My first Publication ocbc_ar17_fullreport_english | Page 91

as ISDA, include a minimum threshold
amount where additional collateral is to
be posted by either party if the mark-
to-market exposures exceed the agreed
threshold. The credit risk associated with
contractual obligations is reduced by the
netting agreements to the extent that if
an event of default occurs, all amounts
with the counterparty are settled on a
net basis. Agreements may also contain
rating triggers where additional collateral
posting is required in the event of a
rating downgrade. However, given our
investment grade rating, there is minimal
increase in collateral posting under a one-
notch rating downgrade occurrence. We
also use CCP to reduce counterparty risk
for Over-the-Counter (“OTC”) derivatives.
Managing Credit Risk Concentrations
Credit risk concentrations may arise
from lending to a single borrower, a
group of connected borrowers, or diverse
groups of borrowers affected by similar
economic or market conditions. Where
appropriate, limits are set and monitored
to control concentrations by borrower,
group of connected borrowers, product,
industry and country. These limits are
aligned with our risk appetite, business
strategy, capacity and expertise. Impact
on earnings and capital is also considered
in limit setting.
We continue to diversify our country
exposure with our expanded presence
and activities in Greater China, Malaysia
and Indonesia. As a key player at home,
we have significant exposure to the real
estate market in Singapore. Dedicated
specialist real estate units manage this
risk by focusing on client selection,
collateral quality, project viability and real
estate cycle trends. Regular stress tests
are also conducted to identify potential
vulnerabilities in the real estate portfolio.
REMEDIAL MANAGEMENT
We have an established process to
constantly assess our portfolios to
detect potential problem credits at
an early stage. As we value long-term
customer relationships, we understand
that some customers may be facing
temporary financial distress and prefer
to work closely with them at the onset
of their difficulties. We recognise the
opportunity to promote customer loyalty
and retention in such instances, even
as we enforce strict discipline and place
a priority on remedial management to
minimise credit loss.
We classify our credit exposures
according to the borrowers’ ability to
repay their financial obligations on time
and in full from their normal sources of
income. Credit exposures are categorised
as “Pass” or “Special Mention”, while non-
performing loans (“NPLs”) are categorised
as “Substandard”, “Doubtful”, or “Loss”
in accordance with MAS Notice 612 on
Credit Files, Grading and Provisioning
(“MAS Notice 612”). Upgrading of NPL
to performing status can only be done
when there is an established trend of
credit improvement. The upgrade needs
to be supported by an assessment of the
borrower’s repayment capability, cash
flows, and financial position.
Credit exposures are classified as
restructured assets when we have
granted concessions in restructured
repayment terms to borrowers who are
facing difficulties in meeting the original
repayment schedules. A restructured
credit exposure is classified into the
appropriate non-performing grades based
on the assessment of the borrower’s
financial condition and ability to repay
under the restructured terms. Such a
credit exposure must comply fully with
the restructured terms before it can be
restored to performing loan status in
accordance with MAS Notice 612.
We have dedicated remedial management
units to manage the restructuring, work-
out and recovery of non-performing
assets for wholesale portfolios. For
retail portfolios, appropriate risk-based
and time-based collections strategies
are developed to maximise recoveries.
We also use analytical data such as
delinquency buckets and adverse status
tags for delinquent consumer loans to
constantly fine-tune and prioritise our
collection efforts.
Impairment Allowances for Loans
We maintain impairment allowances
that are sufficient to absorb credit losses
inherent in our loan portfolios. Total loan
impairment allowances comprise specific
allowances against NPLs and a portfolio
allowance for all performing loans to cover
expected losses that are not yet evident.
Specific allowances for credit losses
are evaluated either individually or
collectively for a portfolio. The amount
of specific allowance for an individual
credit exposure is determined by
ascertaining the difference between
the present value of future recoverable
cash flows of the impaired loan and
the carrying value of the loan. For
homogenous unsecured retail loans
such as credit card receivables, specific
allowances are determined collectively as
a portfolio, taking into account historical
loss experience of such loans. NPLs are
written off against specific allowances
when all feasible recovery actions have
been exhausted or when the recovery
prospects are considered poor.
Portfolio allowances are set aside based
on our credit experiences and judgement
for estimated inherent losses that may
exist but have not been identified
for any specific financial asset. Credit
experiences are based on historical loss
rates that take into account geographic
and industry factors. Under the current
Financial Reporting Standard 39 (“FRS 39”)
as modified by MAS Notice 612,
a minimum of 1% portfolio allowance
on uncollateralised exposures is set
aside as portfolio allowances.
Impairment allowances will be guided by
Singapore Financial Reporting Standard
(International) 9: Financial Instruments
(“SFRS(I) 9”) with effect from 1 January
2018. SFRS(I) 9 replaces the FRS 39 loan
impairment allowance requirements
as modified by MAS Notice 612 with
a forward-looking expected credit
loss (“ECL”) model (for information on
impairment allowance, refer to Note 50
in the Financial Statements).
MARKET RISK
MANAGEMENT
Market risk is the risk of loss of income
or market value due to fluctuations in
factors such as interest rates, foreign
exchange rates, credit spreads, equity and
commodity prices or changes in volatility
or correlations of such factors. At OCBC
BUILDING ON OUR CORPORATE STRATEGY FOR SUSTAINABLE GROWTH
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