Risk management can be a tricky process it is considered one of the oldest professions in the history. Managing risk is a clearly defined process that demands specific identification of the loss exposure in order to address the loss with the most proper available management techniques. Risk management is a crucial element for maintaining any type of business operating successfully. In this report, we will be talking about ADCB which happens to be one of the UAE’s most successful and risk controlling banks, discussing the types of risk that could face the bank and the appropriate risk management tools that the bank handles its risks by.
Abu Dhabi Commercial Bank is one of the largest banks in the UAE and it is third by rank and the second largest in Abu Dhabi by assets, at AED 184 billion at the end of 2011. The Bank has 49 branches, four pay offices, and 296 ATMs in the UAE and also operates two branches in India and an offshore branch in Jersey. It employs more than 5,000 people from 49 nationalities, serving over 460,000 retail customers and more than 34,000 corporate and SME clients. ADCB is a public joint stock company incorporated in the Emirate of Abu Dhabi, UAE following the merger of Khaleej Commercial Bank, Emirates Commercial Bank, and Federal Commercial Bank. ADCB is registered under the UAE Federal Commercial Companies Law Number 8 of 1984 under registration Number 4 and operates in the UAE under a banking license issued by the Central Bank of the UAE.
2. ADBC’s vision, mission and strategy.
Our vision Is to be the number one bank of choice in the UAE. A constantly innovating, financially successful organization of the highest integrity, respected by our customers, by our competitors and by the community.
To build a partnership with our customers that lasts a lifetime by:
• Treating every customer as an individual
• Offering innovative products and unparalleled service
• Never forgetting that our customer has a choice
The Bank is currently in the process of finalizing its strategic plan for 2012–2016:
• Growth through a UAE-centric approach and controlled ‘internationalization’
• Sustainability through liability growth
• Maintaining a culture of service excellence and efficiency
• Managing ADCB’s risks in line with a predefined risk strategy
• Attracting, developing, and retaining the best talent with incentives aligned with the strategic objectives.
3. Risk Management Strategy
Abu Dhabi commercial bank deals with risk in the most specified terms of management using the most adequate tools that are fitting to each type of risk that faces the bank. The objectives of risk management are clearly defined and well-established as a core principle in the bank’s operations, processes and practices.
Risks are managed within the Abu Dhabi Commercial Bank very flexibly as much as the bank’s structure would allow the freedom of risk control measurements and practices to be undertaken, and that opens a gate to incorporate new businesses and involve more business opportunities that can expand the bank’s operations on a higher scale of success.
The frame work of the risk management strategy is comprehensive as it is communicated in a hierarchical form from the top management (Board of Directors) to the lower level of management to flow throughout the bank.
The hierarchal structure of Abu Dhabi commercial bank is distributed through separate and determined levels as follows:
a) Strategic level:
Incorporates risk management functions that are performed by the senior management and Board of Directors such as:
• Definition and identification of material risks;
• Determining the Bank’s risk drivers and ensure that they comply with the current business plans.
• To formulate proper strategies and polices to manage and control risks
• To provide independent reviews and constantly challenge structure.
• Construct the most proper risk management systems and control tools for the purpose of ensuring that risk will remain under control in acceptable levels and there are enough rewards to compensate the losses that occur from undertaken risk.
b) Management (Macro) Level:
In this level risk management is included within a business area or across business lines. In this category we can find the risk management activities that are performed by the bank’s middle management efforts as well as all the risk reviews and analysis.
c) Transaction (Micro) Level:
in the transaction level risk management is controlled by the front office and loan origination functions and those are considered to be the individuals that take the risk o behalf of the bank. Risk management is not entirely free and up to those individuals it is also restricted by operational procedures and guidelines set by management.
Risk management in Abu Dhabi commercial bank is hierarchical as we said before which indicates that the functions of risk management are always starting with the highest level committees downwards each contributing majorly as their position in the hierarchy can serve:
1) Board Risk & Credit Committee (BRCC)
2) Board Audit & Compliance Committee (BACC)
3) Board Corporate Governance Committee (BCGC)
There are major contributors to risk management as well that are Executive Management-level
1) Assets and Liabilities Management Committee
2) Management Risk & Credit Committee
3) Management Recoveries Committee
The Bank also hires a Chief Risk Officer function, and his job is to oversee credit risk, Market risk, Operational risk, Consumer risk, Compliance risk, and the Remedial risk functions. Mainly all types of risk that can be faced by Abu Dhabi commercial bank. Not only that but he it is delegated to oversee the committees and the bank considers him a part of Internal Audit, BRCC, BACC, BCGC, and the Board of Directors. And has overall day-to-day responsibility for risk management.
On the other hand the effectiveness of risk reviews and analysis heavily relies on the senior managers, management risk oversight committees, Internal Audit, BRCC, BACC, BCGC, and the Board of Directors.
The Chief Risk Officer plays an important role in the risk management processes of the bank. Because, it is his job to present and report to the Board the conclusions and developments of risk potentials that face the bank, the risk environment of the bank and the performance of the risk analysis conducted and their reviews. Thus, it is logical to conclude that the responsibility of risk profiles and established risk strategies and market developments or even the risk policies and guidelines are up to him to provide to the Board.
The Board of Directors is the head decision making forum in the bank. It is responsible for all the controlling activities, leadership, and supervision in the bank and it is crucial for the bank’s Board of Directors to deliver and share and communicate value among shareholders and employees and oversee the management of risk and control techniques and strategies.
The Audit ; Compliance Committee is committee in Abu Dhabi commercial bank that is specialized in assisting the Board of Directors by he helping it to ensure the validity of the bank’s financial statements and the legality of its policies and business provisions of the bank’s internal Audits, by monitoring the performance of the Bank’s external and internal auditors, compliance with legal and regulatory requirements and internal policies, and internal control over financial reporting.
4. Types of Risk and risk management processes and procedures
In Abu Dhabi commercial bank there are common types of risk that we thought are major to shed the light upon in this report. Specifically choosing those types of risks because, we believe that for any successfully operating bank those are the types of risks that can be dangerous in effect and impactful. We will be mentioning the identification of risk and assessment protocols and management tools used.
1. Credit Risk (Retail and Wholesale)
Credit risk is the risk that one party to a financial instrument will fail to pay for an obligation and damage the other party by incurring losses to them. Abu Dhabi Commercial Bank deals with credit risk by monitoring credit exposures limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. But monitoring is very inclusive that it comprises credit exposures, In addition to monitoring credit limits, the Bank manages the credit exposure relating to its trading activities by conducting agreements with the involved parties under perfect circumstances that will lead the duration limit window to tighten.
Concentrations of credit risk arise when a certain amount of involved parties decide to engage in similar business activities, which happen to be in the same geographic region, or have similar economic features. That type of credit risk can affect the ability of the parties to meet their contractual obligations because it will be affected very easily by any economic change that might occur. Concentrations of credit risk indicate that the bank’s performance is relatively sensitive to developments that occur in a certain industry or geographic location.
Risk management process
The risk management process is handled here by the Board which are responsible for setting up committees that will review credit risk management and approve overall Bank credit policy, and address all significant credit policy issues
These committees that are responsible for controlling credit risk are the Board Risk ; Credit Committee (BRCC), Board Audit ; Compliance Committee, Board Corporate Governance Committee, Assets and Liabilities Management Committee, Management Risk ; Credit Committee, Management Recoveries Committee.
The concentration credit risk is reviewed on a regular basis in the industry sectors, geographic locations, and involved parties.
The bank also controls credit risk using Diversification. The risk is diversified by setting maximum exposure limits to individual, sectors, and industries, and any excesses is soon to be reported to the BRCC/MRCC.
Based upon the reviews provided by the concerned committees the bank’s tolerance for credit risk and the level of returns it expects to achieve for incurring various credit risks is easily predicted and comprehended. The reviews can also be a good source for ensuring the development and implementation of the Credit Risk Strategies, and the policies and procedures for identifying, measuring, monitoring, and controlling Credit Risk.
2. Market Risk
Market risk can be defined as the risk that the Bank’s income or value of a financial instrument will fluctuate due to changes in market risk factors such as interest rates, foreign exchange rates, equity prices, commodities prices, and options’ volatilities.
Market price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual security, or its issuer, or factors affecting all securities traded in the market.
Risk management process
Market risk can be said to be unavoidable, as The Bank is exposed with each investment made in marketable securities or any other financial instruments like derivatives. The bank’s strategy in controlling this type of risk as well lies in diversification of portfolio through the use of VAR and other market risk limits. Also it is crucial to keep monitoring the developments in the market and the elements that are impactful to stocks and market movements, including analysis of the operational and financial performance of the investment sources. There are 3 steps in managing this risk:
1. The first step starts off with measuring the market risk function that implements evaluation and the risk policies of the used financial instruments in the trading book. All evaluation models should be independently examined and approved for mathematical integrity and suitability. the use of these models to measure market risk within a 99% confidence level through value at risk (VaR), stressed value at risk (SVaR).