5 CREDIT RISK
Creditriskarisesfromourdailyactivitiesinvariousareasofbusiness–lendingtoretail,corporateandinstitutionalcustomers;trading activitiessuchasforeignexchange,derivativesanddebtsecurities;andsettlementoftransactions.Creditriskisoneofthemostsigniicant
measurablerisksfacedbyDBS.
Lendingexposuresaretypicallyrepresentedbythenotionalvalueorprincipalamountofon-balancesheetinancialinstruments.Financial guaranteesandstandbylettersofcredit,whichrepresentundertakingsthatDBSwillmakepaymentsintheeventthatacustomercannot
meetitsobligationstothirdparties,carrythesamecreditriskasloanseventhoughtheyarecontingentinnature.Pre-settlementCredit ExposuresPCEfortradingandsecuritiestransactionsaremeasuredtakingintoaccountcollateralandnettingarrangements.Settlement
riskistheriskoflossduetothecounterparty’sfailuretoperformitsobligationafterDBShasperformeditsobligationunderanexchange ofcashorsecurities.
PleaserefertoNote41.1totheFinancialStatementsonpage169fordetailsonDBS’maximumexposuretocreditrisk.
5.1 Credit Risk Management at DBS
DBS’ framework for credit risk management comprises the following building blocks:
POLICIES AsestablishedintheGroupCreditRiskManagementFramework,
thedimensionsofcreditriskandthescopeofitsapplicationare deined.Seniormanagementsetstheoveralldirectionandpolicy
formanagingcreditriskattheenterpriselevel.TheGroupCore CreditRiskPolicyCCRPsetsforththeprinciplesbywhichDBS
conductsitscreditriskmanagementandcontrolactivities.This policy,supplementedbyanumberofoperationalpolicies,ensures
consistencyincreditriskunderwritingacrossDBSandprovides guidanceintheformulationofbusiness-speciicandorlocation-
speciiccreditriskpolicies.Theselatterpoliciesareestablished toprovidegreaterdetailsontheimplementationofthecredit
principleswithintheGroupCCRPandareadaptedtorelect differentcreditenvironmentsandportfolioriskproiles.The
GroupCCRPisconsideredandapprovedbytheRiskExCobased onrecommendationsfromtheGCPC.
RISK METHODOLOGIES Managingcreditriskisperformedthroughourdeepunderstanding
ofourcustomers,thebusinessestheyareinandtheeconomiesin whichtheyoperate.Thisisfacilitatedthroughtheuseofcredit
ratingsandlendinglimits.DBSusesanarrayofratingmodelsin boththecorporateandretailportfolios.Mostarebuiltinternally
usingDBS’ownlossdata.Limitsand“rulesforthebusiness”are drivenfromDBS’RiskAppetiteStatementandTMRACrespectively.
SigniicantdealsarealsoreviewedandapprovedbytheGroupCredit CommitteewhichischairedbytheDeputyCROandcomprises
representativesfromRMGandInstitutionalBankingGroup.
Retailexposuresaretypicallymanagedonaportfoliobasisand assessedbasedoncreditscoringmodels,creditbureaurecords,
internalandavailableexternalcustomers’behaviourrecordsand supplementedbyRiskAcceptanceCriteria.
Wholesaleexposuresareassessedusingapprovedcreditmodels, reviewedandanalysedbyexperiencedcreditriskmanagerstaking
intoconsiderationtherelevantcreditriskfactors.Forportfolios withintheSMEsegment,DBSalsousesaprogramme-based
approachforabalancedmanagementofrisksandrewards.Credit extensionsareproposedbythebusinessunitandareapprovedby
thecreditriskfunctionbasedonindependentcreditassessment, whilealsotakingintoaccountthebusinessstrategiesdetermined
byseniormanagement.
PleaserefertoSection5.3onpage99forfurtherdiscussiononour internalcreditriskmodels.
Derivativespre-settlementcreditriskarisingfromacounterparty’s defaultisquantiiedbyitscurrentmark-to-marketplusan
appropriateadd-onfactorforpotentialfutureexposure.This methodologyisusedtocalculateDBS’regulatorycapitalunder
theCurrentExposureMethodCEMandisincludedunderDBS’ overallcreditlimitstocounterpartiesforinternalriskmanagement.
Issuerdefaultriskthatmayarisefromderivativesandsecuritiesare generallymeasuredbasedonjump-to-defaultcomputations.
DBSactivelymonitorsandmanagesitsexposuretocounterparties inover-the-counterOTCderivativetradestoprotectitsbalance
sheetintheeventofacounterpartydefault.Counterpartyrisk exposureswhichmaybemateriallyandadverselyaffectedby
marketriskeventsareidentiied,reviewedandacteduponby managementandhighlightedtotheappropriateriskcommittees.
Speciicwrong-wayriskariseswhentheexposuretoaparticular counterpartyispositivelycorrelatedwiththeprobabilityofdefault
ofthecounterpartyduetothenatureoftransactionswiththe counterparty.DBShasapolicytoguidethehandlingofspeciic
wrong-wayrisktransactionsanditsriskmeasurementmetrictakes intoaccountthehigherrisksassociatedwithsuchtransactions.
POLICIES RISK METHODOLOGIES
PROCESSES, SYSTEMS AND REPORTS
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Concentration Risk Management DBS’riskmanagementprocessesaimtoensurethatanacceptable
levelofriskdiversiicationismaintainedacrossDBSinlinewiththe RiskAppetite.Forcreditrisk,weuseECasthemeasurementtool,
sinceitcombinestheindividualriskfactorsofProbabilityofDefault PD,LossGivenDefaultLGDandExposureatDefaultEAD
aswellasportfolioconcentrationfactors.WesetgranularEC thresholdstoensurethattheallocatedECstayswithintheRisk
Appetite.Thesethresholdsareregularlymonitoredinrespect ofmajorindustrygroupsandsinglecounterpartyexposures.In
addition,wesetnotionallimitsforcountryexposures.Governance processesexisttoensurethatexposuresareregularlymonitored
againstthesethresholdsandappropriateactionsaretakenif thresholdsarebreached.Wecontinuallymonitorandassess
theneedtoenhancethescopeofthresholds.
Country Risk Countryriskistheriskoflosswhichisspeciicallyattributedto
eventsinaspeciiccountryoragroupofcountries.Itincludes political,exchangerate,economic,sovereignandtransferrisks.
InDBS,Countryriskismanagedaspartofconcentrationrisk managementundertheRiskAppetiteFramework.
Transferriskistheriskthatcapitalandforeignexchangecontrols maybeimposedbygovernmentauthoritiesthatwouldprevent
ormateriallyimpedetheconversionoflocalcurrencyintoforeign currencyandortransferfundstonon-residents.Atransferriskevent
couldthereforeleadtoadefaultofanotherwisesolventborrower.
Theprinciplesandapproachinthemanagementoftransferrisk aresetoutinDBS’CountryRiskManagementFramework.The
frameworkincludesaninternaltransferriskandsovereignrisk ratingsystemwheretheassessmentsaremadeindependentof
businessdecisions.TransferrisklimitsaresetinaccordancetoDBS’ RiskAppetiteFramework.Limitsfornon-strategiccountriesareset
usingamodel-basedapproach.Limitsforstrategiccountriesareset basedoncountry-speciicstrategicbusinessconsiderationsand
acceptablepotentiallossversustheRiskAppetite.Thereareactive discussionsamongtheseniormanagementandcreditmanagement
inright-sizingtransferriskexposurestotakeintoaccountnotonly risksandrewards,butalsowhethersuchexposuresareinline
withourstrategicintent.Allcountrylimitsaresubjecttoapproval bytheBRMC.
Stress Testing Weperformvarioustypesofcreditstresstestswhichare
directedbytheregulatorsordrivenbyinternalrequirementsand management.Creditstresstestsareperformedataportfolioor
sub-portfoliolevelandaregenerallymeanttoassesstheimpact ofchangingeconomicconditionsonassetquality,earnings
performance,capitaladequacyandliquidity.
Acreditstresstestworkinggroupisresponsiblefordeveloping andmaintainingarobuststresstestingprogrammetoincludethe
executionofthestresstestingprocessandeffectiveanalysisof programmeresults.Stresstestresultsarereportedanddiscussed
intheGCRC,theRiskExCoandtheBRMC.
Thestresstestingprogrammeiscomprehensiveinnaturespanning allmajorfunctionsandareasofbusiness.Itbringstogetheran
expertviewofthemacro-economics,market,andportfolio informationwiththespeciicpurposeofdrivingmodeland
expertorientedstresstestingresults.
DBSgenerallyperformsthefollowingtypesofcreditstresstesting ataminimumandothersasnecessary:
PILLAR 1 CREDIT STRESS TESTING
DBSconductsPillar1creditstresstestingregularlyasrequiredbyregulators.UnderPillar1creditstress testing,DBSassessestheimpactofamildstressscenarioatleasttwoconsecutivequartersofzeroGDP
growthonInternalRatings-BasedIRBestimatesi.e.ProbabilityofDefault,LossGivenDefaultand ExposureatDefaultandtheimpactonregulatorycapital.ThepurposeofthePillar1creditstresstestis
toassesstherobustnessofinternalcreditriskmodelsandthecushionaboveminimumregulatorycapital.
PILLAR 2 CREDIT STRESS TESTING
DBSconductsPillar2creditstresstestingonceayearaspartoftheICAAP.UnderPillar2creditstress testing,DBSassessestheimpactofstressscenarios,withdifferentlevelsofseverity,onassetquality,
earningsperformance,internalandregulatorycapital.Theresultsofthecreditstresstestsformaninput tothecapitalplanningprocessunderICAAP.ThepurposeofthePillar2creditstresstestingistoexamine,
inarigorousandforward-lookingmanner,thepossibleeventsorchangesinmarketconditionsthatcould adverselyimpactDBS.
INDUSTRY-WIDE STRESS TESTING
DBSparticipatesintheindustry-widestresstestIWSTundertakenannually.Thisisasupervisorydriven stresstestconductedaspartofthesupervisoryprocessandongoingassessmentofinancialstabilityby
theregulator.UndertheIWST,DBSistoassesstheimpactofadversescenarios,providedbytheregulator, onassetquality,earningsperformance,andcapitaladequacy.
SCENARIO ANALYSIS
DBSalsoconductsmultipleindependentcreditstresstestsandsensitivityanalysesonitsportfolio orasub-portfoliotoevaluatetheimpactoftheeconomicenvironmentorspeciicriskfactors.Thepurpose
ofthesetestsandanalysesistoidentifyvulnerabilitiesforthepurposeofdevelopingandexecuting mitigatingactions.
PROCESSES, SYSTEMS AND REPORTS DBScontinuestoinvestinsystemstosupportriskmonitoring
andreportingforboththewholesaleandconsumerbusinesses. Theend-to-endcreditprocessisconstantlysubjecttoreviewand
improvementthroughvariousfront-to-backinitiativesinvolvingthe businessunits,RMG,Operationsandotherkeystakeholders.
Day-to-daymonitoringofcreditexposures,portfolioperformance andtheexternalenvironmentthatmayhaveanimpactoncredit
riskproilesiskeytoDBS’philosophyofeffectivecreditrisk management.Riskreportingoncredittrends,whichmayinclude
industryanalysis,earlywarningalertsandkeyweakcredits,is providedtothevariouscreditcommittees,andkeystrategies
andactionplansareformulatedandtracked.
Creditcontrolfunctionsensurethatcreditriskstakencomplywith Group-widecreditpoliciesandguidelines.Thesefunctionsensure
properactivationofapprovedlimitsandappropriateendorsement ofexcessesandpolicyexceptions,andmonitorcompliancewith
creditstandardsandcreditcovenantsestablishedbymanagement andregulators.
Anindependentcreditriskreviewteamconductsregularreviews ofcreditexposuresandjudgementalcreditriskmanagement
processes.Italsoconductsindependentvalidationofinternalcredit riskratingprocessesonanannualbasis.Thesereviewsprovide
seniormanagementwithobjectiveandtimelyassessmentsof theeffectivenessofcreditriskmanagementpracticesandensure
Group-widepolicies,internalratingmodelsandguidelinesare beingadoptedconsistentlyacrossdifferentbusinessunitsincluding
relevantsubsidiaries.
Non-Performing Assets DBSclassiiesitscreditfacilitiesas‘PerformingAssets’or‘Non-
PerformingAssets’NPAinaccordancewiththeMonetary AuthorityofSingapore’MASNoticetoBanksNo.612“Credit
Files,GradingandProvisioning”MASNotice612.Theseguidelines requireDBStocategoriseitscreditportfoliosaccordingtoits
assessmentofaborrower’sabilitytorepayacreditfacilityfrom theborrower’snormalsourcesofincome.Thereareivecategories
ofassetsasfollows:
CLASSIFICATION GRADE DESCRIPTION
Performing Assets Pass
Indicatesthatthetimelyrepaymentoftheoutstandingcreditfacilitiesisnotindoubt.
Special mention
Indicatesthatthecreditfacilitiesexhibitpotentialweaknessesthat,ifnotcorrected inatimelymanner,mayadverselyaffectfuturerepaymentsandwarrantclose
attentionbyDBS.
Classified or NPA Substandard
Indicatesthatthecreditfacilitiesexhibitdeinableweaknesseseitherinrespect ofbusiness,cashloworinancialpositionoftheborrowerthatmayjeopardise
repaymentonexistingterms.Thesecreditfacilitiesmaybenon-defaulting.
Doubtful
Indicatesthatthecreditfacilitiesexhibitsevereweaknessessuchthattheprospect offullrecoveryoftheoutstandingcreditfacilitiesisquestionableandtheprospect
ofalossishigh,buttheexactamountremainsundeterminable.
Loss
Indicatesthattheamountofrecoveryisassessedtobeinsigniicant. ThelinkagebetweentheaboveMAScategoriesandtheDBS’
internalratingsisshowninSection5.3onpage100. Creditfacilitiesareclassiiedasrestructuredassetswhenwegrant
concessionstoaborrowerbecauseofdeteriorationintheinancial positionoftheborrowerortheinabilityoftheborrowertomeetthe
originalrepaymentschedule,andconcessionsgrantedrestructured termsareconsideredasnon-commercial.Arestructuredcredit
facilityisclassiiedintotheappropriatenon-performinggrade dependingontheassessmentoftheinancialconditionofthe
borrowerandtheabilityoftheborrowertorepaybasedonthe restructuredterms.Suchcreditfacilitiesarenotreturnedtothe
performingstatusuntiltherearereasonablegroundstoconclude thattheborrowerwillbeabletoserviceallfutureprincipaland
interestpaymentsonthecreditfacilityinaccordancewiththe restructuredterms.
Otherthantheabove,wedonotgrantconcessiontoborrowers inthenormalcourseofbusiness.Inanyrestructuringofcredit
facilities,suchborrowersarereviewedonacasebycasebasisand onlyoncommercialterms.
Inaddition,itisnotwithinDBS’businessmodeltoacquiredebts thathavebeenrestructuredatinceptione.g.distresseddebts.
PleaserefertoNote2.10totheFinancialStatementsonpage132 forDBS’accountingpoliciesontheassessmentofspeciicand
generalallowancesforcreditlosses.Ingeneral,speciicallowances arerecognisedfordefaultingcreditexposuresratedsub-standard
andbelow.ThebreakdownofNPAforDBSaccordingtoMAS Notice612requirementsbyloangradingandindustryandthe
relatedamountsofspeciicallowancesrecognisedcanbefound inNote41.2totheFinancialStatementsonpage172.Abreakdown
ofDBS’pastdueloanscanalsobefoundinthesamenote.
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Whenrequired,DBSwilltakepossessionofthecollateralitholds assecuritiesandwilldisposeofthemassoonaspracticable,
withtheproceedsusedtoreducetheoutstandingindebtedness. AbreakdownofcollateralheldforNPAisshowninNote41.2to
theFinancialStatementsonpage173.Repossessedcollateralis classiiedinthebalancesheetasotherassets.Theamountsof
suchotherassetsfor2014and2013werenotmaterial.
5.2 Credit Risk Mitigants