KENANGA INVESTMENT BANK BERHAD INTEGRATED ANNUAL REPORT 2024 WE ARE KENANGA OUR SUSTAINABILITY APPROACH LEADERSHIP STATEMENT HOW WE ARE GOVERNED OUR VALUE CREATION APPROACH FINANCIAL STATEMENTS SHAREHOLDERS’ INFORMATION ADDITIONAL INFORMATION 27 26 KEY RISKS AND MITIGATION KEY RISKS AND MITIGATION Impact to Kenanga Market risk poses the potential for financial losses, which impacts financial returns and capital. Opportunities • Notwithstanding the challenges posed by the key market factors, significant opportunities arise to enhance the Group’s market position and drive sustainable growth. Supported by the aforementioned mitigation measures, the Group is well-positioned to seize opportunities driven by evolving trading, investment and hedging requirements among customers and counterparties. • Cultivate a culture that emphasises the development of financial market products designed to meet the evolving needs of customers while ensuring the timely evaluation and mitigation of emerging risks. • Prioritise efficient capital deployment to support strategic growth initiatives, enabling management to optimise risk limits and balance business expansion with prudent risk management practices. Through these proactive and adaptive mitigation strategies, the Group reinforces its reputation as a forward-thinking, agile institution, capable of navigating market uncertainties and capitalising on opportunities in an increasingly dynamic financial landscape. Credit Risk Market Risk Mitigation Measures • Established Credit Risk Management policies at both the Group-wide and business unit levels, which are reviewed regularly to reflect current conditions. • Board-approved authority structures at both the Group and business unit levels ensure that transactions remain within the risk appetite. • Internal risk thresholds and limits (e.g., single counterparty, sectoral exposure) are set to mitigate concentration risk. • Stringent pre-approval assessments are conducted on clients and collateral quality, including valuation caps. • Climate risk is integrated into underwriting to manage transition and physical risks. • Credit risk tools, such as Internal Credit Risk Rating and Collateral Scoring Model, are used to assess counterparty strength and collateral quality. • Independent reviews are conducted for material credit decisions. • Regular monitoring of large exposures, high-risk sectors, and watchlist accounts is conducted to detect early warning signals. • Comprehensive reporting on credit risk position (e.g., portfolio risk, problematic credits) is provided to the Board and Risk Management and Credit Committees. • Risk Management and Credit Committees oversee policies, stress testing, and key risk reports. • Annual reviews and impairment assessments (via Impairment Assessment Report) are conducted to identify deteriorating credits at an early stage. • Independent Credit Review conducts post-approval review on a regular basis to ensure adherence to policies and regulatory requirements. • Adequate Expected Credit Loss provisions and management overlays are in place for impaired loans/ financing. • Keep abreast of market, regulatory and global developments impacting credit risk. • Conduct regular stress testing to identify vulnerabilities and reinforce risk mitigation controls. Mitigation Measures • An effective governance structure and strong management oversight that emulate best practices for risk taking activities on market related exposures. Reinforced oversight and review of business plans, new product offerings and processes, and market risk limits framework to proactively address emerging global market risks. • Established risk-reward driven market risk framework and policy, coupled with sustainable model- and analytical-based methodology ensure that market risk-taking activities are aligned with risk-reward principles and overall risk appetite framework. • Carefully designed risk-based product-mix that promotes sustainable trading and investment income. A robust and improved evaluation process regularly assesses the relevance of underlying assets used in trading and product structuring, ensuring alignment with shifting market dynamics. • Diversified asset classes and cross product trading and investment strategies that optimise returns relative to the risk assumed. Trading strategies with stable margins are prioritised over high-risk proprietary trading to enhance portfolio resilience and reduce volatility. • Conduct stress testing and refine input parameters in periodic assessments to better evaluate the impact of extreme market conditions on trading and investment performance. • Bolster effective monitoring and responsiveness to structural, regulatory, and competitive market shifts. R1 R2 Credit risk refers to the risk of loss arising from obligor’s or counterparty’s failure to fulfil their financial and contractual obligations in accordance to the agreed terms. It stems primarily from the Group’s lending/ financing, underwriting, investment, hedging and trading activities from both on- and off-balance sheet transactions. Opportunities • Manage risk and seek appropriate returns in accordance with the level of risk, as well as mitigating factors. • Build capacity and expertise to leverage technology and AI for improved analytics, streamlined credit processes and faster turnaround times. • Integrate climate risk scenario analysis and stress testing results as part of credit risk assessment to derive actionable insights, enable better informed decision-making and proactive risk mitigation strategies. Market risk refers to the risk of deterioration in the value of financial instruments due to adverse movements in market factors such as interest rates, credit spreads, equity prices, currency exchange rates and their volatility. The dynamic and rapidly changing global and domestic market landscape poses significant challenges to achieving strategic objectives in market risk management. Key factors contributing to this complexity include geopolitical tensions, increased interest rate volatility, sustained inflationary pressures, the rise of unilateralism, intensifying market competition and the shifting dynamics of the global order. Impact to Kenanga Credit risk leads to potential impairment losses, which impact financial return and capital. Our Approach Effective credit risk management enables the Group to make a robust assessment of the counterparty’s creditworthiness in fulfilling its obligations throughout its credit and economic life cycles. This is supported by an appropriate credit structure, covenants and a risk-based pricing framework, which lead to more sustainable growth and profitability. Our Approach As part of its core financial activities, risk taking is permitted for trading and investment in key permissible markets e.g. interest rates, foreign exchange and equities, as well as their respective derivatives markets. These activities are guided by the prescribed risk limits defined in the market risk limit framework.
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