risK oVErViEw CORPORATE GOVERNANCE
The Bank is currently measuring the economic capital needs both for credit
risk and operational risk. This will be used as the base to implement vBM
value Based Management through the measurement of RORAC Return On Risk
Adjusted Capital. One of Bank Mandiri business focuses in 2012 is the micro
segment; this was evident by signiicant growth of 60.4 yoy in micro segment
that was justiied with high rating of RoRAc.
Bank Mandiri has prepared Basel iii implementation that refers to Basel
documents as well as regulations and initiatives presented by Bank indonesia.
Bank Mandiri is active in the working group participation of Basel iii and
Quantitative impact study Qis held by Bank indonesia. Based on June 2012
position, Qis results generally present Bank Mandiri’s stance in meeting
the Basel iii guideline, with higher simulation result of capital Adequacy
Ration compared with Basel ii capital adequacy calculation. This was due
to Bank Mandiri capital structure that was dominated by Tier 1 common
equity. Qis results also present Bank Mandiri operations at a low-risk level,
by the leverage ratio adequacy and high liquidity ratio, as the result of
tight risk controlling of balance sheet exposure. The position of liquidity
assets and the Bank’s balance sheet composition is consistent towards Basel
iii requirements.
suPPoRTing uniTs RevieW
RisK MAnAgeMenT THRougH oPeRATionAl AcTiviTies
Risk management through operational activities was intended for the
management of credit risk, market risk and operational risk on an acceptable
level. Bank Mandiri implements risk appetite and risk tolerance in the form
of a limit policy and limit system. This system is developed and proposed by
business units to the risk management unit, and approved by the Risk capital
committee. The limit was determined based on overall limits, limit per risk
type and limit per certain functional activity that possess risk exposure. The
limit policy function is not only for the risk controlling process but also to boost
business strategy and expansion into a growth corridor with an optimum risk-
reward proile.
credit risk is managed through front end, middle end and back end. Market
risk and liquidity management is implemented through limit systems. All
working units manage the operational risk on products and activity of the
Bank, while risk management units will do a bankwide review as well as
measure their efectiveness assurance by an Audit internal unit.
1. credit Risk Management credit risk arises from loan activity,
placement of securities at other banks, sales to customers and trading activity.
ProCEss FLow oF CrEdiT and CrEdiT risK ManaGEMEnT
loan Proposal
Pre- screen
Approval loan
Analysis Booking
Monitoring Review
collection, loan
Work out
Account Portfolio
strategy
credit Policy Bank
Mandiri KPBM,
standart Procedure
credit sPK,
product manuals,
standard operating
Procedures integrated
end-to-end loan
processing systems
loAn oRiginATion
sysTeM los
inTegRATeD PRocessing
sysTeM iPs
Front end Middle end
Back end
Four-eye, Portfolio
guideline industry
class, industry
Acceptance criteria,
Application Modules,
credit scoringRating,
spreadsheet, nota
Analisa Kredit,
limit, Bi
checking, Appraisal,
check on
the spot,
loan Pricing
loan Monitoring,
Watch list,
credit Risk
Proile, Portfolio
Management industry
limit, stress
Testing, validation
collection system,
loan Work
out, Portfolio
Management Phase
out, Portfolio
sales stages
loan Processes
Methods Tools
Policies integrated
systems
RISK MANAGEMENT
PT Bank Mandiri Persero Tbk.
Credit risk also arises from commitment and contingency transactions to
customers and counterparties. The objectives of credit risk management are
to measure, anticipate, and minimizing loss due to customer failure in debt
or counterparty in fulilling their obligations.
Bank Mandiri maintains an integrated credit process and credit risk
management by Business unit, credit operation unit, and credit Risk
Management unit. The process is supported by an integrated system and
applied in an end-to-end manner.
Credit Policy
Bank Mandiri developed the Bank Mandiri credit Policy KPBM as
the guideline in end-to-end credit management; include credit culture
and credit Doctrines. The credit policy application operationally is set under
credit Procedure standard sPK and in the Product Manual. The credit
management process irst deines the target market then the, risk assessment
and loan monitoring.
Bank Mandiri applies prudent principles in loan distribution, where the
independent business units and credit risk units conduct the credit analysis
function. The credit approval function is implemented with the “4 eyes principle”,
and an independent credit operation unit conducts the credit administration
function.
Credit approval
credit approval and its limit for the corporate and commercial segments
are measured with a credit rating system. This is followed with a business
appraisal analysis through an integrated spreadsheet and credit Analysis note
nAK as well as end-to-end with the integrated Processing system iPs.
Meanwhile the process is measured with our credit scoring system for
retail business banking micro and consumer segments. credit process and
credit risk management for micro and consumer segments are done with an
end-to-end process that is integrated with the loan origination system los.
credit rating wholesale and credit scoring retail and consumer models
are continuously developed and validated, as well as monitored through
scoring Model Review and Rating reports. The results of the credit rating
and credit scoring model delivers a Probability of Default PD score.
Meanwhile the Bank continuously develops loss given Default lgD and
credit conversion Factors ccF models to calculate exposure at Default eAD
to support Basel ii implementation and economic capital calculation.
The collateral in the credit process may be set as inanced objects moving or
unmoving objects, as well as non- inanced objects personal guarantee or
corporate guarantee. credit collaterals have to meet several criteria such
as economic value, marketability, transferability, and jurisdical value.
Credit Monitoring
Bank Mandiri strives to comply with Bank indonesia regulations and prudent
practices in assessing and monitoring credit quality, among others, based on
business prospect assessment factors, debtors’ performance and ability to pay.
A Watch list is applied to monitoring the credit of debtors from corporate,
commercial and business banking segments speciically for Rp2 billion
limit. The Watch list is a standard method, structured, and comprehensive
in monitoring the debtors’ performance. The system is used to conduct an
immediate action plan to prevent decreasing credit quality of debtors.
The monitoring process is done at least every quarter to identify potential
non-performing debtors through the integrated loan Monitoring system
with the iPs system, and to carry out early warning analysis. The Bank will
determine an account strategy based on an analysis of results and conduct
early action to prevent decreasing credit quality.
credit monitoring for Rp2 billion limit for business banking, retail and
consumer segments are implemented on the portfolio level through portfolio
analysis on several aspects portfolios quality and quantity from several
perspectives: industry, region, product, credit type, business unit, segment,
etc., which are presented on the credit risk report.
Bank Mandiri also conducts credit monitoring on credit processes and
systems, as well as its supporting
SUPPORTINg UNITS REvIEw
tools, through credit session forums that are regularly held for every credit
segment. Any issues and weaknesses on business process, credit policy as well
as methodology and credit tools will be identiied and immediately actioned for
improvement.
The Bank holds a periodical simulation and stress testing to anticipate early
warning signal the movement in the Bank’s portfolio quality per segment
or per industry sector, which may arise due to changes in economic
condition parameters that may occur under extraordinary circumstances
extreme but plausible. The Bank will obtain guidelines from this simulation
to closely monitor potential non- performing sectors and debtors and
to set anticipative steps to prevent the worst possible impact. Bank Mandiri
continues to conduct stress-testing simulations related to commodity
price luctuations and the impact of provincial minimum wage increases.
Credit Collection and recovery
The Risk Management Directorate develops policies to manage credit
collection and recoveries speciically for the retail and consumer segments
micro and business banking credit with limits up to Rp5 billion. The
employed policy was developed to be more focussed, systematic,
aggressive and integrated and is based on product type and collection
bucket. This policy is supported by the Automated collection system with
end-to-end manner and completed with the following collection tools:
a. To monitor and record billing
activities through the telephone to minimize Reputational Risks
and at the same time to be utilized as trainingcoaching.
PorTFoLio GuidELinE ProCEss
Targeted Prospective
industry industry class
eligible individual
customer industry
Acceptance criteria
Maximum exposure
limit industry
limit
b. To increase eiciency, efectiveness and productivity of the credit
card collection process which is integrated with the Behavior score.
To improve eiciency and efectiveness, the Bank applied in 2009 a credit card
billing strategy based on the collection recovery scorecard. This strategy
continues to be reined. The Bank will continue to enhance its Automated
collection system for credit cards and micro credit Debt Relief Program
restructurization as a commitment to comply with Bank indonesia’s regulation
on limit restrictions of restructured loan collectability.
Management Portfolio and Concentration risk
The Bank implements capital allocation and active portfolio management
principles in the portfolio level of credit risk management by referring to our
Portfolio guideline Pg, which consists of industry classiication and industry
Acceptance criteria and industry limit.
RISK MANAGEMENT
PT Bank Mandiri Persero Tbk.
This guideline will be applied in all credit risk management stages.
The objective of Industry Classiication and industry Acceptance criteria
is to pick winners from targeted customers from priority industries that
may provide added economic value. The proactive selection process has
created a professional and sustainable partnership relationship between the
Bank and customer. concentration risk is conducted through
industry sector diversiication in line with industry class. This is done by
considering several factors such as industrysector prospects, Bank internal
skills, and portfolio performance. industry limit is set for every sector
that stated a maximum credit allocation aligned with industry class. industry
limit’s difer based on the risk and return level of each industry. Meanwhile
concentration risk for debtor level is set through an in-house limit, a more
conservative manner compared with Maximum limit of credit Distribution
BMPK as stipulated by Bank indonesia.
CrEdiT CoMPosiTion BanK Mandiri PEr EConoMiC sECTor dECEMBEr 2012
Trading others
Agriculture Business
services Mining
Transport communication
construction electricity, gas Water
social services industry
1 2
3 4
5 6
7 8
9 10
5.56 3.46
3.13 1.08
22.52
18.89 14.02
13.45 11.53
6.36
Bank Mandiri does not engage in asset securitization activities as investors,
original creditors, or issuers.
The Bank successfully managed its credit risk capital allocation amounting
to Rp26.86 trillion as of December 2012; below the limit of Rp29.86 trillion.
industry 7.13
5.53 4.52
1.69 1.30
1.06 0.51
0.78
Foods Beverage chemicals others
Basic Metals Textiles, clothing leather
Pulp, Paper others others industry
non Metal Mining others Wood Forestry Products
SUPPORTINg UNITS REvIEw
SENSITIvITy ANALySIS CREDIT RISK Risk Factors
value Change NPL Change bps
gDP 100bps
42.59 Inlation
100bps 36.53
BI Rate 100bps
36.63 Exchange Rate RpUSD
Rp.100USD 30.03
Other Risk Factors Consider Fixed
Credit Growth and Quality
Bank Mandiri booked signiicant credit growth in 2012 and maintained its nPl
level. Bank Mandiri’s credit portfolio for all segments bank only was increased
by 24.1 yoy with nPl level of 1.74 gross or 0.37 net. several credit
segments experienced above average growth, such as micro segment with
60.4 yoy growth, yet maintained the nPl level at 3. The achievement
was attributable to the integrated and excellent end-to-end credit process,
covering identiication process of potential credit sector, accurate and
stringent underwriting process, continued credit-monitoring process,
comprehensive management portfolio, and disciplined settlement on non-
performing loans.
The Bank conducts periodical stress testing to analyze the impact of macro
economic trends toward the portfolio, towards its proitability and its capital
resilience. The stress testing is done in two ways: sensitivity analysis and scenario
analysis. Based on simulation results of sensitivity analysis in 2012, the impact on
macro variables movement will afect the nPl level on the Bank’s credit portfolio in
the next one year as follows:
voluMe cReDiT QuAliTy BAnK MAnDiRi DeceMBeR 2012 RP billion
400 30
1200 90
2000 150
800 60
1600 120
124,474 101,622
37,509 18,397
5,119 46,880
1,785 1,082
929 608
870 699
nPl Pl
nPl Pl
RISK MANAGEMENT
PT Bank Mandiri Persero Tbk.
2. Market Risk Management
Market risk – Trading Book
The trading book’s market risk was attributable to interest rate and
exchange rate luctuations on the trading portfolio including derivative
instruments. In the implementation of trading market risk management, the
Bank applies principle of segregation of duties by separating front oice
units executing trading transactions, middle-oice units implementing risk
management processes, developing policies and procedures and back
oice unit executing the transaction settlement process.
The Bank conducts a daily valuation process on the trading book portfolio
that is completed byindependent sources. The Bank uses market price
sources from: i. Reuters, Bloomberg or similar agency;
ii. Exchange prices or secondary market; iii. Screen prices; or
iv. The most conservative quotes
provided by a minimum of 2 two brokers andor an independent
market maker with a good reputation.
The Bank applies mark-to-model process for non-market price
instruments based on a methodology approved by the board of directors and
this is reviewed periodically.
Market risk measurement for the capital adequacy calculation is conducted
both with the standardized method as well as an internal method. The
standardized method calculation is used in the monthly reporting to the
regulator Bank Indonesia – bank only,
VaLuE aT risK Var PEr risK FaCTor rp.billion
vaR year End 2012
Maximum Minimum
Average year End 2011
Fx 2.25
11.70 1.28
4.88 2.73
IR 3.66
15.00 0.67
5.43 6.20
Total 4.84
16.66 1.75
7.57 6.31
Utilisation Limit vaR 10.57
44.91 3.82
17.70 17.01
Limit vaR Total 45.80
37.10
and quarterly consolidated. whereas the Internal Method calculation is done
in daily reporting to the management and utilizes the value at Risk vaR
methodology.
The Bank applies two vaR calculation approaches, as follows:
i. variance Covariance Method, to calculate market risk on plain vanilla
product transactions. This method applies the Exponential weighted
Moving Average EwMA concept in the volatility calculation that provides
a larger weighting for current data with a decay factor value at 0.94;
ii. Historical Simulation Method, to calculate market risk of derivative
transactions. The following are realization of value at
Risk in 2012:
whereas the realization of Minimum Capital Adequacy Requirement KPMM
in 2012 with Standardized and internal method is as shown on the right bar
chart.
The Bank conducts market risk monitoring on treasury activities
to ensure the risk is in line with the risk appetite. The process is done by
comparing risk realization towards set limits. Further, the Bank also monitors
treasury performance to ensure achievement on business target and
revenue.
The feasibility and accuracy of the value at Risk vaR internal method
approach is constantly measured through a backtesting process. The
backtesting process will present the existing threshold level, to measure
loss estimation compared with vaR calculations in line with actual
hypothetical loss and how to tolerate the threshold level. The result of
backtesting as of December 2012 presented a valid vaR calculation
methodology without breaching PL calculation is not exceeded daily vaR.
The Bank conducts stress-testing process on extreme market conditions
to evaluate capital resilience toward signiicant market movements and
prepares required strategies if a crisis arises. stress-testing is done through the
following stress scenario combination:
suPPoRTing uniTs RevieW
capital charge Market Risk
27-D ec
-11 10-
Jan-12 24-
Jan-12 07-F
eb -12
21-F eb
-12 06-M
ar -12
02-M ar
-12 03-
A pr
-12 17-
A pr
-12 01-M
ay -12
15-M ay
-12 29-M
ay -12
12- Jun-12
26- Jun-12
10- Jul-12
24- Jul-12
07- A
ug-12 21-
A ug-12
04-s ep
-12 18-s
ep -12
02- o
ct -12
16- o
ct -12
30-no v
-12 12-no
v -12
27-D ec
-12 11-D
ec -12
25-D ec
-12 20.000.000.000
15.000.000.000 10.000.000.000
5.000.000.000 -
5.000.000.000 10.000.000.000
15.000.000.000 20.000.000.000
Rp.billion Proit
loss vaR
upper vaR
lower
i. Based on Bank indonesia scenario, with the Bank biggest loss potential
will amount to Rp285.97 billion if the interest rate is increased by 400 basis
points and the Rupiah appreciates by 20;
ii. Based on the Bank’s Historical scenario, the Bank’s biggest loss
potential amounts to Rp234.17 billion if the interest rate is increased by 31
– 314.5 basis points and the Rupiah appreciates by 30.
RISK MANAGEMENT
Jan Feb
Mar Apr
May Jun
Jul Aug
sep oct
nov Dec
standard Model
internal Model
120.00 100.00
80.00 60.00
40.00 20.00
Rp.billion
PT Bank Mandiri Persero Tbk.
Market risk – Banking Book
The banking book’s market risk is attributable to, interest rate and
exchange rate luctuations on banking book activity. The banking book’s
market risk is managed by optimizing the structure of the Bank’s statement of
inancial position to obtain maximum yield at risk levels acceptable to the
Bank. The controls over the Banking book’s market risk is performed by
setting a limit which refers to the regulator’s requirements and the
internal policies, and is monitored on a weekly and monthly basis by the Market
Risk Management unit.
The banking book’s interest rate risk arises from movements in market
interest rates counter tothe position or transactions held by the Bank, which
could afect the Bank’s proitability earnings perspective as well as the
economic value of the Bank’s capital economic value perspective. The
sources of the banking book’s interest rate risk are repricing risk repricing
mismatch between asset and liability components, basic risk usage of
diferent interest rate reference, yield curve risk changes in the shape
and slope of the yield curve and the option risk loan repayment or release
of deposit before maturity. The Bank utilizes the repricing gap and performs
sensitivity analysis to obtain the projected net interest income nii and
economic value of equity eve. Based on simulation results of sensitivity
analysis as at December 31, 2012, the impact from an interest rate increase
of 100 bps will lower the level of Bank nii and equity by 2.74 and 2.82
respectively for the next 12 months, from the set target.
exchange rate risk is attributable to unfavourable exchange rate
movements in the market when the Bank has an open position. exchange
rate risk arises from foreign exchange currency transactions with customer
or counterparty, which led to an open position in foreign currency or structural
positions in foreign currency due to capital investment. The Bank manages
exchange rate risk by monitoring and managing the net open Position noP
in accordance with internal limits and the regulations of Bank indonesia.The
Bank posted overall noP absolute at 0.76 from capital as of December 31,
2012.
The Bank conducts stress testing on the banking book’s market risk on a regular
basis to asses the impact of interest rate and exchange rate movements
on extreme conditions crisis toward revenue and capital
Pricing Management
The Bank applies a pricing policy for loans and deposit products. The pricing
policy is one of the Bank’s strategies to maximise net interest Margin niM
and simultaneously support the Bank to achieve revenue and market share in
the competitive market.
As a market leader the Bank consistently seeks to apply strategies in terms of
pricing of funding. However, taking
sEnsiTiViTY anaLYsis inTErEsT raTE
Description Dec 2011
Dec 2012 nii sensitivity 100bps, nii 12mo
against target nii 3.07
2.74 eve sensitivity 100bps: equity
1.84 2.82
earning at Risk equity 0.40
0.26 capital at Risk equity
1.15 1.06
into account liquidity conditions and funding needs, the Bank may
implement an aggressive strategy greater than major competitors or
defensive equal to or smaller than major competitors.
The Bank implements risk-based pricing to customers, which varies
according to the level of credit risk. In order to minimize interest rate risk,
the lending interest rate is adjusted with the interest rate from the cost
of funds. Other than cost of funds, lending interest rates are determined
by considering overhead costs, credit risk premiums and proit margins
as well as taking into account the Bank’s competitiveness with its major
competitors. lending rates can be either be loating or ixed rates.
The Bank announces the Base lending Rate sBDK of Rupiah currency in every
oice, website, and quarterly through newsmedia as per the Bank indonesia
circular letter no. 135DPnP dated February 8, 2011.
3. liquidity Risk Management liquidity risk arises if the Bank is
not able to provide liquidity at a fair price that impacts the Bank’s
proitability and capital. The Bank’s liquidity is inluenced by the funding
structure, asset liquidity, liabilities to counterparty and loan commitment
to debtors. The Bank’s liquidity risk indicators are measured through several
indicators, which among others include minimum reserve ratio Minimum
current Account-gWM ratio and cash, secondary reserve liquidity reserve and
loan to deposit ratio lDR. The liquidity risk control is done in accordance with
the required regulatory and internal limits.
As of December 31, 2012, the Bank maintained Rupiah gWM primary
reserve of 8.00 from total third party Rupiah denominated funds, whereas
Rupiah gWM secondary reserve was at 24.94 from total third partyRupiah
Denominated funds. Meanwhile for the foreign exchange, the Bank maintained
gWM at 8.01 from the total third party fund denominated in foreign exchange
in accordance with the required regulatory limit.
The Bank has a liquidity reserve limit in the form of a safety level limit, which
represent the Bank’s liquidity reserve projection for three months ahead. As at
December 31, 2012, the liquidity reserve balance was above the safety level.
As of December 31, 2012, the Bank’s lDR was 77.66, which qualiied as
“very liquid” in the assessment of Bank soundness. The Bank uses a liquidity
gap to project the liquidity conditions in the future.The liquidity gap was created
on the basis of the maturity mismatch between the components of assets and
liabilities including of-balance sheet, which is organized into time periods
time buckets based on contractual maturity or behavioral maturity. As of
December 31, 2012, the Bank’s liquidity forecast up to 12 months ahead is in a
position of optimal surplus.
To determine the impact of changes in market factors and internal factors
in extreme conditions crisis on the liquidity condition, the Bank
conducts stress testing of liquidity risk on a regular basis. The Bank has
liquidity contingency Plan lcP, which will cover the funding strategy
and pricing strategy. The funding strategy consists of money market
lending, repo, bilateral loan, Fx swap, and sale of marketable securities. lcP
determination, of liquidity condition and funding strategies, has considered
internal and external conditions.
in order to anticipate direct and indirect impact from the european
crisis to the Bank’s liquidity condition and business, the Bank has activated
its Business command center Bcc to intensively manage and monitor the
liquidity condition and loan to Deposit Ratio lDR in foreign currencies. Bcc
manages the adequacy of the Bank’s liquidity and foreign currency lDR by
providing foreign currency liquidity for selective credit disbursement
and monitoring the movement of foreign currency source of funds on a
daily basis. Thereby, foreign currency liquidity reserves can be maintained
above the minimum liquidity reserve and lDR limits. Bcc also coordinates
programs to increase cheap and stable foreign currency funding sources.
suPPoRTing uniTs RevieW
RISK MANAGEMENT
PT Bank Mandiri Persero Tbk.
To increase awareness of unstable economic conditions, either from
the crisis in Europe andor various domestic issues, BCC also monitors
external indicators among others: USDIDR exchange rate, Indonesia’s
ive year credit Default swap cDs, spread between 5 years Roi compared
with 5 years usT, composite stock price index iHsg, Rupiah interest
rate and usD interbank, non Delivery Forward nDF usDiDR iM and update
market informations.
since the activation of Bcc, the Bank foreign currency liquidity reserves
can be controlled over the limit and foreign currency lDR realisation at
maximum level of 85. 4. operational Risk Management
operational Risk is deined as the risk resulting from inadequate or failure in
internal processes, people and systems or from external factors which impact
the Bank’s operations.
efective operational risk management may reduce losses due to operational
risk. Frameworks for operational Risk Management oRM are based on Bank
indonesia regulations and Basel ii and the provisions of the Bank’s internal
regulations. At this time, the Bank has an oRM risk management policy, Mandiri
Risk Management Policy KMRBM, and standard operating Procedures soPs,
which contains both the technical aspects of operational risk management
governance, reporting systems and capital calculation.
in addition, to support Bank’s innovations to meet customer needs of
its product and services, the Bank has established procedures regarding risk
management and mitigation measures for new Products and Activities PAB,
which is standard operating Procedure soP for PAB to standardize PAB risk
management in an end-to-end manner and in turn to create excellent products
or activities as well as improve the Bank’s proit, corporate image, and
service quality. in an efort to always implement prudent principles and
good corporate governance, the Bank
formulates assessment methodologies on 8 eight types of risk. Making new
products and activities to meet required regulatory guidelines.
In order to improve the efectiveness of operational risk management, the
Bank has implemented the following initiatives: alignment of operational
risk methodology with risk-based audit methodology through synchronization
risk library; providing a communication tool with the President Director called
“letter to ceo” and dually serving as a Whistle Blower system; and implement
of operational Risk Management Tools oRM Tools.
oRM Tools used for oRM implementation are as follows: