OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASELIII RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020IN TERMS OF CENTRAL BANK OF OMAN CIRCULAR BM 1027DATED 4 DECEMBER 2007 & BM 1114 DATED 17 NOVEMBER 2013
OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020CONTENTSA. SCOPE OF APPLICATION . 2B. CAPITAL STRUCTURE . 3C. CAPITAL ADEQUACY . 4D. CREDIT RISK EXPOSURE AND ASSESSMENT 6i. General disclosure . 6ii. Gross credit risk exposures. 9iii. Geographic distribution of exposures .9iv. Industry or counterparty type distribution of exposures . . 10v. Residual contractual maturity of credit exposure . 11vi. Loans and provisions by major industry or counterparty type . 13vii. Geographic distribution of impaired loans . 15viii. Movement in gross loans. 16E. DISCLOSURE FOR PORTFOLIO SUBJECT TO STANDARDISED APPROACH . 16F. CREDIT RISK MITIGATION UNDER STANDARDISED APPROACH . 18G. MARKET RISK IN TRADING BOOK . 19H. INTEREST RATE RISK IN BANKING BOOK . 20I. LIQUIDITY RISK . 22J. OPERATIONAL RISK . 30K. COMPOSITION OF CAPITAL DISCLOSURE. 31
2OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020A. SCOPE OF APPLICATIONOman Arab Bank SAOG (the Bank or the Parent Company) was incorporated in the Sultanate of Oman on1 October 1984 as a closed joint stock company. On 6 July 2020, Oman Arab Bank SAOC became a listedBank and the name was changed from Oman Arab Bank SAOC to Oman Arab Bank SAOG. The Bank has onesubsidiary, Alizz Islamic Bank and accordingly, the information in the document pertains to the Bank and theParent Company. The Bank was a subsidiary of Oman International Development and Investment CompanySAOG up to 29 June 2020 and from 30 June 2020, the Bank is a subsidiary of Arab Bank PLC, an entity basedin Jordan.On 6 July 2020, the Bank transferred its Islamic Window (Al Yusr) to AIB. Hence, the Bank is now having AIBas a separate Islamic Banking subsidiary. Al Yusr Islamic Window has been transferred based on net assetsvalue as of 30 June 2020 as common control transaction.This is first set of consolidated Basel disclosures being prepared by the Bank after acquisition of the AIB anddisposal of Al Yusr to the AIB. Consolidated Basel disclosures comprises of the results of the Bank for the yearand AIB (subsidiary) from date of acquisition. Parent company disclosure comprises of the results of the Bankfor the year and Al Yusr until 30 June 2020.The Bank's objectives of capital management are:-to comply with the capital requirements set by the regulator i.e. the Central Bank of Oman(CBO) ;to safeguard the Bank's ability to continue as a going concern while providing adequate returns to theshareholders; andto maintain a strong capital base to support the development of its business.The Bank complies with CBO's requirements for the capital adequacy as specified in the Circular provided forthe implementation of the Basel II accord.Basel II Accord consists of three mutually reinforcing Pillars - Minimum Capital Requirements (First Pillar),Supervisory Review Process (Second Pillar) and Market Discipline (Third Pillar). Under the First Pillar, the newframework offers three distinct options, for computing capital requirements for credit and operational risks,respectively. The approaches for credit risk (Standardized, Internal Ratings-Based –Foundation and Advanced)and operational risk (Basic Indicator, Standardized and Advanced measurement) are based on increasing risksensitivity and allow banks to choose any of the approaches that are most appropriate to their risk managementpractices.
3OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020B. CAPITAL STRUCTUREThe Bank's Tier 1 and Tier 2 capital are as follows2020RO ,136)52,60672,553409,5482020ParentCompanyRO 88472,553(107,144)313,81825,20918,0532525Tier 2 Capital25,23418,078Total Capital434,782331,896ConsolidatedPaid up share capitalShare premiumLegal reserveGeneral reserveSpecial reserveSubordinated Debt reserveOther disclosed reservesOther intangiblesRetained earningsPerpetual BondsLess allocated to SubsidiaryTier 1 CapitalEligible expected credit loss on loans & advances andfinancing to customersInvestment revaluation reserve (45% only )Tier 1 CapitalThe Bank's authorised share capital is RO 200,000,000 and issued share capital comprises1,669,410,000 fully paid shares of RO 0.100 each. In accordance with Article 106 of the OmaniCommercial Companies Law of 1974, the Bank is required to transfer 10% of its profit after tax forthe year to the legal reserve until the accumulated balance of the reserve equals at least one third ofthe Bank’s paid up share capital. General reserves have been created out of the Bank's retainedearnings to meet any unforeseen contingency.The subordinated debt reserve has been created by a transfer of 20% of the subordinated bonds out ofthe profit after tax for the year. The Central Bank of Oman requires that a reserve be set aside annuallyfor the subordinated bonds which are due to mature within five years. The reserve is available fortransfer back to retained earnings upon maturity of the subordinated bonds.Additional Tier 1 Capitala. On 29 December 2016, the Bank issued unsecured perpetual Tier 1 bonds of RO 30 million(30,000,000 units of RO 1 each through private placement). The bonds are listed in the MuscatSecurities Market and are transferable through trading. The bonds carry a fixed coupon rate of7.75% per annum payable semi-annually in arrears and treated as deduction from equity. Interestis non-cumulative and payable at Bank’s discretion. The bonds form part of Tier 1 Capital of theBank and comply with Basel-3 and Central Bank of Oman regulation.b. Additionally, on 17 October 2018, the Bank issued another series of unsecured perpetual Tier 1bonds of RO 42.5 million (42,553,000 units of RO 1 each through private placement). The bondscarry a fixed coupon rate of 7.5% per annum payable semi-annually in arrears and treated as
4OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020deduction from equity. Interest is non-cumulative and payable at Bank’s discretion. The bondsare in pari-passu with earlier issue.B. CAPITAL STRUCTURE (continued)The Tier 1 bonds do not have a fixed or final maturity date and are redeemable by the Bank at its solediscretion. The Bond under note (a) has First Call Date on 29 January 2022 and bond under note (b)has First Call date on 17 October 2023 or on any interest payment date thereafter subject to the priorconsent of the regulatory authority.Tier 2 CapitalTier 2 Capital consists eligible Expected Credit Loss (ECL) on loans & advances and financing tocustomers as required by the CBO and cumulative fair value gains on eligible investments securitiesas allowed under the guidelines for Basel II by CBO.The eligible ECL is made for the loan impairment on the performing portion of the loans and advancesagainst the losses incurred but not identified.C. CAPITAL ADEQUACYQualitative disclosuresBasel II provides a range of options for determining the regulatory capital requirements for credit and operationalrisks. It allows the banks and the supervisors to select approaches that seem most appropriate for the level ofsophistication of the banks’ activities, financial market infrastructure and risk management practices.The Bank has chosen the following approaches for determining the regulatory capital with the approval ofCentral Bank of Oman:i.ii.Standardized Approach for the credit risk with a simplified approach for the risk weighting ofcollaterals under the credit risk mitigation andBasic Indicator approach for the operational risk.The Bank's Board of Directors reviews the capital requirements based on the strategic plan of the Bank. This isreviewed periodically based on the current market and economic conditions. While formulating the Bank’sstrategic plans, the Bank's management takes into account forward-looking factors such as changes in theeconomic conditions, market and liquidity conditions. The Bank’s current and future capital requirements arecalculated in relation to its strategic business objectives. The strategic plan delineates the Bank’s short-term andlong-term capital needs, capital expenditures required for the foreseeable future, target capital levels, and capitalsources. The Bank prepares its capital planning and operational budgeting on an annual basis.Management considers that the Bank has adequate systems for monitoring and reporting risk exposures. Thecapital needs are assessed based on changes in the Bank’s risk profile. The Board of Directors and the seniormanagement receive regular reports or updates on the Bank’s risk profile and capital needs through the Assetsand Liabilities Committee (ALCO), Management Credit Committee (MCC) and directly from the RiskManagement Department. This information is used to:a.b.c.d.e.evaluate the level and trend of material risks and their effect on capital requirements;evaluate the sensitivity and reasonableness of the main assumptions used in the capital measurementsystem;determine that the Bank holds sufficient capital against various risks;determine that the Bank meets its internal capital adequacy goals; andassess its future capital requirements based on the Bank’s reported risk profile and in turn make necessaryadjustments to the Bank’s strategic plan.The Management is in the process of setting the policies and procedures to progressively move to the advancedapproaches set out in Basel II for the capital measurement.
5OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020C. CAPITAL ADEQUACY (continued)Quantitative disclosureTable-1 : Position of Risk weighted Assets and detail of Capital Adequacy is presented as under2020 ConsolidatedSl.No123DetailsGross BalanceNet Balance( Book Value)RO'0003,412,206444,3135,731( Book 1Risk ,2002,820,1374On -Balance sheet ItemOff -Balance sheet ItemDerivativesAssets for Operations riskAssets in Trading bookTotal5678Tier 1 CapitalTier 2 CapitalTier 3 CapitalTotal Regulatory Capital409,54825,234434,78126.96.36.199Capital requirement for credit riskCapital requirement for market riskCapital requirement for operational riskTotal required capital344,5042,41226,753373,6691011Tier 1 RatioTotal Capital Ratio14.52%15.42%2020 Parent CompanySl.No123DetailsGross BalanceNet Balance( Book Value)RO'0002,521,047402,6925,731( Book 8Risk ,0752,175,3654On -Balance sheet ItemOff -Balance sheet ItemDerivativesAssets for Operations riskAssets in Trading bookTotal5678Tier 1 CapitalTier 2 CapitalTier 3 CapitalTotal Regulatory Capital313,81818,078331,89188.8.131.52Capital requirement for credit riskCapital requirement for market riskCapital requirement for operational riskTotal required capital244,6341,60220,246266,48210Tier 1 Ratio14.43%11Total Capital Ratio15.26%
6OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENTi. General disclosureQualitative disclosuresCredit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause theother party to incur a financial loss. Credit exposures arise principally from lending activities, investmentactivities and other assets in the Bank’s asset portfolio. There is also credit risk in off-balance sheet financialinstruments, such as loan commitments and financial guarantees.Credit risk is one of the most significant risks for the Bank. The Bank has a robust credit risk framework andpolicies for each of the businesses it operates. The policies are aligned with the risk appetite and credit limitsare set up based on the counter party risk rating, industry sector, and as per the guidelines of Central Bank ofOman. Credit risk is actively managed and rigorously monitored in accordance with well-defined credit policiesand procedures. Prior to the approval of a credit proposal, a detailed credit risk assessment is carried out whichincludes an analysis of the obligor financial condition, market position, business environment and quality ofmanagement. The credit risk management and control are centralised in the credit risk management and creditreview teams which is divided into corporate, financial institutions and retail groups. The credit risk in corporateand financial institutions portfolio is primarily managed by the Credit Risk Department while the Retail BankingDepartment manages the credit risk with predefined programs. The Risk Management Department reviews thecredit risk independently and directly reports to the Compliance and Risk Management Committee of the Boardof Directors. The risk management framework also includes policies with respect to problem recognition, earlywarning lists, watch lists, classification parameters and risk rating adjustments.When determining whether the risk of default on a financial instrument has increased significantly since initialrecognition, the bank considers reasonable and supportable information that is relevant and available withoutundue cost or effort. This includes both quantitative and qualitative information and analysis, based on theBank’s historical experience and taking into consideration both internal and external indicators, expert creditassessment, guidelines issued by CBO and inclusion of forward-looking information. Besides assessing thequalitative characteristics, the Bank's assessment of probability of default of individual counterparties is mainlylinked with the number of days the borrower was in default as defined by the CBO circular number BM 977dated 25 September 2004. Past dues and impaired exposures are defined in accordance with the relevant CBOregulations. Bank has adopted the International Financial Reporting Standards (IFRS) 9 guidelines forestimation of Expected Credit Loss as per International Accounting Standards Board (IASB) and CBOguidelines on International Financial Reporting Standards (IFRS) 9 on Financial Instruments, effective from 1stJanuary 2018.In addition, the Bank assesses the adequacy of the security and financial performance of the borrowers in furtherdowngrading the classification.The Bank considers a financial asset to be in default when the borrower is unlikely to pay its credit obligationsto the bank in full, without recourse by the Bank to actions such as liquidating collateral; or the borrower is pastdue more than 90 days on any credit obligation to the Bank. In assessing whether a borrower is in default, theBank considers both qualitative factors such as breaches of covenants and quantitative factors such as overduestatus and non-payment on another obligation of the same issuer to the Bank.Given the nature of the bank’s exposures and availability of historical statistically reliable information, the bankderives the point-in-time (PIT) probability of default (PD) using Banks own internal historical experience. TheBank links TTC PDs with forward looking economic factors to drive PIT PD estimates for each rating category.The methodology takes into consideration forward looking economic forecasts under three scenarios (base case,negative case, and positive case), historical economic data, the asset correlation of each rating category, andTTC PDs for deriving PIT PDs. The relationship between the economic factors and default and loss rates havebeen developed using internal historical data and relevant external market data
7OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENT (continued)Credit Risk Management and ControlThe Bank monitors, manages and controls credit risk exposures based on an internal credit rating system thatrates individual obligors based on a certain rating scale. The internal credit rating is a measure of the creditworthiness of a single obligor, based on an assessment of the credit risk relating to senior unsecured, mediumterm, foreign currency credit exposure. The primary objectives of the internal credit rating system are themaintenance of a single uniform standard for credit quality measurement, and to serve as the primary basis forBoard-approved risk parameters and delegated credit authority limits.The Bank manages, limits and controls concentrations of credit risk in particular, to individual counterpartiesand groups, and to industries, sectors and countries.The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted inrelation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks aremonitored and reviewed periodically by the Management Credit Committee, Compliance and Risk Managementcommittee of the Board of Directors and the Executive Committee of the Board of Directors.The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering onand off-balance sheet exposures. Exposure to credit risk is also managed through regular analysis of the abilityof borrowers and potential borrowers to meet interest and capital repayment obligations and by changing theselending limits where appropriate.Some other specific control and mitigation measures are outlined below.(a)CollateralThe Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is takingsecurity for funds advanced, which is common practice. The Bank implements guidelines on the acceptabilityof specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advancesare: charges over business assets such as premises, inventory and accounts receivablelien on fixed depositscash marginsmortgages over residential and commercial propertiespledge of marketable shares and securitiesLong-term finance and lending to corporate entities are generally secured. The housing loans are secured bymortgage over the residential property. Credit cards and similar revolving credit facilities are generallyunsecured. Additionally, in order to minimise the credit loss the Bank seeks additional collateral from thecounterparty as soon as impairment indicators are noticed for the relevant individual loans and advances.(b) Assessment of the financial capabilities of the borrowersThe borrowers with balances above the limit specified are subject to the review of their audited financialstatements. The relationship managers remain in close contact with the borrowers. The Bank assesses thefinancial performance of the borrowers by reviewing key performance ratios, including solvency and liquidityratios. The annual reviews are performed by the relationship managers and are also reviewed by the CreditReview Department.
8OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENT (continued)(c) Credit-related commitmentsThe primary purpose of these instruments is to ensure that funds are available to a customer asrequired. Guarantees and standby letters of credit carry the same credit risk as loans. Documentaryand commercial letters of credit – which are written undertakings by the Bank on behalf of a customerauthorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms andconditions – are collateralised by the underlying shipments of goods to which they relate and thereforecarry less risk than a direct loan.Commitments to extend credit represent unused portions of authorisations to extend credit in the formof loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit,the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However,the likely amount of loss is less than the total unused commitments, as most commitments to extendcredit are contingent upon customers maintaining specific credit standards.The Bank monitors the term to maturity of credit commitments because longer-term commitmentsgenerally have a greater degree of credit risk than shorter-term commitmentsMeasurement of ECLThe key input parameters into the measurement of ECL are the probability of default (PD), loss givendefault (LGD) and exposure at default (EAD). These parameters are derived from internally developedstatistical models, other historical data using both internal and external factors, and incorporatesforward-looking information.PD estimates are estimates at a certain date, and are calculated using the banks internal recovery dataafter consideration of the contractual maturities of exposures and estimated prepayment rates.The PIT PD estimates are converted to cumulative PIT PDs for exposures that have tenors in excessof one year and that are assessed on lifetime PDs. The lifetime PDs are calculated by compoundingthe 12-month PIT PDs.LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parametersbased on the history of recovery rates of claims against defaulted counterparties, based on historicaldata using both internal and external factors.EAD represents the expected exposure in the event of a default. The Bank derives the EAD from thecurrent exposure to the counterparty and potential changes to the current amounts allowed under thecontract including amortisation. The EAD of a financial asset is its gross carrying amount. For lendingcommitments and financial guarantees, the EAD is converted to balance sheet equivalents.Subject to a maximum of 12-month PD for financial assets for which credit risk has not significantlyincreased, the bank measures ECL considering the risk of default over the maximum contractualperiod over which it is exposed to credit risk. Where modelling of a parameter is carried out on acollective basis, the financial instruments are grouped on the basis of shared risk characteristicsincluding instrument type, credit risk ratings and geographic location of the borrower.The Bank calculates PIT PD estimates under three scenarios, a base case, negative case and positivecase. A probability weighted ECL is then calculated by assigning probabilities, based on currentmarket conditions, to each scenario.
9OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENT (continued)Quantitative disclosureii. Gross credit risk exposuresTable-2Sl.NoType of credit exposure12OverdraftsPersonal LoansLoans against TrustReceiptsOther LoansBills PurchasedDiscountedTotal345Average Gross y 8,390720,003766,870Total Gross Exposure as at202020192020ParentParentConsolidatedCompany ,958,0562,017,6592,739,6722,001,0602,059,890iii. Geographic distribution of exposuresTable-32020 ConsolidatedSl.No12345Type of credit exposureOverdraftsPersonal LoansLoans against TrustReceiptsOther -RO'000-RO'000-RO'000153,5771,042,8592020 Parent companySl.NoType of creditexposure12OverdraftsPersonal LoansLoans against TrustReceiptsOther ,001,060Oman
10OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENT (continued)iv. Industry or counterparty type distribution of exposuresTable-42020 ConsolidatedSl.No12345678910111213141516Economic SectorImport TradeExport TradeWholesale & Retail TradeMining & QuarryingConstructionManufacturingElectricity, gas & waterTransport & communicationFinancial InstitutionsServicesPersonal LoansAgriculture & AlliedActivitesGovernmentNon-Resident LendingAll OthersTotal (1 to ,6782020 Parent CompanySl.No12345678910111213141516Import TradeExport TradeWholesale & Retail TradeMining & QuarryingConstructionManufacturingElectricity, gas & waterTransport & communicationFinancial InstitutionsServicesPersonal LoansAgriculture & AlliedActivitesGovernmentNon-Resident LendingAll OthersTotal (1 to 5812,001,06019,743402,692
11OMAN ARAB BANK SAOGDISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENT (continued)v. Residual contractual maturity of credit exposureTable-52020 ConsolidatedSl.No123456789Time BandUp to 1 month1-3 months3-6 months6-9 months9-12 months1-3 years3-5 yearsOver 5 329,03532,41022,9063,818103470,6782020 Parent CompanySl.No123456789Time BandUp to 1 month1-3 months3-6 months6-9 months9-12 months1-3 years3-5 yearsOver 5 120,38318,3193,818103402,692
OMAN ARAB BANK SAOG13DISCLOSURES UNDER BASEL II - PILLAR III AND BASEL III RELATED DISCLOSURESFOR THE YEAR ENDED 31 DECEMBER 2020D. CREDIT RISK EXPOSURE AND ASSESSMENT (continued)vi. Loans and provisions by major industry or counterparty typeTable-62020 ConsolidatedSI.NO12345678910111213141516Economic SectorImport TradeExport TradeWholesale & retail tradeMining & quarryingConstructionManufacturingElectricity ,gas & waterTransport & communicationFinancial InstitutionsServicesPersonal LoansAgriculture & Allied ActivitiesGovernmentNon-Resident LendingAll OthersTotalGross 52,739,672Of which Stage3 ,3504071,88725,432123,011ECL held for ,5554,327211410,24239,559ECL held for 01581,88714,08765,159Stage 3 ECLProvidedduring the year*RO'0005,188113
oman arab bank saog disclosures under basel ii - pillar iii and basel iii related disclosures for the year ended 31 december 2020 in terms of central bank of oman circular bm 1027 dated 4 december 2007 & bm 1114 dated 17 november 2013 .