Annex 2: Basel III – Disclosures under Pillar III as per the Banking Act Direction No. 01 of 2016

Key regulatory ratios – Capital and liquidity

Basel III computation of capital ratios

Leverage ratio

Liquidity coverage ratio (LCR) – All Currency

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 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. Based on this process the Bank proactively raised both Tier I and Tier II capital to ensure the Bank's capital ratios remained well above the internally set thresholds, assuming the projected growth in risk weighted assets over the next few years.

In monitoring the progress of the planned capital optimisation initiatives and to take periodical corrective action to improve the capital position of the Bank, the Bank has created the Basel Committee, a working group, which meets on a quarterly basis to deliberate the progress of initiatives and take decision on corrective action. The Committee is chaired by the Managing Director/CEO of the Bank.

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 is committed to maintaining the internal CAR thresholds.

A comprehensive analysis of “Strengthening funding and liquidity management with ALCO oversight” given on page 88.

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)

Exposures by asset classes and risk weights (post CCF and CRM) (Contd.)

Market risk under standardised measurement method

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

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

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

Differences between accounting and regulatory scopes and mapping of financial statement categories with regulatory risk categories – Bank (Contd.)

There were no differences between accounting and regulatory scopes.

Bank Risk Management Approach

Effective risk management is at the core of the Bank’s value creation model as it accepts risks 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 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” on pages 254 to 284.

Risk management related to key risk exposures

The quantitative disclosures relating to key risk areas such as credit, market, liquidity, operational, Environmental, Social, and Governance are presented and discussed in the Section on “Risk Governance and Management” on pages 254 to 284 and in Note 66 of the Financial Statements on Financial Risk Review on pages 426 to 457.

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