ICBC (London) plcv.icbc.com.cn/userfiles/Resources/ICBC/haiwai/ICBCLondon/download/2018/... · the Prudential Regulation Authority (‘PRA’) and regulated by the Financial Conduct

ICBC (London) plc

Pillar 3 Disclosures

31 December 2017

Contents

Table of Contents 1. Overview ............................................................................................................. 1

1.1 Background ......................................................................................................... 1 1.2 Regulatory requirements for Pillar 3 disclosures ............................................... 1 1.3 Scope of disclosure requirements ....................................................................... 1 1.4 Non-material, proprietary or confidential information ....................................... 2 1.5 Scope of application ............................................................................................ 2

1.6 Basis and frequency of disclosure....................................................................... 2 1.7 Means of disclosure and verification .................................................................. 2 2. Governance and risk management framework ................................................... 3

2.1 Governance – Board and Committees ................................................................ 3 2.2 Risk management ................................................................................................ 5 2.2.2 Risk policy and procedure ................................................................................... 7 3. Capital resources ................................................................................................. 8 3.1. Total capital available ......................................................................................... 8

4. Capital requirements ......................................................................................... 12

5. Capital buffers ................................................................................................... 14 6. Leverage ............................................................................................................ 15 7. Asset encumbrance ............................................................................................ 17

8. Credit risk........................................................................................................... 19 8.1 Credit risk management objectives and policies ................................................ 19

8.2 Strategies and processes to manage credit risk ................................................. 19 8.3 Structure and organisation of the credit risk function ....................................... 20

8.4 Measurement and reporting of credit risk .......................................................... 20 9. Credit risk mitigation ......................................................................................... 24

9.1 Policies, strategies and processes for hedging,

mitigating and monitoring credit risk ............................................................... 24 9.2 Risk statement for credit risk ............................................................................. 25

10. Use of external credit assessment institutions ................................................... 26 11. Exposures to counterparty credit risk (‘CCR’) .................................................. 27

11.1 Risk statement for counterparty credit risk ....................................................... 27 12. Credit risk adjustments ...................................................................................... 28

12.1 Specific impairment and collective provisions .................................................. 28 13. Market risk ......................................................................................................... 31 13.1 Market risk management objectives and policies .............................................. 31 13.3 Risk statement for market risk ........................................................................... 32

14. Operational risk .................................................................................................. 33 14.1 Operational risk management, objectives and policies ..................................... 33 14. 2 Measurement and reporting of operational risk ................................................ 33

14.3 Risk statement for operational risk ................................................................... 34 15. Exposure to interest rate risk in the banking book (‘IRRBB’) ......................... 35 15.1 Interest rate risk management objectives and policies ...................................... 35 15.2 Measurement and reporting of interest rate risk ............................................... 35 15.3 Risk statement for interest rate risk .................................................................. 36

16. Other risks .......................................................................................................... 37 16.1 Risk statement for other risks ............................................................................ 38 17. Remuneration ..................................................................................................... 39

17.1 Overview ........................................................................................................... 39

17.2 Decision-making process for determining Remuneration Policy ..................... 39 17.3 Information on the link between pay and performance .................................... 40 17.4 Quantitative information ................................................................................... 41

Pillar 3 Disclosures 2017 ICBC (London) plc

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1. Overview

1.1 Background

ICBC (London) plc (‘the Bank’), formed in 2003, is a UK-registered bank (4552753) authorised by

the Prudential Regulation Authority (‘PRA’) and regulated by the Financial Conduct Authority

(‘FCA’) and the PRA. The Bank is a wholly-owned subsidiary of Industrial and Commercial Bank

of China Limited (‘ICBC Ltd’ or ‘the Parent Bank’). The Bank is primarily a wholesale bank

although it also offers a range of retail banking services to individuals and small businesses,

particularly where there is a connection to China.

1.2 Regulatory requirements for Pillar 3 disclosures

The Basel framework is a comprehensive set of measures, developed by the Basel Committee, to

strengthen the regulation, supervision and risk management of the banking sector. It comprises three

complementary pillars:

Pillar 1 – sets out the minimum capital requirements for credit, market and operational risk.

Pillar 2 – requires firms and supervisors to take a view on whether a firm should hold

additional capital against firm specific risks.

Pillar 3 – aims to encourage market discipline by developing a set of disclosure requirements

which will allow market participants to assess key pieces of information on a firm’s capital,

risk exposures, risk assessment process and hence the capital adequacy of the firm.

The European Union implemented the Basel III framework through a new Capital Requirements

Directive and a Capital Requirements Regulation known collectively as ‘CRD IV’. The CRD IV

framework replaced Basel II and introduced a revised definition of capital resources, including

additional capital and disclosure requirements.

The Directive was transposed into UK legislation with the PRA providing additional guidance in its

supervisory statements. The Capital Requirements Regulation (‘CRR’) applies directly to EU

member states, including the UK until such time as it completes its exit from the EU. CRD IV came

into effect on 1 January 2014, although it contained numerous requirements to be phased in over time.

The disclosure requirements applicable to CRR firms are set out in Part Eight of the CRR Articles

431 to 455 ‘Disclosure by Institutions’. The European Commission (‘EC’) supplemented the (Level 1)

text with detailed technical standards (Level 2 and 3) requirements. The EBA has also provided more

detail, including templates and guidance. In 2017 the EBA published templates for non-significant

firms to disclose key metrics relating to the Liquidity Coverage Ratio (‘LCR’). Later the same year,

the PRA published PS30/17, setting out its expectation for PRA-regulated firms to disclose their total

capital requirement or, where this has not yet been set, to disclose their total Pillar 1 and Pillar 2A

capital guidance (Individual Capital Guidance or ‘ICG’).

1.3 Scope of disclosure requirements

The disclosures set out in this report have been prepared by ICBC (London) plc in accordance with

the requirements set out in Part Eight of Capital Requirements Regulation. The Bank’s policy is to

meet all required Pillar 3 disclosure requirements as detailed in the CRR and the Level 2 and 3

regulation provided by the EC, PRA and EBA.

The regulatory capital ratios are based solely on ICBC (London) plc’s balance sheet and off-balance

sheet items. Unless otherwise stated, all figures are presented in thousands (‘000) of USD, which is

the reporting currency of ICBC (London) plc. The reporting date is 31 December 2017, the Bank’s

financial year-end.


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The disclosures included in this document refer to the Bank’s overall risk management and its

approach to assessing the adequacy of its capital.

1.3.1 Pillar 3 Disclosure Policy

The Bank has adopted a formal policy, the Pillar 3 Disclosure Policy, to comply with the disclosure

requirements as contained in Article 431 (3) of the CRR and as relevant to the scale of the operations

of ICBC (London) plc. This policy sets out the contents of the Pillar 3 Disclosure document and

includes consideration of whether information is material, proprietary or confidential, the required

frequency of disclosures and their verification.

The Bank annually reviews its policy and disclosures in conjunction with the preparation and

publishing of its annual audited accounts. The latest version of this policy was approved by the

Board of Directors on 16 April 2018.

1.4 Non-material, proprietary or confidential information

The Bank has not sought any exemption from the disclosure requirements on the basis of materiality

or on the basis of proprietary or confidential information.

1.5 Scope of application

ICBC (London) plc has no subsidiaries. Industrial and Commercial Bank of China Limited was

granted a banking licence to establish a branch in London in September 2014 (‘ICBC London Branch’

or ‘the Branch’). The information disclosed in this document is solely related to ICBC (London) plc

(‘the Subsidiary’). The Branch is outside of the scope of this document. However, all transactions

between the Branch and the Subsidiary are at ‘arm’s length’.

1.6 Basis and frequency of disclosure

This Pillar 3 disclosure document has been approved by the Board on 16 April 2018. The Board has

verified that it is consistent with formal policies adopted regarding its production and validation.

Information in this report has been prepared solely to meet the disclosure requirements under CRD

IV.

These disclosures do not constitute any form of financial statement nor do they constitute any form of

contemporary or forward-looking record or opinion about the business. Unless indicated otherwise,

information contained within this document has not been subject to external audit. However, there is

no material difference between information disclosed in this report and the Annual Report and

Financial Statements. This disclosure document should be read in conjunction with the ICBC

(London) plc Annual Report and Financial Statements for the year ended 31 December 2017.

Disclosure will be made annually and published as soon as practicable after publication of the

Annual Report and Financial Statements. ICBC (London) plc will reassess the frequency of

disclosure in light of any material change in its business structure, the approach used for the

calculation of capital, or regulatory requirements.

1.7 Means of disclosure and verification

The Bank’s Pillar 3 Disclosures document has been reviewed by the Board of Directors and approved

on 16 April 2018 and is published on the Bank’s corporate website (www.icbclondon.com). These

disclosures explain how the Bank has calculated its capital requirements and provide information

relating to risk management.

http://www.icbclondon.com)/


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2. Governance and risk management framework

2.1 Governance – Board and Committees

The Board is comprised of two Executive and five Non-Executive Directors (‘NEDs’), of whom two

are independent. Members hold a total of six directorships outside of the ICBC Group, excluding

organisations that do not pursue predominantly commercial objectives. The Board is responsible for:

Development and implementation of an Enterprise-Wide Risk Management (‘EWRM’) strategy

in accordance with the Bank’s risk tolerance.

Determining the structure, responsibilities and controls for managing risk.

Communicating the risk strategy, key policies for implementing the strategy and the risk

management structure throughout the Bank.

Closely monitoring current trends and potential market developments that may present

significant, unprecedented and complex challenges for managing risk, so that they can make

appropriate and timely changes to the risk strategy as needed.

Defining the specific procedures and approvals necessary for exceptions to policies and limits,

including the escalation procedures and follow-up actions to be taken in response to a breach of

any limit.

The Bank has a comprehensive recruitment policy in place for Board members. The policy requires

all Board members to have a good understanding of their role and responsibilities in addition to a

solid background in banking and the relevant discipline required for the particular role. Candidates

must also fulfil the Bank’s standards set out in the internal Fitness and Propriety Policy. The policy

stipulates that local candidates should be recommended by a reliable source (definition specified in

the policy document) and that candidates appointed by the Parent Bank need to meet the local

standards required of bank directors. Candidates must also be acceptable to the regulators. The policy

outlines the interview process and the pre-screening measures used for Board members, including a

review of the Financial Services Register, where applicable.

Executive Board members are appointed by the Parent Bank and approved by the Board. They are

required to have a full understanding of their areas of responsibility and an adequate understanding of

those areas of the business undertaken by the Bank for which they are not directly accountable.

The Board of Directors has established a number of Board-level committees including the Audit

Committee, Governance & Compliance Committee and Risk Committee. The Committees ensure a

very strong focus on risk in the Bank.

The Board has ultimate responsibility for setting the Bank’s strategy, risk appetite and control

framework, and measures performance against targets. It normally meets a minimum of four times a

year. The Board is also responsible for discharging the Bank’s responsibilities under the

Remuneration Code; approving the appointment of senior executives; and agreeing authority levels

and the delegation of authority. To assist it in discharging its responsibilities, the Board has

instituted the high-level committees mentioned above, governed by clear terms of reference.

Controls are regularly tested by the Internal Audit, Risk & ALM (‘Asset & Liability Management’),

Compliance & Legal and Credit Management Departments. These departments’ reports are

presented to the Board-level committees.

The Bank’s governance policies are set by the Board and implemented by the management team.

The chart below illustrates the organisation structure of the Bank as at 31 December 2017.


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Chart 1: Management

December 2017

ICBC (London) plc

Organization Chart100% owned by ICBC Limited

Board of Directors

Chairman (SMF9)

Hao Hu Risk Committee

Chair (SMF10)

Peter Goshawk

Governance &

Compliance Committee

Chair (SMF10)

John Kerr

Audit Committee Chair

(SMF11)

David Newton

CEO (SMF1)

Ruixiang Han

Chair of Executive

Committee

Chair of Financial

Crime Risk

Committee

Deputy General

Manager (SMF4)

Robert Clark

Deputy General

Manager

Ying Shi

Deputy General

Manager

Xiao Lu

Chair of Asset

& Liability

Committee

Deputy CEO

(SMF3)

Shuyi Yuan

Chair of Credit

Committee

Risk & ALM

Institutional

Banking

Retail & Account

Service

Global Loan

Syndications

Corporate

Banking

Treasury (includes

certification

population)

Credit

Management

PDS (Sole

client is

ICBC-FS,

New York

Head of Internal

Audit (SMF5)

Farrukh Shaida

HR & Admin

Head of

Compliance &

Legal (SMF16)

Asim Siddiqui

MLRO (SMF17)

Credit

Administration

Operations

IT

Deputy General

Manager (SMF2)

Graeme Tosen

CFO

Financial

Control

Audit Committee – Chaired by an Independent Non-Executive Director, members of this Committee

are all Non-Executive Directors. The Executive Directors, other Senior Management, the Head of

Financial Control and the Head of Compliance & Legal are invited to attend as observers. The Head

of Internal Audit is Secretary to the Committee. The duties / responsibilities of the Committee, which

normally meets six times a year, include:

1) Informing the Board of the outcome of the statutory audit and explaining how the statutory

audit contributed to the integrity of financial reporting and what the role of the Audit Committee was

in that process.

2) Overseeing the financial reporting process and agrees recommendations and proposals to

ensure its integrity.

3) Overseeing the effectiveness of the firm’s internal quality control and its internal audit.

4) Monitoring the performance of the statutory audit, taking into consideration the Financial

Reporting Council’s report on the audit firm (if applicable).

5) Reviewing and monitoring the independence of the statutory auditor and the scope and cost of

the statutory auditor’s work.

6) Responsibility for the procedure for the selection of the statutory auditor.

7) Having oversight of the Bank’s tax affairs.

The Bank’s external auditors normally attend Audit Committee meetings.

Governance & Compliance Committee – Chaired by a Non-Executive Director, members of this

Committee comprise Non-Executive Directors, the CEO and the Deputy CEO. The CRO, the CFO

and the Head of Internal Audit attend as observers. The Head of Compliance & Legal is Secretary to

the Committee. The Committee normally meets four times a year and is responsible for examining

all aspects of governance and compliance matters in the Bank, i.e. ensuring clarity of the relationship

between the UK Subsidiary and the UK Branch and reviewing the organisation structure to ensure it

remains fit for purpose. This Committee also monitors the mix of staff, particularly at management

level, between expatriate and locally-recruited staff. In 2017, the Committee met five times.


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Risk Committee – Chaired by an Independent Non-Executive Director, members of this Committee

comprise of Non-Executive Directors, the CEO and the Senior Manager responsible for Risk

oversight. Other Senior Management and some Heads of Departments are invited to attend as

observers. The Head of Risk & ALM is Secretary to the Committee. The Committee normally

meets four times a year and is responsible for advising the Board on risk management and making

recommendations where action or improvement is required. The Committee reviews the Bank’s

quarterly Enterprise-Wide Risk Report and makes recommendations on risk categories including

credit, liquidity and funding, market, regulatory, conduct, operational, legal, concentration, strategic,

cyber, geopolitical and reputational. The Committee reviews the ICAAP, ILAAP, Recovery Plan

and Resolution Pack, providing robust challenge which feeds into the production process of these

regulatory documents, enhancing their quality. In 2017, the Risk Committee met four times.

At the Executive level, there are four committees concerned with risk management issues: Executive

Committee, Asset and Liability Committee, Credit Committee and the Financial Crime Risk

Committee.

Executive Committee – Chaired by the CEO, this Committee comprises the Senior Management and

is responsible for the development and implementation of strategy, operational plans, procedures and

budgets. The Committee also assumes overall responsibility for the functions of emergency planning

and disaster recovery in the Bank. Department Heads are invited to join discussions when relevant.

The Committee meets monthly or more frequently if required.

Asset and Liability Committee (‘ALCO’) – Chaired by the CFO, this Committee comprises all

Senior Management, the Head of Risk & ALM, the Head of Financial Control, the Deputy Head of

the Corporate Banking Department, the Head of Institutional Banking Department, the Head of

Global Loan Syndications Department, and the Head of Treasury Department. The Asset and

Liability Committee is set at the executive management level to assist the executive management

with the oversight and management of the Bank’s assets and liabilities; to ensure that business lines

are aligned to the Bank’s overall objectives; and to ensure that all ALM-related risks remain within

the risk appetite set by the Board. The Committee meets quarterly; a sub-committee meets monthly.

Credit Committee – Chaired by the Senior Manager responsible for Credit Management, this

Committee comprises Senior Management, the Head of Risk & ALM, the Head of Treasury, the

Head of Credit Management and the Deputy Head of Corporate Banking. The CEO is not a member

of the Credit Committee, but can, as an Authorised Approver, exercise a veto over Committee

decisions. However, if a credit proposal is declined by the Committee, the CEO cannot overturn that

decision. The Committee is the principal forum below Board level for discussing lending proposals.

Currently, all credit limits must be supported by Credit Committee. The Committee also makes

recommendations on credit policy issues, monitors loan quality, asset mix, possible concentration

risk, and makes recommendations on provisions for doubtful loans. The Committee meets weekly or

more frequently if required.

Financial Crime Risk Committee - Chaired by the CEO, this Committee comprises the Deputy

CEO, the Senior Manager responsible for Risk & ALM and Compliance & Legal Departments, the

Senior Management of the front offices and Financial Control Department, the Head of Compliance

& Legal and the Money Laundering Reporting Officer (‘MLRO’). The Committee is responsible for

reviewing financial crime risks including Anti-Money Laundering (‘AML’) risk, Counter Terrorist-

Financing (‘CTF’) risk, fraud and sanctions risk. It also reviews business-critical CDD, AML and

CTF issues and assesses the Bank’s risk appetite in respect of AML, sanctions, fraud and bribery.

The Committee meets quarterly or more frequently if required.

2.2 Risk management


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Since its inception in 2003, the Bank has maintained a strong risk management culture. It has well-

documented procedures; a range of committees to ensure that at least ‘four eyes’ are involved in all

major policy and operating decisions; clear decision-making processes and criteria; an appropriate

degree of segregation of duties in the Bank’s operations; and produces accurate and timely

management information. Risk reporting is produced by independent risk management functions and

presented to all relevant stakeholders including the regulators, Parent Bank, Risk Committee, ALCO

and Senior Management.

The Bank has an independent Internal Audit function with a reporting line to the Chairman of the

Audit Committee. The Internal Audit Department is responsible for carrying out a risk-based

programme of work to ensure that appropriate controls are in place and working effectively in

accordance with the Bank’s policies and local regulations. The Audit Committee approves an annual

audit plan and receives regular internal and external audit reports. In addition, the Parent Bank’s

Internal Audit function undertakes full and/or partial reviews throughout the year.

2.2.1 Risk governance

The Bank has a fully embedded risk culture and has adopted the Three Lines of Defence Model to

enhance its risk management and control practices, assigning specific risk management

responsibilities across the organisation. The underlying premise is that, under the oversight and

direction of the Board of Directors and Senior Management, the Three Lines of Defence support the

segregation of duties across the Bank for effective risk management.

The First Line of Defence (‘1LoD’) lies with the business and process owners, whose activities

generate the risk exposure to the Bank. The 1LoD owns the risk management responsibilities and the

design and execution of the organisation’s controls to respond to those risks. The 1LoD adopts the

principle of four-eyes review, the principle being that all key reports, reconciliations and controls are

reviewed by someone other than the originator and that for key controls a second person other than

the originator reviews to check that the key control has operated. The Second Line of Defence

(‘2LoD’) supports the Management on its risk oversight responsibilities, bringing expertise and

ensuring that the risks are adequately managed by the business. For all key matters and in line with

the Senior Manager’s Regime, a Senior Manager is assigned the responsibility and accountability of

a specific work or project. The Third Line of Defence (‘3LoD’), represented by the Internal Audit

function, provides assurance to the Board and Senior Management on the effectiveness of the 1LoD

and 2LoD in fulfilling their risk management responsibilities. In this sense, Internal Audit is

responsible, inter alia, for providing an independent assessment and assurance that key controls and

governance processes are functioning effectively and are appropriate to identify, monitor, manage

and mitigate the risks inherent in the business.

In order to strengthen its risk management, the Bank has created specialised 2LoD functions under

the direct responsibility of Senior Management independent from the 1LoD; those functions are the

Risk & ALM, Credit Management Department and Compliance & Legal Departments. These

departments help to build a risk awareness culture in the organisation by disseminating the most up-

to-date risk management know-how, practice and regulatory developments. The 2LoD functions

provide management information and general risk management updates to Risk Committee and

Governance & Compliance Committee on a regular basis.

Board and Senior Management

The Board is responsible for overseeing the Senior Management, establishing sound business

practices and strategic plans, and setting the Bank’s risk appetite and tolerance. The Board has

ultimate responsibility for Enterprise-Wide Risk Management.


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The Board, or a Board-level Committee, approves:

Strategies, policies, processes and systems relating to the management of Enterprise-Wide Risk.

The Board, or a Board-level Committee, reviews regularly (not less frequently than annually):

Annual Report and Financial Statements, including Chairman’s Statement and Strategic Report.

Risk reports.

Stress and scenario testing, including the underlying assumptions.

Regulatory documents, including the ICAAP, ILAAP, Recovery Plan, Resolution Pack and

Pillar 3 disclosures.

Quarterly Management Information Pack.

Policy Documents.

A number of committees have been established to oversee and control risk, as detailed in the

previous section.

The Executive Directors have a full understanding of their areas of responsibility and an adequate

understanding of those areas of business undertaken by the Bank for which they are not directly

accountable.

Senior Management is responsible for:

Developing and implementing the Enterprise-Wide Risk Management strategy in accordance

with the Bank’s risk tolerance.

Determining the structure, responsibilities and controls for managing risk.

Communicating the risk strategy and key policies for implementing the strategy and supporting

the risk management structure throughout the Bank.

Monitoring current trends and potential market developments that may present significant,

unprecedented and complex challenges for managing the risks, so that they can take appropriate

and timely management actions.

Defining the specific procedures and approvals necessary for exceptions to policies, including

the escalation procedures and follow-up actions to be taken in response to breaches of limits.

2.2.2 Risk policy and procedure

The Bank’s risk policies are commensurate with its business strategy, and are regularly reviewed to

ensure that they remain adequate. The Enterprise-Wide Risk Management Framework sets the

guidelines to assess the overall Bank’s risk profile, identifying the inherent and residual risk

exposures. The Risk Appetite Policy sets out the Bank’s risk tolerance and limits for each risk

category. The risk appetite defines qualitative and quantitative risk limitsand early warning indicators

to help monitor the level of risk exposure. The risk policies are reviewed and approved by the

Board’s Risk Committee on at least an annual basis.

The Bank adopts a cautious and prudent risk management approach, seeking to eliminate the

unnecessary risks and to minimise losses from unavoidable risks. In adopting this risk management

approach, the Bank takes into consideration the costs involved and assesses its risk strategy from the

risk adjusted profitability perspective.


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3. Capital resources

3.1. Total capital available

The initial capital of ICBC (London) plc was $100 million when it was formed in 2003. This Tier 1

capital was increased to $200m in October 2007. On 28 October 2013, a contract for a 10-year

subordinated loan was signed between ICBC Ltd and the Bank. This replaced the previous 5-year

subordinated loan with ICBC Ltd from 22 February 2010, which had the same notional value of

$100m. On 29 December 2016, the Bank amended its subordinated loan agreement. No changes

were made to the substance of the loan. Throughout 2017, the Bank complied fully with the regulatory capital Requirements. The Bank’s

capital as at 31 December 2017 was as follows:

Table 1 – Own Funds

USD ‘000

Particular 2017

USD '000

2016

USD '000

Paid up capital 200,000 200,000

Retained earnings 199,057 177,359

Available-for-sale reserve (657) 688

Common Equity Tier 1 Capital 398,400 378,047

Regulatory adjustment (552) (563)

Common Equity Tier 1 Capital 397,848 377,484

Additional Tier 1 capital - -

Tier 1 Capital 397,848 377,484

Subordinated loan 100,000 100,000

General credit risk adjustments 2,280 2,020

Tier 2 Capital 102,280 102,020

Total Capital 500,128 479,504

Total risk-weighted exposures 1,794,374 1,777,358

Capital Ratio

Common Equity Tier 1 Ratio (%) 22.17% 21.24%

Tier 1 Capital Ratio (%) 22.17% 21.24%

Total Capital Ratio (%) 27.87% 26.98%

Institution specific buffer requirement 5.79% 5.15%

- of which capital conservation buffer requirement 1.250% 0.625%

- of which countercyclical buffer requirement 0.0394% 0.027%

CET 1 available to meet buffers 22.18% 21.24%

The subordinated loan of $100m qualifies as lower Tier 2 capital and is subject to amortisation on a

straight line basis from October 2018.


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Table 2 – Reconciliation between regulatory own funds and audited Financial

Statements as at 31 December 2017

USD ‘000

Particular

Audited

Financial

Statements

Regulatory

Own

Funds

Regulatory

Adjustment

Paid-up capital 200,000 200,000 -

Retained earnings 199,057 199,057 -

Available-for-sale reserve (657) (657) -

Common Equity Tier 1 Capital 398,400 398,400 -

Regulatory Adjustment

(552) 552

Common Equity Tier 1 Capital 398,400 397,848 552

Tier 1 Capital 398,400 397,848 552

Subordinated loan 100,000 100,000 -

General credit risk adjustments 2,280 2,280 -

Tier 2 Capital 102,280 102,280 -

Total Capital 500,680 500,128 552

Table 3 – Main features of capital instrument

Share capital Subordinated loan

1 Issuer ICBC (London) plc ICBC (London) plc

2 Unique identifier N/A N/A

3 Governing law(s) of the instrument English English

Regulatory treatment

4 Transitional CRR Rules Common Equity Tier 1 Tier 2

5 Post- Transitional CRR Rules Common Equity Tier 1 Tier 2

6

Eligible at solo / (sub-) consolidated /

solo and (sub-) consolidated Solo Solo

7 Instrument type Share capital Subordinated loan

8 Amount recognised in regulatory capital USD 200,000,000 USD 100,000,000

9 Nominal amount of instrument USD 200,000,000 USD 100,000,000

9a Issue price 1 USD 100,000,000

9b Redemption price 1 USD 100,000,000

10 Accounting classification Shareholder’s equity Liability - amortised cost

11 Original date of issuance*

19/05/2003 and

01/10/2007 28/10/2013

12 Perpetual or dated N/A Dated

13 Original maturity date N/A 27/10/2023

14

Issuer call subject to prior supervisory

approval No No

15

Optional call date, contingent call dates

and redemption amount N/A N/A

16 Subsequent call dates, if applicable N/A N/A

Coupons/dividend

17 Fixed or floating dividend coupon N/A Floating


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Share capital Subordinated loan

18 Coupon rate and any related index N/A Libor + 1.3 %

19 Existence of dividend stopper No No

20a

Fully discretionary, partially

discretionary or mandatory (in terms of

timing) Fully discretionary Mandatory

20b

Fully discretionary, partially

discretionary or mandatory (in terms of

amount) Fully discretionary Mandatory

21

Existence of step-up or other incentive to

redeem No No

22 Non-cumulative or cumulative N/A Cumulative

23 Convertible or non-convertible N/A Non-convertible

30 Write-down features No No

35

Position in subordination hierarchy in

Liquidation (specify instrument type

immediately senior to instrument) Subordinated debt N/A

36 Non-compliant transitioned features No No

*The Bank issued $100m of Common Shares per issuance.


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Table 4 – Transitional Own Fund Disclosure

USD ‘000

Particular

Amount at

Disclosure

Date

Transitional

Adjustment

End-Point

CRD IV

Common Equity Tier 1 (CET 1) capital:

Instruments and reserves Capital Instruments and related share premium accounts,

of which:

- Ordinary shares 200,000 - 200,000

- Retained earnings 199,057 - 199,057

Available-for-sale reserve (657) - (657)

Common Equity Tier 1 (CET 1) capital before

regulatory adjustment 398,400 - 398,400

Common Equity Tier 1 Capital: Regulatory

adjustment

-

Additional Value Adjustments (552) - (552)

Total regulatory adjustments to CET 1 (552)

(552)

CET 1 capital 397,848 - 397,848

Additional Tier 1 Capital: Instruments - - -

Tier 1 Capital 397,848 - 397,848

Tier 2 Capital: Instruments and provisions Capital instruments and related share premium accounts 100,000 - 100,000

General credit risk adjustments 2,280 - 2,280

Tier 2 Capital 102,280 - 102,280

Total Capital (Tier 1 + Tier 2) 500,128 - 500,128

Total Risk-Weighted Assets 1,794,374 - 1,794,374

Capital Ratios and Buffers

Common Equity Tier 1 Ratio (%) 22.17% - 22.17%

Tier 1 Capital Ratio (%) 22.17% - 22.17%

Total Capital Ratio (%) 27.87% - 27.87%

Institution-specific buffer requirement 5.79% 1.25% 7.04%

- of which capital conservation buffer requirement 1.250% 1.25% 2.50%

- of which countercyclical buffer requirement 0.0394% - 0.0394%

CET 1 available to meet buffers 22.18% - 22.18%


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4. Capital requirements

The Board of Directors has the ultimate responsibility for capital management. The Board has

delegated responsibility for day-to-day capital management and risk management to the Chief

Executive Officer, who has delegated it to the Asset Liability Management Committee (‘ALCO’).

The Chief Executive Officer and Chief Finance Officer are responsible for the regular review and

oversight on capital management of the Bank.

The Bank’s capital is monitored on a periodic basis through management information produced by

the Financial Control Department and sent to the Senior Management and reported at Executive

Committee when major decisions are taken.

The Bank has adopted the Standardised Approach to credit and market risk and the Basic Indicator

Approach to operational risk in order to calculate the Pillar 1 capital requirements.

The Bank produces an Internal Capital Adequacy Assessment process (‘ICAAP’) report annually,

based upon the year-end financial statements. The ICAAP includes an assessment of the Bank’s

capital needs based upon the minimum regulatory requirements and additional capital charges that

the Bank deems it prudent to include. These additional capital charges take account of factors such as:

the current quality of the credit book; the risks associated with any concentrations (in particular,

geographical areas or industry sectors); risks identified from stress testing and scenario analysis,

including in the area of treasury products; risks associated with the Bank’s view of how potential

economic changes might affect the banking industry or its customers; and capital charges for planned

new business projects.

The process also includes an analysis of the Pillar 2 capital that would be required under both

stressed and unstressed conditions and includes appropriate “add-ons” to required capital to reflect

Pillar 2 risks.

The PRA assess the Bank’s own capital assessment and sets the Internal Capital Guidance (‘ICG’),

which includes both Pillar 1 and Pillar 2A capital.

The total of the Pillar 1 requirement and Pillar 2A ICG was 13% at 31 December 2017.


13 | P a g e

Table 5 – Pillar 1 capital requirement

USD ‘000

Exposure class

2017 2016

Risk-

weighted

assets

Pillar 1 capital

requirement

(8%)

Risk-

weighted

assets

Pillar 1

capital

requirement

(8%)

Credit and Counterparty credit risk

Central governments or central banks - - - -

Multilateral development banks - - - -

Institutions 320,984 25,679 356,013 28,481

Corporates 1,127,840 90,227 1,149,576 91,966

Secured by mortgages on immovable

property 178,328 14,266 82,946 6,636

Exposure at default - - 15,000 1,200

Other items 39,685 3,175 37,346 2,988

Total credit risk 1,666,837 133,347 1,640,881 131,271

Operational risk 125,483 10,039 127,677 10,214

Market risk (position risk) 135 11 243 19

Credit valuation adjustment (‘CVA’) 1,919 154 8,557 685

Grand total 1,794,374 143,551 1,777,358 142,189

Total capital resources available

500,128

479,504

Headroom over total capital

requirement

356,577

337,315

It is the Bank’s policy to maintain a prudent degree of headroom above the minimum required capital

level. The level of capital is monitored daily against an internal early warning limit set by the Bank.


14 | P a g e

5. Capital buffers

Table 6 – Geographical distribution of credit exposures relevant for the calculation of

the countercyclical capital buffer (‘CCyB’)

USD ‘000

General Credit

Exposures *

Trading

book

exposure

Own funds requirements

Own funds

require-

ment

weights

Counter-

cyclical

capital

buffer

rate

of

wh

ich

:

Gen

era

l cr

edit

exp

osu

res

of

wh

ich

:

Tra

din

g b

oo

k

exp

osu

res

To

tal

Australia 69,189 - 5,535 - 5,535 0.04 -

Denmark 46 - 1 - 1 0.00 -

France 21,444 - 1,716 - 1,716 0.01 -

Luxembourg 32,669 - 1,643 - 1,643 0.01 -

Netherlands 70,086 - 5,607 - 5,607 0.04 -

Sweden 19,541 - 1,563 - 1,563 0.01 2.00%

United Kingdom ** 1,072,962 1,218 61,484 11 61,495 0.47 -

Japan 47 - 1 - 1 0.00 -

Russia 21,512 - 1,721 - 1,721 0.01 -

Switzerland 84,452 - 6,015 - 6,015 0.05 -

Turkey 5,673 - 227 - 227 0.00 -

United States 356,896 - 2,830 - 2,830 0.02 -

Norway 34 - 1 - 1 0.00 2.00%

China 359,484 - 13,521 - 13,521 0.11 -

Guernsey 53,198 - 4,256 - 4,256 0.03 -

Hong Kong 22,939 - 1,701 - 1,701 0.01 1.250%

Jersey 46,670 - 3,734 - 3,734 0.03 -

Cayman Islands 83,729 - 4,643 - 4,643 0.03 -

South Korea 10,501 - 168 - 168 0.00 -

South Africa 105,494 - 8,440 - 8,440 0.06 -

Zambia 81,467 - 6,517 - 6,517 0.05 -

British Virgin

Islands 25,290 - 2,023 - 2,023 0.02 -

Other countries*** 173,716 - - - - - -

Total 2,717,039 1,218 133,347 11 133,358 1.00

* General Credit Exposures include contingent commitments.

** Since exposure on the trading book is less than 2% of aggregate risk-weighted exposures, all trading book

exposure is allocated in the UK.

*** Other countries includes exposure to multilateral development banks.

Table 7 – Amount of institution-specific countercyclical capital buffer

USD '000

Total risk exposure amount 1,666,972

Institution-specific countercyclical capital buffer rate 0.0394%

Institution-specific countercyclical capital buffer requirement 656.79


15 | P a g e

6. Leverage The Leverage ratio measures the relationship between the capital resources of the Bank and its total

assets, as well as certain off-balance sheet exposures. There is currently no Leverage ratio

requirement applicable to the Bank but its Leverage ratio as at 31 December 2017 was 14.64%,

which exceeded the 3% provisional level set by the Basel Committee. In calculating the ratio, the

Bank has adopted a fully phased-in Tier 1 approach to capital.

Table 8 – Summary reconciliation of accounting assets and Leverage ratio exposures

USD ‘000

Total assets as per published Financial Statements 2,431,239

Adjustments for derivative financial instruments 17,220

Adjustment for securities financing transactions (‘SFTs’) -

Adjustment for off-balance sheet items (i.e. conversion to credit equivalent

amounts of off-balance sheet exposures) 266,298 Other adjustments 2,282

Leverage ratio total exposure measure 2,717,039

Table 9 - Leverage ratio common disclosure

USD in ‘000

On-balance sheet exposures (excluding derivatives and SFTs)

On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but

including collateral) 2,381,401

(Asset amounts deducted in determining Tier 1 capital) -

Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary

assets) 2,381,401

Derivative exposures

Replacement cost associated with all derivatives transactions (i.e. net of eligible

cash variation margin) 52,120

Add-on amounts for PFE associated with all derivatives transactions (mark- to-

market method) 17,220

Total derivatives exposures 69,340

Other off-balance sheet exposures

Off-balance sheet exposures at gross notional amount 566,787

(Adjustments for conversion to credit equivalent amounts) (300,489)

Other off-balance sheet exposures 266,298

Capital and total exposure measure

Tier 1 capital 397,848

Leverage ratio total exposure measure (sum of lines 3, 11, 16, 19, EU-19a and

EU-19b) 2,717,039

Leverage ratio

Leverage ratio 14.64%

Choice on transitional arrangements and amount of derecognised fiduciary

items

Choice on transitional arrangements for the definition of the capital measure

Fully phased in

Tier 1 Capital


16 | P a g e

Table 10 – Breakdown of on-balance sheet exposures (excluding derivatives, SFTs and

exempted exposures)

Total on-balance sheet exposures (excluding derivatives, SFTs, and

exempted exposures), in USD ‘000, of which: 2,381,401

Exposures treated as sovereigns 215,508

Exposures to regional governments, MDBs, international organisations and PSE

not treated as sovereigns 173,716

Institutions 921,293

Secured by mortgages on immovable property 178,328

Retail exposures -

Corporates 852,947

Exposures at default -

Other exposures (e.g. equity, securitisations, and other non-credit obligation

assets) 39,609

Disclosure on qualitative items

Description of the process used to manage the risk of excessive leverage

The Leverage ratio is monitored on a quarterly basis, compared against the Bank’s internal

limit and considered as part of the Bank’s capital planning.

If the Bank were to experience a significant deterioration in its Leverage ratio, it could

manage the risk of excessive leverage by reducing its assets or by raising capital.

Description of the factors that had an impact on the Leverage ratio during the period

to which the disclosed leverage ratio refers:

The Leverage ratio was 14.64% in 2017 (2016: 12.79%). The ratio increased due to an

increase in Tier 1 capital and a decrease in the total exposures.

6.1 Risk statement for leverage

The risk of excessive leverage is considered to be a low risk for the Bank. With regard to its risk profile and

strategy, the Bank concludes that the leverage risk management systems put in place are adequate.


17 | P a g e

7. Asset encumbrance

Asset encumbrance is the process by which assets are pledged as collateral in order to secure funding

or credit-enhance a financial transaction from which they cannot be freely withdrawn. The Bank

undertakes certain financial transactions such as repurchase agreements and derivatives that result in

certain assets being encumbered.

Moreover, the data is presented as a median calculation for 2017 rather than a point in time (31

December 2017), in accordance with the EU Delegated regulation.

Table 11 – Template A – Encumbered and unencumbered assets

USD ‘000

Carrying

amount of

encumbered

assets

Fair value

of

encumbered

assets

Carrying

amount of

unencumbered

assets

Fair value of

unencumbered

assets

010 040 060 090

010 Assets of the reporting

institution 155

2,807,363

030 Equity instruments

040 Debt securities

417,491 417,491

070 - of which: issued by

general governments 203,036 203,036

080

- of which: issued by

financial

corporations

214,455 214,455

090

- of which: issued by

non-financial

corporations

- -

120 Other assets 155

1,972,382

121 - of which: loans & advances -

1,861,365

Table 12 – Template B – Collateral received USD ‘000

Fair value of

encumbered

collateral

received or own

debt securities

issued

Unencumbered

Fair value of

collateral

received or

own debt

securities

issued available

for

encumbrance

010 040

130 Collateral received by the reporting institution - -

150 Equity instruments - -

160 Debt securities - -

230 Other collateral received - -


18 | P a g e

Fair value of

encumbered

collateral

received or own

debt securities

issued

Unencumbered

Fair value of

collateral

received or

own debt

securities

issued available

for

encumbrance

010 040

240 Own debt securities issued other than own covered

bonds or ABSs - -

250 Total Assets, Collateral received and own debt

securities issued - -

Table 13 – Template C - Source of encumbrance

USD ‘000

Matching

liabilities,

contingent

liabilities or

securities lent

Assets,

collateral

received and

own

debt securities

issued other

than covered

bonds and

ABSs

encumbered

010 030

010 Carrying amount of selected financial liabilities 2,925 -

010 - of which: Derivatives 2,518 -

These asset encumbrance disclosures are prepared on a regulatory basis and as such will differ from

the asset encumbrance disclosures presented in the Annual Report and Financial Statements. As at 31

December 2017, the amount of encumbered assets was $617k. This amount related to margin

deposited with a central counterparty for clearing of derivatives. Of the total carrying amount of

unencumbered assets in Table 18, 5% of assets would not be deemed available for encumbrance in

the normal course of business.

7.1 Risk statement for asset encumbrance

The risk of asset encumbrance is considered to be a low risk for the Bank. With regard to its risk

profile and strategy, the Bank concludes that the asset encumbrance risk management systems put in

place are adequate.


19 | P a g e

8. Credit risk

8.1 Credit risk management objectives and policies

Credit risk exposes the Bank to losses caused by financial or other issues experienced by its clients.

Credit risk is defined as the risk arising from an obligor’s (typically a company, financial institution

or issuer of financial instrument) failure to meet the terms of any agreement and obligations. Credit

risk arises when funds are extended, committed, invested or otherwise exposed through contractual

agreements, whether reflected on- or off-balance sheet. Credit and credit counterparty risk arises

primarily from three types of transactions:

Lending transactions through loans and advances to clients and counterparties creates the risk

that an obligor will be unable or unwilling to repay capital and/or interest on loans and advances

granted to them. This category also includes money market loans, where funds have been placed

with other financial institutions

Issuer risk on financial instruments where payments due from the issuer of a financial instrument

will not be received

Trading transactions, giving rise to settlement risk.

ICBC (London) plc places strong emphasis on credit risk management and recognises it as a key risk

in the operation of the Bank. Default triggers a total or partial loss of money lent to a counterparty

and the main objective is to avoid and minimise such losses. The Bank has put in place procedures,

detailed in the Credit Policy, Credit Management Manual and Risk Appetite Policy to manage and

strengthen credit risk management.

8.2 Strategies and processes to manage credit risk

ICBC (London) plc has a clear strategy of its target markets. Although Europe, the UK and China are

its key markets, the Bank periodically accepts credit exposures in other geographical locations such

as North America (USA) and Africa, in line with the Parent Bank’s cross-border lending policy and

procedures. The cross-border policy and procedures ensure that there is mutual and close cooperation

between the domestic entities of ICBC Ltd where the borrower is located and the Overseas Entities of

ICBC Ltd that are taking credit exposures to the borrower are located in that jurisdiction. Any

proposal outside of the established credit risk appetite policies requires approval by the Bank’s Risk

Committee.

Counterparty credit risk is assessed using quantitative and qualitative analysis, as articulated in the

Bank’s Credit Policy, Credit Management Manual and other documents. The assessment of client

profiles includes consideration of their character and integrity, core competencies, track record and

financial strength. A strong emphasis is placed on the historic and ongoing stability of income and

cash flow streams generated by the clients. The Bank’s primary assessment method is therefore the

ability of the client to meet their payment obligations.

The Bank is exposed to credit risk in its on- and off-balance sheet activities and daily settlements.

The Bank manages credit risk by establishing individual counterparty limits, industry sector limits

and country limits for counterparties with which it undertakes business within the terms of its credit

policies and procedures. A credit analysis is performed on all new and existing counterparties and

related credit exposures to assess the counterparty’s ability to repay and meet its obligations. This

analysis is undertaken by Credit Analysts within Credit Management Department.

The Bank uses two External Credit Assessment Institutions (‘ECAIs’) namely Standard & Poor’s (‘S

& P’) and Fitch for evaluating credit risk and building counterparty risk profiles for all exposure

classes.


20 | P a g e

The Bank also employs the Parent Bank’s internal rating system, located within the Global Credit

Management System (‘GCMS’), to grade entities that are not rated by the external credit agencies

and to facilitate monitoring of asset quality at portfolio as well as counterparty level. The rating

model focuses mainly on quantitative data and financial ratios as well as qualitative data and a rating

is generated and assigned based on ICBC Group methodology.

8.3 Structure and organisation of the credit risk function

Relationship Managers (within Corporate Banking and Institutional Banking Departments) and

Traders (Treasury Department) are the originators of businesses and transactions, which are then

examined and assessed independently by the Credit Analysts. After an evaluation and assessment of

risks, the Credit Analysts make their recommendations and present the credit applications to the

Credit Committee for consideration and approval. Relationship Managers and Traders operate within

these limits. The Board of Directors and Senior Management of the Bank are ultimately responsible

for credit risk and overall risk management.

Approvals are granted according to the Annual Operation and Management Authorisation and Credit

Policy of the Bank, with a documented hierarchy. The Bank also undertakes annual reviews of loans

and assets in the bond portfolio to monitor and assess the overall quality of the portfolio. Asset

quality of the portfolio is monitored and the results of the analysis are reviewed by the Credit

Committee and Risk Committee on a quarterly basis.

It is the Bank’s policy and practice that credit limits for counterparties are reviewed at least annually

and limits are then approved by the Credit Committee and the Authorised Approver.

Post-lending management: Monitoring of credit exposures against approved limits for

counterparties, industries and countries on a regular basis is a key function of post-lending

management to maintain a healthy loan portfolio. Requests for waivers and amendments of existing

credit facilities, where it is judged that their approval will result in higher credit risk than when the

deal was originally sanctioned, are submitted to Credit Committee and the Authorised Approver.

The Bank documents and maintains a record either in forms of credit proposals or memoranda of all

counterparties for whom forbearance is applied, and material waiver requests are taken into

consideration in the categorisation of asset quality. Financial covenants are monitored by Credit

Analysts to ensure their compliance.

8.4 Measurement and reporting of credit risk

The asset book comprises mainly syndicated and bilateral loans to corporates and banks. There is

also an active portfolio of trade finance deals, normally of short tenor, involving discounting and re-

financing of letters of credit issued by banks in emerging-market as well as developed countries. The

Bank also undertakes structured commodity trade finance for selected counterparties and commercial

real estate lending. Commercial real estate loan transactions are supported by first legal mortgages or

charges over property. The following characteristics of the property are considered: the type of

property, its location, tenant mix, sponsor and the ease with which the property could be re-let and/or

re-sold. Commercial real estate lending generally takes the form of good-quality property

underpinned by strong third party leases. However, the primary consideration in all cases is debt

serviceability. The Bank’s exposure to the property market is well-diversified, with a strong bias

towards prime locations and a focus on quality of tenants for commercial assets. The loan-to-value

ratio, interest cover ratio and debt service ratio are key parameters set to assess risks in commercial

real estate lending. All of the Bank’s commercial real estate transactions are located in the UK and

are subject to a strict underwriting process. The Bank has a secured real estate sector exposure limit

of 9.9%.


21 | P a g e

The Bank issues guarantees and standby letters of credit on an ad hoc basis, where the counterparty

in the UK or Europe has a business interest in China. The Bank adds its confirmation to letters of

credit and undertakes participation risks, on a funded or unfunded basis, in relation to trade finance

transactions. The Bank has a small number of MiFID investment products; these are predominantly

OTC derivatives including FX and interest rate swaps (‘IRS’).

Credit limits are established for all transactions which give rise to credit risk. In the case of loans and

advances, the amount at risk is the maximum exposure less any collateral and realisable assets in the

event of default. In the case of bond investment, the exposure at risk is the maximum amount of the

debt related to issuer risk of the financial instrument where payments due from the issuer will not be

received in the event of default.

Table 14 below shows the gross credit risk exposures as at 31 December 2017 and the average

exposures during 2017. Both measures of exposure value are shown before the application of credit

risk mitigation techniques or ‘CRM’.

Table 14 –Gross and average exposures by exposure class

USD ‘000

Exposure class Average Gross

exposure*

Gross exposure

(before CRM)

Central governments or central banks 236,902 215,508

Multilateral development banks 139,163 173,716

Institutions 1,085,204 953,304

Corporates 1,285,197 1,156,575

Secured by mortgages on immovable property 123,720 178,327

Exposure at default* 12,000 -

Other Items 38,112 39,609

Total 2,920,298 2,717,039

*At 31 December 2017, the Bank had one impaired loan which was fully provided for – see Table 22.

Table 15 summarises loans and advances to banks and corporates and financial investments by

geographical area.

The Bank manages concentration risk by counterparty, industry sector and country. The Bank has

geographical risk concentration in Europe (mainly the UK) and in China, reflecting its business focus.

North American exposures are mainly in the USA, the largest of which are US Treasury investments

held as high-quality liquid assets (‘HQLA’). African exposures are mainly to banks in South Africa

and one corporate in Zambia.


22 | P a g e

Table 15 – Exposure class by geographic distribution

USD ‘000

Exposure class Asia and

Pacific

Europe Middle

East

North

America

South

America

Africa Total

Central

governments or

central banks

7,903 27,570

-

180,035

-

-

215,508

Multilateral

development

banks

12,053

-

-

114,887

-

46,776 173,716

Institutions 278,578 401,311 5,673 176,861

-

90,881 953,304

Corporates* 175,680 775,795

-

109,020

-

96,080 1,156,575

Secured by

mortgages on

immovable

property

-

178,327

-

-

-

-

178,327

Exposure at

default

- - - - - - -

Other Items - 39,609 - - - - 39,609

Total 474,214 1,422,612 5,673 580,803 - 233,737 2,717,039


23 | P a g e

Table 16 below summarises credit exposures by industry. For the reporting period ending 31

December 2017, 35% of credit exposures related to financial institutions, 8.1% to mining, 7.5% to

manufacturing companies and 9.9% to commercial real estate. Overall the asset portfolio reflects a

good diversification of industries as the Bank lends across a broad range of industry segments.

Table 16 – Industry type by exposure class

USD ‘000

Exposure class Industry Gross exposure

Central governments or central banks Sovereign 215,508

Multilateral development banks - 173,716

Institutions - 953,304

Corporates Commodity Trading 51,674

Manufacturing Industry 205,148

Mining 221,052

Oil & Gas 54,647

Utilities 72,357

Real Estate & Housebuilders 125,042

Retailers 101,275

Non-bank FIs (‘NBFIs’) 70,099.33

Construction & Materials 64,950.70

Transport 58,806

Electronic & Electrical

equipment 38,879

Pharmaceuticals & Biotech 31,128

Others 61,517

Subtotal 1,156,575

Secured by mortgages on immovable

property - 178,327

Exposure at default - -

Other Items - 39,609

Total - 2,717,039

Table 17 - Maturity profile of loans

The Bank’s exposures as at 31 December 2017 by maturity dates and time horizons are shown in

Table 17 below.

USD ‘000

Exposure class 0-3

months

3 months – 1

year

1-5 years Over 5

years

Total

Central governments or central

banks

80,407 135,101 - - 215,508

Multilateral development

banks

59,939 12,010 101,767 - 173,716

Institutions 553,827 88,691 310,786 - 953,304

Corporates* 297,579 211,244 527,166 120,586 1,156,575

Secured by mortgages on

immovable property

12,104 63,874 102,349 - 178,327

Exposure at default - - - -

Other Items 39,609 - - - 39,609

Total 1,043,465 510,920 1,042,068 120,586 2,717,039

*Includes one exposure of $4,000 to an SME.


24 | P a g e

9. Credit risk mitigation

9.1 Policies, strategies and processes for hedging, mitigating and monitoring credit

risk

ICBC (London) plc considers credit risk mitigation techniques as part of the credit assessment of a

potential client or business proposal and not as a separate consideration of mitigation of risk. Credit

risk mitigants include any collateral item over which the Bank has a pledge of security, first legal

charges over property, netting agreements, cash, or terms and conditions imposed on a borrower with

the aim of reducing the credit risk inherent to that transaction.

The Bank has adopted a number of techniques to mitigate credit risk. The Bank takes collateral

whenever the need arises. The valuation of collateral is updated on a regular basis and increases in

frequency when the credit risk of a counterparty begins to deteriorate. The types of credit risk

mitigation employed by the Bank are listed below.

Netting Agreement: ICBC (London) plc has entered into a netting agreement (‘the Netting

Agreement’) for on-balance sheet netting with its Parent Bank. The Netting Agreement restricts

on-balance sheet netting to mutual claims between an institution and its counterparty. It is

compliant with CRR Regulation EU NO 575/2013 and is treated as funded credit protection for

those loans and deposits which are denominated in the same currency, meaning that ICBC

(London) plc is entitled to set-off GBP loans against GBP deposits, USD loans against USD

deposits, Euro loans against Euro deposits and CNY loans against CNY deposits. The Netting

Agreement also mitigates the concentration risk arising from large exposures, ensuring that the

Bank’s net exposure to ICBC Group is maintained within the regulatory large exposure threshold.

Guarantees, standby letters of credit and unfunded risk participation agreements: The

Bank participates in lending activities against the support and collateral of guarantees, standby

letters of credit and unfunded risk participation agreements. In such cases, the Bank regards its

credit risk as being to the guarantee providers rather than the underlying borrowers. The Bank

uses strong investment-grade guarantors, including corporates and international financial

organisations rated ‘A’ or above by Fitch and Standard & Poor’s. The Bank also uses guarantees

from strong and reputable insurance companies to support credit facilities extended to corporate

clients.

Lending collateralised by property: The Bank’s commercial real estate lending (all in the UK)

is collateralised by mortgages or charges over the property. Other considerations such as the

loan-to-value ratio, debt service ratio and interest cover ratio, as set out in the Bank’s policy and

guidelines for this sector, are taken into consideration. Commercial real estate lending generally

takes the form of good-quality property often underpinned by strong third party leases.

Valuations on commercial properties in the portfolio are an intrinsic part of the Bank’s ongoing

focus on collateral management and assessment.


25 | P a g e

Table 18 – On-balance sheet exposures before and after CRM by exposure class

USD ‘000

Exposure class Gross exposure

(before CRM)

Gross exposure

(after CRM)

Central governments or central banks 215,508 215,508

Multilateral development banks 173,716 173,716

Institutions 953,304 936,660

Corporates* 1,156,575 1,156,575

Secured by mortgages on immovable property 178,327 178,327

Exposure at default - -

Other Items 39,609 39,609

Total 2,717,039 2,700,395

*Includes one exposure of $4,000 to an SME.

Unfunded credit risk mitigation in the form of guarantees and one risk participation agreement was

$70.163m as at 31 December 2017. The unfunded credit risk mitigation relates to corporate

exposures.

9.2 Risk statement for credit risk

Credit risk is considered to be a medium risk for the Bank. Credit risks are managed prudently with

proper controls in place in the form of a Risk Appetite Policy and key indicators such as the Non-

Performing Loans (‘NPL’) ratio and the counterparty ratings floor. These complement various credit

policies and procedures that govern the entire credit lending process. The Bank is prepared to accept

low-to-medium risk in order to enhance returns. The Bank’s growth strategy is moderate with higher

long-term returns, as opposed to an aggressive approach. Generally the Bank takes a conservative

approach to credit risk management, which is evident in the low NPL ratio of 0.2% as at 31

December 2017 (2016: 1.04%). With regard to its credit risk profile and strategy, the Bank concludes

that the credit risk management systems and controls put in place are adequate.


26 | P a g e

10. Use of external credit assessment institutions

The Bank used the following external credit assessment institutions (‘ECAIs’) for credit risk and

counterparty credit risk calculations purposes throughout the reporting period:

Standard & Poor’s (‘S&P’).

Fitch.

Table 19 below shows that the gross exposure amount as at 31 December 2017 subject to the use of

ECAIs was $1,392m. The exposures include both on- and off-balance sheet items. In the case of

off-balance sheet exposures, the Bank applies a Credit Conversion Factor (‘CCF’) as prescribed

under CRD IV and the Standardised Approach to credit risk.

Table 20 below shows exposures after credit risk mitigation (‘CRM’). As at 31 December 2017, 73%

of assets were risk-weighted under Credit Quality Steps 1 to 3. Credit Quality Steps 1-3 represent

investment grades AAA to BBB- of S&P and Fitch. Approximately 49% of the Bank’s assets,

mainly corporates and commercial real estate exposures, are not externally-rated but all assets are

internally-rated and assessed. The Bank considers the asset quality of its unrated counterparties to be

good on the basis of their financial standing, credit profiles and low probability of default

underpinned by well-structured credit and an identified source of repayment. Exposures subject to the

use of ECAIs are marketable, with the exception of one impaired asset highlighted in Table 22 below.

Table 19 - Exposure amounts subjected to the use of ECAIs

USD ‘000

Exposure class Gross

exposure

Central governments or central banks 215,277

Multilateral development banks 161,663

Institutions 637,684

Corporates 377,380

Secured by mortgages on immovable property -

Exposure at default -

Total 1,392,004

Table 20 – Exposures amounts by CQS

USD ‘000

Credit Quality Step Gross

exposure

Exposure

after CRM

1 426,872 426,872

2 350,314 333,669

3 261,598 261,598

4 351,305 351,305

5 1,915 1,915

6 - -

Total 1,392,004 1,375,359


27 | P a g e

11. Exposures to counterparty credit risk (‘CCR’)

Derivative instruments are used to hedge exposures to interest rate risk in the banking book and

foreign exchange risks (market risk). Counterparty credit risk (‘CCR’) is the risk that a counterparty

to a derivative instrument could default prior to the maturity of the contract. Counterparty credit

exposures are subject to credit limits on the same basis as other credit exposures. Counterparty credit

exposure is measured using the CCR Mark-to-Market method.

The Bank has limited wrong-way risk exposure. Wrong-way risk exposures arise when the likelihood

of default by counterparties is positively correlated with general market risk factors or when the

future exposure to a specific counterparty is positively correlated with the counterparty’s probability

of default due to the nature of the transaction.

In 2017, no collateral was received or placed by corporate clients for derivative contracts. However,

the EMIR clearing obligation which came into effect on 21 December 2016 means that eligible

contracts are now cleared through a central counterparty (‘CCP’). Additional EMIR rules, which

came into effect on 1 March 2017, require the exchange of variation margin with all covered

counterparties, meaning the use of collateral is likely to increase.

The Bank does not use credit default swaps as protection against asset quality deterioration.

The Bank did not take advantage of any netting benefits under an ISDA Master Agreement1 (or

similar) during the period. ICBC (London) plc itself does not have an external credit rating.

Table 21 – Counterparty credit risk for derivative contracts

USD ‘000

Exposure Class

Notional

Value

of

Derivatives

Credit

exposure

Collateral

held

Net

Derivatives

Credit

Exposure

Central governments or central banks - - - -

Multilateral Development Banks - - - -

Institutions 443,582 8,631

8,631

Real Estate - - - -

Corporates 639,401 60,805 - 60,805

Covered Bonds - - - -

Total 1,082,983 69,435 - 69,435

11.1 Risk statement for counterparty credit risk

The Bank’s counterparty credit risk profile is considered to be low, and in line with its risk tolerance.

With regard to its risk profile and strategy, the Bank concludes that the counterparty credit risk

management systems put in place are adequate.

1The ISDA Master Agreement permits the netting of payments due under the same transaction so that only a

single amount is exchanged between the parties, rather than numerous payments involving the same

transactions.


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12. Credit risk adjustments

12.1 Specific impairment and collective provisions

Past Due: Contractual payments of either principal or interest being past due up to 89 days are

defined as past due but not impaired. Under this category, past due but not impaired loans as at 31

December 2017 were nil (2016: nil).

Impaired loans: According to the Bank’s Impairments Policy, a financial asset or group of assets is

impaired and impairment losses are recognised only if there is objective evidence as a result of one or

more events that occurred after the initial recognition of the assets. At each balance sheet date, the

Bank assesses whether there is objective evidence of impairment. If evidence exists, then a detailed

impairment calculation is carried out to determine if an impairment loss should be recognised. The

amount of the loss is measured as the difference between the asset’s carrying amount and the present

value of estimated cash flows discounted at the financial asset’s original effective interest rate.

Objective evidence of past due and impaired assets is based on the main criteria summarised below:

Significant financial difficulty of the issuer or obligor.

Breach of contract such as clear evidence of event of default.

Payments of either principal or interest exceeding 90 days or more have not been received.

The issuer or obligor will enter bankruptcy proceedings.

The primary sources of repayment are insufficient to service the remaining contractual principal

and interest amounts, and the Bank has to rely on secondary sources for repayment.

The asset is no longer traded publicly or there is no market to trade the assets.

Clear evidence of measurable data indicating that actual and future cash flows will be insufficient

to service interest and principal.

The Bank’s accounting policy for the determination of impairments is set out in Note 1 to the 2017

Financial Statements under ‘Impairment of financial assets’. A summary of the main provisions of

the policy is set out below.

Loans and advances to banks and customers

For loans and advances to banks and customers carried at amortised cost, the Bank assesses

individually and collectively whether there is objective evidence of impairment. For the purpose of

collective evaluation of impairment, which is intended to reflect incurred losses that have not yet

been specifically identified, financial assets may be grouped on the basis of similar credit risk

characteristics (e.g. asset type, industry, geographical risk etc) and should reflect global risk factors

that are difficult to quantify.

Objective evidence of impairment may include loss events and other changes such as:

Significant financial difficulty of the borrower or obligor

Breach of contractual obligations such as non-payment or partial payment of interest or principal

Higher probability that the borrower will enter administration, liquidation or other financial

reorganisation

Shrinkage or disappearance of an active secondary market for that financial asset

For collectively-assessed assets, reduced estimates of future cash flows consistent with related

observable data such as unemployment, property prices, international sanctions and any other

factors indicating a higher probability of default. Changes in historical loss experience should

also result in reassessment of collective impairments.


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If there is objective evidence that an impairment loss has been incurred, the amount of the loss is

measured as the difference between the assets carrying amount and the present value of estimated

future cash flows (excluding future expected credit losses that have not yet been incurred). The

carrying amount of the asset is reduced through the use of an allowance account and the amount of

the loss is recognised in the Profit and Loss Account. Interest income continues to be accrued on the

reduced carrying amount based on the original effective interest rate of the asset. Loans together

with the associated allowance are written off when there is no realistic prospect of future recovery

and all collateral has been realised or has been transferred to the Bank.

All impaired loans are reviewed for changes to the recoverable amount. If, in a subsequent year, the

amount of estimated impairment loss increases or decreases because of an event occurring after the

impairment was recognised, the previously recognised impairment loss is increased or reduced by

adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the

Profit and Loss Account.

The present value of the estimated cash flows is discounted at the financial asset’s original effective

interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment

loss is the current effective interest rate. The calculation of the present value of the estimated future

cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure

less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

Table 22 - Impaired exposures by geography and industry

USD ‘000

Type of counterparty Geography Industry Gross exposure

Specific

Provision

Corporate North America

(USA)

Oil & Gas 5,000 5,000

Total - - 5,000 5,000

At the end of 2017 there was one impaired loan of $5m (2016: $30m for two impaired loans) and

there is no identifiable collateral held against the $5m exposure, which relates to an oil and gas

company in the USA and is fully provided for. During 2017, the Bank sold an impaired loan of

$25m which led to a write-off charge as shown in Table 23 below.

The collective impairment provision as at 31 December 2017 was $2.280m (2016: $2.020m), which

reflects the fact that losses, although not yet specifically identified, are known from experience to

exist within the Bank’s portfolio.

Collective impairment is calculated using outstanding credit exposures and drawdown of loans as at

31 December 2017 and applying the weighted average of probabilities of default (‘PDs’). The

marginal increase of $260k in collective provisioning from $2.020m in 2016 to $2.280m in 2017 as

shown in Table 23 below was the result of higher probability of default methodology applicable to

some counterparties.


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Table 23 – Impairment allowance

USD ‘000

Collective

Impairment

Specific

Impairment Total

Balance at 1 January 2017 2,020 15,000 17,020

Amounts written off - (10,979) (10,979)

Charge / (reversal) during the year 260 979 1,239

Balance at 31 December 2017 2,280 5,000 7,280


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13. Market risk

13.1 Market risk management objectives and policies

Market risk is defined as the risk of losses in on- and off-balance sheet positions, arising from

adverse movements in market prices. The risks subject to the market risk measurement frameworks

are (in line with Basel II definition):

The risks pertaining to interest rate-related instruments and equities in the trading book.

Foreign exchange risk and commodities risk throughout the Bank.

The Bank does not currently undertake proprietary trading or engage in market making activities.

The trading book exposures result solely from client servicing in the following products: FX spot, FX

forwards, FX swaps, and interest rate swaps. As general practice, client servicing trading positions

are back-to-back squared2.

The FX risk in the banking book mainly originates from the adverse impact of the movement of

exchange rates on the interest income, financial and tax expenses or impairment provisions arising in

a currency different than the one used for the consolidation of the financial statements.

As a consequence, the Bank is only exposed to general interest rate risk and foreign exchange risk.

The market risk management objective is to maintain a low risk profile and, on that basis, the Bank

has set its Market Risk Management Policy and strategy.

13.2 Measurement and reporting of market risk

13.2.1 Position risk

Position risk refers to the risk of holding and/or taking positions in debt securities or other interest

rate-related instruments within the trading activity. Given its low exposure, the Bank uses the

maturity-based Standardised Approach for measuring and monitoring its position risk.

As of 31 December 2017, the Bank maintained $135,189 of position risk exposure with a capital

requirement of $10,815, both of which are considered immaterial for the business.

Table 24 – Position risk exposure

USD

Own funds requirements

Total risk exposure amount

10,815 135,189

13.2.2 Foreign exchange risk

Foreign exchange risk refers to the risk of losses on the banking or trading books due to adverse

fluctuation of foreign exchange rates. Throughout 2017, the foreign currency exposure was within

the approved limits at all times. At the end of 2017, the overall FX exposure (shorthand3) was

$477,327 (long). The largest individual currency exposure was denominated in EUR.

2Back-to-back Squared – back-to-back hedged, i.e. fully offsetting a position to reduce the risk of adverse

price movements in an asset. 3Shorthand method is a way to measure the Bank's overall foreign exchange exposure, by using the greater of

the sum of the short positions and the long positions.


32 | P a g e

As the sum of the Bank’s overall net foreign exchange position, calculated in accordance with the

procedure set out in CRR Article 352, does not exceed 2% of its total own funds, the Bank does not

calculate an own funds requirement for foreign exchange risk. The foreign currency positions as at 31

December 2017 were as follows:

Table 25 – Foreign exchange exposure

Currency Exposure (USD)

GBP

-362,328

RMB 58,455

EUR 58,211

CHF 116,063

JPY 50,260

ZAR 59,847

SEK 81,302

Table 26– FX Sensitivity Analysis

USD

USD appreciates 200 basis points -4,827



USD depreciates 200 basis points 4,960



13.2.3 Monitoring and reporting of market risk

The Bank sets the market risk limits according to its risk appetite and in alignment with the Parent

Bank’s guidance. The exposure against the approved limits is monitored on a daily basis by the Risk

& ALM Department, which as a 2LoD is independent from the Treasury Department. The Risk &

ALM Department submits regular reports to the Asset and Liability Committee and Risk Committee

to support their oversight roles and management decisions. The Risk & ALM Department provides

additional management information on foreign exchange and trading exposures to the Parent Bank,

which in turn provides further market risk management guidance to the Bank.

13.3 Risk statement for market risk

The Bank’s market risk profile is considered to be low, and in line with its risk tolerance. Senior

Management assessed the supporting management information and systems to be effective and

adequate with regard to the Bank’s market risk profile, risk appetite and strategy.


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14. Operational risk

14.1 Operational risk management, objectives and policies

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes,

people and systems, or from external events, including legal risk, but excluding strategic and

reputational risk. It is a pervasive risk that involves all aspects of the business as well as other agents

who deal with the Bank. When operational risks materialise, they not only have immediate financial

consequences for the Bank but also affect its business objectives, customer service and regulatory

responsibilities.

Operational risk is one of the principal risks in the overall Enterprise-Wide Risk Management

Framework. There are several major types of operational risks faced by the Bank, including internal

fraud, external fraud, clients, products, business practice, execution, delivery and process

management, employment system and workplace safety, damage to physical assets, and IT events.

(NB Cyber risk, a subset of operational risk, is assessed separately below in section 16 - Other Risks.)

Given its inherent nature, the Bank’s objective is to manage and control operational risk in a cost-

effective manner that is consistent with its risk appetite. In achieving this, the Bank seeks:

To minimise the impact of losses suffered in the normal course of business (expected losses) and

avoid or reduce the likelihood of suffering large extreme (unexpected) losses.

To improve the effective management of operations and thus strengthen the Bank’s reputation.

The Bank has established and maintained an Operational Risk Management Policy which defines the

operational risk and its components, sets out the governance and responsibilities for controlling the

operational risk exposure, articulates the operational risk appetite and limits, specifies the tools and

processes of operational risk management, defines the capital allocation method for operational risk

and provides the public disclosure requirements.

14. 2 Measurement and reporting of operational risk

The Bank has adopted the Basic Indicator Approach (‘BIA’) for the calculation of its operational risk

capital requirement (‘ORCR’), which is equal to 15% of the three-year average of the Bank’s Net

Interest and Non-Interest Income. As at 31 December 2017, the Pillar 1 operational risk capital

charge was $8,573m.

The Bank’s operational risk management framework consists of the following key components:

Identification and categorisation of key operational risks, with specific risk appetite thresholds.

Risk assessments (financial and non-financial) for each category of risk.

Control assessments to evaluate operational risk management effectiveness.

Loss register and incident management procedures.

Key risk indicators (‘KRIs’) for monitoring operational risk exposure.

Scenario analysis for assessing the potential impact of stressed events.

Mitigation tools such as insurance coverage for specific operational risk events.

The Bank has established an internal reporting procedure to support the operational risk oversight

across the organisation and the timely implementation of remediation actions. On an annual basis, the

Bank produces the Operational Risk Annual Summary Report for the Risk Committee and the

Compliance Report for the Compliance function. On a quarterly basis, the Operational Risk Incident

and Loss Report is prepared for Risk Committee to support Senior Management decisions and

oversight, while the Major Incidents and Legal Risk Management Report are produced to facilitate

the Parent Bank’s risk oversight. The Bank also has in place specific alert reports, such as the Major


34 | P a g e

Incident of Corruption or Misconduct Report, to support the adequate and timely escalation of a

significant operational risk event.

14.3 Risk statement for operational risk

Operational risk exposure is considered to be low and in line with the Bank’s risk appetite. The total

operational loss incurred in 2017 was $1,940. The Senior Management assessed the supporting

management information and systems to be effective and adequate with regard to the Bank’s

operational risk profile, risk appetite and strategy.


35 | P a g e

15. Exposure to interest rate risk in the banking book (‘IRRBB’)

15.1 Interest rate risk management objectives and policies

Interest rate risk in the banking book (‘IRRBB’) refers to the current or prospective risk to the Bank’s

capital and earnings arising from adverse movements in interest rates that affect its banking book

positions. Interest rate movements can have a negative impact on the Bank’s ‘economic value’, if the

present value of the net assets (on-/off- balance sheet) decreases. Adverse changes in interest rates

can also affect earnings and potentially threaten the capital base.

Repricing risk is the risk arising from the timing of instruments’ rate changes (repricing). The

magnitude of the impact depends on the changes to the yield curve term structure and/or the size of

the maturity gap. Basis risk refers to the impact of relative changes in interest rates for financial

instruments that have similar tenors but are priced using different interest rate indices. Option risk

arises from option derivative positions or from optional elements embedded in a bank’s assets,

liabilities and/or off-balance sheet items, where the bank or its customer can alter the level and

timing of their cash flows. At present, repricing risk is the main IRRBB exposure for ICBC (London)

plc.

The Bank’s objective is to maintain a medium-low IRRBB profile by decreasing the sensitivity of the

Bank’s earnings and economic value to the interest rate fluctuation. The Bank has set its Interest

Rate Risk Management Policy (i.e. risk management strategy, process and limits) to be aligned with

its conservative IRRBB appetite.

15.2 Measurement and reporting of interest rate risk

The Bank assesses the IRRBB exposure from the earnings and economic value perspectives on a

quarterly basis. The earnings risk analysis assesses the impact of interest rate movements on the Net

Interest Income (‘NII’) over a time horizon of 1 year. The economic value risk analysis assesses the

potential impact of interest rate movements on the market values of the Bank’s assets, liabilities and

off-balance sheet instruments over a longer term.

The Bank uses gap, duration and sensitivity analyses for identifying, measuring, monitoring and

controlling the IRRBB. The interest rate gap is calculated based on the contractual re-pricing

maturity of the assets and liabilities, without considering any cash flow optionality assumption (e.g.

loan prepayments or deposit pre-withdrawal). The Bank’s capital, together with other non-funding

liabilities, is treated as resources with ‘no-specific repricing’ maturity, and is assumed not to be

sensitive to the interest rate change.

Table 26 below shows the impact of a 100/200 basis point increase/decrease in the Bank of England

base rate on Net Interest Income as at 31 December 2017.

Table 27 – Sensitivity analysis of 1-year Net Interest Income (‘NII’)

Parallel shift in interest rate Net Interest Income

sensitivity (USD)

+100/-100 basis points 1,712,0000 / -1,712,000

+200/-200 basis points 3,424,000 / -3,424,000

Table 28 below shows the impact of a 200 basis points increase in the base rate on economic value at

31 December 2017.


36 | P a g e

Table 28– Sensitivity analysis of economic value

USD

Amount/Ratio

Change in economic value -8,598,000

Change in economic value / capital -1.80%

15.2.1 Monitoring and reporting of interest rate risk

In order to control IRRBB, the Bank sets limits to the change in the economic value (change in

economic value / capital) and the 1-year NII. Risk & ALM Department monitors and analyses the

change on the IRRBB exposure on a quarterly basis, and submits the following management

information to the ALCO and Risk Committee:

Cumulative re-pricing gap within 1 year / interest-bearing assets.

Gap Sensitivity analysis in relation to interest income and capital.

Scenario analysis: non-parallel movements of interest rates.

The Risk & ALM Department provides additional management information on the IRRBB exposure

on a quarterly basis to the Parent Bank, which in turn provides further interest rate risk management

guidance to the Bank.

15.3 Risk statement for interest rate risk

The Bank’s interest rate risk profile is considered to be low, and in line with its risk tolerance. The

Senior Management assessed the supporting management information and systems to be effective

and adequate with regard to the Bank’s IRRBB profile, risk appetite and strategy.


37 | P a g e

16. Other risks

Liquidity and funding risk – The Bank is exposed to the risk that it may be unable to meet its

obligations as they fall due, arising from the differing maturity profiles of its assets, liabilities and

off-balance sheet items.

In line with the PRA’s liquidity rules, the Bank produces an annual Internal Liquidity Adequacy

Assessment Process (‘ILAAP’) document to assess the adequacy of its liquidity and funding risk

management practices. The ILAAP also complies with the EBA guidelines on common procedures

and methodologies for the Supervisory Review and Evaluation Process (‘SREP’) and aligns with the

further guidance provided in PRA Supervisory Statement SS24/15. As part of its counterbalancing

capacity, the Bank holds a high-quality liquid assets portfolio (‘HQLA’) to mitigate potential

liquidity risk events. At as 31 December 2017, the Bank’s HQLA was of high quality, with 94% of

the assets categorised as Level 1.

The Liquidity Coverage Ratio (‘LCR’) is measured, monitored and reported daily. The Bank met the

LCR regulatory and internal limits at all times during 2017. At 31 December 2017, the LCR closed at

418%, with a liquidity surplus of $248m.

Table 29 below shows the 12-month average of the liquidity buffer, net cash outflow and liquidity

coverage ratio as at the end of each quarterly period. The Bank has consistently maintained sufficient

counterbalancing capacity for the running of its operations.

Table 29 – LCR Disclosure (12-month average)

USDm 31 Mar 2017 30 Jun 2017 30 Sept 2017 31 Dec 2017

Liquidity Buffer 375.96 366.40 365.36 372.19

Total Net Cash Outflows 191.16 183.11 174.07 167.31

Liquidity Coverage Ratio 205% 206% 217% 236%

The relevant COREP reports (NSFR, ALMM and LCR) were submitted to the regulator within the

applicable timeframes.

Cyber Risk – The Bank is exposed to the risk of financial loss, disruption or damage to its reputation,

or the reputation of its Parent, from a failure of its information technology systems. Cyber risk

threatens not only the technology supporting its daily operations but also its business and ability to

comply with regulatory requirements. The Bank benefits from highly specialised and effective

technical support from its Parent, which develops, maintains and monitors the core IT systems and

which has robust procedures to manage and monitor cyber risk (providing monthly reports to the

Bank). As well as Parent support, the Bank manages cyber risk within its Enterprise-Wide Risk

Management framework, including Senior Management oversight through regular reporting to the

Board-level Risk Committee. The Bank will continue to strengthen its internal management of cyber

risk through additional resources and further definition of the First and Second Lines of

Defence. Meanwhile cyber risk in the Bank is well-controlled.

Reputational Risk – The Bank places the utmost importance on the management of its regulatory

and legal compliance to minimise the reputational risk arising from any breach. The Bank is mindful

of the significant damage that could be done to its reputation, and to that of the wider group, by any

public perception of an inadequate attitude to risk by the Bank. During 2017, the Bank had no

reputational risk incidents.


38 | P a g e

Strategic Risk – The Bank is exposed to geopolitical, industry and regulatory risks that could

impede the fulfilment of its desired strategic business plan. The Senior Management maintain close

coordination with the Parent Bank with regard to the latest economic conditions and developments in

China and their potential collateral effect on the Bank in the UK. Developments in the UK and other

major markets are also closely monitored. Close liaison with regulators ensures that the Bank

complies with all regulatory requirements and requests.

Legal Risk – The Bank takes care to minimise disputes by ensuring as far as possible that all

documentation comprehensively contemplates and addresses the risks involved. The Bank will

always seek specialist legal advice when required.

Conduct Risk – The Bank is aware of the risks it faces from the improper professional conduct of its

employees. The Bank has a robust Fitness and Propriety Policy and Conduct Risk Policy requiring

high standards of expected staff behaviour and the optimising of good customer outcomes. Staff

performance appraisals take account of appropriate regulatory conduct and behaviours.

Group Risk – The Bank is exposed to group risk in its liquidity management activities and via the

possible credit downgrading of the Parent Bank.

16.1 Risk statement for other risks

The Bank is exposed to numerous ‘other risks’ but considers these to be in line with its risk tolerance.

Senior Management assessed the supporting management information and systems to be effective

and adequate with regard to the Bank’s risk profile, appetite and strategy.


39 | P a g e

17. Remuneration

17.1 Overview

Remuneration disclosures are prepared in accordance with the CRR remuneration disclosure

requirements, as further elaborated in the FCA’s General Guidance on Proportionality: The

Remuneration Code (SYSC 19), PRA SS2/17 and Pillar 3 Disclosures on Remuneration (Article 450

of the CRR). According to the PRA’s approach to proportionality set out in SS2/17, the Bank falls

within Proportionality Level 3.

As a Level 3 firm, the Bank is able to dis-apply the following rules: SYSC 19D.3.56R concerning the

payment of variable remuneration in shares and capital instruments, SYSC 19D.3.59R concerning

deferred remuneration and SYSC 19D3.61R- SYSC 19D365R concerning performance adjustments.

SS2/17 further allows Level 3 firms to dis-apply disclosure requirements set out in Articles 450(1)(c),

450(1)(d), 450(1)(e), 450(1)(f), 450(1)(h)(i-vi) and 450(1)(i) of the CRR.

In accordance with the Pillar 3 Disclosures on Remuneration (Article 450 of the CRR), the Bank is

required to provide disclosures regarding its Remuneration Policy and practices for those categories

of staff whose professional activities have a material impact on its risk profile, i.e. Material Risk

Takers (‘MRTs’).

The Remuneration Policy recognises the need to attract, motivate and retain high-calibre staff

necessary to obtain business results and ensure that:

The best people are recruited on merit and the recruitment process is fair and free from bias and

discrimination.

Steps are taken to achieving diversity in the employee profile of the Bank, including members of

the Board, to represent a variety of views and experience. This will include, amongst others,

such factors as age, gender, and educational and professional background. It will also include

achieving an appropriate balance between locally-hired employees and expatriates from the

Parent Bank.

The Policy operates in the context of ICBC (London) plc’s business goals and its other HR policies

and is in compliance with the provisions of the Equality Act 2010. It aims to ensure that

remuneration practices are fair and consistent with the Bank’s view on equality and diversity.

The Bank implements and maintains remuneration policies, procedures and practices that are

consistent with and promote sound and effective risk management.

17.2 Decision-making process for determining Remuneration Policy

Governance of all matters related to remuneration with the Bank lies with the Board, which includes

two independent Non-Executive Directors. These Non-Executive Directors are considered to be both

independent of the Bank and in possession of the necessary skills to exercise appropriate judgment.

Board meetings are held on a quarterly basis.

The Board is responsible for the implementation of the Remuneration Code and the annual review of

the Bank’s adherence to it. It is also the Bank’s current policy that the implementation of the

Remuneration Policy is subject to an independent review by the Bank’s Internal Audit Department.

In setting Remuneration Policy, the Board recognises its role in ensuring remuneration arrangements

that are structured in order to promote an effective risk management culture aligned with the Bank’s

business strategy, objectives and long-term interests. This is balanced with the need to recruit and


40 | P a g e

motivate suitably experienced staff with competitive pay and benefits comparable to similar

organisations in the market place.

The Board is responsible for approving and maintaining the Policy. The Board takes into

consideration input from the Risk & ALM, Human Resources & Administration, Compliance &

Legal and Financial Control Departments. The Board will consider information affecting

remuneration throughout the year and will ensure that remuneration policies, practices and

procedures are clear and documented, including the performance appraisal process and decisions.

No external consultants have been used for the determination of the Remuneration Policy.

17.3 Information on the link between pay and performance

The Bank ensures that the structure of an employee’s remuneration is both consistent with the market

and promotes effective risk management. The Bank sets the fixed component of remuneration to

represent a sufficiently high proportion of the total remuneration to allow the operation of a fully-

flexible policy on variable remuneration components. Fixed components of remuneration represent

base salary as well as cash and non-cash benefits.

The variable component of remuneration is in the form of an annual discretionary bonus. The bonus

is performance-related and based on a combination of the assessment of the performance of the

individual, the business unit concerned and the overall results of the Bank.

The Bank would not consider any total variable remuneration that would limit its ability to strengthen

its capital base.

Key performance indicators (‘KPIs’) are set on an annual basis for the Bank, departments and

individuals. These indicators are financial and non-financial. This means that when assessing

performance, both financial and non-financial criteria are taken into consideration. Assessments of

the Bank’s financial performance used to calculate variable remuneration are based principally on

profits. Variable remuneration will be impacted where negative financial performance of the Bank

occurs. Non-financial performance metrics form a significant part of the performance assessment

process and include:

Effective adherence to risk management and compliance with the regulatory system.

Individual role level and market value.

Assessed individual performance.

Behaviours that pose a risk to the Bank’s values/goals, as expressed in the Compliance Policy,

can override assessments of financial performance.

The Bank does not pay guaranteed variable remuneration. Payments are made to reflect performance

achieved. The Bank does not have long-term incentive plans. Furthermore the Bank does not offer

shares, options or other non-cash variable remuneration instruments.

In 2017, the Bank did not offer any sign-on inducements and made no severance payments. Deferred

payments were made to two expatriate MRTs.

Pension policy

The Bank operates a group personal pension, which is a defined contribution scheme with fixed

monthly employer contributions and the facility for employee contributions. No discretionary

pension benefits are paid to staff.


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17.4 Quantitative information

As at 31 December 2017, the Bank employed 164 staff, 92 of whom were eligible for variable

remuneration awards in respect of their service during 2017. The Remuneration Code requires that

banks identify relevant staff including senior management, risk takers, staff engaged in control

functions and any employees receiving total remuneration that takes them into the same remuneration

bracket as senior management and risk takers, whose professional activities have a material impact

on the firm's risk profile, and designate them as MRTs.

A total of 23 MRTs were identified in 2017, including those serving on the Executive Committee. Of

these, three MRTs left during the year, having performed 26 months’ combined service in 2017.

Four new MRTs joined the Bank during the year. Tables 30 and 31 below provide remuneration

details for the MRTs.

Table 30 – The aggregate quantitative information for MRTs on remuneration, broken

down by business area as of 31 December 2017 (Art 450 (1)(g) of CRR)

Business area

Remuneration

£

Remuneration

$

Senior Management (Board and

Executive Committee) £2,260,882 $2,913,757

Sales, Trading and Risk £1,435,951 $1,850,610

Central Support £416,524 $536,803

Total Material Risk Takers £4,113,357 $5,301,171

* GBP 1 = USD 1.2888 (average rate in 2017).

Table 31 – Aggregate quantitative information on remuneration, broken down by fixed

and variable remuneration of Senior Management and other MRTs as at 31 December

2017 (Article 405 (1)(h) of CRR)

USD*

Fixed

remuneration**

Variable

remuneration

(bonus)

Total Ratio

between

fixed and

variable

Senior Management (Board and

Executive Committee) $2,149,572 $764,186 $2,913,757 3

Other Material Risk Takers $1,911,231 $476,183 $2,387,414 4

Total Material Risk Takers $4,060,802 $1,240,368 $5,301,171 3

* GBP 1 = USD 1.2888 (average rate in 2017).

** Includes cash allowances and non-cash allowances

http://fshandbook.info/FS/glossary-html/handbook/Glossary/E?definition=G365

http://fshandbook.info/FS/glossary-html/handbook/Glossary/R?definition=G1013

http://fshandbook.info/FS/glossary-html/handbook/Glossary/F?definition=G430


42 | P a g e

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