Abu Dhabi Commercial Bank Risk Management Research

Abu Dhabi Commercial Bank

Research By : Faisal Arfat 

ADCB is the third largest bank in the UAE and the second largest in Abu Dhabi by assets, at AED 184 billion at the end of 2011. The Bank has 48 branches, four pay offices, and 294 ATMs in the UAE and alsooperates two branches in India and an offshore branch in Jersey. It employs more than 4,000 people from 49 nationalities, serving over 450,000 retail customers and more than 34,000 corporate and SME clients.

ADCB is a public joint stock company incorporated in the Emirate of Abu Dhabi, UAE following the merger of Khaleej Commercial Bank, Emirates Commercial Bank, and Federal Commercial Bank. ADCB is registered under the UAE Federal Commercial Companies Law No (8) of 1984 under registration No 4 and operates in the UAE under a banking licence issued by the Central Bank of the UAE.

Capital structure and ownership

ADCB's authorized and issued share capital is AED 5.596 billion, each share having a nominal value of AED 1. The Government of Abu Dhabi indirectly holds 61.59 percent (of which the Abu Dhabi Investment Council owns 58.08 percent) of the Bank's share capital. ADCB is listed on ADX, the Abu Dhabi Securities Exchange.

Our mission

To build a partnership with our customers that lasts a lifetime by
1. Treating every customer as an individual
2. Offering innovative products and unparalleled service
3. Never forgetting that our customer has a choices.

Our vision

To be the number one bank of choice in the UAE. A constantly innovating, financially successful organization of the highest integrity, respected by our customers, by our competitors and by the community.

Corporate governance

Abu Dhabi Commercial Bank believes in, and is committed to, good corporate governance, to provide a basis for its future development and corporate performance, to support trust in its activities as a recipient of depositors' funds and shareholders' capital, and to enable it to contribute to the successful development of the financial system of Abu Dhabi.

The guiding principles of the Bank's corporate governance policies are fourfold:

Responsibility - the clear division and delegation of authority.

Accountability - in the relationships between the bank's management and the board, and between the board and the shareholders and other stakeholders.

Transparency - and disclosure to enable stakeholders to assess the bank's financial performance and condition.

Fairness - in the treatment of all stakeholders.

The Corporate Governance Committee monitors best practices worldwide and regularly reviews and makes recommendations to enhance the Bank's corporate governance practices and disclosures in order to achieve high standards of corporate governance.

The Committee held three meetings over the course of 2011. Amongst other things, in 2011 the Corporate Governance Committee worked on the following matters:

appointment of Adviser to the Board of Directors

performance evaluation of individual Directors and the Board of Directors, and the adoption and monitoring of the action plan arising from the performance evaluation

monitoring of professional development opportunities for Directors including surveys, analysis of findings, evaluation of professional development opportunities, and monitoring delivery and quality of programmes amendments to the Bank's Articles of Association to better reflect the Bank's governance framework

reviewing and recommending amendments to Board and management committees' terms of reference

Directors' professional development programmes ongoing review of international developments in corporate governance and assessment of Bank's practices

considering corporate governance sponsorships

considering international developments in corporate governance best practices

publication of corporate governance information

making recommendations to the Board and Board Committees on governance matters

The Corporate Governance Committee plays an advisory role, reporting its recommendations to the Board for final approval. 

The Committee considers that positive progress was made during 2011 in the implementation of the Bank's corporate governance initiatives. The Bank's initiatives were recognised by:

World Finance Magazine's award for 'Best Corporate Governance' in the UAE for the second year in a row; and

The Allied Compliance Consultants 3rd Annual International GRC & Financial Crimes Conference and Exhibition as the 'Financial Institution of the Year', in recognition of the Bank's excellent initiatives in corporate governance, protecting stakeholders' interests and raising investor trust and confidence.

Directors' remuneration

Directors' remuneration is set annually by the Board following delegation from the Bank's shareholders. Any proposals for changes are considered by the Nomination, Compensation & HR Committee prior to obtaining Board and, if necessary, shareholder approvals.

According to federal laws and the Bank's articles of association, Directors may not receive any remuneration in respect of a year where the Bank does not achieve net profits.

Other benifits

Directors are eligible to receive, and have received, loans from the Bank. However, all loans are made on arms' length terms.

It has been the Bank's historical practice to grant gifts to Directors on an annual basis. The gifts are generally immaterial in value in the context of the Bank's overall financial position.

Whistle blowers:

Control activities are closely monitored across the Bank by the Bank's internal audit function, working independently of management. In addition, the risk management and compliance functions monitor control activities on an ongoing basis. All three functions cover all banking activities in general and key risk areas in particular. The Board's Audit & Compliance Committee reviews audit reports periodically and particularly where significant violations to the applicable regulations, prescribed policies and procedures have occurred. The Board's Audit & Compliance Committee ensures the implementation of regulations, policies and procedures through all Bank departments aimed at mitigating identified risks and safeguarding the interest of the Bank and its shareholders.

While the Board's Audit & Compliance Committee oversees and reviews the Bank's compliance policies and their implementation, the Group Compliance department which reports to the Chief Risk Officer, is responsible for advising and monitoring compliance with local regulatory requirements. Compliance with anti-money laundering procedures and internal training in such procedures is also developed and administered by the Group Compliance department.

The Bank's internal controls over financial reporting comprise processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles. The Bank's internal controls over financial reporting include policies and procedures that (i) are designed to ensure maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of management and directors of the Bank; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Bank's assets that could have a material effect on the financial statements. Internal controls are designed to ensure that adequate independent internal checks and balances exist in keeping with the maker-checker or four-eye principle and that the oversight roles are embedded in areas reporting independently to non-originating areas.

The Bank's internal control system has been designed to provide reasonable assurance to the Bank's Board of Directors and shareholders. All internal control systems, no matter how well designed, have inherent limitations and they may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

However, improvement of control activities is an ongoing process at ADCB that includes identification, evaluation and management of significant risks faced by the Bank.

Audit Arrangements:

An external auditor is appointed annually by shareholders on the recommendation of the Board of Directors.

The scope of the audit is agreed between the Audit & Compliance Committee and the auditor. Any additional work proposed to be performed by the external auditor is reviewed by and approved by the Audit & Compliance Committee on an item-by-item basis, as and when it surfaces. The Terms of Reference of the Audit & Compliance Committee specify the nature and scope of the external auditors' work. The Bank has complied with local rules and regulations as well as international best practices governing the appointment of and carrying out of non-audit work by the auditor.

The Board's external auditor selection policy and the Bank's articles of association include measures to ensure the ongoing independence of the Bank's external auditor:

No audit firm may be appointed for more than 7 consecutive years without shareholders' approval.

No individual audit partner may be responsible for the audit for more than 5 consecutive years.

The Committee will make recommendations on the rotation of the external audit firm, or of the partner of the firm in charge of the Bank's audit, to ensure the independence of the external auditors.

Without the consent of the Committee, the external auditor may not carry out any additional work for the Bank which is not part of the audit program.

The external audit partner attends meetings of the Audit & Compliance Committee by invitation and, if so required, attends the Board meetings when the annual and quarterly reports are approved and signed, and otherwise when needed. The Audit & Compliance Committee also periodically meets separately with the Bank's internal auditors and the auditor in the absence of management.

internal audit

The internal audit group (IAG) is responsible for the evaluation of the Bank's risk management, control and governance processes.  The IAG also oversees and conducts the Bank's internal audit function.

The IAG is responsible to ensure that all transactions undertaken by the Bank are conducted in accordance with the Bank's internal procedures, and in compliance with applicable legal and regulatory requirements, thereby minimising the risk of fraudulent, improper or illegal practices.  The IAG performs its function in accordance with a risk-based audit methodology.

In carrying out its audit activities and responsibilities, members of the IAG have unrestricted access to all of the Bank's records (either manual or electronic), assets, physical properties and personnel, relevant to the audit.

Although the IAG conducts audits on all of the Bank's units, the frequency of internal audits carried out with respect to each of the Bank's units depends on the inherent risk of that unit and its related control risk evaluation.  All audits are conducted in accordance with the annual audit plan, which is approved by the Audit & Compliance Committee, and which may be broadened as circumstances require.

The Head of IAG functionally reports to the Audit & Compliance Committee and to the Chief Executive Officer on administrative and day-to-day matters.

The Bank is subject to four main sources of regulation and supervision:

The Central Bank – the Central Bank provides prudential supervision of banking activities.  Monitoring by the Central Bank is undertaken by way of regular inspections of banks and their records and the requirement for regular submission of data including credit data and anti-money laundering measures.

UAE Federal Laws, including the Federal Law No.8 of 1984 Concerning Commercial Companies, as administered by the Ministry of Economy and the Department of Planning and Economy, in addition to any other local regulatory authorities of the Emirates.

As a listed company, the Bank is subject to the rules and regulations enforced by the Emirates Securities and Commodities Authority and the markets upon which its shares and debt are listed, including the ADX, the London Stock Exchange, the Luxembourg Stock Exchange and the Swiss Stock Exchange.

As an Institution in which the government of Abu Dhabi's share is not less than 50%, the Bank is subject to audits by Abu Dhabi Accountability Authority.

Risk Management Strategy
Risk management objectives are clear and ADCB has developed a well established strategy to deliver them, through robust risk management processes and practices. Risks are proactively managed within the Bank, while the framework is flexible to incorporate new businesses the Bank undertakes. The framework is comprehensive and has been communicated from the Board of Directors down to the individual business lines.

Risk management activities broadly take place simultaneously at the following different hierarchy levels.

a) Strategic level: encompasses risk management functions performed by senior management and Board of Directors such as:
definition and identification of material risks;

ascertaining the Bank's risk appetite and ensuring business plans are consistent with it;

formulating strategy and policies for managing risks;

independent review and challenging of structures;

establishing adequate systems and controls to ensure that overall risk remains within acceptable levels and the rewards compensate for the risk taken.

b) Management (Macro) Level: encompasses risk management within a business area or across business lines. Generally the risk management activities performed by middle management or units devoted to risk reviews fall into this category.
c) Transaction (Micro) Level: involves 'on-the-line' risk management where risks are actually created. This is the risk management activity performed by individuals who take risk on the Bank's behalf such as front office and loan origination functions. The risk management in those areas is confined to following operational procedures and guidelines set by management.

The Risk Management function starts at the highest level with Board-level committees, with the following committees contributing to risk management:
– Board Risk & Credit Committee (BRCC)
– Board Audit & Compliance Committee (BACC)
– Board Corporate Governance Committee (BCGC)

The following Executive Management-level committees also actively manage risk:

– Assets and Liabilities Management Committee
– Management Risk & Credit Committee
– Management Recoveries Committee

The Bank also has a Chief Risk Officer function, which oversees the Credit risk, Market risk, Operational risk, Consumer risk, Compliance risk, and the Remedial risk functions.

Governance Structure by Risk Type
Capital and Liquidity Risk
Monitoring of liquidity position on a daily/weekly/monthly basis. This entails forecasting of future cash inflows/outflows and ensuring that the Bank can meet the required outflows;

Regular liquidity stress testing conducted under a variety of scenarios, covering both normal and more severe market conditions with well defined triggers and suggested action; and

Ensuring regular compliance with the liquidity ratios such as "Advances to stable resources ratio" stipulated by the Central Bank of UAE. Whilst the Central Bank of UAE allows a maximum of 1:1, the Bank has set a stricter internal ratio.

Retail and Wholesale Banking Credit Risk
Defining and ultimately deciding on the Bank's tolerance for credit risk and the level of returns it expects to achieve for incurring various credit risks;

Ensuring the development and implementation of the Credit Risk Strategies relevant to each business line, and the policies and procedures for identifying, measuring, monitoring, and controlling Credit Risk; and

Ensuring that Product Development is subject to adequate procedures and controls before being introduced or undertaken.

Market Risk:
Establishment of a comprehensive market risk policy framework;Independent measurement, monitoring and control of market risk; and Setting up, approval and monitoring of limits.

Operational Risk:

Ensure compliance with regulatory and other legal requirements;

Documentation of controls and procedures;

Periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;Reporting of operational losses and proposed remedial action; and Development of contingency plans.

Responsibilities
Responsibility for risk management is designated at all levels within the Bank. The responsibilities for effective review and challenge reside with senior managers, management risk oversight committees, Internal Audit, BRCC, BACC, BCGC, and the Board of Directors.

The Chief Risk Officer (CRO) is a member of the Management Executive Committee and has overall day-to-day accountability for risk management. The CRO regularly presents a report to the Board summarising developments in the risk environment and performance trends in the key portfolios. The CRO manages the Independent Risk function, which monitors the Bank's risk profile relative to established risk appetite, risk strategy, market developments and policy guidelines.

The Board of Directors is the Bank's principal decision-making forum. It has overall responsibility for leading, supervising and controlling the Bank, and is accountable to shareholders for creating and delivering sustainable shareholder value through its guidance and supervision of the Bank's business. Amongst other items, the Board continues to focus on risk management, control and strategy. The Board is also responsible for the Internal Control Framework. It oversees the management of the most significant risks through the regular review of risk exposures and related key controls.

The Audit & Compliance Committee provides assistance to the Board to fulfil its duties to ensure and oversee the Bank's financial statements, the qualifications, independence and performance of the Bank's external and internal auditors, compliance with legal and regulatory requirements and internal policies, and internal control over financial reporting.

Stress Testing
In addition to its regular standardised risk reporting process, ADCB carries out (ad hoc) stress tests. Stress testing is a technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge how certain stress factors will affect a company, industry, asset book or the portfolio of the Bank. They are usually simulation models that test hypothetical scenarios.

Several stress tests are conducted, both scheduled and ad hoc, in the form of sensitivity or scenario analysis, either for a specific risk type or for ADCB as a whole. The stress test can represent various economic situations such as severe economic crisis, counterparty failures, and a variety of projected major operational risk events, both systemic and idiosyncratic.

Corporate Social Responsibility (CSR)

Message from the Management

We are pleased to present our fourth annual Corporate Social Responsibility (CSR) report.  ADCB produces this report as part of our ongoing programme of CSR activities and initiatives, highlighting our commitment to support the principles of CSR which provide our business with the vital components to operate both responsibly and ethically.

ADCB is one of the UAE's foremost banking institutions, and as such, takes a leading role as a socially responsible corporate citizen, as is evident from the numerous community programmes we have been involved in throughout the year.  We are dedicated to providing the very best services and products to our customers and a supportive, educational whilst challenging environment for our staff, while ensuring that we deliver excellent returns to our shareholders.   

This year's report shows the different ways in which ADCB conducts responsible business, from raising awareness of environmental and health issues, to supporting regional topics such as Zakat and fire prevention. We put our local and regional community at the heart of everything we do and remain deeply committed to improving our CSR credentials. 

I would personally like to thank everyone at ADCB for their CSR achievements this year, this report emphasizes ADCB's commitment to sustained CSR achievements, helping create a better environment for everyone we inspire.

Ala'a Eraiqat
Chief Executive Officer

Responsible Banking:

                                Ambition Loan for Education

                               Unified Credit       Culture launch

Meethaq Credit Card :

The ADCB Meethaq Credit Card is the first card introduced in the UAE with a CSR theme. The core ideals of the card are reflected in its partnerships with the Red Crescent Authority and Environment Agency .

ADCB's alliance with the Environment Agency, Abu Dhabi focuses on promoting environmental awareness by assisting the Agency in educating customers as well as providing opportunities for customers to participate in environmental campaigns

Community         Investment:

ADCB Sports   Care    Programme     Partnership

ADCB's           Support             of  Emirates  Woman Awards            2010

ADCB  Marriage            Fund Tie-up

Health and Safety:

            Heart   Disease           Awareness      Day

Breast  Cancer Awareness      Drive

New     Fire      Prevention       Strategy           by        ADCP

Environment:

ADCB  partners           with      Enviroserve     to         Go       GRecycling      Initiatives

Recycling        Initiatives

Directors ethics and professional development:

Tailored induction programmes are arranged for all newly appointed Directors. The programme comprises a comprehensive Directors' induction pack, meetings with other Directors and senior management, as well as comprehensive guidance on the duties and responsibilities of Directors, the Bank's policies and procedures and relevant legal and regulatory requirements.

The Bank provides Directors with opportunities to update and develop their skills and knowledge through external seminars, regular presentations from senior management, and relevant reading materials. In addition, the Board Secretariat works with various external providers to source suitable tailored training sessions.

responsibility of Bank's Board of Directors:

it is the responsibility of Bank's Board of Directors to:

ensure that effective measures are in place to safeguard the Bank's assets;

ensure proper accounting records and reliable financial information by procedures designed to avoid or reduce risks and ensure compliance with applicable laws and regulations;

ensure that an adequate and effective system of internal controls and procedures is established and maintained; and

evaluate the effectiveness of the Bank's internal control system, identifying control objectives, reviewing significant control policies and establishing relevant control procedures.