Arab Banking B S C : Basel III Pillar 3 Disclosure (30 Jun 2025)

About this update from Arab Banking Corporation B S C

Basel III - Pillar III disclosures 30 June 2025 Basel III - Risk and Pillar III disclosures 30 June 2025 Executive summary 3 The Basel III framework 3 Pillar I 4 Pillar II 4 Pillar III 5 Group structure and overall risk 6 Group structure 6 Risk and capital management 6 Risk in Pillar I 8 Risks in Pillar II 10 Regulatory capital requirements and the capital base 15 Capital requirement for credit risk 16 Capital requirement for market risk 17 Capital requirement for operational risk 17 Capital base 18 Leverage ratio 19 Credit risk - Pillar III disclosures 20 Definition of exposure classes 20 External credit rating agencies 20 Credit risk presentation under Basel III 22 Credit exposure 23 Impaired assets and provisions for impairment 31 Off balance sheet exposure and securitisations 34 Credit related contingent items 34 Derivatives 34 Counterparty Credit Risk 35 Capital management 36 Related party transactions 40 Repurchase and resale agreements 40 Material transactions 40 APPENDIX I - REGULATORY CAPITAL DISCLOSURES 41 PD 1: Post 1 January 2019 disclosure template 41 PD 2: Reconciliation of Regulatory Capital 46 PD 3: Main features of regulatory capital instruments 49 APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued) 50 Basel III - Risk and Pillar III disclosures 30 June 2025 ‌Executive summary This document comprises of the Group's (as defined below) capital and risk management disclosures as at 30 June 2025 and for the six-month period then ended. The disclosures in this section are in addition to the disclosures set out in the interim condensed consolidated financial statements for the six-month period ended 30 June 2025 presented in accordance with IAS 34 Interim financial reporting (IAS 34) issued by International Accounting Standards Board (IASB). 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.)) [hereinafter referred to as "the Bank" or "Bank ABC" and together with its subsidiaries "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 2025 amounted to US$ 31,126 million (YE 2024: US$ 28,556 million), comprising 87% (YE 2024: 87%) credit risk, 6% (YE 2024: 6%) market risk and 7% (YE 2024: 7%) operational risk. The total capital adequacy ratio was 15.9% (YE 2024: 16.6%), compared to the minimum regulatory requirement of 12.5%. ‌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. Basel III - Risk and Pillar III disclosures 30 June 2025 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. ‌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 internal risk appetite above the CBB thresholds. The Group has defined its internal risk thresholds above the CBB thresholds and has identified viable management mitigation actions that can restore capital above these thresholds in case of a breach. 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: 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. ‌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 under business as usual and stressed conditions. The ICAAP compares this against available capital resources to assess adequacy of capital. The ICAAP and the internal processes that support it should be proportionate to the nature, scale, and complexity of the activities of a bank. Basel III - Risk and Pillar III disclosures 30 June 2025 The Basel III framework (continued) b Pillar II (continued) The Basel Pillar II guidelines require each bank to be individually assessed to determine an individual minimum capital adequacy ratio. 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. Pillar II guidelines also encourage 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. 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. ‌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, risk exposures and capital-related information, 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. Basel III - Risk and Pillar III disclosures 30 June 2025 ‌Group structure and overall risk ‌Group structure The parent bank, Arab Banking Corporation (B.S.C.), was incorporated in 1980 in the Kingdom of Bahrain under an Amiri Decree and operates under a conventional wholesale banking license issued by the CBB. The Bank's consolidated financial statements are prepared on a full consolidation basis in accordance with IFRS Accounting Standards. The CBB's capital adequacy framework allows subsidiaries in other regulatory jurisdictions reporting under Basel III framework to be aggregated based on that jurisdiction's framework, rather than based on the CBB's guidelines subject to the CBB approval. Under this aggregation methodology, risk-weighted assets of subsidiaries are aggregated with those of the rest of the Group based on the guidelines of their respective regulator to determine the Group's total capital adequacy ratio. During 2024, the Bank obtained an approval to apply aggregation approach from the CBB and accordingly one of its subsidiary, Banco ABC Brasil SA, which is regulated by the Central Bank of Brazil (BACEN), has calculated its risk weighted assets in accordance with BACEN's guidelines and aggregated with the rest of the Group's risk weighted assets as at 30 June 2025. Rest of the subsidiaries in the table below have been consolidated based on full consolidation approach under CBB guidelines. The principal subsidiaries as at 30 June 2025, all of which have 31 December as their year-end, are as follows: ABC International Bank plc ABC SA Country of incorporation United Kingdom France Shareholding % of Arab Banking Corporation (B.S.C.) 100.0 100.0 ABC Islamic Bank (E.C.) Bahrain 100.0 Arab Banking Corporation (ABC) - Jordan Jordan 87.0 Banco ABC Brasil S.A. Brazil 63.6 ABC Algeria Algeria 88.9 Arab Banking Corporation - Egypt [S.A.E.] Egypt 99.6 ABC Tunisie Tunisia 100.0 Arab Financial Services Company B.S.C. (c) Bahrain 98.0 ‌Risk and capital management Governance The Governance framework within the Bank is driven by the Board of Directors ("Board") with clearly defined roles and responsibilities for Board level committees, Management committees and Executive Management within the Bank. Board Level The Board has five committees, amongst which the Board Risk Committee (BRC) is tasked with oversight of all key risk matters in the Bank. The Board, under advice from the BRC, sets the Basel III - Risk and Pillar III disclosures 30 June 2025 2. Group structure and overall risk (continued) b. Risk and Capital management (continued) Board Level (continued) Group's Risk Strategy/Appetite and Policy Guidelines. Executive management is responsible for their implementation. Within the broader governance infrastructure, the Board Committees carry the main responsibility for best practice management and risk oversight. At this level, the BRC oversees the definition of risk/reward guidelines, risk appetite, risk tolerance standards, and risk policies and standards. Management Committees The current committee structure provides for the Group Risk Committee (GRC) and Group Asset Liability Committee (GALCO) reporting to the BRC and the Group Compliance Oversight Committee (GCOC) to the Board Compliance Committee. The primary objective of the GRC is to define, develop and monitor the Group's overarching risk management framework considering the Group's strategy and business plans. The GALCO is responsible for overseeing the implementation of the Group's Asset / Liability Management Framework which includes capital, liquidity & funding, and market risk in line with the Risk Appetite Framework. The GCOC is responsible for strengthening the focus on compliance within the Group's risk management framework. The Group's subsidiaries are responsible for managing their risks through local equivalents of the head office committees described above with appropriate Group oversight. Three lines of defense model The Bank employs the three lines of defense model to protect value of the Group. Some of the key responsibilities split by each line are presented below: 1 st Line: (Ownership & Management) Day to day identification, measurement, management, and control of relevant risk related to their area of responsibility; Designing and implementing controls to respond to any changes in the risk profile; Identification, evaluation and reporting their key risk exposure; Root cause analysis of risk events and action planning to prevent recurrence; Tracking of action plans and performance assurance/testing to ensure that completed actions are proved effective; Maintaining appropriate and adequate documentation to evidence compliance with their risk accountabilities and responsibilities . 2 nd Line: (Provide oversight on the management of risks) Development and maintenance of the Risk Policy and Framework; Oversight of 1 st line's compliance with the Risk Policy & Framework Review and challenge of actions being undertaken by the 1 st Line in respect of relevant risks; Reporting to relevant committees on significant risks and control weaknesses and progress undertaken by the 1st Line in mitigating risks outside of the risk appetite. Basel III - Risk and Pillar III disclosures 30 June 2025 2. Group structure and overall risk (continued) b. Risk and Capital management (continued) Three lines model (continued) 3 rd Line: (Assurance) Independent assurance of the effectiveness of Controls; Risk based programme of audit activity; and Reporting to the Audit Committee . The Credit & Risk Group (CRG) operates within the Bank's second line of defense. Its function is independent from business and is tasked with managing, mitigating and overseeing credit, market, operational and other material risks arising from the Group's activities. CRG independently reviews and monitors the 1st line's compliance with the Bank's risk management framework and provides recommendations to relevant committees . All areas of risk are overseen by the Group Chief Credit & Risk Officer, who reports to the Group CEO and the Chair of the BRC. The Group Balance Sheet Management (GBSM) function is a second line function responsible for capital planning and management, coordinating Internal Capital Adequacy and Assessment Process (ICAAP), efficient capital allocation through administering risk adjusted return on capital (RAROC), liquidity planning and analysis, structural funding assessment, developing Internal Liquidity Adequacy Assessment Process (ILAAP), dynamic Balance Sheet modeling to assess potential emerging impact on capital and liquidity metrics and facilitating Balance Sheet optimisation. Group Audit functions as a third line of defense and has a reporting line, independent of management, directly to the Board Audit Committee. The primary objective of Group Audit is to provide an independent opinion and risk-based review on the design and operating effectiveness of the control environment across the group on all aspects of risk management, including Bank's policies and procedures. ‌Risk in Pillar I Pillar I addresses three specific types of risks, namely credit, market and operational risk. The Pillar I process describes the basis for the calculation of regulatory capital. CREDIT RISK Credit risk is the risk that a customer or counterparty to a financial asset, fails to meet its contractual obligations, and causes the Bank to incur a financial loss. Credit Risk Management ensures that the 1 st line complies with the Bank's policies, standards and procedures designed to manage risk. In particular it ensures that the obligor risk rating is accurate and reviewed on a timely basis. The Group's portfolio and credit exposures are managed in accordance with the Group Credit Policy, which applies Group-wide qualitative and quantitative guidelines, with particular emphasis on avoiding undue concentrations or aggregations of risk. The Group's banking subsidiaries are governed by policies and standards aligned with the Group Credit Policy and its associated standards but may be adapted to suit local regulatory and legal requirements as well as individual units' product and sectoral needs. Basel III - Risk and Pillar III disclosures 30 June 2025 2. Group structure and overall risk (continued) c. Risk in Pillar I (continued) Credit Risk (continued) The Group's retail lending is managed under a framework that considers the entire credit cycle. Retail obligor facilities are offered under product programs. The product programs are governed by a set of policies and standards describing the product program approval, monitoring, reporting and recovery processes. Additionally, CRG ensures that where obligors default, losses are kept to a minimum through timely remedial actions. Refer note 26.4 to the 31 December 2024 audited consolidated financial statements for definition and policies for management of credit risk. MARKET RISK Refer note 26.6 to the 31 December 2024 audited consolidated financial statements for definition and policies for management of Market risk. The Group is exposed to the following types of market risk: Currency rate risk The Group's trading book has exposures to foreign exchange risk arising from cash and derivatives trading. Additionally, structural balance sheet positions relating to net investment in foreign subsidiaries expose the Group to foreign exchange risk. These positions are reviewed regularly and an appropriate strategy for managing structural foreign exchange risk is established by the GALCO. Group Treasury is responsible for executing the agreed strategy. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Group is exposed to interest rate risk because of client trades & positional trading strategies which is managed by setting appropriate market risk limits. Equity price risk Equity position risk arises from the possibility that changes in the prices of equities, or equity indices, will affect the future profitability, or the fair value of financial instruments. The Group is exposed to equity risk in its trading position and investment portfolio, primarily in its core international and GCC markets. Equity positions in the banking book Quoted Equities 11 Unquoted Equities 15 26 Realised gain during the year - Unrealised gain at 30 June 2025 3 There were no sales with respect to equity positions in the banking book for the six-month period ended 30 June 2025. Basel III - Risk and Pillar III disclosures 30 June 2025 2. Group structure and overall risk (continued) c. Risk in Pillar I (continued) OPERATIONAL RISK Refer note 26.10 to the 31 December 2024 audited consolidated financial statements for definition and policies for management of Operational Risk. ‌Risks in Pillar II The following section captures some of the risks considered for the Pillar II assessment. The Pillar 2A measurement framework for risks considered is detailed in "CAPITAL MANAGEMENT" section. LIQUIDITY RISK Liquidity risk is the risk that maturing and cashable assets may not cover cash flow obligations (liabilities) as they fall due, without incurring unacceptable costs or losses. The Group's Liquidity Management Framework (GLMF) ensures that the Group proactively manages liquidity and structural funding risks to support prudent business growth while having the ability to withstand a range of liquidity stress events. The Group undertakes a detailed assessment to identify all material sources of liquidity and funding risks and have assessed appropriate levels of required Liquid Assets Buffers and contingency funding actions. The Group's liquidity risk appetite sets appropriate liquidity metrics to monitor all material sources of liquidity risks, and the liquidity risk appetite framework extends to all entities within the Group. The Group maintains high quality liquid assets (HQLA) at prudent levels to ensure that cash can quickly be made available to honour all its obligations, even under adverse conditions. The Group is generally in a position of surplus liquidity, its principal sources of liquidity being its high-quality liquid assets and marketable securities. A maturity gap report, which reviews mismatches, is used to monitor medium and long-term liquidity and funding positions. All offshore subsidiaries of the Group manage principally on a self-funded basis to meet their liquidity and funding requirements. The GLMF ensures that the key risk indicators are monitored proactively, including daily monitoring of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) amongst a range of other liquidity risk indicators, and these are regularly reported to the senior management. The Group conducts daily liquidity stress testing to ensure that the Liquidity Survival Horizon (LSH) is always maintained above the established risk appetite threshold.

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