Annual report 2004 (PDF, 4141 kB) - Unicredit Bank

26 FINANCIAL RISKS
(a)
Strategy in using financial instruments
The Bank’s activities are principally related to the use of financial instruments. The Bank
accepts deposits from customers at both fixed and floating rates and for various periods
and seeks to earn above average interest margins by investing these funds in high quality
assets. The Bank seeks to increase these margins by consolidating short-term funds
and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet
all claims that might fall due.
The Bank also seeks to raise its interest margins by obtaining above average margins, net
of provisions, through lending to commercial and retail borrowers with a range of credit
standing. Such exposures involve not just on-balance sheet loans and advances but the Bank
also enters into guarantees and other commitments such as letters of credit and other
contractual liabilities.
The Bank also trades in financial instruments where it takes positions in traded and over
the counter instruments including derivatives. The Bank policy allows to use derivatives only
for hedge Bank’s position or for clients deals. The Board places trading limits on the level of
exposure that can be taken in relation to both overnight and intra-day market positions.
(b)
Credit risk
The Bank structures the levels of credit risk it undertakes by placing limits on the amount
of risk accepted in relation to one borrower, or groups of borrowers, and to geographical
and business segments. Such risks are monitored on a revolving basis and are subject to an
annual or more frequent review. Limits on the level of credit risk by industry sector and by
country are approved by the Board of Directors.
In the course of 2004, the Bank implemented a new internal rating system for corporate
banking segment. The internal rating system was developed in cooperation with the Bank's
parent company. The internal rating system reflects both the client's financial system and
qualitative indices, such as the quality of management or position of the respective person on
the market. Individual entities are classified into nine classes. Based on the internal rating
system, clients classified from 6 to 8 are included into the group of watched loans. Class 9 has
been reserved for non-performing loans.
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