MARITIME & MERCHANT BANK ASA Pilar III 2023
According to Basel III and
The Capital Requirements Regulation
Pilar III
3.3.2 CALCULATION BASIS FOR COMPANIES | 16 | ||
3.3.3 CREDIT MANAGEMENT AND CONTROL | 16 | ||
3.3.4 CONCENTRATION RISK STRESS TEST | 17 | ||
3.4 | ESG | 17 | |
3.5 | INTEREST RATE RISK | 17 | |
3.6 | CURRENCY RISK | 19 | |
3.7 | CVA RISK | 20 | |
3.8 | LIQUIDITY RISK | 20 | |
3.9 | OPERATIONAL RISK | 21 | |
RISK MANAGEMENT IN MARITIME & MERCHANT BANK | 22 | ||
4.1 | CORPORATE GOVERNANCE | 22 | |
4.1.1 | MANAGEMENT PRINCIPLES | 22 | |
4.1.2 | RISK LIMITS - RISK APPETITE | 23 | |
4.1.3 | GOVERNING POLICIES | 23 | |
4.1.4 | FUNCTION POLICIES | 23 | |
4.1.5 WORK PROCESSES AND PROCEDURES | 24 | ||
4.1.6 | KEY CONTROLS | 24 | |
REMUNERATION | 24 | ||
ATTACHMENTS | 26 | ||
STANDARD FORM FOR DISCLOSURE OF COMMON EQUITY CAPITAL | 26 | ||
TEMPLATE EU KM1 - KEY METRICS TEMPLATE | 32 |
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CAPITAL REQUIREMENTS
The Bank's Risk Policy provides a general description of the types of risk the Bank faces and how the Bank should act in relation to these. This is described in the Bank's Risk Policy.
The Bank must at all times maintain control over the risks it faces. In cases where the risk is greater than what is acceptable in relation to our policy, measures must immediately be taken to reduce the risk.
Different risks within the various areas will have different probabilities of occurring and different consequences for the Bank. The emphasis must be to focusing on the risks with the greatest consequences.
Banking entails systematic risk taking versus risk pricing. This means that the risk must not be so high that it threatens the existence of the Bank, while at the same time it must not be so low that it threatens the Bank's earnings. The Bank accepts a moderate risk for its total business.
2.1 COMMON EQUITY TIER 1 (CET 1)
Below is an overview of the Bank's capital and minimum capital requirement regarding Pilar I calculated using the standard method regarding credit risk method and the basic method regarding operational risk. The Bank's capital base consists only of Common Equity Tier 1 (CET 1) capital.
Amounts in 1 000 USD | Calculation | Risk Weight | Balance | |
Basis | ||||
Share capital | 9 709 | 9 709 | ||
Other reserves | 121 874 | 121 874 | ||
- | Dividend | - 5 160 | - 5 160 | |
- | Deferred tax assets and intangible assets | - 61 | - 61 | |
- | This year's result | - | - | |
- | Adjustments to CET1 due to prudential filters | - 144 | - 144 | |
Common Equity Tier 1 (CET 1) | 126 215 | 126 215 | ||
Credit Risks | ||||
+ Bank of Norway | - | 0% | 6 546 | |
+ | Local and regional authorities | - | 0% | 13 153 |
+ | Institutions | 13 477 | 20% | 67 385 |
+ Companies | 302 069 | 84% | 358 752 | |
+ Covered bonds | 12 245 | 10% | 122 454 | |
+ Shares | 243 | 100% | 243 | |
+ Other assets | 1 679 | 100% | 1 679 | |
Total Credit risks | 329 713 | 570 212 | ||
+ | Operational risk | 38 674 | ||
+ | Counterparty risk derivatives (CVA-risk) | 2 944 | ||
Total calculation basis | 371 330 | |||
Capital Adequacy | ||||
Common Equity Tier 1 % | 34.0% | |||
Total capital % | 34.0% |
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2.2 LEVERAGE RATIO
Maritime & Merchant Bank's capital target for the leverage ratio is 10.00%.
The requirement from The Financial Supervisory Authority of Norway is 3% leverage ratio.
The leverage ratio for Maritime & Merchant Bank was 21.68 % on 31.12.2023.
2.3 BUFFER REQUIREMENTS
Maritime & Merchant Bank's Countercyclical buffer is calculated like this:
Exposure to customers by | Country-specific | Capital requirements | |||
geographical location (1) | USD | buffer | USD | % | |
Norway | 143 325 726 | 2.50 % | 3 583 143 | 2,50 % | |
Germany | 33 752 606 | 0.75 % | 253 145 | 0,75 % | |
USA | 23 754 029 | 0.00 % | - | 0,00 % | |
Hong Kong | 9 250 407 | 1.00 % | 92 504 | 1,00 % | |
Other Countries | 91 985 712 | 2.50 % | 2 299 643 | 2,50 % | |
Other Assets and shares | 625 069 | 2.50 % | 15 627 | 2,50 % | |
Total | 302 693 549 | 6 244 061 | 2.06 % | ||
(1) Loans = Loans + Committed loans - Cash Pledge | |||||
Maritime & Merchant Bank's Systemic Risk buffer is calculated like this: | |||||
Exposure to customers by | Country-specific | Capital requirements | |||
geographical location (1) | USD | buffer | USD | % | |
Norway | 143 325 726 | 4.50 % | 6 449 658 | 4.50 % | |
EU countries (without | 33 752 606 | 0.00 % | - | 0.00 % | |
System Risk Buffer) | |||||
Other countries | 124 990 148 | 0.00 % | - | 0.00 % | |
System Risk Buffer Other | 26 717 170 | 4.50 % | 1 202 273 | 4.50 % | |
Total | 328 785 651 | 7 651 930 | 2.33 % |
(1) Loans = Loans + Committed loans - Cash Pledge
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RISK ANALYSIS
The Bank's risk is managed in accordance with the Bank's various policies and routines. Expertise will be a means of management and control in all areas.
As far as the management of credit risk is concerned, this is performed in accordance with the regulations for capital adequacy as they are described in Circular 03/2022. The overarching guidelines for managing credit and counterparty risk are described in detail in this document. This specifies that the Bank uses the standard method. Further descriptions are provided in the underlying policies and routines for this area.
Credit risk is the risk of the Bank incurring losses in connection with granting credit due to the customer being unable to fulfil their obligations. This is one of the risks that can have the greatest consequences and is thus one of the risks the Bank must focus on and monitor most.
The key prerequisites for reducing this type of risk are good credit assessments, as well as good routines, systems and tools for granting credit and monitoring loan commitments.
A special Credit Policy has been prepared that describes this in more detail.
The Bank's Credit Policy states that debt servicing capacity is the most important criteria when considering granting credit. Thereafter, the collateral is assessed. The policy also requires that all credit customers have adequate insurance cover.
The Bank must maintain control over its credit risk at all times through the use of good systems and routines for granting credit and monitoring commitments. The Bank wants to maintain a moderate risk profile when it comes to credit risk.
3.1 STATUS
The profit for 2023 the period before tax is USD 18 572 116 (USD 13 627 283) and profit after tax is USD 12 899 987 (USD 7 188 696). The bank has zero credit losses and no distressed loans. The return on equity before tax was 15% in the 4th quarter of 2023 (13.8%).
The dividend for 2023 is USD 0.063 per share for 2023 (Total USD 5 159 995), which is 40% of profit after tax.
2023 was a new year characterized by war, conflicts, and geo-political unrest. The war between Ukraine and Russia has raged on unabated. The attack by Hamas on Israel has triggered a regional conflict with major consequences in an already vulnerable area. Unfortunately, both conflicts seem to be far from a solution, at least in the short term.
Despite fears of inflation and general uneasiness about growth in the economy in the industrialized part of the world, global stock exchanges have consistently shown rising indices throughout the year.
However, growth in the world economy is moderate and according to OECD's calculations global growth rose by an estimated 3,1% in 2023, is expected to slow to 2,9% in 2024 and then increase to 3% in 2025. OECD points out that further growth depends on Asian economies are developing positively.
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War and crisis situations have historically often influenced the shipping markets in a positive direction and the current situation is no exception. The tanker market is experiencing a boom with a strong rate development throughout the year and with a corresponding increase in ship values. Recent developments in the Middle East have reinforced this.
The dry cargo market was disappointing through parts of the year with a long-awaited recovery towards the end of the year and the start of 2024 has given reason for some optimism. For both tank and dry cargo, the order book for newbuilding is moderate in a historical perspective and the delivery time for newbuilding is beginning to approach 3 years on average.
The container market has been characterized by many analysts as a ''predicted disaster'' because of a contracting wave in connection with the extreme rate development in 2020-22. Rates have come down significantly from historical levels, but the market is currently somewhat more stable than many forecasts suggested, but there are many uncertainties now that we are looking ahead. Phasing out older tonnage and compliance with the IMO regulations for emissions will be key factors.
The strong focus on what will be the fuel of the future for ships continues. Green ammonia, methanol and hydrogen are all in the news basically every day. The various options have their own characteristics and corresponding pros and cons. The big challenge will be to raise production to a volume that can meet demand on a global level. The access to sufficient green electric power will inevitably be the key issue.
The supply of credit to the maritime sector has been maintained at a high level. Not only traditional banks but also alternative lending platforms and various fund constellations offer financing, so there is coverage to say that there is sufficient loan capital available for both project-based and company financing. The market is characterized by quite fierce competition and margins are under pressure.
The requirements for safe and reliable transport are increasing. Deliveries of critical goods to protect life and health in vulnerable areas are vital. Maritime transport is and will be the key element in safeguarding the safety of the population. We will contribute in our own way by financing projects for customers we know take this heavy responsibility seriously through professional operation and management.
3.2 IT
Given the inherent IT-risks for a bank, this area is subject to continuous monitoring. IT-related risks are closely monitored and included in the Bank's risk reporting to the Board and executive management team. The Internal Audit also carries out independent reviews in this area.
3.3 CREDIT RISK
Credit risk is the major risk to the Bank. Maritime & Merchant Bank ASA may face a loss if the borrower is not able to pay interest or principal as agreed upon, provided the pledged collateral is not sufficient to cover the Bank's exposure.
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The Bank monitors market developments in segments where it has exposure and takes a proactive approach towards the risks taken.
The Bank's internal credit strategy has limits for maximum exposure to the various shipping segments, and Acceptable Risk Criteria form guidelines for the lending strategy.
The Bank uses an internally developed scorecard model for assessing the credit risk in the loan portfolio. The scorecard model predicts Probability of Default (PD), Loss Given Default (LGD) and risk class (from 1 to 10). Default is failure to satisfy the terms of a loan obligation or failure to pay back a loan.
Significant judgements are required when assessing models and assumptions, and resulting estimates are thus uncertain in nature. The model is based on experience and criteria well known in scoring models. The model is validated on a regular basis.
Forward looking factors, like expected freight earnings and ship values, are based on one year forward estimates. Time charter rates for each specific segment and interest rates that are used in the model are those prevailing at the time of scoring.
Input in the scoring model for establishing the PD for one specific exposure can either be the actual earnings based on freight contracts entered into, or shipbrokers earnings estimates for the next 12 months, normally expressed in the time charter rates for the period going 12 months forward.
When a loan is granted, the PD is estimated for the full tenor of the loan, and projected future cash flow is based on long term time charter rates for similar tenor (if available) in combination with consideration of low rate scenarios.
Risk classification is done once per year as a minimum in connection with annual renewal of exposures, or more frequently if there are shifts in input factors which are not regarded as temporary.
Risk classes and credit score: | |||
Very low risk Credit score: 1-2 | PD: | 0.00 - 0.25% | |
Low risk | Credit score: 3-4 | PD: | 0.25 - 1.00% |
Medium risk | Credit score: 5-7 | PD: | 1.00 - 3.00% |
High risk | Credit score: 8-9 | PD: | 3.00 - 8.00% |
Loss exposed | Credit score: 10-11 | PD: | > 8.00% |
Factors in scorecard PD - model:
Quantitative factors:
- Loan to value (LTV) - Value Adjusted Equity
- Interest coverage - Cash flow to support interest payment
- Instalment coverage - Cash flow to support instalments
- Current Ratio
- Free Cash
Qualitative factors
- Corporate structure
- Ownership
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- Technical management
- Commercial management
Factors in LGD model:
- Age of vessel
- Liquidity of vessel type (specialised tonnage)
- Yard/Country
- Net loan exposure above scrap value
- Enforcement cost
- Jurisdiction
- Corporate complexity
- Covenant Structure
- ESG
Expected Loss (EL)
EL = PD * LGD * EAD
EAD = Exposure at Default (Notional + Accrued Interest - Cash Reserves)
3.3.1
Loss allowance
The EL is performed on an individual basis. After the transition to IFRS 9, provisions have been presented as expected loss over 12 months (Step 1) and expected loss over the life of the instrument (Step 2).
Non-performing commitments (Step 3) are commitments where the customer has not paid due instalments on loans within 90 days of maturity (or as described in the Financial Report 31.12.2023, Note 6).
If credit risk has increased significantly after initial recognition but there is no objective proof of loss, an allowance of expected loss over the entire lifetime ("Step 2") has to be made. The individual loss provisions under IAS 39 did not change materially upon the transition to IFRS 9 ("Step 3").
In assessing what constitutes a significant increase in credit risk, the Bank, in addition to the standard's presumption of financial assets that have cash flows that have been due for more than 30 days are subject to significantly increased credit risk, assumed qualitative and quantitative indicators. The most important quantitative indicator the Bank assess is whether it has been a significant increase in credit risk determined by comparing the original likelihood of default and Loss Given Default ("PD x LGD") with the Probability of Default and Loss Given Default ("PD x LGD") at the reporting date. However, when assessing significant increase in credit risk for IFRS 9 purposes, Loss Given Default is not included in the assessment. Based on this the Bank has defined that a doubling in the Probability of Default or an absolute change of 1% constitutes a significant increase in credit risk.
Reclassification of commitments from Step 2 to Step 1, is based on an individual assessment. However, there must be some objective evidence that the commitment has recovered.
The Bank follows qualitative and quantitative indicators on a regular basis and in any situation where there is a suspicion that there have been conditions of negative importance for the commitment/customer.
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Macro scenarios
Expected Loss from the Bank's risk score model will be adjusted with a macro scenario factor (MF). The Bank estimates three macro-economic scenarios consisting of factors that will or can have an impact on shipping markets and value appraisal of vessels financed in our portfolio in the respective markets. Each scenario gets assigned a probability and a factor. The factor represent change in Expected Loss or Loss Allowance. The forecast, probability assignment and factor estimation are based on own judgment and experience.
The following factors are included in the macro evaluation process:
- Demand for seaborn shipping (World growth (GDP))
- Supply: Orderbook (shipbuilding), scrapping and idle capacity (utilization)
- Cyclicality (we assume shipping is cyclical and mean reverting)
- Geopolitical and other factors
The probability weighted macro factor (MF) will be multiplied with the Expected Loss and give Loss Allowance (or Macro Scenario adjusted Expected Loss). The factor (MF) is calculated to be 1,6331.
Exposure in the scenario model is the same as at year-end (31.12.2023).
Loss Allowance and Impairments
Loss allowance | 31.12.2023 | 31.12.2022 | 31.12.2021 | 31.12.2020 | ||||
Step1 | 1 298 | 277 | 1 345 | 649 | 618 860 | 659 824 | ||
Step2 | 436 250 | 568 370 | 826 436 | 779 360 | ||||
Step3 | 0 | 0 | 0 | 0 | ||||
Sum | 1 734 | 527 | 1 914 | 019 | 1 445 | 296 | 1 439 | 184 |
Allowance/Loan Ratio | 0,51 % | 0,51 % | 0.46 % | 0,53 % | ||||
Impairments (Credit Loss) | 386 435 |
Forbearance
Based on the soft freight markets for the bulk vessels, a small number of clients were granted relief on their contractual debt obligations towards the bank (amortisations only) during-23. All waivers were done in combination with the ultimate owners of the borrowers providing new equity/liquidity into the borrowing entities to strengthen their financial position. Loans with reliefs given are individually assessed to be moderate risk and no significant negative migration.
As per year end 2023 no commitments have been forbearance marked.
31.12.2023
Number | Exposure | Amortization | Interest | Owner | |
Stage | of loans | 2022 | relief | relief | contribution |
1 | 0 | 0 | 0 | 0 | 0 |
2 | 0 | 0 | 0 | 0 | 0 |
Total | 0 | 0 | 0 | 0 | 0 |
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Disclaimer
Maritime & Merchant Bank ASA published this content on 14 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 March 2024 12:01:06 UTC.
