Alfa-Bank Ukraine (ABU) has developed comprehensive risk management policies, based on the general risk management principles of Alfa-Bank Russia and adapted to the specific dynamics of the banking sector in Ukraine. Our Bank focuses on managing risk in the following areas: credit, liquidity, interest rates, currency and operations.
The cornerstone principles of our risk management policy are:
- Centralization of all financial risk management at the head office level;
- Maintaining a balance between risk and profitability;
- Defining limits and restrictions on certain balance sheet items;
- Unified pricing of transactions and services;
- Ensuring risks are continuously monitored;
Alfa-Bank Ukraine recognizes the following risk categories:
Credit risk
Alfa-Bank Ukraine manages its credit risk by establishing internal policies aimed at keeping credit risk exposure within acceptable parameters.
The Bank’s internal credit RM policy is to:
- set, monitor and review internal credit ratings of customers and counterparties
- set and monitor lending limits
- constantly monitor creditworthiness of customers and establish allowances for asset impairment
Alfa-Bank Ukraine uses a group-wide system of internal credit ratings (ICRs) based on methodologies developed by Alfa-Bank Russia for customer and transaction analysis. The ICR system regulates every aspect of the Bank’s lending operations and outlines procedures for analyzing the financial position of borrowers and the value of any proposed collateral or other security, as well as specifies the requirements for loan documentation and the procedure for monitoring loans.
Liquidity risk
Liquidity risk arises from mismatches between the maturities of a bank’s assets and liabilities. Sufficient funds are necessary to meet the Bank’s general funding commitments, manage its positions, and fund assets at appropriate maturities and rates, as well as liquidate them at a reasonable price and in an appropriate time frame. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. An unmatched position potentially enhances a Bank’s profitability, but can also increase the risk of losses. The Bank’s policy on liquidity risk is that liquidity prevails over profitability. The Bank has developed a comprehensive package of procedures and systems to implement its liquidity risk management strategy.
Interest Rate Risk
Due to the very nature of the banking industry, the Bank is exposed to some interest rate risk, primarily due to lending and advances to customers and other banks at fixed interest rates, in amounts and for periods that differ from those of term deposits and other borrowed funds at fixed interest rates. The Bank measures interest rate risk in each of the main international currencies separately, although its management procedures are the same for all currencies. ALCO sets limits on repricing mismatches that may be undertaken, which is monitored weekly by the Treasury. In the absence of any available hedging instruments, the Bank normally seeks to match its interest rate positions.
The Treasury monitors changes in benchmark interest rates, market volatility or similar events on a day-to-day basis. The results of the Treasury’s evaluations and analyses are discussed at ALCO meetings. ALCO also shapes the policies guiding the Bank’s interest rate risk management approach, including minimum credit loans and maximum borrowing rates, taking into consideration products, customer groups and trends. In addition to standard calculations, the Bank uses stress tests that determine the level of interest rate risk in unforeseen circumstances. This approach enables the Bank to evaluate possible future changes in net interest income, as well as determine priority areas for interest risk management. Stress test results are also reviewed and discussed at ALCO meetings.
Currency Risk
Currency risk is a form of risk where the value of a bank’s financial instruments may fluctuate along with changes in foreign currency exchange rates. As the Bank has open positions in a number of different currencies, it monitors and sets limits on long and short term exposure by foreign currencies and uses the hryvnia as its base currency. Capital adequacy requirements also limit open currency positions for the Bank as a whole. The Bank complies with all applicable NBU requirements in addition to using its own methods for evaluating currency rate risk.
Operational Risk
Operational risk management principles:
- Expertise in all new products and initiatives;
- Review of all changes in current operational processes;
- Development of an operational risk management framework:
- Defining key indicators of bank operations
- Regular data collection processes with built-in data quality control
- Making use of MIS monitoring in decision-making
