BIMB Integrated Annual Report 2019

48 FINANCIAL RISK MANAGEMENT POLICIES (CONTINUED) 48.4 Market risk (continued) (a) Banking (continued) (ii) Profit rate risk in the banking book portfolio Profit rate risk in the banking book portfolio is managed and controlled using measurement tool known as earnings-at-risk (“EaR”) and Economic Value of Equity (“EVE”). The Bank monitors the sensitivity of EaR and EVE under varying profit rate scenarios (i.e. simulation modeling). The model is a combination of standard and non-standard scenarios relevant to the local market. The standard scenarios include the parallel fall or rise in the profit rate curve and historical simulation. These scenarios assume no management action. Hence, it does not incorporate actions that would be taken by the Bank’s Treasury to mitigate the impact of the profit rate risk. In reality, depending on the view on future market movements, the Bank’s Treasury would proactively manage and strategize to change the profit rate exposure profile to minimise losses and to optimise net revenues. The Bank’s hedging and risk mitigation strategies range from the use of derivative financial instruments, such as profit rate swaps, to more intricate hedging strategies to address inordinate profit rate risk exposures. The table below shows the Bank’s profit rate sensitivity to a 100 basis points parallel shift as at reporting date. 2019 2018 Increase/(decrease) -100bps +100bps -100bps +100bps RM’Million RM’Million RM’Million RM’Million Bank Islam Impact on EaR (119.4) 119.4 (129.5) 129.5 Impact on EVE 225.5 (225.5) 133.4 (133.4) Another control to manage the profit rate risk in the banking book portfolio includes present value of 1 basis point change (“PV01”) which measures the portfolio’s sensitivity to market rates movement. (iii) Market risk in the trading book portfolio Market risk in the trading book portfolio is monitored and controlled using Value-at-Risk (“VaR”). It is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates over a specified time horizon and to a given level of confidence. The VaR model used by Bank Islam is based on historical simulation which derives plausible future scenarios from past series of recorded market rates and prices. NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2019 (CONTINUED) 288 Integrated Annual Report 2019 Group Overview Sustaining The Group Management Discussion & Analysis Group Governance