Tesco 2011 Annual Report Download - page 57

Download and view the complete annual report

Please find page 57 of the 2011 Tesco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 162

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162

TESCO PLC Annual Report and Financial Statements 2011
—
53
Overview Business review Governance Financial statements
Principal risks Key controls and mitigating factors
REGULATION AND EXTERNAL ENVIRONMENT CONTINUED
Regulatory, economic and political risks
In each country we operate in, we may be impacted by regulatory and
tax changes, increased scrutiny by competition authorities, political
developments and the economic environment
• External uncertainties carefully considered when developing strategy
and reviewing performance
• Ongoing monitoring of developments through local CEOs
• We try to anticipate and contribute to important changes in public
policy wherever we operate
• Engagement with governmental and non-governmental organisations
to represent views of our customers and employees
• Business development follows thorough due diligence work
Activism and terrorism
A major incident or terrorist event could impact on the Group’s ability
to trade
• Appropriate contingency plans
• Security systems and processes that reflect best practice
Climate change
The main environmental risk we face is climate change. It is essential
we work to mitigate it through energy efficiency, the sustainable
management of other resources and waste minimisation
• Engagement with key stakeholders and experts in developing
environmental policy, including through the Sustainable Consumption
Institute we endowed at Manchester University
• Climate change strategy is part of our Community Plan and is reviewed
regularly by our Corporate Responsibility Committee, Executive
Committee and Board
TESCO BANK/FINANCIAL SERVICES RISKS
Tesco Bank (the Bank) primarily operates in the UK retail financial services market offering savings products, unsecured consumer lending
products and general insurance products as well as travel money and ATM services. In addition to the principal risks above that apply generally
to the Group as a whole, the section below sets out principal risks relating specifically to the Bank.
Funding and liquidity
Liquidity risk is the risk that the Bank, although solvent, either does
not have available sufficient financial resources to enable it to meet its
obligations as they fall due, or can secure such resources only at
excessive cost
Funding risk is the risk that the Bank does not have sufficiently stable
and diverse sources of funding or the funding structure is inefficient
• Dedicated Treasury function responsible for management of funding
and liquidity risks within the framework approved by Tesco Bank Board
• Conservative Balance Sheet structure with prudent risk appetite
supported by explicit targets and metrics which enable funding and
liquidity to be managed in excess of regulatory requirements
• Strong liquid position with a diversified stock of highly marketable
liquid assets that can be used as a buffer against unforeseen impacts
on cash flow or in stressed environments
• Lending activities are primarily funded by retail deposits
• Daily monitoring and management of key funding and liquidity ratios
with monthly reporting to Assets & Liabilities Management Committee
and Tesco Bank Board
• Regular stress testing undertaken to assess the adequacy of funding
and liquidity resources during periods of market dislocation and stress
External environment
The Bank is exposed to general UK economic conditions as well as
general market trends in the areas in which it operates. Economic
conditions are subject to significant uncertainty with commentators
split on the sustainability of the economic recovery. General economic
and market conditions are likely to have an impact on the Bank’s
credit portfolios
• Independent Credit Risk team, reporting directly to Chief Risk Officer,
responsible for the development and oversight of the credit risk
framework and supporting the business in the implementation of
policies and processes
• Low credit risk appetite with focus on responsible lending and
maintaining a risk profile better than the industry average
• Whilst credit performance has remained strong and favourable to
industry averages, the Bank continues to closely monitor its credit
portfolios and make changes to its business acquisition and credit limit
management strategies to mitigate, as far as possible, downside
economic risks
• The impact of extreme but plausible deterioration in economic
conditions is considered as part of the Bank’s stress-testing programme
• Regular reporting of credit risk information and performance against
risk appetite to Tesco Bank’s Risk Management Committee, Board Risk
Committee and Board