aligns with the further guidance in PRA supervisory statement SS24/15 annually to assess the adequacy of its liquidity and funding resources to cover the risks identified. A buffer of high quality liquid assets (‘HQLA’) is held to mitigate the Bank’s liquidity risk.

� In order to meet the Liquidity Coverage Ratio (‘LCR’) requirements that came into effect on 1/10/2015, the Bank undertook extensive preparatory work and made substantial investments in 2015 in data collection, LCR daily monitoring and new liquidity reporting. It is adapting its systems to report the required data items relating to the calculation of the LCR; conduct specific LCR training to ensure that staff are adequately trained to manage liquidity risk reporting and deeply understand LCR implications of the business model and liquidity risk management; and to closely follow the process of designing revised COREP templates for reporting the LCR, as specified in the Delegated Act, and hence to anticipate their impact.

� Reputational Risk – the Bank places a very high degree of importance on the management of its compliance with regulations and laws – including anti-money laundering regulations - to help minimise compliance risk. The Bank is very mindful of the large amount of damage that could be done to its reputation by any form of failure. Reputational damage, if it occurred, would be likely to arise as a result of an operational failure or a liquidity failure.

� Business Risk – The Bank is exposed to geopolitical, industry and regulatory risks that could deflect it from its desired strategy and business plan. Senior management maintain very close contact with the Parent Bank to keep up-to-date with the latest economic conditions and developments in China and their effect on the Bank in the UK. Close liaison with Regulators ensures that the Bank complies with all regulatory requirements and requests.

� Litigation Risk – The Bank takes care to avoid disputes by ensuring that all documentation comprehensively covers the risks involved. Where appropriate, it seeks specialist legal advice. Systems and procedures are reviewed regularly to safeguard the Bank against any legal or regulatory lapses.

� The Bank currently has no exposure to equity risk or securitisation risk.

� Professional Conduct Risk – The Bank is aware of the risks it faces from the improper professional conduct of its employees. The Professional Conduct Policy details the measures in place to protect the Bank from the risks arising from bribery, gifts and hospitality, conflicts of interest and market abuse. Staff are required to certify, at least annually, that they agree to adhere to the letter and the spirit of the policy.

� Group Risk – The Bank is exposed to group risk in its liquidity management activities and possible credit downgrading of the Parent Bank. Liquidity risks are examined in detail in the Bank’s Individual Liquidity Adequacy Assessment (‘ILAA’). The Parent


30 | P a g e

Bank is one of the largest banks in the world and is closely-connected to the Chinese economy. Any credit downgrading would be likely to apply to all Chinese banks and would not significantly affect the local operations.

14. Remuneration

14.1 Overview

In accordance with the Capital Requirements Regulation (CRR) remuneration disclosure requirements, as further elaborated in the FCA’s General Guidance on Proportionality: The Remuneration Code (SYSC 19) and Pillar 3 Disclosures on Remuneration (Article 350 of the CRR), the Bank falls within proportionality level 3.

As a Level 3 firm, the Bank is able to dis-apply the following rules: SYSC 19A.3.47R concerning the payment of variable remuneration in shares and capital instruments and SYSC 19A.3.49R and SYSC 19A.3.51R concerning deferred remuneration.

Applying the same principle of proportionality, as set out in the PRA’s LSS8/13, ‘Remuneration standards: the application of proportionality’, the Bank is required to provide the following disclosures regarding its remuneration policy and practices for those categories of staff whose professional activities have a material impact on its risk profile, ‘material risk takers’.

The Remuneration Policy (‘the Policy’) recognises the need to attract, motivate and retain high-calibre staff necessary to obtain business results. The Policy operates in the context of ICBC (London) plc’s business goals and the Bank’s other people policies. It aims to ensure remuneration practices are fair and consistent with the Bank’s view on equality and diversity.

Recruitment will be solely on the basis of the applicant's abilities and individual merit as measured against the criteria for the job. Qualifications, experience and skills will be assessed at the level that is relevant to the job. ICBC applies an equal opportunities policy for all stages of the recruitment process e.g. short listing, interviewing and selection.

The Bank implements and maintains remuneration policies, procedures and practices that are consistent with and promote sound and effective risk management.

14.2 Decision-making process used for determining the Remuneration Policy

Governance of all matters related to remuneration with the Bank lies with the Board of Directors (‘the Board’), which includes two independent Non-Executive Directors. These Non-Executive Directors are considered to be both independent of the Bank and in possession of the necessary skills to exercise appropriate judgment.

The Board is responsible for the implementation of the Remuneration Code and the annual review of the Bank’s adherence to it. It is also the Bank’s current policy that the implementation of the remuneration policy is subject to an independent review by the Bank’s Internal Audit Department.

In setting remuneration policy, the Board recognises its role in ensuring remuneration arrangements that are structured in order to promote an effective risk management culture aligned with the Bank’s business strategy, objectives and long terms interests. This is balanced with the need to recruit and motivate suitably experienced staff with competitive pay and benefits comparable to similar organisations in the market place.


31 | P a g e

The Board is responsible for approving and maintaining the Policy. The Board takes into account inputs from the Risk & ALM, Human Resources & Administration, Compliance & Legal and Financial Control Departments. The Board will consider information affecting remuneration throughout the year and will ensure that remuneration policies, practices and procedures are clear and documented, including the performance appraisal process and decisions.

No external consultants have been used for the determination of the Remuneration Policy.

14.3 Information on link between pay and performance

The Bank ensures that the structure of an employee’s remuneration is both consistent with the market and promotes effective risk management. The Bank sets the fixed component of remuneration to represent a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components. Fixed components of remuneration represent base salary as well as cash and non-cash benefits. The variable component of remuneration is in the form of an annual discretionary bonus. Bonus is performance related and is based on a combination of the assessment of the performance of the individual, the business unit concerned and the overall results of the Bank.

The Bank would not consider any total variable remuneration that would limit the firm’s ability to strengthen its capital base.

Key Performance Indicators are set on an annual basis for the Bank, departments and individuals. These indicators are financial and non-financial. When assessing performance therefore both financial and non-financial criteria are taken into account. Assessments of the Bank’s financial performance used to calculate variable remuneration are based principally on profits. Variable remuneration will be impacted where negative financial performance of the Bank occurs. Non-financial performance metrics form a significant part of the performance assessment process. The following factors will also be considered:

� Effective adherence to risk management and compliance with the regulatory system;

� Individual role level and market value;

� Assessed individual performance;

� Behaviours that pose a risk to the Bank’s values/goals, as expressed in the Professional Conduct Policy, can override assessments of financial performance.

The Bank does not pay guaranteed variable remuneration; payments are made to reflect performance achieved. The Bank does not have long term incentive plans. Furthermore the Bank does not offer shares, options or other non-cash variable remuneration instruments.

In 2015, the Bank did not offer any sign-on inducements and no severance payments or deferred remuneration were made.

Pension policy The Bank operates a straightforward pension policy, namely a group personal pension scheme with fixed monthly employer contribution with the facility for employee contributions. No discretionary pension benefits are paid to staff.

14.4 Quantitative Information

The Bank classifies those staff whose professional activities have a material impact on its risk profile as ‘Code Staff’ with respect to the PRA/FCA’s Remuneration Rules.


32 | P a g e

As at 31/12/2015, the Bank employed 112 staff, 104 of whom were eligible for variable remuneration awards in respect of their service during 2015. The Remuneration Code requires that banks identify relevant staff including senior management, risk takers, staff engaged in control functions and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the firm's risk profile and designate them as ‘Code Staff’. Eighteen staff were identified as Code Staff in 2015, including those that serve on the Executive Committee.

Table 21 – The aggregate quantitative information on remuneration, broken down by business area as of 31/12/2015 (Art 450 (1)(g) of CRR) Units in ‘000 USD*

Business area Remuneration

Senior Management (Board and ExCo) $669

Wholesale, Retail & Treasury $701

Central Support $1,091

Total Code Staff $2,461

* 1GBP = 1.5285 USD for 2015 (Average rate)

Total staff employment costs (including variable remuneration) in 2015 were $16.8 million, of which the employment costs of the Code Staff were $2.5 million.

Table 22 – The aggregate quantitative information on remuneration, broken down by fixed and variable of Senior Management and other Code Staff as of 31/12/2015 (Article 405 (1)(h) of CRR) Units in ‘000 USD*

Fixed remuneration**

Variable remuneration (bonus)

Total

Senior Management (Board and ExCo)

$610 $60 $669

Other Code Staff $1,493 $299 $1,792

Total Code Staff $2,103 $359 $2,461

* 1GBP = 1.5285 USD for 2015 (Average rate). ** Includes cash allowances and non-cash allowances


33 | P a g e

ICBC (London) plc

81 King William Street London EC4N 7BG

United Kingdom www.icbclondon.com

Pillar 3 Disclosures - Industrial and Commercial Bank of...

Documents

Transcript of Pillar 3 Disclosures - Industrial and Commercial Bank of...