Tesco 2013 Annual Report Download - page 115

111
Tesco PLC Annual Report and Financial Statements 2013
OVERVIEW BUSINESS REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS
Note 22 Financial risk factors continued
Tesco Bank
Interest rate risk
Interest rate risk arises where assets and liabilities in Tesco Bank’s banking activities have different repricing dates. Tesco Bank policy seeks to
minimise the sensitivity of net interest income to changes in interest rates. Potential exposures to interest rate movements in the medium to
long term are measured and controlled through position and sensitivity limits. Short-term exposures are measured and controlled in terms of net
interest income sensitivity over 12months to a 1% parallel movement in interest rates. Tesco Bank also use Economic Value Equity (‘EVE’) for risk
management purposes with focus on the value of Tesco Bank in today’s interest rate environment and its sensitivity to changes in interest rates.
Interest rate risk is managed using interest rate swaps as the main hedging instrument.
Liquidity risk
Liquidity risk is the risk that Tesco Bank is unable to meet its payment obligations as they fall due. Liquidity risk is managed within Tesco Bank’s
banking activities and adheres to the liquidity requirements set by the Prudential Regulation Authority (‘PRA’). Tesco Bank’s Board has set a defined
liquidity risk policy and contingency funding which is prudent and in excess of the minimum requirements as set out by the PRA and by Tesco Bank.
A diversified portfolio of high-quality liquid and marketable assets is maintained. Cash flow commitments and marketable asset holdings are
measured and managed on a daily basis. Tesco Bank has sufficient liquidity to meet all foreseeable outflow requirements as they fall due and its
liquidity risk is further mitigated by its well diversified retail deposit base and a pool of surplus cash resources that are invested in a range of
marketable assets.
Credit risk
Credit risk is the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk principally
arises from the Bank’s retail lending activities but also from the placement of surplus funds with other banks and money market funds, investments
in transferable securities and interest rate and foreign exchange derivatives. In addition, credit risk arises from contractual arrangements with third
parties where payments and commissions are due to the Bank for short periods of time.
Retail credit policy is managed through the credit risk policy framework with standards and limits defined at all stages of the customer lifecycle,
including new account sanctioning, customer management and collections and recovery activity. Customer lending decisions are managed
principally through the deployment of bespoke credit scorecard models and credit policy rules, which exclude specific areas of lending, and an
affordability assessment which determines a customer’s ability to repay an outstanding credit amount. Wholesale credit risk is managed using
a limit-based framework, with limits determined by counterparty credit worthiness, instrument type and remaining tenor. A limits framework
is also in place for the management of third party credit exposures.
Ineffective management and controls over the emerging asset quality of the Group’s lending portfolios could expose the Group to unacceptable
levels of bad debt. The Group’s asset quality is reflected through the level of its impairment by lending type. Asset quality profiles are regularly
monitored and reported to the appropriate senior management team and risk committees.
The table below presents an analysis of credit exposure by impairment status across the different exposure classes. The table predominantly relates
to banking assets; the retail instalment lending applies to credit agreements in the insurance business.
Credit quality of loans and advances
As at 23 February 2013
Retail
unsecured
lending
£m
Retail
mortgage
lending
£m
Retail
instalment
lending
£m
Total
£m
Past due and defaulted
Less than 90 days past due 30 – – 30
90–179 days past due 42 – – 42
180 days plus past due 76 – – 76
Past due but not defaulted
0–29 days past due 41 – 1 42
30–59 days past due 11 – – 11
60–119 days past due 9 – – 9
Neither past due nor defaulted
Low risk* 4,935 258 202 5,395
High risk** 126 – – 126
Total 5,270 258 203 5,731
* Low risk is defined as an asset with a probability of default of less than 10%.
** High risk is defined as an asset with a probability of default of 10% or more.