Arab Banking B S C : Basel III Pillar 3 Disclosure (30 June 2023)

Basel III - Pillar III disclosures

30 June 2023

Bank ABC
Basel III - Risk and Pillar III disclosures
30 June 2023
Executive summary	3
1.	The Basel III framework	3
	a.	Pillar I	4
	b.	Pillar II	4
	c.	Pillar III	5
2.	Group structure and overall risk	6
	a.	Group structure	6
	b.	Risk and capital management	7
	c.	Risk in Pillar I	8
	d.	Risk in Pillar II	10
3.	Regulatory capital requirements and the capital base	16
	a.	Capital requirement for credit risk	17
	b.	Capital requirement for market risk	18
	c.	Capital requirement for operational risk	18
	d.	Capital base	19
4.	Credit risk - Pillar III disclosures	21
	a.	Definition of exposure classes	21
	b.	External credit rating agencies	21
	c.	Credit risk presentation under Basel III	23
	d.	Credit exposure	24
	e.	Impaired assets and provisions for impairment	32
5.	Off balance sheet exposure and securitisations	35
	a.	Credit related contingent items	35
	b.	Derivatives	35
	c.	Counterparty Credit Risk	36
6.	Capital management	37
7.	Related party transactions	41
8.	Repurchase and resale agreements	41
9.	Material transactions	41
APPENDIX I - REGULATORY CAPITAL DISCLOSURES	42
	PD 1: Post 1 January 2019 disclosure template	42
	PD 2: Reconciliation of Regulatory Capital	47
	PD 3: Main features of regulatory capital instruments	50

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Bank ABC

Basel III - Risk and Pillar III disclosures 30 June 2023

Executive summary

This document comprises of the Group's (as defined below) capital and risk management disclosures as at 30 June 2023.

The disclosures in this section are in addition to the disclosures set out in the interim condensed consolidated financial statements for the period ended 30 June 2023 presented in accordance with IAS 34.

The principal purpose of these disclosures is to meet the disclosure requirements of the Central Bank of Bahrain (CBB) through their directives on public disclosures under the Basel III framework. This document describes the Group's risk management and capital adequacy policies and practices - including detailed information on the capital adequacy process and incorporates all the elements of the disclosures required under Pillar III. It is organised as follows:

• An overview of the approach taken by Bank ABC (Arab Banking Corporation (B.S.C.)) ["the Bank"] and its subsidiaries [together "the Group"] to Pillar I, including the profile of the risk- weighted assets (RWAs) according to the standard portfolio, as defined by the CBB.
• An overview of risk management practices and framework at the Bank with specific emphasis on credit, market, and operational risk. Also covered are the related monitoring processes and credit mitigation initiatives.
• Other disclosures required under the Public Disclosure Module of the CBB Rulebook Volume 1.

The CBB supervises the Bank on a consolidated basis. Individual banking subsidiaries are supervised by the respective local regulator. The Group's regulatory capital disclosures have been prepared based on the Basel III framework and Capital Adequacy Module of the CBB Rulebook Volume 1.

For regulatory reporting purposes under Pillar I, the Group has adopted the standardised approach for credit risk, market risk and operational risk.

The Group's total risk-weighted assets as at 30 June 2023 amounted to US$ 28,937 million (2022: US$ 27,546 million), comprising 91% (2022: 91%) credit risk, 3% (2022: 3%) market risk and 6% (2022: 6%) operational risk. The total capital adequacy ratio was 16.3% (2022: 16.8%), compared to the minimum regulatory requirement of 12.5%.

1. The Basel III framework

The CBB implemented the Basel III framework from 1 January 2015.

The Basel Accord is built on three pillars:

• Pillar I defines the regulatory minimum capital requirements by providing rules and regulations for measurement of credit risk, market risk and operational risk. The requirement of capital must be covered by a bank's eligible capital funds.

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Bank ABC

Basel III - Risk and Pillar III disclosures 30 June 2023

1. The Basel III framework (continued)

• Pillar II addresses a bank's internal processes for assessing overall capital adequacy in relation to material sources of risks, namely the Internal Capital Adequacy Assessment Process (ICAAP). Pillar II also introduces the Supervisory Review and Evaluation Process (SREP), which assesses the internal capital adequacy.
• Pillar III complements Pillar I and Pillar II by focusing on enhanced transparency in information disclosure, covering risk and capital management, including capital adequacy.

a. Pillar I

Banks incorporated in the Kingdom of Bahrain are required to maintain a minimum capital adequacy ratio (CAR) of 12.5% and a Tier 1 ratio of 10.5%. Tier 1 capital comprises of share capital, treasury shares, reserves, retained earnings, non-controlling interests, profit for the period and cumulative changes in fair value.

In case the CAR of the Group falls below 12.5%, additional prudential reporting requirements apply and a formal action plan setting out the measures to be taken to restore the ratio above the target should be submitted to the CBB. The Group has defined its risk appetite above the CBB thresholds. The Group will recourse to its recovery planning measures prior to the breach of its Board approved risk thresholds.

The CBB allows the following approaches to calculate the RWAs (and hence the CAR).

Credit risk	Standardised approach.
Market risk	Standardised, Internal models approach.
Operational risk	Standardised, Basic indicator approach.

The Group applies the following approaches to calculate its RWAs:

1. • Credit risk - Standardised approach: the RWAs are determined by multiplying the credit exposure by a risk weight factor dependent on the type of counterparty and the counterparty's external rating, where available.
   • Market risk - Standardised approach.
   • Operational risk - Standardised approach: regulatory capital is calculated by applying a range of beta coefficients from 12% - 18% on the average gross income for the preceding three years - applied on the relevant eight Basel defined business lines.
2. Pillar II

Pillar II comprises of two processes, namely:

• an Internal Capital Adequacy Assessment Process (ICAAP); and
• a Supervisory Review and Evaluation Process (SREP).

The ICAAP incorporates a review and evaluation of all material risks to which the Bank is exposed to and an assessment of capital required relative to those risks. The ICAAP compares this against available capital resources to assess adequacy of capital to support the business plan and withstand extreme but plausible stress events. The ICAAP and the internal processes that support it should be proportionate to the nature, scale, and complexity of the activities of a bank.

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Bank ABC

Basel III - Risk and Pillar III disclosures 30 June 2023

1. The Basel III framework (continued)

b Pillar II (continued)

The CBB's Pillar II guidelines require each bank to be individually assessed by the CBB in order to determine an individual minimum capital adequacy ratio. Pending finalisation of the assessment process, all the banks incorporated in the Kingdom of Bahrain are required to maintain a 12.5% minimum capital adequacy ratio and a Tier 1 ratio of 10.5% for the consolidated group. This already includes a 2.5% capital conservation buffer as part of Pillar I capital requirements.

The SREP is designed to review the arrangements, strategies, processes and mechanisms implemented by a bank to comply with the requirements laid down by the CBB and evaluates the risks to which the bank is/could be exposed. It also assesses risks that the bank poses to the financial system.

The SREP also encourages institutions to develop and apply enhanced risk management techniques for the measurement and monitoring of risks, in addition to the credit, market and operational risks addressed in the core Pillar I framework. Other risk types, which are not covered by the minimum capital requirements in Pillar I, include concentration risk, liquidity risk, interest rate risk in the banking book, climate change risk, pension obligation risk, strategic risk and reputational risk. These are covered either by capital, or risk mitigation processes under Pillar II.

The Group's ICAAP meets the CBB's ICAAP regulatory requirements and has also been benchmarked to international practice, and adapted as appropriate, relevant and proportionate to Bank ABC's business model. The Pillar II Capital assessment is based on Group Capital Management Framework (GCMF) and the CBB's ICAAP and IST (Integrated Stress Testing) regulatory requirements.

c. Pillar III

Pillar III prescribes how, when and at what level information should be disclosed about an institution's risk management and capital adequacy assessment practices.

Pillar III complements the minimum risk-based capital requirements and other quantitative requirements (Pillar I) and the supervisory review process (Pillar II) and aims to promote market discipline by providing meaningful regulatory information to investors and other interested parties on a consistent basis. The disclosures comprise detailed qualitative and quantitative information.

The disclosures are designed to enable stakeholders and market participants to assess an institution's risk appetite and risk exposures, and to encourage all banks, via market pressures, to move towards more advanced forms of risk management.

The Group's disclosures meet the minimum regulatory requirements and provide disclosure of the risks to which it is exposed, both on and off-balance sheet.

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