hewlett-packard international bank plc capital ... · section 1: overview 1.1 business overview...

HPIB Pillar 3 Disclosures

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Hewlett-Packard International Bank Plc

Capital Requirements Directive Pillar 3 Disclosures

Code of Conduct for Basel II Pillar 3 Disclosures

Medium Enterprises

December 2013


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CONTENTS PAGE SECTION 1: OVERVIEW 3 SECTION 2: CAPITAL RESOURCES 5 SECTION 3: RISK MANAGEMENT 8 SECTION 4: CREDIT RISK 11 SECTION 5: TREASURY RISK 18 SECTION 6: RESIDUAL RISK 24 SECTION 7: CAPITAL RISK 25 SECTION 8: CONCENTRATION RISK 26 SECTION 9: OPERATIONAL RISK

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SECTION 10: STRATEGIC/BUSINESS RISK 28 SECTION 11: OWNERSHIP RISK 29 SECTION 12: GOVERNANCE RISK 29 SECTION 13: RUMUNERATION 30


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Section 1: Overview 1.1 Business Overview Hewlett-Packard International Bank (“HPIB” or the “Bank”) is a captive leasing company of Hewlett-Packard Company (“HP Co.”). The primary activity of the Bank is the provision of leases & loan facilities, rentals and asset management capabilities to clients of Hewlett-Packard to finance the acquisition of Hewlett-Packard products, which may be integrated with third party products. In addition, the Bank provides back office facilities for other Hewlett-Packard entities. 1.2 Requirements of the Capital Requirements Directive The Capital Requirements Directive (Directive 2006/48/EC) also known as the

Basel II Accord is a complex standard for capital adequacy of banks worldwide.

Basel II was implemented by HPIB on 1st January 2007.

The purpose of the Accord is to promote safety and soundness in the financial

system, align regulatory capital more closely with underlying risks and to

encourage on going investment in bank’s risk management practices by offering

incentives.


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Basel II Menu:

The Basel II Pillar 3 disclosure requirements are specified in Articles 145-149

and Annex XII of Directive 2006/48/EC. The purpose of this document is to

report HPIB’s disclosure requirements as per Pillar 3.

Directive 2006/48/EC will be replaced by the requirements under Directive

EU575/2013 which will be applicable for financial year 2014 onwards.

1.3 Reporting Dates Where possible, information contained in this disclosure document is extracted

from the annual accounts to 31st October 2013. Where required disclosures

were not included in the annual accounts, it has been reported based on data

gathered for the quarterly submissions to the Central Bank of Ireland as at 31st

December 2013.

Minimum capital

Interest Rate Banking Book

Certification

Intervention

Reporting

Comparability

Usefulness

Standardised

Foundation

Advanced

IRB

Basic

Standardised

AMA

Credit Operational Market

Basel II

Pillar 2 Supervision

Pillar 3 Market discipline

Pillar 1 Minimum capital


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Section 2: Capital Resources 2.1 Summary of HPIB’s approach to assessing the adequacy of internal capital to support current and future activities Historically HPIB has been, and continues to be, predominantly financed by

capital and holds a Letter of Comfort from its parent confirming continued

parental support.

HPIB has a formal internal process for assessing its internal capital adequacy.

This consists of the annual Strategic and Business Planning process. Board

and Senior management committees such as the Asset & Liability Sub-

committee (“ALCO”) and the Pricing and Residual committee meet regularly to

consider the adequacy of HPIB’s capital.

Annual Strategic and Business Planning Process The HPFS annual Strategic and Business Planning process involves the HPFS

Global Marketing Council (the HPFS EMEA Director of Marketing and Business

Development is a member of this council) reviewing:

The status of the HPFS strategic initiatives for the current year - focusing

on 1) the status of the initiatives, 2) customer profiles and needs, 3)

competition and challenges and 4) future plans

The HP Co. strategic plans for the next year/future years

Market analysis i.e. IDC and Gartner market analyses with particular

focus on the IT industry.

From these reviews high level strategies for HPFS for future years are

formulated. 80% of these strategies are HPFS global strategies with 20%

regional (EMEA) specific. The draft strategies are presented to the HPFS

Global Leadership team (GLT). The HPIB Managing Director is a member of

this team. The GLT provides feedback on the strategies to the HPFS Global

Marketing Council.

The Marketing and Business Development team create detailed plans for each

strategic initiative using the learnings from prior years, stakeholder inputs (HP

Co and the HPFS GLT) and market/HP internal changes. Key focus areas for

future years are documented and an owner allocated to each initiative. Key

activities, deliverables and measures of success are documented for each

initiative.


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The strategic initiatives are communicated to all HPFS staff, including HPIB, at

the start of year “Kick Off” sessions and updates on progress are provided

throughout the financial year.

Annual Business Planning Process

As an output of the annual Strategic and Business Planning process the annual

Business Plans are set for each HPFS geographic region including HPIB. The

HPIB Business Plan is drafted by the Financial Planning and Analysis

department within the HPIB Finance function and is prepared with a five year

horizon. The key elements to the plan are:

Base run-outs – these reports provide details of all existing deals booked

in HPIB’s systems and how they run-off in the P&L and balance sheet

over future years. The reports are available by country and currency.

New inceptions – the planning model streams out the P&L and balance

sheet for all new deals to be booked in future years. These are also

prepared at a currency/country level. A detailed planning and

consultation process takes place to ensure that valid assumptions are

taken with regard to new business written. Growth targets are

determined by country and target margins are set out in conjunction with

the Pricing department. Assumptions are also made regarding foreign

exchange (“FX”) and interest rates with guidance from HPIB’s Treasury

department.

Asset Management targets are mainly based on lease expiration values,

together with customer specific data. These targets are set at a country

level together with the Asset Management Leader.

Bad debt assumptions are determined by the Credit department and are

set as a percentage of portfolio assets.

Inputs for interest income and expense (based on balance sheet cash /

debt level assumptions) and FX gains and losses are obtained from the

Treasury department.

Administration expenses are prepared for each function in consultation

with the function leader.

Taxation charge is agreed with the Tax department based on effective

taxation rates.

Once all inputs have been obtained and P&L and balance sheet plans

prepared, these are reviewed by HPIB senior management prior to completion

and approval.


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Action plans are put in place to ensure HPIB meets its Business Plan, one of

the plans is to ensure sufficient capital is available to meet the projected

balance sheet and business requirements and to ensure that capital usage is

optimised.

HPIB ensures that capital is optimised through its risk management processes,

the main components of which are:

1. Credit Risk

2. Liquidity Risk

3. Market Risk (including FX, Interest Rate Risk & Treasury counterparty

risk)

4. Residual Risk

5. Capital Risk

6. Concentration Risk

7. Operational Risk

8. Business/Strategic Risk

9. Ownership Risk

10. Governance Risk

The HPIB governance structure ensures that the HPIB Board of Directors (the

“Board”) and the Board Committees and Sub-committees identify, monitor and

review each of the above risks. The management committees – Operational

Excellence Council, Credit and Investment Committee and Pricing and Residual

Committee manage the risks on a day to day basis via business metrics.

The Board reviews and approves the HPIB Business Plan on an annual basis.

Each month senior management reviews HPIB’s performance against the

Business Plan and the quarterly performance against plan is presented to the

Board.

Also ALCO meets quarterly to consider the adequacy of HPIB’s capital to

ensure that both working capital and regulatory capital requirements are met.


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2.2 HPIB Own Funds

Tier 1 Capital 31-Oct-13

$000

Share Capital 10,036

Capital Contribution/Other Reserves 1,667,866

Revenue Reserves 764,790

Total Tier 1 Capital 2,442,692

Tier 2 Capital

Portfolio provision 33,785

Total Capital 2,476,477 Section 3: Risk Management The Bank is firmly committed to the management of risk, recognising that sound

internal risk management is essential to its prudent operation. Risk

management is given top priority throughout the Bank. Responsibility for risk

management policies and limits on the level of risk assumed lies with the Board,

who charges management with developing, presenting and implementing these

policies, controls and limits. The framework is designed to provide a

reasonable degree of assurance that no single event, or combination of events,

will materially affect the well-being of the Bank.

The Risk Committee assists the Board in fulfilling their Risk Management

responsibilities by advising on current risk exposures and future risk strategy.

ALCO, the Credit and Residual Committee and the Operational Risk Committee

report to the Risk Committee at least four times per year to assist the Risk

Committee in carrying out its duties to the Board.

Senior management plays a key role in the identification, evaluation and

management of all risks. All credit and new product decisions require direct

senior management approval. Management is supported by a comprehensive

structure of internal controls, analyses and reporting processes and periodic

examinations by the Bank's Internal audit department.


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Management has identified HPIB’s material risks as follows:

Credit Risk (leasings/financing and treasury counterparty risk)

Liquidity Risk

Market Risk (including FX, Interest Rate Risk & Treasury Counterparty

risks)

Residual Risk (residual value exposures at end of lease term)

Capital Risk

Concentration Risk (counterparty, industry and geographic)

Operational Risk (risk of loss arising from people, processes, systems &

external events)

Business/Strategic Risk

Ownership Risk

Governance Risk

The HPIB Governance Structure:

Risk Governing Board

Committees

Governing

Management

Committees

Credit Risk Credit & Residual Committee

& Risk Committee

Credit & Investment

Committee

Liquidity Risk ALCO Committee & Risk

Committee

N/a

Market Risk ALCO Committee & Risk

Committee

N/a

Residual Risk Credit & Residual Committee

& Risk Committee

Pricing Committee

Capital Risk ALCO Committee & Risk

Committee

N/a

Concentration Risk Credit & Residual Committee

& Risk Committee

Credit & Investment

Committee

Operational Risk Operational Risk Committee &

Risk Committee

Operational Excellence

Council

Business/Strategic Risk Risk Committee N/a

Ownership Risk Risk Committee N/a

Governance Risk Audit & Compliance

Committee

Compliance Committee


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HPIB’s appetite for risk is expressed in its Board approved Risk Appetite

statement, an extract from which is given below:

“A certain level of risk is inherent in any business and it is the responsibility of

the Board to approve the level acceptable to HPIB. The HPIB risk appetite

should be a satisfactory trade off between the level of risk and likely level of

returns. HPIB defines material risk as any risk which may significantly

adversely affect HPIB’s ability to undertake business. Any risk that causes an

impact of $20m or greater is classified as a significant risk to the business.”

3.1 HPIB Minimum Capital Requirements

MATERIAL RISKS 31-Dec-13

$000

Operational Risk 29,970

Treasury Risk 9,667

Credit Risk 230,513

270,150


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Section 4: Credit Risk HPIB has adopted the standardised approach to Credit Risk under Pillar 1 of the CRD.

The core values and main procedures governing the provision of credit are laid

down in the HPIB Credit policy document. This has been approved by the Board

and is reviewed regularly. The Bank's credit risk management system operates

through a hierarchy of exposure discretions. All exposures over a certain level

require the approval of the Credit Committee, which is composed of senior

executives and some of the directors of the Bank. Exposures below Credit

Committee's discretion are approved by reference to the Bank’s Schedule of

Authority document.

A detailed credit review is performed on each new business case. The Bank uses

a risk rating system to evaluate the financial and repayment risk of proposed

advances and to ensure appropriate returns for assuming risks. Credit analysts

undertake a detailed review of each client prior to approval of advances. Credit

lines are approved for customers with strong credit ratings, whether this is based

on external ratings or internal risk rating scale. An annual financial review is

conducted for all credit line customers with an exposure above a $1m threshold.

The ten largest exposures are reviewed each quarter by the Board of Directors of

the Bank.

The quality lending is reviewed monthly by the Head of Credit of the Bank, the

objective of which is to provide an accurate measure of the underlying quality of

HPIB’s loan portfolio, to facilitate early identification of deterioration in quality and

to enable management to focus on problem loans as soon as weaknesses begin

to emerge. This review includes a review of the aged debtors listing, historic write

off experience and an analysis of the lease portfolio by risk category.

The table below shows the gross maximum exposure to credit risk for the

components of the balance sheet including derivatives, including the amount of

financed assets that are considered to be impaired (impaired assets are fully

provided against). The main considerations for the impairment assessment are

where payments are due for more than 90 days and there are known cash-flow

difficulties for the lessee. In the event of a default the Bank reserves the right to

recover the financed assets.


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Extract from HPIB statutory accounts (note 26) 31 October 2013

Gross maximum exposure to credit risk 2013 Investment Non Investment Impaired maximum

Grade Grade exposure

2013 2013 2013 2013

US$’000 US$’000 US$’000 US$’000

Cash and balances with Central Banks 133,029 - - 133,029

Loans and advances to banks 457,462 - - 457,462

Lease assets (gross of provisions) 1,752,448 1,248,292 8,142 3,008,882

Financial fixed assets - - - -

Other assets 220,800 - - 220,800

Prepayments and accrued income 890 - - 890

Derivative financial instruments 6,927 - - 6,927

Amounts due from fellow subsidiaries 52,888 - - 52,888

Total 2,624,444 1,248,292 8,142 3,880,878

Committed credit line - - - 33,323

Total credit risk exposure 2,624,444 1,248,292 8,142 3,914,201

The value of leases which would have been past due or impaired but have been restructured during the year is $5,001k (2012: $6,326k).

There is no difference in the accounting treatment of these leases.

Gross maximum exposure to credit risk 2012 Investment Non Investment Impaired maximum

Grade Grade exposure

2012 2012 2012 2012

US$’000 US$’000 US$’000 US$’000

Cash and balances with Central Banks 90,491 - - 90,491

Loans and advances to banks 385,393 - - 385,393

Lease assets (gross of provisions) 1,707,387 1,134,793 6,504 2,848,684

Financial fixed assets 1,046 - - 1,046

Other assets 136,517 - - 136,517

Prepayments and accrued income 1,235 - - 1,235

Derivative financial instruments 42,642 - - 42,642

Amounts due from fellow subsidiaries 39,447 - - 39,447

Total 2,404,158 1,134,793 6,504 3,545,455

Committed credit line - - - 61,133

Total credit risk exposure 2,404,158 1,134,793 6,504 3,606,588

Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the

maximum risk exposure that could arise in the future as a result in changes in value.

2013 2012

Specific provision for bad debts US$’000 US$’000

Impaired 8,142 6,504

Greater than 180 days provision 2,105 3,605

10,247 10,109

Where financial instruments are recorded at fair value, the amounts shown above

represent the current credit risk exposure but not the maximum risk exposure that

could arise in the future as a result in changes in value. All figures are based on

financial year end 31 October 2013 and 31 October 2012 balances.


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Impaired exposure by industry type

31 December 2013 $000

Finance, Insurance, Real Estate 2,374

Manufacturing 1,422

Retail Trade 619

Services 3,571

Wholesale Trade 46

8,032

Impaired exposure by geographical area

31 December 2013 $000

France 128

Germany 2,489

Czech Republic 192

Finland 46

Portugal 1,336

Spain 1,054

UK 2,787

8,032 Past due exposure by industry type 31 December 2013 $000

Agriculture 31

Construction 1,656

Finance, Insurance, Real Estate 6,017

Manufacturing 63,458

Mining 24

Public Admin 288

Retail Trade 5,388

Services 16,772

Transportation, Communcations, Energy 31,621

Wholesale Trade 3,763

129,018


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Past due exposure by geographical area

31 December 2013 $000

Ireland 2,159

Austria 455

Belgium 1,353

Czech Republic 3,648

Denmark 441

Finland 764

France 10,243

Germany 15,676

Israel 4,292

Netherlands 855

Norway 743

Portugal 3,098

Romania 1,635

Slovenia 237

Spain 17,372

Sweden 37,295

Switzerland 1,987

United Kingdom 26,765

129,018 Concentrations of credit risk

The Bank's financial assets can be analysed by the following geographical

regions:


Gross maximum Gross maximum

exposure 2013 exposure 2012

US$’000 US$’000

United Kingdom 1,104,345 1,063,673

Germany 618,904 594,617

Ireland 406,534 389,816

France 350,987 296,628

Spain 250,711 249,008

Sweden 222,729 215,268

Luxembourg 171,927 88,968

Netherlands 132,355 121,973

Switzerland 83,570 85,102

Portugal 59,178 62,141

Norway 50,855 54,872

Denmark 44,103 25,877

Finland 35,843 44,006

Other countries 127,146 115,755

Total 3,659,187 3,407,704


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Total net exposure by geographical area and exposure class

31 December 2013 (US$000) US$000

Central

Government/C

entral Banks Admin Bodies Institution Corporate Retail Other Total

Ireland 54,958 857 165,151 12,356 5,828 145,026 384,177

Austria - - 89 7,789 465 18,761 27,104

Belgium - 440 3,074 12,115 5,418 14,963 36,011

Czech Republic - - 207 3,556 855 16,724 21,342

Denmark 14 - 871 14,497 2,011 18,178 35,570

Finland - 78 9 9,834 448 19,476 29,844

France - 230 12,350 111,932 28,255 159,465 312,232

Germany 258 2,435 19,422 114,714 25,266 349,568 511,664

Iceland - - 26 2,711 7,488 - 10,225

Israel - - - 1,597 1,232 1,942 4,771

Luxembourg - - 139,750 8,237 - 3,595 151,582

Netherlands 651 8,008 384 65,872 17,404 30,238 122,557

Norway - 11 2,018 10,457 2,006 31,549 46,041

Portugal - 3 1,984 34,243 7,565 15,475 59,270

Romania - 21 3 5,146 5,481 4,459 15,110

Slovakia - - - - - - -

Slovenia - - - 4,117 1,373 2,059 7,549

Spain 249 146 2,369 105,662 25,040 85,266 218,733

Sweden 42 11,067 1,959 34,312 5,910 163,387 216,677

Switzerland 1,402 1,180 3,789 12,317 2,700 36,246 57,634

United Kingdom 1,038 11,791 149,839 481,826 66,656 471,477 1,182,627

58,612 36,267 503,296 1,053,290 211,401 1,587,854 3,450,720 Minimum related capital requirements by exposure class 31 December

2013 Standardised exposure class $000 Minimum capital

requirements

Central governments or central banks 208

Administrative bodies 637

Institutions 10,607

Corporate 82,474

Retail 13,078

Other items 123,509

Total for standardised approach 230,513


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Total lease/financing exposure by industry type

$000 $000 $000

31 December 2013 Tangible fixed assets

Finance lease & loan

receivables Total

Agriculture 5,167 1,798 6,965

Construction 29,014 29,978 58,992

Finance, Insurance, Real Estate 304,614 801,260 1,105,874

Manufacturing 390,960 428,664 819,624

Mining 2,554 609 3,163

Public Admin 93,571 42,441 136,012

Wholesale/Retail Trade 124,060 136,788 260,848

Services 69,524 148,895 218,419

Transportation, Communcations, Energy 177,551 206,000 383,551

1,197,015 1,796,433 2,993,448

4.1 External Credit Assessment Institutions (ECAIs)

HPIB has nominated Standard and Poors as its external credit assessment

institution. Customers that do and do not have an external credit rating agency

rating, are allocated an internal credit rating.

4.2 Portfolio and Specific Provisioning Policy

The objective of HPIB’s collective reserve and specific bad debt provisioning

policy is to establish write-offs within specific reserve targets. HPIB maintains

collective reserves for uncollectability in the lease portfolio and specific reserves

for credit losses from identified customers.

The collective bad debt reserve is based on a percentage of the lease portfolio

assets. The percentage is reviewed on a quarterly basis and is based on

several factors, which include:

Historical performance

Portfolio risk profile

Competitive benchmarking

Specific bad debt reserves are established for identified loss exposures on

leases or loans that have not yet been written-off within the lease accounting

system. A write-off or specific reserve of billed accounts receivable is

mandatory at 180 days past due, unless specific exceptions are granted by the

relevant individuals identified with the HPIB Credit Policy and HPIB Schedule of

Authorisation. A write-off or specific reserve may be warranted sooner if it is

deemed that the account is not collectible. The remaining net investment is to

be reviewed on a deal by deal basis with final reserve decisions based on credit

quality and the status of collection efforts.


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Provision for impairments 2013 2013 2013 2012

US$’000 US$’000 US$’000 US$’000

Specific Collective Total Total

At 1 November 10,109 31,824 41,933 43,502

Provisions acquired during period - -

Provisions created during period 20,371 14,656 35,027 25,377

Provisions released during period (20,511) (14,731) (35,242) (25,195)

Adjustments including FX 278 2,036 2,314 (1,751)

At 31 October 10,247 33,785 44,032 41,933

The charge against profits is analysed as follows:

Provisions created during period 20,371 14,656 35,027 25,377

Provisions released during period (20,511) (14,731) (35,242) (25,195)

Write-offs 21,334 - 21,334 12,542

Recoveries (6,135) - (6,135) (4,280)

Charge against profits 15,059 (75) 14,984 8,444


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Section 5: Treasury Risk 5.1 Liquidity Risk

The liquidity risk management process is designed to ensure that the Bank is

able to honour all of its financial commitments as they fall due. As assets are

financed primarily by capital resources, liquidity is monitored by the Treasury

and Treasury Control departments. The liquidity position of the Bank is

reviewed by the Board of Directors on a quarterly basis.

At the 31st October 2013 the Bank had third party financing requirements of

approximately US$675 million. This debt may vary depending on the

requirements of the business.

The debt is drawn from the Bank’s various debt programmes – a European

Certificate of Deposit programme with a maximum value of US $500 million,

an Interbank programme with uncommitted facilities of US $506 million and a

Corporate programme. Also the Bank utilises inter-company funding from HP

Co for certain categories of business. The main component of the Bank’s

financing, totalling US$2.4 billion, is provided by way of capital contributions

from HP Co and the Bank's retained earnings. HP Co is committed to

providing for the Bank's on-going financing as required.

The Bank ensures its liquidity ratios meet the requirements of the Central Bank

or Ireland’s “Management of Liquidity Risk” guidance note. The Bank is in full

compliance with the qualitative and quantitative requirements of this directive.

Specifically the Bank is committed to maintaining appropriate liquidity ratios

across all the prescribed time bands. These ratios are achieved by ensuring

the mix of debt and investment maturities are consistent with both the needs of

the business and the required ratios set out by the Central Bank of Ireland. In

addition, the Bank maintains a statutory deposit with the Central Bank of

Ireland.

The liquidity ratio at the end of financial year, 31 October 2013 was as follows:

2013 2012 Regulator Requirements

% % %

31 October

0 - 8 days 340 363 100

8 - 30 days 210 264 90


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The following table shows an analysis of assets and liabilities according to when

they are expected to mature or be settled:

Extract from HPIB statutory accounts (note 26) 31 October 2013 Liquidity analysis 31 October 2013 Liquidity analysis 2013

Not more than 3 months

More than 3 months but not

more than 6 months

More than 6 months but not

more than 1 year

More than 1 year but not

more than 5 years

US$ '000 US$ '000 US$ '000 US$ '000

Assets

Cash and balances with Central Bank 133,029 - - -

Loans and advances to banks 457,462 - - -

Tangible fixed assets 25,582 36,723 127,585 1,030,932

Loans and advances to customers 5,003 24,111 51,958 1,603,006

Other assets 220,800 - - -

Cash flow hedges 984 897 1,259 3,026

Derivatives at fair value 761 - - -

Amounts due from fellow subsidiaries 52,888 -

Total financial assets 896,509 61,731 180,802 2,636,964

Liabilities

Deposits by banks 344,178 67,598 - -

Deposit by customers (including debt securities in issue) 258,472 157,778 - -

Other liabilities 34,716 - - -

Accruals 17,194 - - -

Cash flow hedges 11,078 7,440 19,273 37,101

Derivatives at fair value 2,953 - - -

Amounts due to fellow subsidiaries 109,738 69,490 54,051 223,155

Total financial liabilities 778,329 302,306 73,324 260,256

More than 5 years Total

US$ '000 US$ '000

Assets

Cash and balances with Central Bank - 133,029

Loans and advances to banks - 457,462

Tangible fixed assets 5,180 1,226,002

Loans and advances to customers 54,770 1,738,848

Other assets - 220,800

Cash flow hedges - 6,166

Derivatives at fair value - 761

Amounts due from fellow subsidiaries - 52,888

Total financial assets 59,950 3,835,956

Liabilities

Deposits by banks - 411,776

Deposit by customers (including debt securities in issue) - 416,250

Other liabilities - 34,716

Accruals - 17,194


Derivatives at fair value - 2,953

Amounts due to fellow subsidiaries - 456,434

Total financial liabilities - 1,414,215

Net liquidity surplus 2,421,741


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Liquidity analysis 31 October 2012

Liquidity analysis 2012

Not more than 3 months

More than 3 months but

not more than 6 months

More than 6 months

but not more than 1

year

More than 1 year but

not more than 5 years

US$ '000 US$ '000 US$ '000 US$ '000

Assets

Cash and balances with Central Bank 6,264 - - -

Loans and advances to banks 469,620 - - -

Tangible fixed assets 16,585 32,780 122,323 1,161,390

Loans and advances to customers 4,576 23,428 51,812 1,355,855

Other assets 136,517 - - -

Cash flow hedges 5,305 6,852 11,530 17,632


Amounts due from fellow subsidiaries 39,447 -

Total financial assets 679,637 63,060 185,665 2,534,877

Liabilities

Deposits by banks 371,617 10,043 - -

Deposit by customers (including debt securities in issue) 190,157 252,786 - -

Other liabilities 43,298 - - -

Accruals 18,823 - - -

Cash flow hedges 5,574 6,003 14,767 32,619


Amounts due to fellow subsidiaries 4,705 - - -

Total financial liabilities 636,094 268,832 14,767 32,619

More than 5 years Total

US$ '000 US$ '000

Assets

Cash and balances with Central Bank - 6,264

Loans and advances to banks - 469,620

Tangible fixed assets 5,740 1,338,818

Loans and advances to customers 32,261 1,467,932

Other assets - 136,517



Amounts due from fellow subsidiaries - 39,447

Total financial assets 38,001 3,501,240

Liabilities

Deposits by banks - 381,660

Deposit by customers (including debt securities in issue) - 442,943

Other liabilities - 43,298

Accruals - 18,823



Amounts due to fellow subsidiaries - 4,705

Total financial liabilities - 952,312

Net liquidity surplus 2,548,928

-


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5.2 Market Risk

Market risk is the risk that the fair value or future cash flows of financial instruments

will fluctuate due to changes in market variables such as interest rates and foreign

exchange rates. The Bank reduces its exposure to market risk by entering into

forward currency contracts which hedges any risk associated with foreign currency

fluctuation.

Capital N/A N/A

Operating leases Fixed rate. The Bank is exposed to interest rate risk on the

portion of the balance sheet that is funded by debt; mis-

match approved by board

Balance sheet hedging process which is monitored

monthly

Liabilities

Bank and customer deposits Deposits are short term. Interest rate risk is minimised due

to the short average tenor of investments and deposits.

All investments are hedged as part of the Balance Sheet

FX risk management process.

Bank investments Investments are short term. Interest rate risk is minimised

due to the short average tenor of investments and

deposits.

All investments are hedged as part of the Balance Sheet

FX risk management process.

Finance leases & loans Fixed rate. The Bank is exposed to interest rate risk on the

portion of the balance sheet that is funded by debt; mis-

match approved by board

Balance sheet hedging process which is monitored

monthly

Assets Interest Rate Foreign

Exchange

5.3 Interest Rate Risk Interest rate risk arises when there is a mismatch between positions which are

subject to interest rate adjustment within a specific period. The Bank does not have a

trading book and all interest rate risk is in the banking book. At this time, the Bank’s

lease portfolios are primarily financed by the Bank’s capital resources. Where the

lease portfolio is not funded by capital resources it is funded by third party debt and

is therefore exposed to US dollar interest rate risk due to the duration mismatch

between Assets and Liabilities.

The effect on net interest income, and therefore profit before tax over a 3 year

period, of a 1 basis point shift in the yield curve would be as follows:-

+1 basis points -1 basis points +1 basis points -1 basis points

2013 2013 2012 2012

US$’000 US$’000 US$’000 US$’000

Currency

USD 45 (45) 53 (53)


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5.4 Currency Risk Currency risk is the risk that the value of an asset or a liability will fluctuate due to

changes in foreign exchange rates.

The table below (extract Note 21 HPIB Statutory Accounts 2013) shows the Bank’s

transactional currency exposure in the banking book; in other words those non-

structural exposures that give risk to the net currency gains and losses recognised in

the profit and loss account. Such exposures comprise the monetary assets and

monetary liabilities of the Bank that are not denominated in the operating (or

"functional') currency of the Bank which is US Dollars. The objective is to mitigate

this exposure through active management by the Treasury department.

Management of the transactional currency exposures is performed by the Treasury

department. Forward rate contracts are entered into to manage this exposure. The

actual currency exposures are monitored against the anticipated exposures which

were hedged by the Treasury department. The exposure is reviewed as part of the

monthly financial review carried out by the Managing Director of the Bank.

The Bank mitigates the effect of currency fluctuations caused by the revaluation of

the Balance Sheet at the end of each accounting period by hedging all assets with

different source currencies from the Bank’s functional currency of US Dollars,

thereby hedging all material foreign currency denominated exposures.

As a result of the use of derivative instruments, the Bank is exposed to the risk that

counterparties to derivative contracts will fail to meet their contractual obligations. To

mitigate the counterparty credit risk, the Bank has a policy of only entering into

contracts with carefully selected major financial institutions based upon their credit

ratings and other factors, and the Bank maintains risk limits that correspond to each

institution’s credit rating and other factors. The Bank’s established policies and

procedures for mitigating credit risk on principal transactions and short-term cash

include reviewing and establishing limits for credit exposure and continually

assessing the creditworthiness of counterparties. Master agreements with

counterparties include master netting arrangements as further mitigation of credit

exposure to counterparties. These arrangements permit the Bank to net amounts

due from the Bank to a counterparty with amounts due to the Bank from the same

counterparty.

To further mitigate credit exposure to counterparties, the Bank may enter into

collateral security arrangements with its counterparties. These arrangements require

the Bank to post collateral or to hold collateral from counterparties when the

derivative fair values exceed contractually established thresholds which are generally


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based on the credit ratings of the Bank and its counterparties. Such funds are

generally transferred within two business days of the due date.

As of October 31, 2013, the Bank posted US$92.87 million under these collateralized

arrangements, all of which was in cash. The Bank did not have any derivative

instruments under these collateralized arrangements that were in a significant net

liability position.


Balance sheet by currency 2013 2013 2012 2012

US$’000 US$’000 US$’000 US$’000

(incl. effects of (incl. effects of

Assets: hedging) hedging)

Denominated in United States Dollars 503,860 3,143,582 342,371 3,151,884

Denominated in Euro 1,849,580 2,077,503 1,711,475 1,981,640

Denominated in GBP 1,119,332 1,119,332 1,095,055 1,095,055

Denominated in other currencies 410,782 417,387 390,825 392,664

Total assets 3,883,554 6,757,804 3,539,726 6,621,243

Liabilities:

Denominated in United States Dollars 2,837,533 3,072,064 2,904,784 3,176,789

Denominated in Euro 762,461 2,115,562 574,591 1,967,424

Denominated in GBP 222,700 1,150,089 44,672 1,092,757

Denominated in other currencies 60,860 420,089 15,679 384,273

Total liabilities 3,883,554 6,757,804 3,539,726 6,621,243


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Section 6: Residual Risk

Residual value exposure arises where, at lease inception, there is a future

expectation that an asset value remains at the end of the primary term which can

be recovered through a secondary transaction. Details of unguaranteed residual

values are outlined below. These residual values are arrived at through a detailed

analysis of transaction history on asset recovery to projected future values.

Residual realisation is constantly monitored.

Extract from HPIB Statutory Accounts dated 31st October 2013 (Note 32):

Residual Values

Details of unguaranteed residual values are outlined below

2013 2012

US$’000 US$’000

Finance Leases Finance Leases

- Over 5 years 1,540 2,741

- 5 years or less but over 3 years 22,063 21,449

- 3 years or less but over 1 year 23,007 25,097

- 1 year or less 2,279 1,108

48,889 50,395

US$’000 US$’000

Tangible Fixed Assets Tangible Fixed Assets

- Over 5 years - 89

- 5 years or less but over 3 years 6,677 22,281

- 3 years or less but over 1 year 134,237 127,681

- 1 year or less 88,986 72,973

229,900 223,024

On a monthly basis the Pricing and Residual Committee review residual risk

decisions on an individual product group basis. This assessment includes the

review of historical residual recovery rates, along with customer behaviours at

end of term. Scenario testing is employed to assess impacts of predicted future

events and to ensure the financial levels of risk assigned to the product groups

are within the committee’s comfort levels.

All standard product groups are reviewed by the Pricing and Residual

Committee at least annually as per the FAS13, SEC and Sarbanes Oxley

requirements. Any impairment concerns identified through the review process

are further analysed in a specific impairment analysis and review. Corrective

measures are taken if impairment is identified.


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Section 7: Capital Risk

The Bank is a mono-line business, therefore capital risk is measured at an

overall business level. The ALCO and Risk Committees are responsible for

monitoring Capital risk. Given the strong level of capitalisation, the major

sources of HPIB’s capital risk are:-

1 Significant loss events leading to a reduction in capital balances.

2 Rapid balance sheet growth without a corresponding increase in capital

invested.

The Bank is authorised and regulated by the Central Bank of Ireland and is

required under the relevant regulations to maintain sufficient capital to meet its

liabilities. The Bank has in excess of over 9 times capital cover in place as

calculated under Pillar 1.

Capital Requirement

31-Dec-13

$000

Share Capital 10,036

Capital Contribution/Other Reserves 1,667,866

Revenue Reserves 764,790

Total Tier 1 Capital 2,442,692

Tier 2 Capital 33,785

Total Capital Resources 2,476,477

Capital Requirement 270,150

Total Capital Excess 2,206,327


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Section 8: Concentration Risk

The HPIB Credit Policy has defined the credit risk appetite in terms of country

limits, customer concentration limits and business segment limits. These limits

are presented to the Board when the Credit Policy is reviewed annually. The

policy contains four specific limits detailed below:

Prudential Maximum Exposure: HPIB’s exposure to a customer or group of

customers, other than a credit institution, should not exceed 25% of own funds.

Geographical Restrictions: HPIB’s exposure to any one country shall not

exceed 40% of its total portfolio.

Inter-group Exposures: HPIB will not provide lease or loan credit to the HP Co

without prior approval from the Central Bank, and if approved should not exceed

10% of own funds. Industry Restrictions: HPIB’s exposure to a specific industry

shall be limited to 40% of its total portfolio.

These measurements are taken on a portfolio level but also, where needed, on

a transactional level. Awareness within the credit organisation is key when

reviewing/approving large customer limits and the effect the exposure would

have on a customer level but also from an industry and country risk perspective.

A review is completed annually of the concentration risk limits at the same time

as the review of the Credit Policy and annual Stress Testing scenarios to

ensure appropriateness of limits. The review also includes an understanding of

the HPIB Business Plan and its potential impact on the structure of the portfolio.

This review is presented to the HPIB Board, Risk Committee and Credit and

Residual Sub-Committee. HPIB also completes a number of stress tests on

concentration risk focusing on industry, one obligor and geographic

concentrations.


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Section 9: Operational Risk HPIB has adopted the standardised approach to Operational Risk.

Operational Risk is defined as the risk of loss resulting from inadequate or failed

internal processes, people, and systems or from external events. The Board

has approved the HPIB Operational Risk Management Framework.

HPIB Operational Risk Management Framework:

Risk Management Framework

Corporate Governance

Str

ate

gy

/G

oa

ls

Ind

ep

ed

en

de

nt

Assu

ran

ce

Operational Risk

External Regulatory /

LegalPeople Processes Systems Reputational

Action Plans

IdentifyRisks

IdentifyControls

AssessRisks

AssessControls

MonitorIndicators

Analyse

Near Miss/LossCauses

Reporting

Risk Environment

Compliance

Risks

Credit

Risks

Market

Risks

Liquidity

Risks

Financial

Risks

Strategic

Risks

Operational

Risks

Risk and Control Assessments (RCA) are in place for all departments. Risks

are assessed using the HPIB Risk Appetite Matrix. Controls are assessed for

their design and their performance. The RCAs are reviewed and updated

quarterly or as risk profiles change within the business. Key risks and

operational risk loss events are monitored and reported regularly to senior

management and quarterly to the Risk Committee and to the Board via the

Operational Risk Committee.


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Section 10: Strategic/Business Risk HPIB’s strategy is to support and enhance HP Co’s product and service

solutions. HPIB enables customers to acquire complete IT solutions, including

hardware, software and services. HPIB offers innovative, customized and

flexible alternatives to balance unique customer cash flow, technology and

capacity needs.

From a risk perspective HPIB is a “monoline” business offering financing to high

end corporate and enterprise customers. The Bank does not offer financing to

consumers.

Business risk management is an integral part of the management of HPIB.

Risks are managed via Management Committees on a day to day basis and the

internal policies and procedures that govern the operations of HPIB. Schedules

of Authorisations are in place where the Board of Directors delegates the daily

activities to management.

On a quarterly basis the Board, Board Committees and the Board Sub-

Committees monitor HPIB’s performance against its business plan and

objectives. At a strategic level the Board is responsible for supervising the

management of risk by the Risk Committee in accordance with HPIB’s relevant

policies and procedures. At each Board meeting the Board review the

performance of the Risk Committee and the Board Sub-Committees – ALCO,

Operational Risk and Credit and Residual Committees.


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Section 11 Ownership Risk

HPIB is owned by a non-financial, commercial entity, HP Co. The Central Bank

of Ireland has assigned a Pillar 2 capital add-on for this ownership risk.

Section 12 Governance Risk

Governance risk relates to the overall management approach through which

senior management manages and controls the business of HPIB. Governance

activities ensure that critical management information reaches senior

management and the Board to enable appropriate decision making.

Through the Compliance Committee, HPIB ensures that all new regulations

issued are reviewed and implemented, where applicable, within the specified

timeframes.

Governance risk is monitored on an on-going basis as part of the following processes:

Compliance Committee meetings every three weeks

Quarterly Board Sub-Committee meetings

Quarterly Risk Committee meetings

Quarterly Audit and Compliance Committee meetings

Quarterly Board meetings


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Section 13 Remuneration

This section provides brief information on the decision-making policies for

remuneration of HPIB staff (including “identified staff”) and the links between

pay and performance. These disclosures reflect the requirements set out in

Committee of European Banking supervisors’ (CEBS, now EBA) Guidelines on

Remuneration Policies and Practices, issued in December 2010.

Identified Staff

HPIB has completed an assessment process through which 14 employees have

been identified as key staff on the basis that their professional activities are

deemed to have a material impact on HPIB’s risk profile or they perform a key

control function.

Design, Structure and Decision-making process

HPIB’s Remuneration Policy is dependent on the HP Co group policies and

charter. The HPIB Board is satisfied that independent and appropriate control

functions exist in setting this policy at group level. It is the view of HPIB that this

structure avoids potential conflicts of interest and that no employee of HPIB has

significant influence in determining remuneration policies.

HPIB’s capital structure does not correlate to the level of remuneration paid to

HPIB management or employees. HPIB has historically enjoyed large levels of

capital relative to its risk assets and this is due to the operating model which HP

Co has chosen for its Irish subsidiary.

It is the intention that the HPIB Remuneration Policy and practices are

consistent with and promote sound and effective risk management. The policy

forms part of the overarching requirement to have robust governance

arrangements in place and is in line with the business strategy, objectives,

values and long-term interests of HPIB and of HP Co. The HPIB Board

approves the Remuneration Policy on an annual basis.


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Link between pay and performance

HPIB’s independent non-executive directors are compensated a fixed amount

which is not correlated to any financial HPIB metric (e.g. cash flow, net profit)

and the other non-executive Directors serve at the behest of the Hewlett-

Packard group without compensation.

The compensation structure of employees (including other identified staff) are

covered by either HP Co remuneration policies or the world wide HP Financial

Services Incentivised Compensation Plan (ICP) Scheme and is not limited to

the results of HPIB. Overall compensation is dependent on the results of the

HP Co at group level.

Proportionality

HPIB has considered the following in assessing the application of the

proportionality principle:

Size

HPIB is a small institution with a high level of capitalisation from its parent, HP

Co. Its function is to provide funding for IT equipment and other ancillary

services. It does not engage in a high level of risk-taking, as evidenced in the

HPIB Credit and Treasury policies. HPIB is based in Ireland but operates

throughout much of the EEA. It does not, however, account for a large portion

of the financial system in any country in which it operates. HPIB also

represents a small part of HP’s total business operations.

No individual employed by HPIB falls within the definition of “high earner” (as

defined in EBA guidelines)

Internal Structure

HPIB is a wholly owned subsidiary of HP Co. While HP Co is listed on a

regulated market, HPIB is not separately listed. HPIB’s corporate goal is to

support HP Co’s business, providing financing to HP customers.

Nature, Scope and Complexity of the institution

HPIB’s business is a mono-line one with a focus on financing IT products to

commercial and enterprise customers. It does not engage in equity or bond

trading, proprietary or as agent and operates within the EEA.


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Taking into account each of the above, HPIB is considered to be a non-complex

institution for the purposes of the Proportionality Principle.

On this basis, it has chosen to apply neutralisation to a number of provisions.

After due consideration regarding proportionality, it has been agreed that there

is no necessity to form a Remuneration Committee for HPIB. The management

function does not determine its own remuneration. This is determined by the

governing HP Co group policies and therefore it is considered that a supervisory

function is not required.

Remuneration Expenditure The following table shows the remuneration paid by HPIB to Identified Staff in 2013.

Identified Staff USD $’000s

Number of Identified Staff 14

2013 Remuneration 2,315K

2013 New sign-on and severance payments

No new identified staff received a sign-on payment during 2013 relating

to their commencement of employment

No severance payments were made during 2013 to these staff.

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