ICAAP: Credit Risk: Stress Test: Profitability Analysis Stress Test


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As part of the stress testing procedures of the bank’s Internal Capital Adequacy and Assessment Process (ICAAP) we will be looking at how shocks are applied to various elements of the original profitability analysis to determine their impacts on the profitability of the bank’s loan portfolio.

Profitability Analysis Stress Test

The profitability will be stress tested by applying shocks to various elements of the profitability analysis as described earlier. The impact on earnings potential is assessed.

Examples of shocks that could be applied are:

ScenarioDescriptionAdditional Remarks/ assumptionsExample of shocks
1Increase in concentrationAll other factors remaining constantConcentration in a particular sector increases by 10%
2Increase in expected classificationAll other factors remaining constantExpected classification of a particular sector increases by 10%
3Increase in expected provisionAssumes a proportionate change in the worst case provision. All other factors remaining constantExpected provisions of a particular sector increases by 10%. We assume that worst case provision also increases proportionately, subject to a maximum of 100%
4Decrease in IRRAll other factors remaining constantIRR of a particular sector decreases by 50bps
5Increase in Cost of FundsAll other factors remaining constantCost of Funds increases by 50bps

We have discussed how the profitability analysis is stress tested. In the next post we will be looking at ways to stress test market risk.