ADCB

Annual Report and Accounts 2012 |

	Risk Management Strategy
	Governance Structure by Risk Type
	Responsibilities and Stress Testing
	Risk Factors

Risk Management

Risk Factors
Some principal risks which the Bank believes could cause its future performance to differ materially from expectations are described in the table overleaf. However, other factors could also adversely affect the Bank’s performance and so the risks discussed in this report should not be considered to be a complete set of all potential/emerging risks and uncertainties.

The Bank’s approach to identifying, assessing, managing and reporting risks is documented in various policies, processes and standard operating procedures (SOPs).

Risk Category	Description	Risk Management
Higher levels of customer and counterparty defaults arising from adverse changes in credit and recoverability that are inherent in ADCB’s business	As a result of changing macroeconomic landscapes throughout the world, adverse changes in consumer confidence levels, consumer spending, real estate prices could impact ADCB’s customers and thereby their ability to repay debts.	The Bank attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. The Bank also sets strict underwriting standards for all new credits. Portfolio monitoring is done at various business unit/ sector levels at regular intervals. The Bank revamped its Early Warning Alert programme this year.
The Bank’s loan and investment portfolio are concentrated by geography, sector and client	The Bank’s loan portfolio is concentrated in the UAE, and in particular to real estate and construction sectors.	Managing concentration is one of the key pillars of the risk appetite policy and is monitored very closely. Diversification is achieved through setting maximum exposure limits to individual counterparties sectors and countries via rating-based prudential thresholds, with excesses reported to the Board-level risk committees.
Changes in regulations and laws	ADCB is a highly regulated entity and changes to applicable laws or regulations, the interpretation or enforcement of such laws/ regulations, or the failure to comply with such laws/regulations could have an adverse impact on ADCB’s business.	The Bank closely watches the key regulatory developments in order to anticipate changes and impact on business. ADCB participates in regulatory consultative meetings to enhance the financial supervisory framework. Regulatory compliance is closely monitored by the Risk and Audit areas under the oversight of the Board-level risk committees. For further information on regulatory disclosures, please refer to ADCB’s US$7.5 mn Global Medium Term Note Programme Base Prospectus dated 18 February 2013 (pages 12 – 13)
Market risks due to potential exit of one or more countries from Euro as a result of the European debt crisis/ questions surrounding the strength of the US recovery	The Bank is exposed to market risk with respect to its investments in marketable securities and other financial instruments like derivatives.	The Bank limits market risk by maintaining a diversified portfolio and by the continuous monitoring of developments in the market. In addition, the Bank actively monitors key factors that affect stock and market movements, including analysis of the operational and financial performance of investees.
Risk of fraud loss/ operational losses	Operational risk is the risk of loss arising from system failure, human error, fraud, or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss.	The Bank cannot expect to eliminate all operational risks, but through a control framework, and by monitoring and responding to potential risks, the Bank is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.
Liquidity risk	Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn.	The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.
Capital risk	Capital Risk is the risk that the Bank has inadequate capital resources: to ensure capital requirements set by the Central Bank of United Arab Emirates; to safeguard the Bank’s ability to continue as a going concern and increase the returns for the shareholders; and to maintain a strong capital base to support the development of its business.	Capital adequacy and the use of regulatory capital are monitored on a regular basis by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the Central Bank of United Arab Emirates. The required information is filed with the regulators on a monthly basis.

For further information on risk disclosures, please refer to ADCB’s US$7.5 mn Global Medium Term Note Programme Base Prospectus dated 18 February 2013 (pages 1 – 16).