Mega Bank Annual Report 2017

78 Mega Bank -78- The establishment of Risk Management, Loan and Investment committees which adopt responding measures to market environment, changes in industry, and capital limits, and review relevant regulations and cases of significant lending and investments. Setting careful prior review procedures for lending and criteria of handling subsequent matters, regular post-lending follow-up, understanding of clients’ operation and capit al outflows, and increase in the frequency of review on clients with higher risk. Classifying credit ratings based on clients’ probability of default or behavior scoring with management put in practice. Controlling concentration of credit risk by setting credit limits for individuals, corporate groups, industries, areas, and different types of collaterals. Setting credit risk limits by reference to external ratings and prospects with attention to changes in market credit spread and risk concentration of counterparties. The establishment of credit pre-warning list and reporting system. Assessing assets quality regularly and setting aside sufficient reserve for losses. Setting creditor’s rights management unit and advisory committee in charge of accelerating c ollection of non-performing loans. The procedures for credit risk management of the Bank and subsidiaries and related measurement approaches are outlined below: (A) Credit extensions Classification of credit assets and internal risk ratings are as follows: a. Classification of credit assets Corporate credit risk is measured by using the borrower’s default probability model with logistic regression analysis in whic h financial and non-financial factors are incorporated, which predicts the default probability of borrower within the next year. Besides, the extent of risk is measured by using credit rating table and taking into account the characteristics and scale of business. Lending examination and post management are dealt with based on clients’ credit rating. In dividual borrowers are grouped into different risk levels and managed by using application scoring and behavior scoring cards. Back-testing is conducted on internal models regularly; those models are subject to adjustments when necessary. Clients’ credit r atings are reviewed annually and subject to adjustments when there is significant change in their credit ratings. b. Internal risk rating The internal rating for lending is classified as excellent, satisfactory, fair and weak, and corresponds to the Standard & Poor’s rating as follows: Internal risk rating Excellent Satisfactory Fair Weak Corresponding to S&P AAA~BBB- BB+~ BB- B+ B and below (B) Interbank deposits and call loans Before trading with other banks, the Bank and subsidiaries must assess the credit of the counterparty; generally referencing external rating agencies, assets and scale of equity of the counterparty, and the credit rating of the counterparty’s country of origin in order to set different transaction limits, as well as periodically examining the ratings and changes in stock prices of the counterparty in order to monitor the risks of counterparty. (C) Bonds and derivative instruments The limits of bonds purchased by the Bank and subsidiaries are set by considering the credit rating of bond issuers or guarantors (ex. S&P, Moody’s, Fitch, Taiwan ratings or Fitch Taiwan), which needs to meet the minimum rating set by the Board of (Managing) Directors, and country risk at the application, changes in CDS quoted prices and market condition. The Bank and subsidiaries have set trading units and overall total risk limit for non-hedging derivative instruments, and use positive trading contract evaluation and the potential exposure as the basis for calculating credit risk and add the limit to the total credit risk limit for monitoring. ! (D) Asset quality The Bank and subsidiaries have set the minimum requirements and examination procedures for the quality of financial assets of each type, and controls risk concentration of assets portfolios of each type based on the risk limit of each type. The Bank and subsidiaries also monitor the changes in assets quality regularly during the duration of the assets and takes measures to maintain their quality. According to the policies and regulations, reserve for losses is provided adequately for those assets to actually reflect and safeguard the value of owners’ equity. (E) Impairment of financial assets and provision for reserves The Bank and subsidiaries assess at each balance sheet date whether a financial asset is impaired. If there is objective evidence that an event that occurred after the initial recognition of the asset has an impact on the future cash flows of the financial asset, the impairment loss on the financial asset should be recognized. The objective evidence of an impairment loss is as follows: Significant financial difficulty of the issuer or debtor; The issuer or debtor has breached the contract; The Creditor, for economic or legal reasons relating to the borrower’s financial difficulty, granted the borrower a conce ssion;