Basel III Pillar

Transcription

1 Basel III Pillar

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3 CONTENTS I. Information on Subsidiaries and Significant Investments 4 II. III. IV. Consolidated Capital Structure Capital Adequacy A. Qualitative Disclosures B. Quantitative Disclosures Qualtitative Disclosures V. Quantitative Disclosures 14 VI. A. Gross Credit Exposures by Currency Type B. Gross Credit Exposures by Geography C. Gross Credit Exposures by Industry Segment D. Gross Credit Exposures by Residual Contractual Maturity E. Impaired Loans by Industry Segment F. Impaired Loans by Geographic Distribution G. Reconciliation of Changes in Provision for Impaired Loans H. Gross Credit Exposure as per Standardised Approach Gross Credit Exposure as Per Standardised Approach A. Qualitative Disclosures B. Quantitative Disclosures 18 VII. Credit Risk Mitigation: Disclosures for Standardised Approach 19 A. Qualitative Disclosures B. Quantitative Disclosures VIII. Capital Requirement for Market Risk under Standardised Approach 20 IX. Equity Position in the Banking Book A. Qualitative Disclosures 20 B. Quantitative Disclosures X. Interest Rate Risk in the Banking Book (IRRBB) 21 3

4 I. Information on Subsidiaries and Significant Investments Basis of Consolidation: The scope of consolidation of Pillar III differs from the scope of consolidation of the financial statements, which includes the fully consolidated results and balance sheet of Oman Insurance Co (OIC), Mindscape FZ LLC and Injaz Services FZ LLC, as disclosed in the Mashreq Group Annual Report. Information on Subsidiaries and Significant Investments as on 31st December 2017 Country of Incorporation % Ownership Principal Activity Accounting Treatment Surplus Capital Capital Deficiencies Interests Subsidiaries: Osool A Finance Company (PJSC) United Arab Emirates 98.00% Finance Fully consolidated Mindscape FZ LLC United Arab Emirates % Software/Application provider Fully consolidated Mashreq Securities LLC United Arab Emirates 99.98% Brokerage Fully consolidated Injaz Services FZ LLC United Arab Emirates % Service provider Fully consolidated Mashreq Al Islami Finance Company (PJSC) United Arab Emirates 99.80% Islamic finance company Fully consolidated N.A. Mashreq Capital (DIFC) Limited United Arab Emirates % Brokerage and asset & fund management Fully consolidated Makaseb Funds Company BSC Kingdom of Bahrain 99.90% Fund manager Fully consolidated Makaseb Funds Company BSC II Kingdom of Bahrain 99.90% Fund manager Fully consolidated Invictus Limited Cayman Islands % Special Purpose vehicle Fully consolidated Investments: Oman Insurance Company (PSC) Group United Arab Emirates 63.94% Insurance & reinsurance Fully consolidated

5 II. Consolidated Capital Structure Consolidated Capital Structure as on 31st December 2017 Details Summary Terms & conditions of main features of all Capital Instruments Capital Base 20,992,601 1 Common Equity Tier 1 (CET1) Capital 19,809, Share Capital 1,775, Share premium account Eligible Reserves 1,213, Retained Earnings / (-) Loss 16,908, Eligible amount of non-controlling interest 4, Capital shortfall if any Other adjustments (e.g. cumulative effect of foreign currency translation) (59,163) CET1 capital Before the regulatory adjustments and threshold deduction 19,843, Less: Regulatory deductions 42, Less: Threshold deductions - CET1 capital after the regulatory adjustments and threshold deduction N.A. 19,800,859 CET1 capital after transitional arrangement for deductions (CET1) 19,809,325 2 Additional Tier 1 (AT1) Capital (4,233) 2.1 Eligible AT1 capital (After grandfathering) Other AT1 Capital e.g. (Share premium, minority interest) - AT1 capital - AT1 capital after transitional arrangements (AT1) (4,233) 3 Tier 2 (T2) Capital 1,187, Tier 2 Instruments e.g. subordinated loan (After grandfathering and/or amortization), CCF etc. (184,989) 3.2 Other Tier 2 capital (including General Provisions, etc.) 1,376,732 T2 Capital 1,191,742 T2 capital after transitional arrangements (T2) 1,187,509 5

6 III. Capital Adequacy A. Qualitative Disclosures Capital Adequacy and Capital Management The Internal Capital Adequacy Assessment Process (ICAAP) and the Stress Testing team within Risk Management Group is responsible for calculating the Group s capital requirement and managing the Group s ICAAP. This entails monitoring the Group s capital adequacy under a variety of stressed scenarios to assess and report the impact upon the Group s capital buffer (measured as available capital less risk capital demand) and recommending appropriate actions, as required. As part of the ICAAP process, the Bank identifies different risk types based on external and internal risks relevant to the Bank s business model and strategy. Basis the impact, frequency and likelihood of each of the risks identified, the following risk types have been identified as material capital-based Credit Risk, Operational Risk, Market Risk, including investment book risk, Interest rate risk in the Banking book (IRRBB), Business Risk and Funding Cost Risk. In line with the Central Bank instructions, the ICAAP economic capital requirements have been aligned with the requirements under Basel III. Hence, projections of capital have been segregated into CET1 (Common Equity Tier 1) Capital, Additional Tier 1 Capital and Tier 2 Capital. In assessing the compliance to regulatory requirement, the Bank has adopted a maximum of 2.5% additional requirement for the Countercyclical Buffer and 2.5% for Capital Conservative Buffer. Also, as part of the ICAAP process, Mashreq Bank has aligned its IRRBB methodology with the new IRRBB Basel Committee Standard published in April 2016 for Interest Rate Risk in Banking Book. Under this methodology, the Bank has assessed the impact of 6 scenarios on Economic Value of Equity (EVE) and two scenarios on Net Interest Income. In compliance with Central Bank recommendations, the Bank has also revised Loss Given Default (LGD) parameters based on recent validation of LGD models using external specialist consultants along with a downturn LGD model. Mashreq Bank is also using a framework developed by international experts to produce conditional Intra/Inter sectors credit correlations which are reflective of the prevailing macroeconomic environment. Hence, the Pillar II Credit risk capital charge in last ICAAP submission was reflective of the prevailing market conditions. Also, the Bank s Risk Appetite tolerance levels have been set, based on a combination of regulatory and internal limits and ratios governing key aspects of liquidity, credit and capital management. All material risks are assessed in a proactive way within the enterprise risk framework. The Risk Appetite Assessment integrates Basel III compliant stress scenarios, while comprehensive risk capital management ensures an appropriate risk capital allocation at portfolio and transaction level. Mashreq s approach to Pillar 1 Risk Type Credit Market Operational Current Approach Standardised Standardised Standardised Pillar 1 Scope Credit Risk Mashreq Bank uses Standardised Approach for Credit Risk, covering all portfolios including Financial Institutions, Treasury & Capital Market counterparty risk as well credit risk in the Trading Book. This approach allows the use of external ratings from designated credit-rating agencies, wherever available, in determining the appropriate risk weights. The risk weights are determined by the asset class and the external rating of the counterparty. Market Risk Mashreq Bank calculates its market risk capital requirements on the basis of the Standardised Approach for general and specific interest rate risk, foreign exchange risk and equity risk. Operational Risk An Operational Risk Framework (ORM) has been put in place, including a sophisticated IT system to capture and report the large amount of data required. The Risk and Control Self-Assessment (RCSA) process and related processes are embedded within the business units across the Bank. 6

7 Risk Management Objectives and Policies 1. Risk Management Overview a. Objectives The main goals of Mashreq Bank s Risk Management are to oversee the Bank s enterprise-wide risk policies and guidelines under the guidance of the Board of Directors and the Risk Committee, to establish credit limits and delegation authorities, to set and manage the risk surveillance function and decision processes and to implement Group-wide risk assessment methods for each of the Bank s units and operating entities. Mashreq Bank has implemented an integrated Risk Management platform enabling Risk to manage the Bank as a single portfolio. Sophisticated risk metrics such as probability of default and risk charge are calculated at transaction and portfolio level, enabling the Bank to manage its business based upon long-term risk adjusted return. Investments which are affected by market fluctuations in Forex, Interest Rates and Equity Prices are managed via a Value at Risk methodology at transaction and portfolio level. b. Risk Governance The Group has set up a strong risk management infrastructure supported by adoption of best practices in the field of risk management to manage and monitor material risks arising out of its day to day operations. Mashreq Bank s Risk Governance model is as follows: The Risk Committee The Assets & Liabilities Committee (ALCO) The Investment Committee Credit Risk Forum (CRF) Risk Committee The Risk Committee is responsible for developing Group-wide policy frameworks for all risk types as well as managing and monitoring material credit, market and operational risks for the different activities within Mashreq Bank. It also sets the Risk Appetite for the Bank and guides Risk management on Portfolio actions and strategy. ALCO Committee The ALCO Committee is responsible for monitoring the Bank s liquidity, asset liability mismatch, interest rate risk and related parameters. Investment Committee The Investment Committee monitors the credit and investment quality of the Bank s various investment portfolios and recommends portfolio adjustments as required. Credit Risk Forum A Credit Risk Forum, comprising of Chief Risk Officer (CRO), Head of Wholesale Risk, Credit Managers, Special Assets Managers and Head of Legal, review and discuss credits over a certain threshold as well as issues related to policy changes and risk architecture. These are subsequently approved via the Risk Committee. 7

8 c. Risk Management Framework The Board of Directors (BOD) has overall responsibility for the establishment and oversight of the Group s risk management framework and they are assisted by various committees including the Risk Committee, Assets and Liabilities Committee (ALCO) and Investment Committee etc., who work under the mandate of the BOD. These committees approve risk management policies of the Bank developed by the Risk Management Group. The Audit, Fraud and Compliance Group (AFCG) is independent of Risk Management. Audit provides independent assurance to stakeholders and senior management on compliance with all credit policies and procedures in the Bank and the effectiveness of credit management processes. This is undertaken by a periodic review of all risk-taking units, in addition to Risk Management. AFCG reports directly to the CEO. d. Risk Architecture & Analytics Mashreq has robust metrics in place for determining Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) variables. Risk Architecture & Analytics Unit within Risk Management Group is responsible for periodically validating various risk rating models including recalibration of PD, LGD and EAD parameters for ICAAP as well as Stress Testing, in line with Basel III guidelines. As part of its analysis of portfolio pressure points, the Group carries out periodic stress testing to its entire portfolio and takes appropriate action to (i) mitigate risks arising out of specific obligors or industries and/or due to global risk events and their implications on the Group s client base, and (ii) determine portfolio direction and resource allocation accordingly. Different credit underwriting procedures are followed for commercial and institutional lending, and retail lending, as described below. 2. Credit Risk Management Credit risk is actively managed and monitored in accordance with defined credit policies and procedures. The creditworthiness of each counter party is evaluated and appropriate credit limits are established through adoption of prudent credit structures relevant to the credit risk. Each corporate performing borrower is assigned an internal rating between MRS 1 to MRS 25 and non-performing borrowers are assigned ratings of substandard, doubtful and loss. All credit policies are reviewed and approved by the Group s Risk Committee. The policies are reviewed regularly to reflect changes in market conditions or regulatory requirements. Credit Risk Management includes the Special Assets Management Group which manages credits that are rated as watch list and worse. Special Assets Management Group was established to have a more focused view on all remedial accounts and, on a pro-active basis, identify and take timely actions on potential weak credits and also perform recovery function. Retail credit risk is managed on a product basis. Evaluation of a customer s creditworthiness is determined on the basis of statistically validated scoring models and policies and thereafter periodic and detailed credit reviews are performed to monitor and track portfolio performance. Different authority levels are specified for approving programs and exceptions thereto, and individual loans and credits under each program. Each program contains detailed credit criteria (such as customer demographics and income eligibility) and regulatory, compliance and documentation requirements, as well as other operating requirements. All Basel related metrics are generated by a stand-alone IT system independently controlled by the Risk Architecture & Analytics Unit. This Unit has been involved in a project to integrate its Risk Management IT requirements to provide a seamless data solution from transaction origination through to web-based portfolio reporting and to consolidate all data onto a single platform. Retail customer data used in Basel III analytics are generated from Bank s core Banking system and SAS. 8

9 3. Market & Related Risks Management Market Risk is the risk that fair value or cash flows of financial instruments and related income may be adversely affected by movement in market factors such as interest rates, credit spreads, foreign exchange rates, and equity and commodity prices. Market Risk is governed by a comprehensive control framework as defined by an approved Market Risk Policy. The Bank uses Value at Risk (VaR) methodology as its core analytical tool to assess risks across proprietary trading desks. VaR is an estimate of the potential losses arising in a portfolio over a specified time horizon due to adverse changes in underlying market factors. The Bank calculates its one-day VaR at a 99% confidence interval using Monte Carlo simulations approach across its trading portfolio. Value at Risk framework is supplemented by other limits and sensitivity triggers. Stress testing is conducted by generating extreme, but plausible scenarios, such as significant movements in interest rates, credit spreads, etc. and analysing their effect on the Group s trading positions. a. Liquidity Risk Liquidity Risk is the risk that the Group s entities in various locations and in various currencies will be unable to meet a financial commitment to a customer, creditor, or investor when due. The Assets and Liabilities Committee (ALCO) has a broad range of authority delegated by the Board of Directors to manage the Group s asset and liability structure and funding strategy. ALCO meets on a monthly basis or more often as circumstances dictate to review liquidity ratios, asset and liability structure, interest rate and foreign exchange exposures, internal and statutory ratio requirements, funding gaps and general domestic and international economic and financial market conditions. The funding center is responsible for managing liquidity and it follows strict guidelines for deployment of liquid assets within each liquidity bucket. A Liquidity Contingency Funding Plan has been formulated within the ICAAP framework. Major emphasis has been placed on addressing the liquidity requirements formulated within the Basel III framework - the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) As part of the ICAAP a Liquidity Risk Tolerance Statement has been developed, which, together with the Bank s Risk Appetite & Risk Capacity Statement, provide a sound foundation for Strategic Planning & Management Reporting. b. Interest Rate Risk (IRR) Pillar I covers IRR in the Trading Book and treats it as market risk confined primarily to the Treasury and Capital Market (TCM) trading book. Pillar II covers the broader issue of IRR in the Banking Book which is an enterprise risk. c. Equity Risk in the Banking Book Equity Risk in the Banking Book arises from the possibility that changes in equity & indices market prices can adversely affect the value of stocks and securities held by the Bank. d. Property & Investment Risk This risk applies to properties owned by the Bank and long-term investments in subsidiaries, associates and other investments. The risk attached to volatility in all other investments is captured under Market Risk. The Bank is not exposed to material property or investment risk since its material properties and investments are either not intended for disposal or held to maturity. e. Currency Risk Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The exchange rate of the AED against the USD has been pegged since November 1980 and the Group s exposure to currency risk is limited to that extent. The majority of the Bank s spot positions are USD denominated; any other material spot positions are denominated in GCC currencies which are also pegged to the US. The Bank performs short term partial hedges on its USD positions and carries some USD position risk given the fixed parity. 9

10 4. Management & Governance of Operational Risk Operational risk is risk of loss resulting from inadequate or failed internal processes, systems, and people or from external events. Mashreq s Operational Risk policy outlines the approach and governance structure for monitoring and managing of operational risk. Whilst the Bank cannot eliminate all operational risks, it has developed a comprehensive framework of identifying, assessing, controlling, mitigating, monitoring and reporting Operational risk Operational risk management follows three lines of defense model; Business units form the first line of defence. They own the risk and have direct responsibility managing operational risk in their respective areas. Group Operational risk team is the second line of defence which provides policy, tools and infrastructure to assist business units in managing their risks Internal Audit is the third line of defence which provides independent assurance on the effectiveness of the risk management process Regulatory capital requirement for operational risk capital is calculated annually. 5. Other risks a. Regulatory Risk Regulatory risk primarily emanates from changes in Banking laws and regulations which impact the Banking business in specific market, or on other hand where Bank ends up offering products or applying internal procedures / processes which are not in line with the respective regulatory requirements, thus resulting in significant regulatory action against the Bank, which may include withdrawal of license or restriction to conduct certain business. b. Legal Risk Legal risk is managed through strict corporate governance, reporting, legal and compliance guidelines, as well as operational risk identification and control. The Bank has in recent years completed an extensive review of loan and security documentation to mitigate legal risk and ensure standardization of documentation in accordance with best practice and legal policy guidelines. c. Reputation Risk Reputation risk is the risk of loss due to the deterioration of Mashreq Bank s reputation. This risk is managed through strong corporate governance and compliance rules and stringent internal controls within the Group. 10

11 B. Quantitative Disclosures Capital Adequacy as on 31st December 2017 Capital Requirements RWA Capital Charge Capital Ratio (%)* 1 Credit Risk - Standardized Approach 110,138,527 11,564, % 2 Market Risk - Standardized Approach 1,744, , % 3 Operational Risk 10,428,732 1,095, % a. Basic Indicator Approach b. Standardised Approach/ASA 10,428,732 1,095, % c. Advanced Measurement Approach Capital requirements 122,311,564 12,842, % Capital Ratio a. for Top consolidated Group 17.16% b. Tier 1 ratio only for top consolidated Group 16.19% c. CET1 ratio only for top consolidated Group 16.20% d. for each significant bank subsidiary - *In addition to minimum capital requirement of 10.5%, banks were also required to maintain a Capital Conservation buffer of 1.25% for the year 2017, and Mashreq is sufficiently in compliance with the capital requirements. IV. Qualtitative Disclosures Past Due Loans and Securities For recognition of past due loans and securities as non-performing, the Bank uses the same methodology employed by Basel guidelines: The loan, in full or in part, is past due by 90 days or more. Past due includes failure to service the interest. The Bank deems that there is reasonable doubt that the loan will be recovered in full, or in part, or that the client will be able to service the debt, without recourse to collateral. The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of specific provisions (including partial charge-offs), is risk weighted as follows: 150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan; 100% risk weight when specific provisions are 20% and above of the outstanding amount of the loan. Past Due, but not Impaired, Loans and Securities Past due but not impaired loans and other financial assets are those loans and other financial assets where contractual interest or principal payments are past due. Very often these overdues are only for a few days and do not reflect fundamental weaknesses. On these classes of assets the Group believes that specific impairment is not appropriate at the current condition on the basis of the level of security or collateral available and/or the stage of collection of amounts owed to the Group. Impairment / Provisions The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective impairment allowance established for the statistical possibility that some of these loan may get impaired in future. The Group also complies with International Accounting Standards 39 (IAS 39) in accordance with which it assesses the need for any impairment losses on its loans portfolio by calculating the net present value using the original effective interest rate of the expected future cash flows for each loan or its recoverability based on either collateral value or the market value of the asset where such price is available. 11

12 Specific Provisioning Impairment of financial assets Financial assets, other than those at Fair Value through Profit & Loss (FVTPL), are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and advances where the carrying amount is reduced through the use of an allowance account. Subsequent recoveries of amounts previously charged off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In respect of Fair Value through Other Comprehensive Income (FVTOCI) equity securities, any increase in fair value subsequent to an impairment loss is recognized directly in equity. Impairment of loans and advances Impairment of loans and advances are assessed as follows: (i) Individually assessed loans These represent mainly corporate loans which are assessed individually by the Bank s Credit Risk Unit in order to determine whether there exists any objective evidence that a loan is impaired. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan s effective interest rate or at the loan s observable market price, if available, or at the fair value of the collateral if the recovery is entirely collateral dependent. The impairment loss is calculated as the difference between the loan s carrying value and its present value calculated as above. For wholesale loans provisions are made as per the following thresholds: Sub-standard 25% Doubtful 50% Loss 100% (ii) Collectively assessed loans Impairment losses of collectively assessed loans include the allowances on: a) Performing commercial and other loans b) Retail loans with common features which are rated on a portfolio basis and here individual loan amounts are not significant. 12

13 (a) Performing commercial and other loans Where individually assessed loans are evaluated and no evidence of loss is present or has been identified, there may be losses based upon risk rating and expected migrations, product or industry characteristics. Impairment covers losses which may arise from individual performing loans that are impaired at the balance sheet date but were not specifically identified as such until sometime in the future. The estimated impairment is calculated by the Group s management for each identified portfolio as per the requirements of the Central Bank of the UAE and based on historical experience, credit rating and expected migrations in addition to the assessed inherent losses which are reflected by the economic and credit conditions. Retail loans are provided on Days Past Due (DPD) basis 90 DPD: 25% 120 DPD: 50% 180 DPD: 100% Write -off Policy Wholesale The Group writes off a loan or other financial asset (and any related allowances for impairment losses) the loans or other financial assets are uncollectible in whole or in part. This determination is reached after considering information such as the occurrence of significant changes in the borrower or issuer s financial position such that the borrower or issuer can no longer pay its obligation in full, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance Standardised loans, charge off decisions generally are based on a product specific past due status. Assets are written-off against provisions up to the extent of amount considered un-collectible. However, the Group may continue with its recovery effort including litigation, on written off accounts. Retail For all retail (including retail SME loans), write-offs are generally allowed only after three years from the date of which the asset has been classified as Loss or has been charged off. All retail loans are charged off when installments are past due over 181 days (credit cards at 180 DPD). For Mortgage loans, provisions are reported as below: Loans where the under construction property is defined as abandoned, the principal outstanding is fully provided. Loans where the under construction property is defined as High Risk, the principal outstanding is fully provided at 180 DPD. Further for such loans that are < 180 DPD and if the property is at under construction stage for > 5 years from date of booking, the property value is further stressed by 10% (in addition to 30% as required by Central Bank) & provisions are reported on the amount of excess of the loan amount over the stressed value of the property. For all completed properties that have completed 180 DPD and the title deed is not available, provisions are reported on the full principal outstanding. All other mortgage loans are provisioned as per central Bank regulations based on the negative equity component. Partial adoption of foundation IRB/advanced IRB: Approach Description of exposures Plans and timing of migration to implement fully higher approach Standardised Approach All Credit Exposures PD and LGD IRB Models are built and being used within the Bank. However, the Bank is planning to approach CBUAE for adoption of advanced IRB by mid Foundation IRB - - Advanced IRB All Credit Exposures PD and LGD IRB Models are built and being used within the Bank. However, the Bank is planning to approach CBUAE for adoption of advanced IRB by mid

14 V. Quantitative Disclosures A. Gross Credit Exposures by Currency Type Currency Foreign Currency Loans & Islamic Financing Gross Credit Exposures by Currency Type as on 31st December 2017 Investments Others Funded Commitments OTC Derivatives Other Off- Balance Sheet exposures* Non-Funded 21,878,708 11,662,265 33,614,270 67,155,243 1,106, ,399 33,143,910 34,981, ,136,464 AED 45,811, ,728 12,728,962 59,097,693 5,010, ,073 16,405,043 21,554,613 80,652,306 TOTAL 67,689,711 12,219,993 46,343, ,252,936 6,117, ,472 49,548,953 56,535, ,788,770 *Excludes unutilized uncommitted amount of AED 73.6 bn B. Gross Credit Exposures by Geography Gross Credit Exposures by Geography as on 31st December 2017 Geographic Distribution Loans & Islamic Financing Investments Others Funded Commitments OTC Derivatives Other Off- Balance Sheet exposures* Non- Funded United Arab Emirates 53,876,772 3,110,372 18,481,407 75,468,551 5,389, ,999 31,760,639 37,520, ,989,396 GCC excluding UAE 8,221,912 3,241,585 3,674,055 15,137, ,924 54,764 7,438,446 8,004,134 23,141,686 Arab League (excluding GCC) 2,340,019 2,021,257 2,096,135 6,457, , ,848,913 2,038,227 8,495,638 Asia 1,797, ,530 6,866,831 9,581,380 28,744 32,488 3,467,957 3,529,189 13,110,569 Africa 270,310 42,452 1,924,605 2,237, ,740 10,740 2,248,107 North America 13,548 1,800,154 4,614,004 6,427,706-90, ,874 6,519,580 South America - 30,463-30, ,116 Caribbean 166,165-1,074,776 1,240, ,240,941 Europe 126, ,435 4,072,217 4,569, ,468 2,207,384 2,526,852 7,096,671 Australia ,837 23, ,837 Others 877, ,745 3,515,365 5,077, ,813,320 2,813,320 7,891,229 67,689,711 12,219,993 46,343, ,252,936 6,117, ,472 49,548,953 56,535, ,788,770 *Excludes unutilized uncommitted amount of AED 73.6 bn 14

15 C. Gross Credit Exposures by Industry Segment Gross Credit Exposures by Industry Segment as on 31st December 2017 Industry Segment Loans & Islamic Financing Investments Others Funded Commitments OTC Derivatives Other Off- Balance Sheet exposures* Non- Funded Agriculture, Fishing & related activities Crude Oil, Gas, Mining & Quarrying 64, , ,790 14,872 79, ,204 89, , , , ,725 Manufacturing 3,731,217 41, ,885 4,059,015 22,110 3,015 2,370,432 2,395,557 6,454,572 Electricity& Water - 278,230 7, , ,825 91, ,958 Construction 8,987, , ,914 9,685,495 4,171,888-17,263,417 21,435,305 31,120,800 Trade 8,355,308 1,806 5,969,307 14,326,421 30, ,935 4,788,313 5,184,658 19,511,079 Transport, Storage & Communication 2,414, ,409 31,619 2,830, , , ,303 3,762,183 Financial Institutions 1,984,911 2,900,484 33,730,675 38,616, ,492 11,234,932 11,724,424 50,340,494 Services 12,020,812 47, ,773 12,498,330 1,511,056 6,566 8,357,815 9,875,437 22,373,767 Government 9,344,345 8,029,892 4,228,613 21,602, ,306,295 3,306,295 24,909,145 Retail/Consumer banking 19,236,525-29,358 19,265,883 29,338 1, , ,713 19,707,596 All Others 1,416, ,632 1,114,888 2,794, ,533 3, ,778 1,002,578 3,797,068 67,689,711 12,219,993 46,343, ,252,936 6,117, ,472 49,548,953 56,535, ,788,770 *Excludes unutilized uncommitted amount of AED 73.6 bn D. Gross Credit Exposures by Residual Contractual Maturity Gross Credit Exposures by Residual Contractual Maturity as on 31st December 2017 Residual Contractual Maturity Loans & Islamic Financing Investments Others Funded Commitments OTC Derivatives Other Off- Balance Sheet exposures* Non- Funded No specified maturity Less than 3 months 3 months to one year 3,182, ,563 1,174,157 4,768, , ,849 5,415,246 15,841,715 1,745,392 29,775,833 47,362,940 1,897, ,613 15,583,396 17,773,502 65,136,442 7,349,929 1,774,919 11,890,058 21,014, , ,649 6,275,932 6,976,227 27,991,133 One to five years 17,224,303 4,428, ,535 22,380, , ,094 11,724,140 12,799,402 35,179,843 Over five years 24,091,087 3,859,516 2,775,649 30,726,252 2,732, ,116 15,318,636 18,339,854 49,066,106 Grand 67,689,711 12,219,993 46,343, ,252,936 6,117, ,472 49,548,953 56,535, ,788,770 *Excludes unutilized uncommitted amount of AED 73.6 bn 15

16 E. Impaired Loans by Industry Segment Impaired Loans by Industry Segment as on 31st December 2017 Industry Segment Less than 90 days Overdue 90 days and above Provisions Specific General* Impaired Assets** Agriculture, Fishing & related activities Crude Oil, Gas, Mining & Quarrying Manufacturing 579, , ,420 6, ,075 Electricity& Water Construction 47,509 47,509 28,569 1,631 17,309 Trade 205, , ,882 2,428 83,286 N.A. Transport, Storage & Communication 58,620 58,620 12, ,828 Financial Institutions Services 120, ,038 52,021 1,542 66,475 Government 122, ,627 50,000-72,627 Retail/Consumer banking 1,092,662 1,092, ,850 6, ,195 All Others ,226,362 2,226,362 1,065,707 19,860 1,140,795 *General Provision is calculated as 1.5% of CRWA **Impaired Assets = Overdue - Provisions F. Impaired Loans by Geographic Distribution Impaired Loans by Geographic Distribution as on 31st December 2017 Geographic Distribution Less than 90 days Overdue Provisions 90 days and above Specific General* Impaired Assets** United Arab Emirates 1,268,818 1,268, ,278 12, ,154 GCC excluding UAE 740, , ,162 4, ,607 Arab League (excluding GCC) 91,816 91, , (15,857) Asia Africa North America N.A South America Caribbean 124, ,618-2, ,870 Europe Australia Others ,226,362 2,226,362 1,065,707 19,860 1,140,795 *General Provision is calculated as 1.5% of CRWA **Impaired Assets = Overdue - Provisions G. Reconciliation of Changes in Provision for Impaired Loans Please refer to Note 8 (d) and 9 (d) to the consolidated financial statements for the year ended 31st December 2017 under Loans and advances measured at amortised cost and Islamic financing and investment products measured at amortised cost for the movement of the allowance in impairment. 16

17 H. Gross Credit Exposure as per Standardised Approach Asset Classes Gross Credit Exposure as per Standardised Approach as on 31st December 2017 On Balance Sheet Gross Outstanding Credit Risk Mitigation (CRM) Net Exposure Off Balance Exposure Before after CCF & CRM Sheet* CRM CRM Risk Weighted Assets Claims on Sovereigns 22,850,707-22,850,707 22,850,707-22,850,707 2,574,628 Claims on Non-Commercial Public Sector Enterprises (PSEs) 207, , , ,359 - Claims on Multi Lateral Development Banks Claims on Banks 20,754,965 11,688,601 32,443,566 32,443, ,829 26,712,585 15,410,327 Claims on Securities Firms Claims on Corporates And Government Related Enterprises (GREs) Claims included in the Regulatory Retail Portfolio 45,429, ,524, ,953, ,664,113 7,801,729 65,612,796 57,685,471 10,378,925 6,059,519 16,438,444 16,438,444-10,378,925 8,487,706 Claims secured by Residential Property Claims secured by Commercial Real Estate 6,650,800 29,338 6,680,138 6,680,138-6,665,469 3,314,534 11,100,809 5,844,739 16,945,548 16,945, ,761 14,281,326 14,121,592 Past Due Loans 2,343,870 39,087 2,382,957 1,197,779 29,627 1,197,779 1,323,973 High Risk Categories 129, ,686 66,028-66,028 99,042 Other Assets 6,406,785-6,406,785 6,406,785-6,406,785 6,662,129 Claims on Securitised Assets Credit Derivatives (Banks Selling Protection) - 2,975,130 2,975,130 2,975,130-2,975, , ,252, ,161, ,414, ,875,597 8,617, ,354, ,138,527 *Includes unutilized uncommitted amount of AED 73.6 bn 17

18 VI. Gross Credit Exposure as Per Standardised Approach A. Qualitative Disclosures In line with Basel & CBUAE Guidelines, Mashreq uses ratings from three reputed rating agencies for finalizing the risk weights for its assets. As per the guidelines If there are three or more assessments with different risk weights, the assessments corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights will be applied. Hence Mashreq considers the second worst rating of the three ratings, as the final rating. B. Quantitative Disclosures Gross Credit Exposure as per Standardised Approach as on 31st December 2017 Gross Credit Exposure Net Exposure Risk Exposures Subject to Deduction Asset Classes Rated Unrated * after Weighted Post RWA Post CCF & CRM Assets Rated Unrated CRM CRM Claims on Sovereigns 22,758,882 91,825 22,850,707 22,850,707 2,574,628 Claims on Non-Commercial Public Sector Enterprises (PSEs) 207, , ,359 - Claims on Multi Lateral Development Banks Claims on Banks 24,028,856 8,414,710 32,443,566 26,712,585 15,410,327 Claims on Securities Firms Claims on Corporates And Government Related Enterprises (GREs) 6,133, ,820, ,953,860 65,612,796 57,685,471 Claims included in the Regulatory Retail Portfolio Claims secured by Residential Property Claims secured by Commercial Real Estate - 16,438,444 16,438,444 10,378,925 8,487,706-6,680,138 6,680,138 6,665,469 3,314, ,152 15,953,396 16,945,548 14,281,326 14,121,592 Past Due Loans - 2,382,957 2,382,957 1,197,779 1,323,973 High Risk Categories - 129, ,686 66,028 99,042 Other Assets 2,259,601 4,147,184 6,406,785 6,406,785 6,662,129 Claims on Securitised Assets N.A. Credit Derivatives (Banks Selling Protection) 2,975,130-2,975,130 2,975, ,125 59,355, ,058, ,414, ,354, ,138,527 *Includes unutilized uncommitted amount of AED 73.6 bn 18

19 VII. Credit Risk Mitigation: Disclosures for Standardised Approach A. Qualitative Disclosures Policies and processes for, and an indication of the extent to which the Bank makes use of, on - and off - balance sheet netting: Not Applicable Policies and processes for collateral valuation and management: Bank s Collateral Management Policy document includes minimum standards on security and credit risk mitigation across a range of products offered by the Bank, both in terms of risk management and computation of regulatory capital as per Basel guidelines. Mashreq regularly agree on collateral to be received from or to be provided to customers in contracts that are subject to credit risk. Collateral is security in the form of an asset or third-party obligation that serves to mitigate the inherent risk of credit loss in an exposure, by either substituting the borrower default risk or improving recoveries in the event of a default. While collateral can be an alternative source of repayment, it generally does not replace the necessity of high quality underwriting standards. We segregate collateral received into the following two types: Financial and non-financial collateral, which enables us to recover all or part of the outstanding exposure by liquidating the collateral asset provided, in cases where the borrower is unable or unwilling to fulfil its primary obligations. Cash collateral, securities (equity, bonds), collateral assignments of other claims or inventory, equipment (i.e., plant, machinery and aircraft) and real estate typically fall into this category. Guarantee collateral, which complements the borrower s ability to fulfil its obligation under the legal contract and as such is provided by third parties. Letters of credit, insurance contracts, export credit insurance, guarantees and risk participations typically fall into this category. Our processes seek to ensure that the collateral we accept for risk mitigation purposes is of high quality. This includes seeking to have in place legally effective and enforceable documentation for realizable and measureable collateral assets which are evaluated regularly by dedicated teams. The assessment of the suitability of collateral for a specific transaction is part of the credit decision and must be undertaken in a conservative way, including collateral haircuts that are applied. We have collateral type specific haircuts in place which are regularly reviewed and approved. As of now, for Capital Adequacy computation, Mashreq deploys simple approach to Credit Risk Mitigation (CRM) technique, on secured portfolios, collateralized with cash & cash equivalent underlying only. B. Quantitative Disclosures Credit Risk Mitigation: Disclosures for Standardised Approach as on 31st December 2017 Quantitative Disclosures Exposures Risk Weighted Assets Gross Exposure prior to Credit Risk Mitigation 254,875, ,367,236 Less: Exposure covered by on-balance sheet netting - - Less: Exposures covered by Eligible Financial Collateral * 8,061,893 8,061,893 Less: Exposures covered by Guarantees ** 556, ,816 Less: Exposures covered by Credit Derivatives - - Net Exposures after Credit Risk Mitigation 246,257, ,138,527 *This is effectively amount of Cash Collateral used as mitigant post currency haircut **This is effective utilization of the financial guarantee which is translated into reduction in Risk Weight through Simple CRM approach 19

20 VIII. Capital Requirement for Market Risk under Standardised Approach Capital Requirement for Market Risk under Standardised Approach as on 31st December 2017 Market Risk (AED 000) Amount Interest rate risk 66,792 Equity position risk 40,736 Foreign exchange risk 75,624 Commodity risk - Capital Requirement 183,152 IX. Equity Position in the Banking Book A. Qualitative Disclosures Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons: Not Applicable Discussion of important policies covering the valuation and accounting of equity holdings in the Banking book. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices: For details on the accounting policies and valuation methodology, please refer to Note 3 to the consolidated financial statements under Summary of Significant Accounting Policies. As at 31 st December 2017, the Bank s total equity investment portfolio in the Banking book amounted to AED MM (excluding OIC). 50.3% of which represents quoted investments. 20

21 B. Quantitative Disclosures Equity Position in the Banking Book as on 31st December Quantitative Details of Equity Position: Type Current Year Previous Year Publicly Traded Privately Held Publicly Traded Privately Held Equities 79,297 78,431 70,140 82,196 Collective investment schemes Any other investment ,297 78,431 70,140 82, Realised, Unrealised and Latent Revaluation Gains (Losses) during the Year: Particulars Amount Gains (Losses) - Realised gains (losses) from sales and liquidations - *Unrealised gains (losses) recognised in the balance sheet but not through profit and loss account 5,392 **Latent revaluation gains (losses) for investment recorded at cost but not recognised in balance sheet or profit and loss account - 5, Items in (2) above included in Tier 1/Tier 2 Capital: Particulars Amount Tier Capital - Amount included in Tier I capital - Amount included in Tier II capital 5,392 5, Capital Requirements by Equity Groupings: Particulars Amount Fair Value through Other Comprehensive Income (FVTOCI) 20,028 capital requirement 20,028 Note: Above amounts excludes Equity Investments of OIC X. Interest Rate Risk in the Banking Book (IRRBB) Interest rate risk arises from the possibility that changes in interest rates will affect future profitability, cash flows or the fair values of financial instruments. The Bank manages interest rate risk by matching the repricing of assets and liabilities through risk management strategies and monitors the positions on a daily basis to ensure they are maintained within established limits. Adherence to these limits is monitored by ALCO. Interest rate risk is also assessed by measuring the impact of defined movements in interest yield curves on the Bank s net interest income. The following impact on the net interest income and regulatory capital for the year of an immediate and permanent movement in interest yield curves as at 31 st December Shift in Yield Curves Net Interest Income Regulatory Capital +200 basis point 17.70% -3.66% -200 basis point % 3.95% The above interest rate sensitivities are illustrative only and adopt simplified scenarios. The sensitivities do not incorporate actions that could be taken by management to mitigate the effect of interest rate movements. 21

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