Page 318 - Bank-Muamalat_Annual-Report-2023

BANK MUAMALAT MALAYSIA BERHAD

NOTES TO THE
FINANCIAL STATEMENTS
31 DECEMBER 2023 (18 JAMADIL AKHIR 1445H)

47. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT’D.)
(b) Market risk (cont’d.)

Types of market risk (cont’d.)
(i) Traded market risk (cont’d.)

Risk measurement approach
The Group’s and the Bank’s traded market risk framework comprises market risk policies and practices,
delegation of authority, market risk limits and valuation methodologies. The Group’s and the Bank’s traded
market risk for its profit-sensitive fixed income instruments is measured by the present value of a one basis point
change (“PV01”) and is monitored independently by the Treasury Middle Office (“TMO”) on a daily basis against
approved market risk limits. In addition, the TMO is also responsible to monitor and report on limit excesses
and the daily mark-to-market valuation of fixed income securities. The market risk limits are determined
after taking into account the risk appetite and the risk-return relationship and are periodically reviewed by
Risk Management Department. Changes to market risk limits must be approved by the Board of Directors.
The trading positions and limits are regularly reported to the ALCO. The Group and the Bank maintain its
policy of prohibiting exposures in trading financial derivative positions unless with the prior specific approval
of the Board of Directors.
(ii) Non-traded market risk

The Group’s and the Bank’s core non-traded market risk refers to the rate of return risk in the Group’s and
the Bank’s Islamic banking business, foreign exchange risk, and equity risk.
Rate of return risk

Rate of return risk refers to the potential loss of income arising from changes in market rates in regards to
return on assets and on the returns payable on funding. The risk arises from option portfolios embedded
in the Group’s and the Bank’s assets and liabilities.
Rate of return risk emanates from the repricing mismatches of the Group’s and the Bank’s banking assets
and liabilities and also from the Group’s and the Bank’s investment of its surplus funds.

Risk measurement approach
The primary objective in managing the rate of return risk is to manage the volatility in the Group’s and the Bank’s
net profit income (“NPI”) and economic value of equity (“EVE”), whilst balancing the cost of such hedging
activities on the current revenue streams. This shall be achieved in a variety of ways that involve the offsetting
of positions against each other for any matching assets and liabilities, the acquisition of new financial assets
and liabilities to narrow the mismatch in profit rate sensitive assets and liabilities, and entering into derivative
financial instruments which have the opposite effects.

The Group and the Bank use various tools including repricing gap reports, sensitivity analysis, and income
scenario simulations to measure its rate of return risk. The impact on earnings and EVE is considered at all
times in measuring the rate of return risk and is subject to limits approved by the Board of Directors.

The following tables indicate the effective profit rates at the reporting date and the Group’s and the Bank’s
sensitivity to profit rates by time band based on the earlier of contractual repricing date and maturity date.
Actual repricing dates may differ from contractual repricing dates due to prepayment of financing or early
withdrawal of deposits.

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