Risk Appetite The Board sets the Group's risk appetite, which defines the level and nature of risks that we are willing to take on behalf of our shareholders in the conduct of our business, while maintaining our commitments to customers, debt holders, employees, regulators and other stakeholders. Our objective is to manage risks prudently for the long-term viability of the Group while balancing the interests of all stakeholders. Our risk appetite takes into account forward-looking operating environment and potential downside risks. Business plans are guided by our risk appetite through policies, limits and processes to ensure that we operate within our available risk capacity. Senior business and risk managers participate in regular forums to discuss the operating environment, event risks and potential 'dark clouds' that may have a significant impact on our earnings or solvency. These are quantified via stress tests as well as segment-specific and ad hoc event-specific portfolio reviews to assess the potential impact of alternative scenarios on our earnings and capital, and the vulnerabilities of material portfolios. An annual Internal Capital Adequacy Assessment Process (ICAAP) incorporating the results of stress tests covering various risk types is conducted to evaluate if our business plans allow us to maintain sound capital levels under both forward-looking operating environment and severe stress scenarios. Appropriate risk-mitigating actions are taken to manage downside risks. Plan Business Risk Appetite Risk Capacity Business Plan Demand for Risk and Financial Resources such as Funding and Capital Risk Appetite Level and nature of risk deemed acceptable while ensuring sufficient buffer in the Risk and Financial Resources Risk Capacity Supply of Risk and Financial Resources such as Funding and Capital Credit Risk Management Credit risk arises from our lending activities to retail, corporate and institutional customers. It also includes counterparty and issuer credit risks arising from our underwriting, trading and investment banking activities. Credit Risk Management Approach Our credit risk management framework captures the complete credit risk management cycle. It is operationalised through policies and procedures covering the identification, assessment, measurement and monitoring, as well as control and mitigation of credit risk at the enterprise level. Responsible Financing is an integral part of our credit risk management. We have a dedicated framework and supporting policies to integrate Environmental, Social and Governance (ESG) considerations into our credit risk evaluation and approval process. Through the framework, sustainability is integrated across our corporate lending activities from the strategic and portfolio to transaction level. Please refer to our Sustainability Report for more information on Responsible Financing and Sustainable Financing. Our credit risk management approach varies according to the characteristics and nature of the portfolios or customer segments. Specific policies and procedures are established for major customer segments. Please refer to Table 1 for more information. Table 1: Credit Risk Management Approach for Major Customer Segments Consumers and Small Businesses Credit risks are managed on a portfolio basis. Credits are extended through credit programmes with predefined portfolio and transaction limits, acquisition strategy, product structure, as well as customer selection, lending and collateral criteria. Application models are used to enable efficient, objective and consistent risk evaluation and credit decisioning. Bankruptcy and credit bureau checks, along with systems and processes such as source identification of credit origination and independent verification of documentation, are used to detect fraud. Comprehensive risk management information systems (MIS) are used to track and monitor the performance of the portfolios. Behavioural models are used for early identification of problem loans. Managing Counterparty Credit Risk Counterparty Credit Risk (CCR) typically arises from our trading and banking activities in derivatives and debt securities and is the risk that the counterparty may default on its obligations during the term of the financial contract. CCR management, which covers credit exposures to counterparties, is measured as the sum of current mark-to-market value of the transaction plus an appropriate add-on for potential future exposures in response to market prices changes. Credit limits are established for each counterparty based on our assessment of the counterparty's creditworthiness, the suitability and appropriateness of the product offered and alignment with approved trading mandates and investment strategies. Credit risk mitigation tools are also used to manage CCR where appropriate. Corporate and Institutional Customers Credits extended are individually assessed, risk-rated and further evaluated by experienced credit officers. Credit extensions are guided by predefined target market and risk acceptance criteria. Credit decisions are made after comprehensive qualitative and quantitative risk assessment, including a thorough understanding of the customer and customer group's interdependencies. Credits are jointly approved by business and credit risk units to ensure objectivity and shared risk ownership. Please refer to the Credit Risk Mitigation section for details. Credit exposures are independently managed through daily limit monitoring, excess escalation and approval and timely risk reporting. We also have an established policy and process to manage wrong-way risk which can occur when the credit exposure to a counterparty is adversely correlated with the credit quality of the same counterparty. Credit Portfolio Management Credit portfolio management focuses on managing the 'collective or aggregate risk' of our credit portfolios rather than the credit risk of individual borrowers. We have developed and implemented a range of capabilities to better understand, measure and monitor credit risk at the portfolio level. These capabilities include: Private Banking Customers Credits extended are individually assessed and subject to comprehensive credit assessment, availability of acceptable collateral and compliance with loan advance ratio and margin requirement. . Credits are jointly approved by business and credit risk units . to ensure objectivity and shared risk ownership. Advance ratios are dependent on the liquidity, volatility and diversification of the collateralised portfolio under stressed conditions. Marketable securities taken as collateral are subject to daily valuation and independent price verification controls. Timely and disciplined execution of margin calls, top-up provisions, stop-loss and force-selling are strictly managed in accordance with approved procedures. Portfolio Segmentation: This is the process of grouping credit exposures that are similar in nature. It involves the use of attributes that represent common business drivers such as location, industry and product type, as well as common risk drivers such as exposure to material downside risks like a property bubble. We have invested substantially to standardise the way credit exposures are grouped using consistent taxonomy to improve data quality. Portfolio Modelling: This includes the use of internal rating models to quantify the exposure risk, default risk and potential losses of our borrowers. Please refer to Table 2 for information on our internal rating models. We also use stress test models to simulate the potential increase in our credit losses and credit risk-weighted assets under stressed scenarios.