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ANNUAL REPORT 2021 309
SUSTAINABILITY STATEMENT OUR GOVERNANCE OUR NUMBERS OTHER INFORMATION

46. fINANcIAL RIsk MANAGeMeNT OBJecTIves AND POLIcIes (cONT’D.)

(b) Market risk (cont’d.)
Types of market risk (cont’d.)
(ii) Non-traded market risk (cont’d.)

Rate of return risk (cont’d.)
Effects of rate of return risk

- Earnings at Risk (“EAR”)
The focus of analysis is more on the impact of changes in rate of return on accrual or reported earnings.
Variation in earnings such as reduced earnings or outright losses can threaten the financial stability of the
Group and the Bank by undermining its capital adequacy and reducing market confidence.

- Economic Value of Equity (“EVE”)
Economic value of an instrument represents an assessment of present value of its expected net cash flows,
discounted to reflect market rates. Economic value of the Group and the Bank can be viewed as the present
value of the Group’s and the Bank’s expected net cash flows, which can be defined as the expected cash
flows on assets minus the expected cash flows on liabilities plus the expected net cash flows on off-balance
sheet position. The sensitivity of the Group’s and the Bank’s economic value to fluctuation in rate of return is
particularly an important consideration of shareholders and Management.
- Value at Risk (“VaR”)

VaR approach is used to estimate the maximum potential loss of the investment portfolio over a specified
time.

Rate of return risk measurement
- Gap analysis
Repricing gap analysis measures the difference or gap between the absolute value of rate of return sensitive
assets and rate of return sensitive liabilities, which are expected to experience changes in contractual rates
(re-priced) over the residual maturity period or on maturity.

A rate sensitive gap greater than one (>1) implies that the rate of return in sensitive assets is greater than the
rate of return in sensitive liabilities. As rate of return rises, the income on assets will increase faster than the
funding costs, resulting in higher spread income.

A rate sensitive gap less than one (<1) suggests a higher ratio of rate of return in sensitive liabilities than in
sensitive assets. If rate of returns rises, funding costs will grow at a faster rate than the income on assets,
resulting in a fall in spread income (net rate of return income).
- Simulation analysis
Detail assessments on the potential effects of changes in rate of return on the Group’s and the Bank’s
earnings are carried out by simulating future path of rate of returns and also their impact on cash flows.
Simulation analysis will also be used to evaluate the impact of possible decisions on the following:
- Product pricing changes;
- New product introduction;
- Derivatives and hedging strategies; and
- Changes in the asset-liability mix.