My first Publication ocbc_ar17_fullreport_english | Page 84

CAPITAL MANAGEMENT
(This section forms an integral part of OCBC’s audited financial statements)
CAPITAL POLICY
The key objective of the Group’s
capital management policy is to
maintain a strong capital position to
support business growth and strategic
investments, and to sustain investor,
depositor, customer and market
confidence. In line with this, OCBC
targets a minimum credit rating of
“A” and ensures that its capital ratios
are comfortably above the regulatory
minima, while balancing shareholders’
desire for sustainable returns and high
standards of prudence. OCBC actively
manages its capital composition to
achieve an efficient mix of different
capital instruments in order to optimise
its overall cost of capital.
CAPITAL MONITORING
AND PLANNING
OCBC Group’s capital is closely monitored
and actively managed to ensure that
there is sufficient capital to support
business growth, and to pursue
strategic business and investment
opportunities that will create value
for our stakeholders, while taking into
consideration the Group’s risk appetite.
OCBC Group’s internal capital adequacy
assessment process (“ICAAP”) involves a
comprehensive assessment of all material
risks that the Group is exposed to and
an evaluation of the adequacy of the
Group’s capital in relation to those risks.
This includes an annual capital planning
exercise to forecast capital demands
and assess the Group’s capital adequacy
over a 3-year period. This process takes
into consideration OCBC’s business
strategy, operating environment,
target capital ratios and composition,
as well as expectations of its various
stakeholders. In addition, capital stress
tests are conducted to understand the
sensitivity of the key assumptions in the
capital plan to the effects of plausible
stress scenarios, and to evaluate how the
Group can continue to maintain adequate
capital under such scenarios.
Within OCBC Group, excess capital will
be centralised as far as possible at the
parent (i.e. OCBC Bank) level to ensure
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OCBC ANNUAL REPORT 2017
easy deployment across the Group.
Whilst the transfer of capital resources
within the Group is generally subject to
regulations in local jurisdictions, where
applicable, OCBC has not faced significant
impediments on the flow of capital
within the Group.
DIVIDEND
Our dividend policy aims to provide
shareholders with a predictable and
sustainable dividend return, payable on at
least a half-yearly basis. For the financial
year ended 31 December 2017, the Board
of Directors has recommended a final
dividend of 19 cents per share. This brings
the full year 2017 dividend to 37 cents
per share, or an estimated total dividend
payout of S$1,550 million, representing
37% of the Group’s core net profit of
S$4,146 million (2016: total dividend
payout of S$1,507 million, representing
43% of the Group’s core net profit of
S$3,473 million).
SHARE BUYBACK AND
TREASURY SHARES
Shares purchased under the share
buyback programme are held as treasury
shares. These are recorded as a deduction
against share capital, and may be
subsequently cancelled, sold or used to
meet delivery obligations under employee
share schemes. During the financial
year ended 31 December 2017, the Bank
purchased 20.6 million ordinary shares for
S$224 million as part of its share buyback
programme, while 24.5 million treasury
shares were delivered to meet obligations
under its employee share schemes.
CAPITAL
ADEQUACY RATIOS
On 14 September 2012, the Monetary
Authority of Singapore (“MAS”) revised
the MAS Notice 637 to implement the
Basel III capital adequacy framework for
Singapore. The Basel III capital standards
came into effect on 1 January 2013
and are being progressively phased in
on 1 January each year, from 2013 to
2019. Singapore-incorporated banks are
required to meet minimum Common
Equity Tier 1 (“CET1”), Tier 1, and total
capital adequacy ratios of 6.5%, 8.0%,
and 10.0%, respectively, in 2017.
To ensure that banks build up adequate
capital buffer outside periods of stress,
a Capital Conservation Buffer (“CCB”) of
2.5 percentage points above the
minimum capital adequacy requirements
was introduced. The CCB is to be
maintained in the form of CET1 capital,
and will begin at 0.625% on 1 January
2016, and increase by 0.625 percentage
point on 1 January each year, to reach
2.5% on 1 January 2019. Including the
CCB, Singapore-incorporated banks will
be required to meet CET1 CAR, Tier 1 CAR
and total CAR of 9.0%, 10.5% and 12.5%,
respectively, from 1 January 2019.
In addition, OCBC will be subject to a
Countercyclical Buffer requirement if
this buffer is applied by regulators in
countries which the Group has credit
exposures to. Generally in the range of
0% to 2.5% of risk-weighted assets, the
Countercyclical Buffer is not an ongoing
requirement but it may be applied by
regulators to limit excessive credit growth
in their economy.
The table below shows the composition
of the Group’s regulatory capital
and its capital adequacy ratios as of
31 December 2017 based on MAS’
transitional Basel III rules for 2017. The
capital adequacy ratios were determined
in accordance with the requirements
of MAS Notice 637, which included
the definitions for CET1, Tier 1 and
Tier 2 capital, the required regulatory
adjustments against capital (including
goodwill, intangible assets, deferred tax
assets and investments in unconsolidated
financial institutions in which the
Bank holds a major stake), and the
methodologies available for computing
risk-weighted assets. Some of OCBC’s
existing Additional Tier 1 and Tier 2
capital instruments were issued under
the Basel II capital adequacy framework.
These capital instruments did not
contain provisions to require them to be
written off or converted into ordinary
shares if the Bank was determined by the
Monetary Authority of Singapore (“MAS”)