2. CAPITAL ADEQUACY (CONTINUED) 2.1 Capital Management (continued) Total outstanding Subordinated Sukuk Murabahah and Sukuk Wakalah issued under all programmes which are qualified as Tier 1 and Tier 2 regulatory capital of the Bank and the Group as of 31 December 2022 is RM2.2 billion. 2.2 Internal Capital Adequacy Assessment Process (“ICAAP”) The Group has carried out the internal assessment process on capital as prescribed in BNM’s CAFIB - ICAAP (“Pillar 2”) to complement its current capital management practices. The first ICAAP Document Policy was formalised and approved by the Board in March 2013 and is being reviewed on an annual basis. The Group’s ICAAP helps to suggest the minimum internal capital requirement for its current and future business strategies and financial plans for the next 3 years via a comprehensive risk assessment process on its portfolio risk exposures, its risk management practices towards its material risks and potential capital planning buffer required in the event of stress. Material Risk Assessment Initial Capital Assessment Economic Capital Definition Capital Supply Capital Demand Capital Stress Test Internal Capital Target Ratio INTERNAL CAPITAL PLANNING INTERNAL AUDIT INVOLVEMENT The Group’s ICAAP is conducted on a consolidated basis covering all the Bank’s legal entities as suggested by BNM’s Pillar 2 Guideline. The Group’s ICAAP methodology can be summarised as follows: Under ICAAP, the following risk types are identified and measured: •• Risks captured under Pillar 1 (i.e. Credit Risk, Market Risk, and Operational Risk); •• Risk not fully captured under Pillar 1 (e.g. Migration and Residual Risk); and •• Risk not covered under Pillar 1 (e.g. Credit Concentration Risk, Profit Rate in the Banking Book, Shariah NonCompliance Risk, Regulatory/Compliance Risk, Contagion Risk, and IT Risk). 2.3 Stress Testing Regular stress testing (including reverse stress testing) is performed to assess the Group’s ability to maintain adequate capital under both normal business cycle and unfavourable economic conditions. The stress testing is embedded within the risk and capital management process of the Group and is a key function of capital planning and business planning processes. Stress Testing also plays an important role in: •• Identifying the possible events or future changes in the financial and economic conditions of the country and globally that could potentially have unfavourable effects on the Group’s exposures; •• Identifying the different portfolios response to changes in key economic variables (profit rate, foreign exchange rate, GDP, etc); •• Evaluating the Group’s ability to withstand such changes, i.e. its capacity in terms of its capital and earnings, to absorb potentially significant losses; and •• Analysing the Group’s ability to meet the minimum regulatory capital requirement at all times throughout a reasonably severe economic crisis. The Group has put in place a stress testing programme (including reverse stress testing) which has taken into account all risks deemed material to the Group, namely credit risk, market risk, liquidity risk and operational risk including Shariah non-compliance risk, regulatory compliance risk, contagion risk and IT risk. In line with the Group’s Stress Testing Policy, ad-hoc and more frequent stress testing has been conducted to assess the impact of deterioration on specific risk areas, in line with stressed macroeconomic variables. The impact of COVID-19 pandemic outbreak such as repayment assistance, vulnerable portfolio and liquidity risk to the Group were assessed to ensure the Group’s ability to maintain adequate capital under stressed conditions. Pillar 3 Disclosure as at 31 December 2022 Integrated Report 2022 388
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