BIMB Integrated Annual Report 2017

45. FINANCIAL RISK MANAGEMENT POLICIES (CONTINUED) 45.4 Market risk (continued) (a) Banking (continued) (ii) Profit rate risk in the non-trading portfolio Profit rate risk in the non-trading portfolio is managed and controlled using measurement tool known as earnings- at-risk (“EaR”). The Bank monitors the sensitivity of EaR 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 the Bank’s Treasury to mitigate the impact of the profit rate risk. In reality, depending on the view on future market movements, the Bank’s Treasury would proactively seek to change the profit rate exposure profile to minimise losses and to optimise net revenues. The nature of the hedging and risk mitigation strategies corresponds to the market instruments available. These 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 Bank’s profit rate sensitivity to a 100 basis points parallel shift as at reporting date. 2017 2016 -100bps +100bps -100bps +100bps INCREASE/(DECREASE) RM’MILLION Bank Islam Impact on EaR (85.41) 85.41 (28.46) 28.46 Impact on EVE 168.00 (168.00) 266.25 (266.25) Other control to manage the profit rate risk in the non-trading portfolio includes present value of a 1 basis point change (“PV01”) which measures the portfolio’s sensitivity to market rates movement. (iii) Market risk in the trading portfolio Market risk in the trading portfolio is monitored and controlled using Value-at-Risk (“VaR”). It is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates over a specified time horizon and to a given level of confidence. The VaR model used by Bank Islam is based on historical simulation. This model derives plausible future scenarios from past series of recorded market rates and prices, taking into account inter-relationship between different markets and rates such as profit rates and foreign exchange rates. The historical simulation model used by the Bank incorporates the following features: • potential market movements are calculated with reference to data from the past two years; • historical market rates and prices are calculated with reference to foreign exchange rates and profit rates; and • VaR is calculated to a 99 per cent confidence level and for a one-day holding period. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2017 267 Overview Value Creation Accountability Financial Statements Sustainability Performance Data Shareholders Information 21 st AGM Information Management Discussion & Analysis