39. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market risk (continued) (i) Profit rate risk (continued) Profit rate risk in the banking book portfolio Profit rate risk in the banking book portfolio is managed and controlled using measurement tools known as Earnings at Risk (“EaR”) and Economic Value of Equity (“EVE”). The Group and the Bank monitor the sensitivity of EaR and EVE under varying profit rate scenarios (i.e. simulation modeling). The model is a combination of standard and non-standard scenarios relevant to the local market. The standard scenarios include the parallel fall or rise in the profit rate curve and historical simulation. These scenarios assume no management action. Hence, it does not incorporate actions that would be taken by Treasury to mitigate the impact of the profit rate risk. In reality, depending on the view on future market movements, Treasury would proactively manage and strategise to change the profit rate exposure profile to minimise losses and to optimise net revenues. The Bank’s hedging and risk mitigation strategies range from the use of derivative financial instruments, such as profit rate swaps, to more intricate hedging strategies to address inordinate profit rate risk exposures. The table below shows the Group’s and the Bank’s profit rate sensitivity to a 150 basis points (2020: 100 basis point) parallel shift as at reporting date. Impact on profit after tax/reserves – Increase/(Decrease) 2021 2020 -150bps RM million +150bps RM million -100bps RM million +100bps RM million Group Impact on EaR (206.6) 206.6 (131.4) 131.4 Impact on EVE 294.0 (294.0) 241.0 (241.0) Bank Impact on EaR (204.7) 204.7 (131.4) 131.4 Impact on EVE 293.6 (293.6) 240.9 (240.9) On 30 June 2020, BNM issued the revised reporting requirements for EVE and EaR which come into effect on 1 January 2021. One of the changes is to report both the EVE and EaR based on 150 basis point parallel shift instead of 100 basis point parallel shift. Another control to manage the profit rate risk in the banking book portfolio includes present value of 1 basis point change (“PV01”) which measures the portfolio’s sensitivity to market rates movement. INTEGRATED ANNUAL REPORT 202 1 Key Messages Overview Value Creation MD&A Sustainability Leadership Accountability Financial Additional Information 341
RkJQdWJsaXNoZXIy NDgzMzc=