PILLAR 3 DISCLOSURES

The Group views the Basel framework as part of continuing efforts to strengthen its risk management culture and ensure that the Group pursues business growth across segments and markets with the right risk management discipline, practices and processes in place.

The qualitative disclosures as required by Notice 637 are presented in the Risk Management report on page 74 to page 83, the Capital Management and Planning report on page 84 to page 85 and the Notes to the Financial Statements as referred to below. Disclosures on remuneration are presented in the Corporate Governance report on page 57 to page 73. The following information does not form part of the audited accounts.

1 SCOPE OF APPLICATION

The Group applies the Basel II Internal Ratings-Based Approach (IRBA) for computing part of its regulatory capital requirements for credit risk. Approved wholesale portfolios are on the Foundation IRBA, while the approved retail portfolios are on the Advanced IRBA. Most of the remaining credit exposures are on the Standardised Approach (SA) for credit risk. The Group also adopts the SA for operational and market risks.

The Group’s capital requirements are generally based on the principles of consolidation adopted in the preparation of its financial statements, as discussed in Note 2.4 to the Financial Statements, except where deductions from eligible capital are required under Notice 637 or where entities meet separation requirements set by the MAS. Refer to Note 23 to the Financial Statements for the list of subsidiaries and other controlled entities.

2 CAPITAL ADEQUACY

The following table sets forth details on the capital resources and capital adequacy ratios (CAR) for the Group as at 31 December 2012. The Group’s Tier 1 CAR and Total CAR as at 31 December 2012 were 14.0% and 17.1% respectively, which are above the MAS minimum requirements of 6.0% and 10.0%.

The constituents of Eligible Total Capital are set out in Notice 637 Part VI. These include shareholders’ funds after regulatoryrelated adjustments, minority interests, and eligible capital instruments issued by the Group. Refer to Notes 34 and 35 to the Financial Statements for the terms of these capital instruments and the Capital Management and Planning report for the approach to assessing the adequacy of capital to support current and future activities.

Refer to Notes 19 to 21, 38, 43.1 and 45 for major types of credit exposures by geographic location and industry distribution, analysis of maximum exposures to credit risk and credit exposures by residual contractual maturity distribution.

3.2 CREDIT RISK ASSESSED USING INTERNAL RATINGS-BASED APPROACH

3.2.1 Retail exposures

(A) Residential mortgage exposures

(B) Qualifying revolving retail exposures

(C) Other retail exposures

(D) Undrawn commitment for retail exposures

3.2.2 Wholesale exposures

(A) Sovereign exposures

(B) Bank exposures

(C) Corporate exposures

(D) Corporate small business exposures

3.2.3 Specialised lending exposures

3.2.4 Provisioning policies for past due and impaired exposures

Refer to the Notes to the Financial Statements listed in the following table for the Group’s provisioning policies in relation to past due and impaired exposures.

3.2.5 Comparison of Expected Loss against Actual Losses

The following table sets out actual loss incurred in 2012 compared with EL reported for certain IRBA asset classes at December 2011. Actual loss refers to specific impairment loss allowance and charge-offs to the Group’s income statement during the financial year ended 31 December 2012.

EL is an estimate of expected future losses using IRBA model estimates of PD and LGD parameters. Under the IRBA, PD estimates are required to be through-the-cycle and LGD estimates are on a downturn basis, floored at regulatory minima for retail exposures and based on supervisory estimates for wholesale exposures. Actual Loss is an accounting-based measure which includes net impairment allowances taken for accounts defaulting during the year and includes write-offs during the year. The two measures of losses are hence not directly comparable and it is not appropriate to use Actual Loss data to assess the performance of internal rating process or to undertake comparative trend analysis.

3.3 CREDIT RISK ASSESSED USING STANDARDISED APPROACH

The following table shows the exposures under SA, analysed by risk weights:

3.4 CREDIT RISK MITIGATION

The following table summarises the extent to which credit exposures are covered by eligible financial collateral, other eligible collateral and eligible credit protection after the application of haircuts:

The above table excludes exposures where collateral has been taken into account directly in the risk weights, such as the specialised lending and residential mortgage exposures. It also excludes exposures where the collateral, while generally considered as eligible under Basel II, does not meet the required legal/ operational standards e.g. legal enforcement certainty in specific jurisdictions. Certain exposures where the collateral is eligible under Foundation IRBA and not under SA have also been excluded for portfolios where the SA is applied e.g. exposures collateralised by commercial properties.

3.5 COUNTERPARTY CREDIT RISK-RELATED EXPOSURES

3.5.1 Notional principal amounts of credit derivatives

Notional values of credit derivatives do not accurately reflect their economic risks. They comprise both beneficiary and guarantor (buy and sell protection) positions.

The Group generally has higher total notional amounts of protection bought than sold as credit derivatives are also used to hedge risks from other instruments, including those from customer flows. The protection sold in credit derivatives are largely matched with the protection bought through other credit derivatives or structured notes issued.

The Group actively monitors its counterparty credit risk in credit derivative contracts. More than 90% of the notional value of the Group’s credit derivative positions as at 31 December 2012 is to 12 large, established names with which the Group maintains collateral agreements.

3.5.2 Credit equivalent amounts for counterparty exposures

Counterparty credit exposure is mitigated by exposure netting through ISDA agreements and recognition of eligible collateral, effects of which have been included in regulatory capital calculations where appropriate.

4 EQUITY EXPOSURES IN BANKING BOOK

4.1 SCOPE OF APPLICATION

The Group’s banking book equity investments consist of:

• Investments held for yield and/or long-term capital gains;
• Strategic stakes in entities held as part of growth initiatives and/or in support of business operations.

The Group’s banking book equity investments are classified and measured in accordance with Financial Reporting Standards and are categorised as either available-for-sale (AFS) investments or investments in associates. Refer to Notes 2.4 and 2.8 to the Financial Statements for the Group’s accounting policies. Entities in which the Group holds significant interests are disclosed in Notes 24 and 25 to the Financial Statements.

4.2 CAPITAL TREATMENT

The Group has adopted the IRBA simple risk weight method to calculate regulatory capital for equity exposures in its banking book.

The following tables summarise the Group’s equity exposures in the banking book, including investments in Tier 1 capital instruments of financial institutions:

Details of the Group’s investments in AFS securities and Associates are set out in Notes 21 and 25 to the Financial Statements respectively while realised gains arising from sale and liquidation of equity exposures are set out in Note 9 to the Financial Statement.

The amount of unrealised gains for AFS equity that have not been reflected in the Group’s income statement, but have been included in Tier 2 Capital is $95 million.

5 SECURITISATION EXPOSURES

The Group does not securitise its own assets, nor does it acquire assets with a view to securitising them. The Group does not provide implicit support for any transactions it structures or in which it has invested.

Banking book assets and trading book securitisation positions are valued in accordance with the Group accounting policy for the respective assets and positions. Refer to Note 2 to the Financial Statements on the Group’s accounting policy.

Securitisations for clients

The Group arranges securitisations for clients and earns fees for arranging such transactions and placing the securities issued into the market. These transactions do not involve special purpose entities that are controlled by the Group. For transactions that are not underwritten, no securitisation exposures are assumed as a direct consequence of arranging the transactions. Any decision to invest in any such arranged transaction is subject to independent risk assessment. Where the Group provides an underwriting commitment, any securitisation exposure arising will be held in the trading book to be traded or sold down in accordance with internal policy and risk limits.

Exposures to client asset-backed securitisations

The Group invests in clients’ securitisation transactions from time to time, and this may include securitisation transactions arranged by either the Group or by other parties. The Group may also act as liquidity facility provider, working capital facility provider or swap counterparty. Subject to Notice 637 paragraph 7.1.11, securitisation exposures in the banking book are risk weighted using either SA or the Ratings-Based Method for exposures under IRBA. Such exposures require the approval of the independent risk function prior to being assumed and are subject to regular risk review thereafter, taking into account the underlying risk characteristics of the assets.

Investment in collateralised debt obligations and asset-backed securitisations

The Group continues to hold certain investments in collateralised debt obligations and asset-backed securitisations that were made before 2008. Allowances for credit losses have been made for the total exposures arising from investments in CDOs. The remaining exposures are reviewed regularly by the independent risk function. To determine the capital requirements, the ratings-based method is used for banking book exposures and the standardised approach is used for trading book exposures. Other than these legacy exposures, the Group has invested in asset-backed securitisations in order to meet policy lending requirements in a certain jurisdiction. These latter exposures are in the banking book and risk weighted under SA. They require the approval of the independent risk function prior to being assumed and are subject to regular risk review thereafter, taking into account the underlying risk characteristics of the assets.

The table below sets out the banking book securitisation exposures (net of specific allowances) held by the Group, analysed by regulatory capital approach, risk weights and exposure type:

The table below sets out the trading book securitisation exposures held by the Group, analysed by risk weights and exposure type:

The Group did not enter into any sale of securitisation exposures during the year. The Group did not obtain credit risk mitigants and guarantees for its resecuritisation exposures.