Banking Digest QUARTERLY Q NEW BASEL III REQUIREMENTS SUMMARY INDICATORS PERFORMANCE HIGHLIGHTS

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1 QUARTERLY Banking Digest Q3-15 BERMUDA MONETARY AUTHORITY NEW BASEL III REQUIREMENTS Basel III adoption became effective beginning 1st January 15 with a phase-in period for capital requirements commencing from 16 to 19 (when full implementation will take place). The sector s capital adequacy will be reported on a parallel basis under both Basel II and III until Q4-15. Basel III capital adequacy and liquidity reporting will be permanent as of 1st January 16 after which Basel II reporting will be discontinued. Basel III risk-based capital requirements are reported, including new capital ratios and a fully implemented leverage ratio. Basel III - Liquidity Coverage Ratio (LCR) reporting became effective 1st January 15 for all banks. PERFORMANCE HIGHLIGHTS The sector s capital position remained unchanged in Q3-15, allowing banks to continue exceeding the regulatory capital requirements under Basel II and Basel III. The Risk Asset Ratio (RAR) under Basel II stayed at.8% during the quarter while the Basel III RAR increased to 17.3%. The primary capital adequacy measure of Tier 1 to Risk-Weighted Assets (RWAs) and Basel III Common Equity Tier (CET 1) remained stable at 19.2% and 15.6% respectively. The Basel III Leverage Ratio increased to 7.7% remaining above the 5.% regulatory requirement. The regulatory leverage ratio increased marginally to 8.8%. Banking sector assets contracted during the quarter falling by 4.9%. Total assets reported by banks declined to $23.4 billion with most of the decrease seen in interbank deposits (down 16.5% or $972. million). Loans were also impacted, falling by 1.7% to $8.5 billion while investment holdings fell by 1.% to $9.2 billion. Sector profits rose in the quarter aided by higher banking and non-banking income, and lower reported non-interest costs. Overall net income level improved in Q3-15, with earnings from other banking income and non-banking income increasing by 16.4% and 7.7%, respectively. Operating and non-operating expense declined by 2.6%, even with banks writing off additional loan losses from their banking book during the period. Asset quality indicators were unchanged during the quarter; though provisioning levels continued to rise. Loan impairment measures of Non-Performing Loans (NPLs) to total loans and annualised net charge-offs to total loans were comparable to the prior quarter. However, banks increased their loan loss provisions by 3.% to $191.9 million. SUMMARY INDICATORS Table I below is a summary of selected indicators, including capital, earnings and asset quality. Table I: Selected Indicators (Ratios in %) Capital Position Risk Asset Ratio (RAR) Basel III Risk Asset Ratio* Tier 1 to Risk-Weighted Assets (RWAs) * n/a Basel III CET I Ratio* * n/a Assets to regulatory capital (multiple) Regulatory leverage ratio (equity to total assets) Basel III Leverage Ratio* Liquidity Cash/cash equivalents to total deposits liabilities * n/a Loan-to-deposit ratio Funding gap** Profitability Interest margin to interest income Return on assets Return on equity Loan Book Provisions to Non- Performing Loans (NPLs) NPLs to total loans NPLs to capital Other Change in BD$ money supply Change in assets Change in RWAs Change in customer deposits * Restated ** Basel III requirements as per the Final Rules, subject to the phase-in period with full implementation commencing in 19. *** Loans less deposits divided by total assets 1

2 BALANCE SHEET Aggregate Balance Sheet Summary of Balance Sheet Ratios Table II below provides a summary of key balance sheet trends in the sector. Table II: Aggregate Balance Sheet Change (BD$ blns) QoQ YoY Assets Cash Deposits Loans & advances Investments Other assets Total assets Liabilities Savings deposits Demand deposits Time deposits Total deposits Other liabilities Total liabilities Equity and subordinated debt Total liabilities and equity Totals may not add due to rounding Total assets within the banking sector declined by 4.9% (or $1.2 billion) during the period, but remained higher than levels reported year-on-year (up 5.9% or $1.3 billion). The decline in total assets was led by interbank deposits (down 16.5% or $972. million) driven by the banks need to fund client transactions. All other core earning assets experienced more modest decreases. During the quarter, loans and advances fell by 1.7% (or $145.4 million), with most of the movement occurring in mortgage loans (down 1.5% or $83.6 million) halting four quarters of stable growth. Investments declined by 1.% (or $91.6 million) during the quarter. Deposit liabilities declined during the period by 6.3% (or $1.4 billion) but are higher than amounts reported a year earlier (up 9.7% or $1.8 billion). The quarterly decrease in deposit liabilities was largely driven by demand deposits (down 8.6% or $1.1 billion), followed by time deposits (down 4.8% or $176.6 million) and savings deposits (down 2.6% or $164.1 million). The decline in demand deposits was attributed to the sizeable outflow of FX$-denominated demand deposits (down 9.4% or $1.1 billion) correlating with the activity noted previously. Table III provides a summary of balance sheet ratios measuring asset quality and capital. Table III: Summary of Balance Sheet Ratio ( unless indicated otherwise) Asset allocation Investments Loans Deposits Deposits allocation Savings Demand Time Capital position Risk Asset Ratio (RAR) Basel III Risk Asset Ratio* * n/a Equity to total assets Basel III Leverage Ratio Assets to regulatory capital (multiple) Loan book * n/a NPLs to total loans Provisions to NPLs Provisions to total loans Totals may not add due to rounding. * Restated ** Basel III requirements as per the Final Rules, subject to the phase-in period with full implementation commencing in 19. The capital position within the sector was unchanged over the period, keeping banks above the regulatory capital requirements under Basel II and Basel III. Both net capital and risk-weighted assets fell at the same rate of 1.5%, while the regulatory capital measure of Tier 1 capital to RWAs was stable at 19.2% (Q2-15: 19.3%). Under the newly implemented Basel III capital requirements, the RAR stood at 17.3%, while the Common Equity Tier 1 (CET 1) remained at 15.6% exceeding the phased-in regulatory minimum capital requirements of 8.% and 4.5%, respectively. The coverage ratio of provisions to NPLs rose for the second straight quarter from 19.7% to.7%, as provision levels increased by 3.% (or $5.6 million) relative to the decline in NPLs (down 3.4% or $28.2 million). Banks continue to maintain prudent levels of loss reserves based on the underlying quality of their loan portfolio. 2

3 Capital Adequacy Chart I below shows the movement in the Risk Asset Ratio (RAR) and the leverage ratio over the last two years. Chart I: Risk Asset Ratio and Leverage Ratio Chart I: Risk Asset Ratio and Leverage Risk Asset Ra;o Dec- 13 Mar- 14 Chart II below reflects the movement in total assets and the change in Risk-Weighted Assets (RWAs) over the last two years. Chart II: Total Assets and Change in RWAs Chart II: Total Assets and Change in RWAs Total Assets Blns Dec- 13 Jun- 14 Risk asset ra;o - scaled to le? Mar- 14 Jun- 14 Total Assets - scaled to le= The capital adequacy levels remained even for the three months ending 3th September, with the regulatory Basel II RAR standing at.8%. Balance sheet leverage experienced very little movement in Q3-15, as the regulatory leverage ratio (equity to total assets) rose marginally to 8.8%. The Basel III leverage ratio rose to 7.7% and continued to be above the newly adopted regulatory minimum requirement of 5.%. Leverage ra;o - scaled to right Change in Risk- weighted Assets - scaled to right Leverage Ra;o Change in RWA (in %) Asset Quality Loan Book Table IV is a summary of ratios measuring the composition and quality of the loan book for the last five quarters. Table IV: Quality of the Loan Book Loans and advances quarter-over-quarter growth rate Residential mortgages to total loans Loan impairments NPLs to total loans NPLs to capital Net charge-offs to loans (annualised) Loan provisioning Provisions to NPLs Provisions to total loans Asset quality indicators, measured by the ratio of net charge-offs to total loans, of.6% and the ratio of NPLs to total loans of 9.4% remained fairly even during the period. However, loan loss provisions set aside by banks to cover expected credit losses rose by 3.% to $191.9 million during the quarter. Consequently, provisions as a percentage of NPLs rose by one percentage point to.7% in Q3-15. The percentage of NPLs to total loans remained fairly stable at 9.4% quarter-on-quarter. Provisions to total loans increased marginally to 2.3% as provision levels rose by 3.% relative to the decline in total loans. Sectoral Distribution of Loans Charts III and IV reflect the sectoral distribution of loans during the quarter and the variation of lending to the different sectors over the last five quarters. Chart III: Sectoral Distribution of Loans and Advances Other Personal Loans, 11.3% Others, 13.3% Other Financial Institutions, 7.9% Other Business and Sevices, 9.6% Real Estate-related, 57.9% 3

4 Chart IV: Sectoral Distribution of Loans and Advances Chart IV: Sectoral Distribution of Loans and Advances Sep-14 The banking sector continued to experience low demand in the real-estate market with loans to this sector remaining at its lowest level for a second consecutive quarter. Notable movements in other sectors have been observed as loans to Other Financial Institutions increased from 5.9% to 7.9%, while lending to Other Business and Services fell from 11.8% to 9.6% over the same period. Investment Book Dec-14 Chart V below shows the structure of the aggregate investment book during the quarter. Chart V: Sectoral Structure of the Investment Book* Mar Jun Sep-15 Real Estate-related Other Financial Institutions Other Business and Services Other ("other loans" and "other personal loans") Chart V: Sectoral Structure of the Investment Book Liquidity and Liquidity Coverage Ratio (LCR) Table V shows the liquidity condition of the banking sector over the last five quarters. Table V: Liquidity Indicators Cash and deposits to total assets Cash and cash equivalents to total deposit liabilities Loan-to-deposit ratio Loans-to-total assets Funding gap* * The difference between total loans and total deposits divided by total assets. All regulated banks have met the applicable minimum liquidity requirement. The liquidity funding structure showed that the ratio of loans to total deposits rose to 41.2% (Q2-15: 39.3%). Overall lending fell at a slower rate (down 1.7%) compared to the decrease in customer deposits (down 6.3%), resulting in a narrowing of the sector s funding gap As of the end of September 15, all banks met the phased-in 6% LCR requirement. * Includes Public Sector Entities (PSEs), securitised (non-equity tranche) investments, securitised (equity tranche) investments, investments in the capital of other banks, and investments in subsidiaries and associated companies. * Includes: public sector entities (PSEs), securitised (non-equity tranches) investments, securitised (equity tranche) investments, investments in the capital of other banks, and investments in subsidiaries and associated companies. Sovereigns Investments held with Banks Other Investments* Chart VI below shows the change in total loans, customer deposits, and the consolidated loan-to-deposit ratio (for both BD$ and FX) over the last five quarters. The rebalancing of the investment book toward other types of securities has shown steady growth as banks look to maximise their returns and optimise the balance between their invested assets. Other Investments increased for the third consecutive quarter, rising to 35.8%. This is mainly driven by the growth in securitised (non-equity) investments (up 3.%). However, over the same period, sovereign investments have steadily declined, falling to 47.5% of total investments. Chart VI: Total Loans and Deposits Chart VI: Total Loans and Deposits 25 Amouints in blns (BD$) Total Loans Customer Deposits Loan- to- deposit ra@o - scaled to right

5 PROFIT AND LOSS Table VI below is a summary of profitability ratios for the sector for the last five quarters. Table VI: Summary of Profitability Ratios Net interest margin to total income Annualised net interest margin to (average) earning assets** Annualised interest income to (average) earning assets** Banking income to total income Non-interest income to total income Non-interest expenses to total income Personnel expenses to non-interest expenses Return on Assets (RoA)** Return on Equity (RoE)*** * * Restated ** Earning assets are averaged over the last four quarters. *** Shareholders equity is averaged over the last four quarters. Margin Analysis Sector earnings rebounded in Q3-15 with banks reporting higher income from non-core sources, and lower operating and non-operating expenses. Quarterly earnings from other banking sources (up 16.4%) and non-banking sources (up 7.7%) improved banking income. At the same time, operating and non-operating expenses declined by 2.6%. The combination of reduced non-interest expense and higher earnings helped boost overall profits. The banking sector s cost efficiency improved during the quarter as non-interest expenses as a percentage of total income declined from 76.% to 7.%. Lower operating and non-operating expenses (down 2.6%) proportional to the change in total income (up 5.4%) contributed to improvement in the efficiency ratio. Chart VIII reflects the distribution of income sources as of end-september 15. Chart VIII: Distribution of Income Sources Other Banking Income, 22.1% Non-banking Income, 15.6% Chart VII below shows the change in income and expense elements of the aggregate profit and loss statement of the sector over the last five quarters. Other Non-banking Income, 1.9% Net Interest Income, 6.4% Chart VII Income and Expenses Chart VII: Income and Expenses Income and Expenses ( of average assets) 1. Chart IX shows the trend in RoE and RoA over the last five quarters. Chart IX: Annualised Return on Assets and Return on Equity Chart IX: Annualised Return on Assets and Return on Equity in % Sep-14 Net Interest Income Dec-14 Mar-15 Jun-15 Non-banking income and other income Sep Sep-14 Dec-14 Mar-15 Jun-15 Sep Other banking income (net) Net charge offs/credit to bad debt (provisions) Operating expenses Net income(loss) ROE - scaled to right ROA - scaled to left 5

6 The quarterly improvement in the banking sector has resulted in higher bank profits and better returns with annualised RoE increasing to 11.2% (Q2-15: 8.4%) and RoA increasing to 1.% (Q2-15:.8%). Chart X shows the actual net charge-offs and the annualised change relative to total loans over the last five quarters. Chart X: Net Charge-off Amount and Proportion of Annualised Charge-offs to Loans Chart X: Net Charge-off Amount and Proportion of Annalised Charge-offs to Loans Charge-offs for Loan Losses and Loan Impairments Banks charged-off $11.9 million (Q2-15: $1.3 million) of loans that were deemed to be uncollectible. The quarterly amount written off is 37.8% lower than the amount reported by banks in the same period last year. Annualised net charge-offs to total loans also increased marginally to.6% during the period. Foreign Currency (FX) Balance Sheet Table VII below shows the aggregate FX balance sheet of the sector over the last five quarters. Table VII: Foreign Currency Balance Sheet Change (In BD$ blns) QoQ YoY Loans and advances Total assets Deposit liabilities Sep-14 Dec-14 Net Charge-off (quarter) - scaled to right Mar-15 Jun-15 Net Charge-off to Loans (annualised) - scaled to left Sep Amounts in Mlns (BD$) The FX$-denominated total assets dipped in Q3-15, falling by 5.4% to $19. billion but remaining 11.3% higher than amounts reported year-on-year. FX$-denominated deposit liabilities fell by 7.4% as the decrease from FX$-denominated demand deposits (down 9.4% or $1.1 billion) largely influenced the negative growth in overall foreign currency deposit liabilities. Table VIII below shows the foreign currency position for the sector for the last five quarters. Table VIII: Foreign Currency Positions FX-denominated assets to total assets FX-denominated loans to total loans FX-denominated deposits to total deposits The sector s foreign currency position declined over the period, driven by the outflow of FX$-denominated deposit liabilities. As a result, the percentage of FX-denominated deposits to total deposits fell from 84.9% to 84.% in Q3-15. Table IX is a summary of ratios measuring the liquidity of the FX$denominated bank balance sheet for the last five quarters. Table IX: Liquidity Indicators (FX Positions) Changes in FX assets Changes in FX loans and advances Changes in FX customer deposits* * Percentage change based on absolute numbers. Cash and deposits to total assets Cash and cash equivalents to total deposit liabilities Loan-to-deposit ratio Loans to total assets Funding gap* * The difference between total loans and total deposits divided by total assets 6

7 Chart XI shows the movement in FX$-denominated loans and deposits, and the ratio of FX$-denominated loans to customer deposits, for the last five quarters. Chart XI: FX Loans and Customer Deposit Chart XI: FX Loans and Customer Deposits Amounts in blns (BD$) The sector s foreign currency liquidity funding ratio of FX$-denominated loans to customer deposits rose sharply during the quarter from 24.8% to 26.5%. Bermuda Dollar Balance Sheet Table X below shows the aggregate Bermuda Dollar balance sheet of the sector over the last five quarters. FX Loans FX Deposits FX Loan- to- Deposit Ra=o (scaled to right) in % Table XI is a summary of ratios measuring the liquidity of the BD$-denominated balance sheet over the last five quarters. Table XI: Liquidity Indicators (BD$ Positions) Cash and deposits to total assets Cash and cash equivalents to total deposit liabilities Loan-to-deposit ratio Loans to total assets Funding gap to total BD$ Assets Chart XII shows the movement in BD$-denominated loans and deposits, along with the ratio of BD$-denominated loans to deposits, for the last five quarters. Chart XII: Bermuda Dollar Loans and Customer Deposits Chart XII: Bermuda Dollar Loans and Customer Deposits The overall BD$-denominated balance sheet amounts were relatively unchanged over the period. Amounts in blns (BD$) Table X: Bermuda Dollar Balance Sheet 11 Change (In BD$ blns) QoQ YoY Loans and advances Total assets Deposit liabilities Note: The BD$-denominated balance sheet of the sector aggregates data submitted on legal entity reporting basis, which is different from the presentation of the banking statistics in the Regulatory Update, which shows the consolidated sector balance sheet. BD Total Loans BD Customer Deposits Loan- to- deposit ra@o (scaled to right) The BD$ liquidity measure continues to indicate there is less reliance on foreign currency deposits to finance Bermuda dollar loans. The loan-to-deposit ratio fell below 1.% for the first time in over six years, dropping to 118.4%. Domestic lending remains low as evident by the decline in BD$ loans (down 2.4%), whereas BD$ deposits were relatively unchanged during the quarter. 7

8 Monetary Aggregates Table XII shows the trend in the domestic money supply over the last five quarters. Table XII: Bermuda Money Supply (Unconsolidated) (In BD$ mln) Notes and coins in circulation Deposit liabilities 3,333 3,34 3,329 3,259 3,294 Banks and deposit companies less: cash at banks and deposit companies Bermuda Dollar money supply % Growth on previous period 3,457 3,462 3,447 3,386 3, ,419 3,426 3,414 3,342 3, % Growth y-o-y The table includes the supply of Bermuda dollars only. The overall BD$ money supply fell slightly during the quarter. Notes and coins in circulation grew for the third consecutive quarter, rising by 1.8% (or $2.2 million) in Q3-15 and were up by $1.7% (or $12. million) year-on-year. Seasonal events during this period helped to support the quarterly growth seen in notes and coins. 8

9 SELECTED INTERNATIONAL DEVELOPMENTS This section lists important publications issued during the last quarter by international organisations and national supervisory authorities. This section does not reflect the views of the Bermuda Monetary Authority (the Authority). Bank for International Settlements (BIS) In September, the Banking Committee on Banking Supervision (BCBS) published its quarterly review for September 15. The report covers areas including international banking and financial market developments, along with special features such as enhanced data information about banks domestic business, with more details about the counterparties with which banks interact. In August, the BCBS released its Basel III monitoring updates for the collection of June 15 data. The update includes: instructions for Basel III monitoring; frequently asked questions on Basel III monitoring; IRRBB qualitative questionnaire; frequently asked questions (FAQs); impact study on the proposed frameworks for market risk and credit valuation adjustment (CVA) risk; and closed form questions for quantitative impact study (QIS) on the proposed market risk framework. In July, the BCBS published updated guidelines for identifying and dealing with weak banks further to its 2 supervisory guidance. Weak banks pose a continuing challenge for bank supervisors and resolution authorities in all countries, regardless of the political structure, financial system, and level of economic and technical development. The BCBS published a progress report on the implementation of principles for effective supervisory colleges. The report sets out detailed findings, based on the monitoring initiatives undertaken by the Basel Committee, and highlights challenges faced by supervisors in running effective supervisory colleges, as well as the practical approaches taken to address them. The BCBS issued its corporate governance principles for banks which supersede the guidance published by the Committee in 1. The revised guidance emphasises the critical importance of effective corporate governance for the safe and sound functioning of banks. The International Monetary Fund (IMF) In July, the IMF released its working paper on the use and effectiveness of Loan-To-Value (LTV) and Debt-Service-To-Income (DSTI) limits. The paper looks closely at the use and effectiveness of these tools in six economies Brazil, Hong Kong Special Administrative Region, Korea, Malaysia, Poland and Romania. European Banking Authority (EBA) In July, the EBA released its consultation on draft Guidelines regarding cooperation agreements between Deposit Guarantee Schemes (DGSs). These Guidelines are part of the EBA s work to promote a consistent and coherent approach to cooperation agreements between DGSs across the European Union (EU) %28CP+on+draft+GL+on+DGS+cooperation+agreemen ts%29.pdf The EBA published its report on macroprudential policy measures. The report gathers and analyses the EBA notifications regarding the application by EU member states of a number of macroprudential tools in the first five quarters following the implementation of the Capital Requirements Directive IV - Directive EU 13/36 (CRR) and Capital Requirements Regulation - Regulation EU 575/13 (CRD IV). n+the+range+of+practices+regarding+macroprudential+policy+meas ures.pdf U.S. Federal Reserve (Fed) In August, the Fed adopted the final rule on the implementation of Risk-Based Capital (RBC) surcharges for global, systemicallyimportant bank holding companies. The final rule establishes RBC surcharges for the largest, most interconnected US-based bank holding companies pursuant to section 165 of the Dodd-Frank Act. In July, the Fed and the FDIC provided guidance to 119 firms filing updated resolution plans in December 15. The guidance will provide each firm with guidance, clarification, and direction for their upcoming resolution plans based on the relative size and scope of US operations for each firm. htm Prudential Regulation Authority (PRA) In July, the PRA released a consultation paper on implementing a leverage ratio framework in the UK. The paper outlines the proposed approach to the implementation of a domestic leverage ratio framework and its key components, such as: scope of application, minimum leverage ratio requirement, leverage ratio buffers, definitions and reporting, and disclosure requirements. cp/15/cp2415.pdf 9

10 GLOSSARY Adjusted return on assets is the return on assets computed using net income excluding extraordinary items. Adjusted return on equity is the return on equity computed using net income excluding extraordinary items. Additional Tier 1 Capital (AT1) is represented by allowable components of Tier One Capital other than Common Equity. Annualised is expressing (a quantity such as an interest rate, profit, expenditure etc.) as if it applied or were measured over one year. Common Equity Tier 1 Capital (CET 1) is the primary and predominant form of regulatory capital, and will be used as the primary capital adequacy measure for all Bermuda banks once Basel III becomes fully implemented. CET 1 Ratio measures the bank s primary core equity capital compared with its total Risk-Weighted Assets. The measurement is used to determine the financial strength of a bank. Coverage Ratio (Provisions to NPLs) is the ratio that shows the extent to which non-performing loans are already covered by provisions. Earning assets includes deposits with other financial institutions, loans, advances and leases, and investments. Equity refers to the shareholder equity. Fees and commissions consist of net income from banking fees, charges and commissions, investment management fees, trust and company administration fees, trustee and custodian fees, and fund management fees. Foreign currency is any currency other than the Bermuda dollar. Funding gap is defined by the difference between total loans and total deposits divided by total assets. General provisions are provisions not attributed to specific assets but to the amount of losses that experience suggests may be in a portfolio of loans. Interest expenses to customer deposits is computed by dividing the annualised interest paid and payable by the average total customer deposit liabilities. Interest income includes interest received and receivable, and consists of interest from deposits with financial institutions, government securities, loans and other interest earning assets. Interest margin is calculated as interest received or receivable less interest paid or payable. Leverage is calculated as shareholder equity divided by total assets. Leverage ratio (Basel III) is the ratio of Tier 1 Capital (including AT1) to total exposure (on-balance sheet exposures, derivative exposures, Securities Financing Transaction (SFT) exposures, and Off-Balance Sheet (OBS) items) as calculated per the Authority s Final Basel Rule. Liquidity Coverage Ratio (LCR) is a calculated measure that ensures banks hold an adequate stock of unencumbered Highly-Quality Liquid Assets (HQLA) that can be converted easily and quickly into cash to meet their liquidity needs over a 3 calendar day liquidity stress scenario period. Mortgages refer to financing for land and buildings for purchasing real estate estate/residential property. Mortgages on residential property to total loans refer to mortgages secured by residential properties consisting of homes, apartments, townhouses, and condominiums as a percentage of total loans. Net charge-offs for loan losses and impaired loans is the sum of general and specific profit and loss charge for doubtful debts and transfers made to suspended interest account (net of recoveries). Net income is derived by netting off provision for taxation from gross profit, and takes into account extraordinary items. Non-interest income includes all other income received by the bank. Included are fees and commissions from provision of services, gains and losses on financial instruments, and other income. Non-interest expenses cover all expenses other than interest expenses, including fees and commissions. Non-performing loans (NPLs) consist of those loans classified as substandard, doubtful and loss as per the BMA guidance on the completion of the prudential information return for banks. A loan is classified as substandard when the delay in repayment is between 31 and 9 days, as doubtful when the delay is between 91 and 18 days, and as loss when the delay exceeds 18 days. Interest income to earning assets is computed by dividing the annualised interest received and receivable by the average total earning assets. 1

11 Other income consists of changes in the book value of investments, other non-banking services income, profit or loss on fixed assets and any other income that cannot be classified into any other specific income line item. Other operating expenses consist of services by external service providers and other operating expenses. Provisions include both specific and general provisions. Risk-weighted assets (RWAs) refer to a concept developed by the Basel Committee on Banking Supervision (BCBS) for the capital adequacy ratio. Assets are weighted by factors representing their riskiness and potential for default. Specific provisions are the outstanding amount of provisions made against the value of individual loans, collectively assessed groups of loans and loans to other deposit takers. Real estate is used to refer to lending to real estate operators, and owners and lessors of real property, as well as buyers, sellers, developers, agents and brokers. Regulatory capital as provided by the banks in their quarterly prudential information returns is the sum of Tier 1 and Tier 2 capital net of applicable total capital deductions. Regulatory capital to total assets is derived by dividing the regulatory capital by the total assets as provided in the prudential information returns. Return on assets is calculated by dividing the net income by the average value of total assets over the same period. The average assets are obtained by averaging the total assets at the beginning and at the end of the quarter. Tier 1 capital consists of ordinary shares, perpetual non-cumulative preference shares, reserves verified by the auditors, current year s losses and minority interest (in Tier 1) adjusted for goodwill and other intangibles, and securitisation but before capital deductions. Total income is the sum of net interest income and non-interest income. Total loans include loans, advances, bills and finance leases. Total risk-weighted assets (TRWA) is the sum of total credit riskweighted assets, total operational risk-adjusted RWA and the total market risk-adjusted RWA. Note: Please refer to the Guidance on Completion of the Prudential Information Return for Banks for a detailed description of the individual components of specific line items. A copy of the Guidance is available for download on the Authority s website: Return on equity is calculated by dividing net income by the average value of shareholder equity over the same period. The average shareholder equity is obtained by averaging the shareholder equity at the beginning and at the end of the quarter. Risk Asset Ratio is calculated as total (net) regulatory capital divided by total risk-weighted assets. BERMUDA MONETARY AUTHORITY BMA House 43 Victoria Street Hamilton HM 12 Bermuda P.O. Box HM 2447 Hamilton HM JX Bermuda tel: (441) fax: (441) enquiries@bma.bm website: 11