Key regulatory ratios – Capital and liquidity

Basel III computation of capital ratios

Leverage ratio

Liquidity coverage ratio (LCR)

Net stable funding ratio (NSFR)

Main features of regulatory capital instruments

(*) A “Trigger Event” is determined by and at the sole discretion of the Monetary Board of the Central Bank of Sri Lanka (i.e. conversion of the said Debentures upon occurrence of the Trigger Event will be effected by the Bank solely upon being instructed by the Monetary Board of the Central Bank of Sri Lanka), and is defined in the Banking Act Directions No. 1 of 2016 of Web Based Return Code 20.2.3.1.1.1.(10) (iii) (a&b) as a point/event being the earlier of:

(a) A decision that a write-down, without which the Bank would become non-viable, is necessary, as determined by the Monetary Board, OR

(b) The decision to make a public sector injection of capital, or equivalent support, without which the Bank would have become non-viable, as determined by the Monetary Board.

(**) Optional. At the discretion of the monetary board of the Central Bank of Sri Lanka upon occurrence of trigger points as detailed above.

(***) The price based on the simple average of the daily volume weighted average price (VWAP) of an ordinary voting share of the Bank during the three (03) months period, immediately preceding the date of the Trigger Event.

Summary discussion on adequacy/meeting current and future capital requirements

The Bank prepares the Corporate Plan and Budget for a period of 5 years which is rolled over every year and contains the forecast for key ratios mentioned under Basel III accord including the Capital Adequacy Ratios (CARs).

As part of the budgeting process the CARs are computed based on the movements in risk-weighted assets underlying the budgeted expansion of assets, including business volumes. The Bank has set up an internal threshold on minimum CARs and ensures that appropriate measures are taken to maintain the CARs above the said threshold in preparing the budget. The budget also captures the capital augmentation plan covering both internal and external capital sources. The Bank also takes initiatives well in advance to raise Tier I and Tier II capital as detailed in the Budget as well as in the Capital Augmentation plan. The Bank has a well established monitoring mechanism to periodically monitor the level of achievement against pre-determined targets to take timely corrective action in case of significant deviations.

Additionally, the Bank has a dynamic ICAAP process with rigorous stress testing embodied in addition to taking into consideration the qualitative aspects such as reputational and strategic risks. The ICAAP process also computes the concentration risk ensuring that the Bank has a well-diversified assets portfolio which is not overly exposed to any individual counterparty or sector. In addition ICAAP process also captures the residual risk to assess the amount of risk that remains after controls are accounted for. This process also proactively identifies the possible gaps in CARs in advance, allowing the Bank to take calculated decisions to optimise utilisation of capital.

Methods of improving the CARs are being evaluated on an ongoing basis and in extreme situations, the Bank will deliberate on strategically curtailing the expansion of risk weighted assets. However, prior to taking such decisions, the Bank will assess the impact on the internally developed thresholds of minimum CARs resulting from the short-term asset expansion plans. The Bank periodically analyses the impact of capital by product and by strategic business unit, to understand the extent of capital consumption to ensure the portfolio optimises the available capital. The Bank is committed to maintaining the internal CAR thresholds despite any leniency provided by Central Bank of Sri Lanka (CBSL) during adverse times.

The Bank has set up a separate Committee headed by the Managing Director to suggest improvements with regard to the Capital and CAR. The Committee deliberates on both internal and external improvements in optimising the utilisation of the capital. During the year, Basel Committee met 3 times and monitored the progress of the activities and suggested many initiatives to improve the utilisation of the capital.

The Bank has developed a basic RAROC framework and are in the process of fine tuning it in order to make use of the model specially when taking credit decisions. RAROC could be used as the basic hurdle rate in lending decisions.

When deciding the dividend for FY 2023, the Bank carried out numerous analysis to identify the most feasible dividend payout, while ensuring a sustainable growth for FY 2024. The dividend is proposed also ensuring the Bank maintains a quarterly CAR above the minimum thresholds as per the Basel III guidelines, taking into account the capital augmentation plans for the year 2024. In the present context since the Bank has investments in the defaulted Foreign currency bonds and therefore carries out numerous computations and analysis to identify the possible impact to the profitability and the CAR due to restructuring of the government bond portfolio. In this regard, a world renowned consultant has been appointed to assist the Bank in restructuring negotiations.

A comprehensive analysis of “Managing Funding and Liquidity: Safeguarding Monetary Fluidity”.

Credit risk under standardised approach

Credit risk exposures and credit risk mitigation (CRM) effects

Credit risk exposures and credit risk mitigation (CRM) effects (Contd.)

Credit risk under standardised approach

Exposures by asset classes and risk weights (Post CCF and CRM)

Market risk under standardised measurement method

Operational risk under the Alternative Standardised Approach (ASA) – Group

Operational risk under the Alternative Standardised Approach (ASA) – Bank

Disclosure 12

Differences between accounting and regulatory scopes and mapping of financial statement categories with regulatory
risk categories – Bank

Bank Risk Management Approach

Effective risk management is at the core of the Bank’s value creation model as we accept risk in the normal course of business. Significant resources are devoted to this critical function to ensure that it is well articulated, communicated and understood by all employees of the Bank as it is a shared responsibility. It is a dynamic and disciplined function increasing in sophistication and subject to stringent oversight by regulators and other stakeholders. The overarching objectives are to ensure that risks accepted are in line with the Bank’s risk appetite and strategic priorities and that there is an appropriate trade-off between risk and reward enabling delivery of value to key stakeholders.“ The risk governance structure, responsibilities attributed throughout the bank, risk management framework, objectives, strategies, policy framework, risk appetite and tolerance limits for key risk types, and the overall risk management approach of the Bank are discussed in the section on “Risk Governance and Management”.

Risk management related to key risk exposures

The quantitative disclosures relating to key risk areas such as credit, market, liquidity, operational, and interest rate risk in the banking book are presented and discussed in the Section on “Risk Governance and Management” on pages 232 to 258 and in Note 66 of the Financial Statements on Financial Risk Review.

D-SIB Assessment Exercise (As per the CBSL Direction No. 10 of 2019)