Risk Management
Introduction
Identification, measurement and management of risk is a strategic priority for HBOS. The Board has established a comprehensive framework covering accountability, oversight, measurement and reporting to maintain high standards of risk management throughout the Group.
Key risks and uncertainties facing the Group
The key risks and uncertainties faced by the Group, which we believe could cause our actual results to differ materially from expected results, are set out below. These factors should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.
Each of the Divisions faces key risks and uncertainties in the execution of their strategy. These are set out in the divisional sections of the Business Review where they can be read in conjunction with the Division’s strategy, and financial and operating performance.
The Group’s earnings are affected by general economic conditions in the markets in which we operate
The Group’s earnings could be affected by deterioration in economic conditions in the UK, where the majority of the Group’s earnings are generated, as well as in the other economies in which we operate. In particular, significantly higher UK unemployment and/or interest rates may reduce borrowers’ ability to repay loans and may cause house prices to fall materially thereby reducing the collateral value on many of our loans. An economic downturn may also reduce demand for many of our products. To mitigate we have developed a diversified business model that operates in many different markets and cycles (including, but not limited to, mortgages, savings, corporate, small to medium enterprises, insurance and investment) both in the UK and increasingly in our chosen overseas markets.
Changes in financial markets may restrict the availability or increase the cost of funding to the Group. Such changes could impact on the margins we are able to achieve or constrain the growth in our businesses. To mitigate this we have developed a well diversified funding and depositor base and would seek to pass on increased cost of funds where appropriate.
Future earnings growth and shareholder value creation depend on the Group’s strategic decisions
Significant resources are devoted to the formulation and implementation of our strategy (which is described in the Chief Executive’s Report on pages 8 to 10). If elements of the strategy do not deliver as planned, either as a result of internal factors such as poor implementation associated with strategic change, or external factors, such as competitor actions, the Group’s earnings may grow more slowly or decline.
The financial performance of the Group is affected by borrowers ability and willingness to repay amounts lent by the Group
This is known as credit risk and more information about how we manage credit risk and our credit exposures is set out on pages 89 to 91.
The Group may be unable to meet its financial obligations as they fall due or is unable to raise sufficient funds to take full advantage of growth opportunities
This is known as liquidity risk. Further information about our approach to managing liquidity risk is explained on pages
95 to 98.
The financial performance of the Group is affected by changes in external market factors such as interest rates, foreign exchange rates, commodity and equity prices and the potential for customers to act in a manner which is inconsistent with business, pricing and hedging assumptions
This is referred to as market risk. Further information about
our management of, and exposure to, market risk is set out
on pages 91 to 95.
The Group may have insufficient capital resources to meet the regulatory minimum requirements, to finance growth, or to support its credit rating
Capital discipline is a key element of the Group’s strategy. Capital is a scarce resource and our task is to deploy it to achieve sustainable returns and add value for our shareholders. The financial performance of the Group may affect the ability to generate sufficient capital. This, together with a reduction in the availability of capital from the capital markets, may affect the Group’s ability to meet the capital requirements of regulators or to have an acceptable capital structure to support the existing credit ratings. The Group’s approach to the management of capital is set out on pages 103 to 104.
The Group’s earnings may be affected by the potential for loss through adverse claims, expense and persistency experience, from both life and general insurance contracts
Insurance and investment risk and its management is described in more detail on pages 99 to 102.
Operational risks exist in the normal course of the Group’s business
In a large organisation with many different processes, IT systems and colleagues, there is a risk that operational losses can result.
Examples of the sources of such risks include fraud, systems reliability, human error, failure of key suppliers, IT security, change management, operational outsourcing or failure to comply with legislation or regulation. Further information about the management of operational risk is set out on page 102.
The Group’s business and earnings can be affected by changes in financial services laws and regulations in each of the locations in which it operates
Any significant regulatory changes could affect how the Group conducts business and its financial performance. Regulatory risk is explained in detail on page 102.
HBOS Board
