PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 2009, 2008 AND 2007
Expressed in millions of Rupiah, unless otherwise stated
Appendix 5137 56. RISK MANAGEMENT continued
Credit Risk continued PG has fundamentally changed the business process in credit where the Bank now proactively gives
priority to industries which give economic value added and select the best companies and individuals within those industries winner players which are set as targeted customers. By using this proactive
approach, the quality of the Bank’s portfolio will improve because the loans granted will be more effective and give value add for both the debtor and the Bank. This proactive approach will also prevent
risk concentration within one particular industry or particular debtor because the Bank actively limits the exposure through Limit Policies Industry Limit and Debtor Limit.
PG is periodically reviewed and the back testing of PG is conducted regularly so that the guideline will remain relevant and up-to-date and has predictive value at an acceptable level. In the first quarter of
2009, the Bank developed Portfolio Outlook which serves as one of the references in determining industrial target market in loan expansion. Portfolio Outlook is issued in an ad hoc manner based on
certain economic conditions which can influence the performance of the loan portfolio. The issuance of Portfolio Outlook is an anticipatory step early warning before the changes in economic condition as
mentioned above are included in the Industry Classification review.
As part of its active portfolio management, the Bank always monitors the development of credit risk portfolio by calculating the Bank’s credit risk profile which reflects the inherent risk and the effectiveness of
the risk control system. The Bank also monitors the development and the quality of the portfolio based on concentration e.g. per business segment, 25 largest debtors, industrial sector, regions, product type,
currency type and risk class. Therefore, the Bank can take anticipatory steps and risk mitigation in both individual and portfolio level.
To monitor the quality and to test the elasticity of portfolio quality NPL and Yield to changes in economic variables which can affect the Bank’s capital adequacy, the Bank regularly and incidentally ad hoc
conducts a stress test to the credit portfolio e.g. per large borrower group, business segment, industry and products based on various scenarios. With this stress test, the Bank can anticipate earlier and take steps
for controlling portfolio and finding the best and optimal solution as short-term and long-tern strategies. Therefore, the Bank’s portfolio quality and capital adequacy can be well maintained.
Based on the explanation above, we can conclude in general that credit risk management in Bank Mandiri has been conducted comprehensively and improved continuously for instance in terms of its control
system.
In continuously developing the quality of human resource in risk management, the Bank has developed a Risk Management Academy which has 18 eighteen modules, specifically prepared for improving the
knowledge and risk awareness of the Bank’s employee.
Market and Liquidity Risk
a. Liquidity Risk Management
Liquidity represents the Bank’s ability to meet all financial liabilities as they fall due in normal condition. The Bank’s liquidity is influenced by the funding structure, asset liquidity, liabilities to the
counterparty and loans commitment to the debtors. Liquidity risk is caused by the inability of the Bank to provide liquidity at normal price that effects the profitability and Bank’s capital. To mitigate
potential liquidity risk, the Bank manages its liquidity risk in order to be able to meet any financial obligation as it comes due, and to maintain an optimum level of liquidity. These objectives are
achieved by setting and implementing a liquidity risk management policy that designates an optimum liquidity reserve, measures and sets limits for liquidity risk, outlines scenario analyses and
contingency plan, and designs a funding strategy as well as preserves access to the market.
PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 2009, 2008 AND 2007
Expressed in millions of Rupiah, unless otherwise stated
Appendix 5138 56. RISK MANAGEMENT continued
Market and Liquidity Risk continued
a. Liquidity Risk Management continued
The liquidity level of the Bank is measured through the Minimum Reserve Requirement as regulated by Bank Indonesia in Bank Indonesia regulation No. 1025PBI2008 dated 23 October 2008
concerning amendment of PBI No. 1019PBI2008 regarding Statutory Reserves at Bank Indonesia for commercial Banks in Rupiah and foreign currencies. In accordance with the regulation, the
minimum ratio of statutory reserves which Bank shall maintain is 7.50 from Third Party Funds TPF in Rupiah which consists of Primary Statutory Reserve and Secondary Statutory Reserves
and 1.00 from TPF in foreign currency. Primary statutory reserves is 5.00 of TPF in Rupiah was effective as at 24 October 2008 and Secondary Statutory reserves is 2.50 of TPF in Rupiah was
effective as at 24 October 2009.
As at 31 December 2009, the Bank’s primary and secondary reserve for Rupiah is 5.00 and 42.29, respectively and 1.32 for secondary reserve for foreign currency.
The Bank’s potential liquidity risk is assessed and monitored through a liquidity gap analysis, which is a projection of the future. Based on the Bank’s 2009 plan Rencana Kerja dan Anggaran
Perusahaan, or RKAP, the Bank’s liquidity is projected to be in a surplus position over the next 12 months. Each funding deficit projection is monitored through Maximum Cumulative Outflow MCO
limit.
The Bank’s ability to handle differing liquidity pressures is assessed by running a range of liquidity scenarios that covers both normal and unusual situations. These also include scenarios for extreme
or crisis conditions stress testing, which then generates contingency plans.
According to the contingency funding plan, the Bank may source its funding needs in bank specific crisis by borrowing ex: repurchase agreement, bilateral funding, collateralised facility agreement,
foreign exchange swap, selling and marketable securities such as Government Debenture Debt and through pricing strategy for third party funding. In general market crisis, bank may source its
funding needs from its secondary reserve which has been build previously or through the liquidity facility from Bank Indonesia.
b. Interest Rate Risk Management
Interest Rate Risk represents a risk that influences the increasedecrease of financial value of the Bank’s assets and liabilities Banking Book due to changes in interest rate that will effect on Bank’s
profit and capital. Interest rate risk is mostly due to the difference in time repricing between Rate Sensitive Assets RSA and Rate Sensitive Liabilities RSL. RSA are dominated with government
bond and loans, and RSL are dominated with Third Party Fund demand deposits, savings deposits and time deposits.
The Bank manages its interest rate risk through the use of repricing gap analysis, duration gap analysis and simulation. To describe the amount of the interest rate risk exposure, the Bank uses
re-pricing gap approach, whilst to measure the revenue sensitivity NII Sensitivity and Economic Value of Equity EVE in effect of interest rate change, the Bank performs simulation with interest
rate shock increasedecrease scenario.
PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 2009, 2008 AND 2007
Expressed in millions of Rupiah, unless otherwise stated
Appendix 5139 56. RISK MANAGEMENT continued
Market and Liquidity Risk continued
b. Interest Rate Risk Management continued
The Bank measures NII Net Interest Income and economic value of equity by assuming a gradual parallel shift ramp up and down in the term structure of interest rate amounting to 100 basis points
bps. The sensitivity analysis result shows that a gradual parallel shift in the term structure of interest rate by 100 bps Rupiah and Foreign Currency will potentially decreased the next 12 months
targeted NII amounting to 0.72 unaudited and decreased the EVE by 0.77 unaudited from Equity. In addition to sensitivity analysis, the Bank also uses a statistical approach to assess the
impact of interest rate volatility on earning Earning at Risk, EaR and equity Capital at Risk, CaR. As at 31 December 2009, the Banks records 0.50 unaudited and 2.31 unaudited EaR and
CaR of its equity.
The Bank also regularly conducts sensitivity analyses on extreme scenarios stress testing to see the impact of significant changes in interest rate on the Bank’s NII and equity value.
The Bank applies a set of monitoring tools called Interest Rate Risk Red Flags, to give an early warning indicator of interest rate risk, which consists of Repricing Gap, NII Sensitivity and Economic
Value of Equity Sensitivity, Earning at Risk and Capital at Risk. The Bank monitors and manages its interest rate risk by establishing limits on interest rate risk indicators. Breach of the limits will be
mitigated through assets-liabilities restructuring or hedging strategies. To certain degree, the Bank uses derivative instruments to hedge its exposure to interest rate change, mostly in the form of
interest rate swaps and forward rate agreements.
c. Pricing Management
Pricing Management is one of the performed strategies in order to support the Bank in taking control of the market share revenue by maximising Net Interest Margin NIM especially through third party
fund and loans pricing.
In determining the third party fund pricing, the Bank considers internal and external factors. Internal factors such as: funding cost, structure and funding target. External factors such as: market liquidity,
market interest rate and guarantee interest rate. By considering the internal and external factors, the Bank implemented the aggressive or defensive strategy.
To determine loans pricing, the Bank established the interest rate based on risk risk based pricing. Loan interest rate structured consists of Cost of Funds, Overhead Cost, Cost of Allocated Capital
and Risk Premium. The Bank established Required Yield which is the Bank’s minimum rate of return.
d. Market Risk Management
The Bank performes market risk management by monitoring the trading activities performed by Treasury. As guidelines, the Bank has established trading risk limits in the form of Value at Risk Limit
VaR Limit, dealer nominal limits and dealer loss limit. The monitoring results were stated in the Trading Risk Profile report periodically such as daily, weekly and monthly basis. Different with other
reports, the Monthly Report describes comprehensively the market risk management including Stress TestingScenario Analysis calculation to quantify the abnormal market movement. In addition, the
reports also states back testing result to assess the VaR measurement’s effectiveness and the methodology’s accuracy.
PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31 DECEMBER 2009, 2008 AND 2007
Expressed in millions of Rupiah, unless otherwise stated
Appendix 5140 56. RISK MANAGEMENT continued
Market and Liquidity Risk continued
d. Market Risk Management continued
In accordance with Bank Indonesia regulations, the Bank has considered market risk using Standard Model in allocating its capital. The minimum capital adequacy required which has
considered market risk as at 31 December 2009 was Rp127,935, therefore the CAR which has considered market risk and credit risk is 15.43 Note 51.
The Bank continuously reviews and improves the implementation of market risk management with the regulation requirements, up to date condition and best practice.
e. Foreign Exchange Risk Management
The Bank measures and manages the structural foreign exchange risk to understand the impact of the exchange rate movement on the Bank’s revenue and capital. The Bank’s foreign exchange
position is primarily US Dollar-denominated, most of the liabilities are in the form of third party funds and borrowing whilst most of the assets are in the form of loans, inter-bank placements and
marketable securities.
In order to manage and mitigate the foreign exchange risk, foreign currency loans and placements were funded mostly with the same currency and to hedge significant foreign exchange open
position, the Bank used derivative instruments such as FX forward, swap and option.
Bank Mandiri complied with Bank Indonesia’s regulation that requires the Net Open Position NOP in all foreign currencies for on balance sheet and aggregate to be no more than 20.00 of the
Bank’s Capital Tier I and Tier II. For prudential principles, the Bank has established internal limit to be no more than 10.00 of the capital. As at 31 December 2009, the Bank’s NOP was 9.09 and
NOP aggregate absolute was 3.44 from the capital Note 52.
Operational Risk Operational Risk is defined as the risk of loss resulting from inadequate or failed in internal processes,
people and systems or from external events. The Bank proactively implements operational risk management to protect the interests of the Bank’s stakeholders. An effective Operational Risk
Management ORM program will protect the customers’ interest, decrease incidence of operational losses, improve the Bank’s reputation and support the Bank in achieving its business goals. Currently, the
Bank conducts several programs for improving its operational risk management, as follows:
a. Operational Risk Mitigation
- The Bank continues to review its policy and adjust operational risk management procedures in
accordance to the latest developments. The Bank’s standard policy consists of Standard Operating Procedures SOP for Operational Risk Management, SOP for New Product or
Activities NPA, as well as the SOP for Business Continuity Plan BCP as a guide for effective implementation of Operational Risk Management in a holistic manner.
- To improve its Operational Risk management, the Bank conducts several ORM Tools
implementation to be deployed in all its business unit Mandiri Loss Event Database, Risk Control Self Assessment and Key Risk Indicators in order to help the Business units manage
their operational risk in its daily activities.
- To identify the Operational Risk, the Bank regularly reports its operational risk profile and
segregated by its business units, in order capture the magnitude of the Bank’s operational risk exposed by Bank’s and all business units.
