32.3 Credit Risk

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.  The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counter-parties, and continually assessing the creditworthiness of counter-parties.  In addition to monitoring credit limits, the Group manages the credit exposure relating to its trading activities by collateral arrangements with counter-parties in appropriate circumstances, and limiting the duration of exposure.  In certain cases, the Group may also close out transactions or assign them to other counter-parties to mitigate credit risk.

The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions.  The credit quality review process allows the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective action.

 

Credit-related commitments risks

The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf. Such payments are collected from customers based on the terms of the letters of guarantee. They expose the Group to similar risks to loans and these are mitigated by the same control processes and policies.

 

a) Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The table below shows the maximum exposure to credit risk for the components of the statement of financial position. The maximum exposure is shown gross, before the effect of mitigation through the use of collateral agreements.


Gross maximum exposure 2017 Gross maximum exposure 2016
AED’000 AED’000
 
Balances with U.A.E. Central Bank 24,185 19,654
Due from banks 676,847 757,741
Loans and advances 2,335,801 2,053,529
Islamic financing and investing assets 173,370 180,016
Investments carried at fair value through other comprehensive income  

376,269

 

380,682

Investments (debt instruments) 81,654 128,569
Statutory deposit 6,000 6,000
Other assets subject to credit risk

176,027

122,914

3,850,153 3,649,105
Contingent liabilities 1,728,187 1,599,736
Commitments 222,274 370,145
Total
5,800,614
5,618,986

 



b) Credit risk concentration

Concentration of risk is managed by customer/counterparty, by geographical region and by industry sector. The funded and non-funded credit exposure to the top 5 borrowers as of
31 December 2017 was AED 693,186 thousand (2016: AED 657,897 thousand) before taking account of collateral or other credit enhancements and AED 372,763 (2016: AED 335,641 thousand) net of such protection, respectively.

  2017 2016
AED’000 AED’000
Geographic region  
U.A.E. 3,515,650 3,252,976
Other Arab countries 80,037 88,059
Europe 187,513 243,754
U.S.A.
Rest of the world 66,953 64,316
Financial assets subject to credit risk
3,850,153
3,649,105
   
Industry sector  
Commercial and business 2,061,983 1,846,901
Personal 479,277 411,854
Banks and financial institutions 1,158,955 1,286,646
Others 149,938 103,704
Financial assets subject to credit risk
3,850,153
3,649,105

 

c) Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

For repurchase and reverse repurchase transactions, cash or securities

For commercial lending, charges over real estate properties, inventory, trade receivables and securities

For personal lending, against post-dated cheques and security cheques

The Group also obtains guarantees from parent companies for loans to their subsidiaries.

 

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and assesses the market value of collateral obtained during its review of the adequacy of the provision for impairment losses. Management estimates the fair value of collaterals and other credit enhancements held against individually impaired financing assets approximating to be AED 17,283 thousand as at 31 December 2017 (2016: AED 16,333 thousand).

 

It is the Group’s policy to dispose of repossessed assets, other than investment properties, in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Group does not occupy repossessed properties for business use.

 

d) Credit quality per class of financial assets

The credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows the credit quality by class of asset, based on the Group’s credit rating system. The amounts presented are net of impairment provisions.

  Neither past due nor impaired   Past due or individually Impaired    
Pass grade   Sub standard grade       Total
AED’000   AED’000   AED’000   AED’000
2017              
Balances with U.A.E. Central Bank 24,220       24,220
Due from banks 676,812       676,812
Loans and advances 2,102,554   54,218   179,029   2,335,801
Islamic financing and investing assets 168,493     4,877   173,370
Investments carried at fair value through other comprehensive income 376,269       376,269
Investment carried at amortised cost 81,654       81,654
Statutory deposit 6,000       6,000
Other assets 176,027       176,027
Total
3,612,029
 
54,218
 
183,906
 
3,850,153

 

  Neither past due nor impaired   Past due or Individually    
Pass grade   Sub-standard grade       Total
2016 AED’000 AED’000 AED’000 AED’000

 

Balances with U.A.E. Central Bank 19,654 19,654
Due from banks 757,741 757,741
Loans and advances 1,891,746 10,305 151,478 2,053,529
Islamic financing and investing assets 174,503 5,513 180,016
Investments carried at fair value through other comprehensive income 380,682 380,682
Investment carried at amortised cost 128,569 128,569
Statutory deposit 6,000 6,000
Other assets 122,914 122,914
Total
3,481,809
10,305
156,991
3,649,105

An analysis of past due loans and Islamic financing and investing assets, by age, is provided below.

 

Aging analysis of past due but not impaired and impaired loans and Islamic financing and investing assets

Less than 30 days   31 to 60 days   61 to 90 days   More than 91 days   Total
AED’000   AED’000   AED’000   AED’000   AED’000
2017
Past due but not impaired
31,365
 
12,896
 
19,149
 
16,378
 
79,788
Impaired       104,118   104,118
Total past due or impaired 31,365   12,896   19,149   120,496   183,906
2016
Past due but not impaired 42,259 23,709 2,735 2,276 70,979
Impaired 86,012 86,012
Total past due or impaired
42,259
23,709
2,735
88,288
156,991