Bank Of Sharjah : Pillar III Disclosure for Bank of Sharjah PJSC for the year ended 31 December 2023

Pillar 3 Report

31 December 2023

Bank of Sharjah P.J.S.C.
Pillar III Disclosure for the year ended 31 December 2023
Table of Contents
1. Introduction	4
2. Purpose and basis of preparation	4
3. Overview of Pillar III	5
3.1 Verification	5
3.2 Implementation of Basel III standards and guidelines	5
4. Key Metrics (KM1)	6
5. Overview of risk management and Risk Weighted Assets (OVA)	7
5.1 Overview of Risk Weighted Assets (RWAs) (OV1)	7
5.2	Differences between accounting and regulatory scopes of consolidation and mapping of
financial statement categories with regulatory risk categories (LI1)	8
5.3	Main sources of differences between regulatory exposure amounts and carrying values in
financial statements (LI2)	11
5.4	Explanations of differences between accounting and regulatory exposure amounts (LIA)	12
6. Composition of Capital	12
6.1 Capital Management	12
6.2	Regulatory Capital	13
6.3	Composition of Regulatory Capital (CC1)	14
6.4	Reconciliation of regulatory capital to balance sheet (CC2)	17
6.5	Main features of regulatory capital instruments (CCA)	18
7. Leverage Ratio	19
7.1 Summary comparison of accounting assets versus leverage ratio exposure (LR1)	19
7.2	Leverage ratio common disclosure template (LR2)	20
8. Credit Risk	21
8.1 General qualitative information about credit risk (CRA)	21
8.2	Relationships between the credit risk management, risk control, compliance and internal audit
functions	22
8.3 Scope and main content of the reporting on credit risk exposure and on the credit risk management
function to the executive management and to the board of directors	22
8.4	Credit quality of assets (CR1)	23
8.5	Changes in Stock of Defaulted Loans (CR2)	23
8.6	Credit Risk Mitigation Techniques (CR3)	24
8.7	Additional Disclosure related to the Credit Quality of Assets (CRB)	24
8.8	Past due exposure but not impaired	25
8.9	Renegotiated Financial Assets	25
8.10 Gross Credit Exposure - Currency Classification	26
8.11 Gross Credit Exposure by Maturity	27
8.12 Gross Credit Exposure by Geography	29
		2

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

8.13	Gross Credit Exposure by Economic Activity	31
8.14	Impaired Loans by Geography	33
8.15	Impaired Loans by Economic Activity	33
8.16	Credit Risk Exposure and Credit Risk Mitigation (CRM) Effects (CR4)	34
8.17	Exposure by Asset classes and Risk Weights (CR5)	36
8.18	Qualitative disclosure requirements related to credit risk mitigation techniques (CRC)	38
8.19	Qualitative disclosures on bank's use of external credit ratings under the standardized approach
for credit risk (CRD)	39
9 Counterparty credit risk (CCR)	40
9.1 Analysis of Counterparty Credit Risk by approach (CCR1)	40
9.2	Credit valuation adjustment (CVA) capital charge (CCR2)	41
9.3	Standardized approach - CCR exposure by regulatory portfolio and risk weights (CCR3)	42
9.4	Composition of collateral for Counterparty Credit Risk exposure (CCR5)	44
10 Market Risk	45
10.1	Market Risk - trading book	45
10.2	Market Risk - non-trading or banking book	45
10.3	Market Risk under the Standardized approach (MR1)	49
10.4	Market Risk	49
11. Interest rate risk in the banking book (IRRBB)	50
11.1	IRRBB risk management objectives and policies	50
11.2	Sensitivity of economic value of equity and NII - (IRRBB1)	51
12 Operational Risk (OR1)	51

1. Policies, frameworks and guidelines for the management of operational risk………………..................51

12.2 Structure and organization of the Operational Risk Management and Control Function……................53

1. Operational Risk Measurement system……………………………………………………….................55

1. Scope and main context of the reporting framework on Operational Risk to Executive Management and to the Board of Directors……………………………………………………………………………………….55
2. Risk Mitigation and Risk Transfer used in the management of operational risk…………………..……56

13	Liquidity risk management (LIQA)	56
	13.1	Exposure to liquidity risk	58
	13.2	Eligible Liquid Asset Ratio (ELAR)	58
	13.3	Advances to Stable Resources Ratio (ASRR)	59
14	Remuneration Policy	60
	14.1	Remuneration Policy (REMA)	60
	14.2	Remuneration awarded during the financial year (REM1)	60
	14.3	Special payments (REM2)	61

3

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

1. Introduction

Bank of Sharjah P.J.S.C. (the "Bank"), is a public joint stock company incorporated by an Amiri Decree issued on 22 December 1973 by His Highness The Ruler of Sharjah and was registered in February 1993 under the Commercial Companies Law Number 8 of 1984 (as amended). The Bank commenced its operations under a banking license issued by the United Arab Emirates Central Bank dated 26 January 1974. The Bank is engaged in commercial and investment banking activities.

The Bank's registered office is located at Al Khan Road, P.O. Box 1394, Sharjah, United Arab Emirates. The Bank operates through six branches in the United Arab Emirates located in the Emirates of Sharjah, Dubai, Abu Dhabi, and City of Al Ain.

2. Purpose and Basis of preparation

The CBUAE supervises Bank of Sharjah ("BOS" or the "Bank") and its subsidiaries (together referred to as the "Group") on a consolidated basis, and therefore receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. The capital requirements are computed at a Group level using the Basel III framework of the Basel Committee on Banking Supervision ("Basel Committee"), after applying the amendments advised by the CBUAE, within national discretion. The Basel III framework is structured around three 'pillars': minimum capital requirements (Pillar I); supervisory review process (Pillar II); and market discipline (Pillar III).

The disclosures have been prepared in line with the disclosures template introduced by the CBUAE guidelines on disclosure requirements published in November 2020, November 2021 and December 2022 respectively.

The annual Pillar III report of the Group for the year ended 31 December 2023 comprises detailed information on the underlying drivers of risk-weighted assets (RWA), capital of the Bank, its wholly owned subsidiaries (together referred to as "The Group"). The report should be read in conjunction with the Group's Consolidated Financial Statements for the year ended 31 December 2023.

The complete listing of all direct subsidiaries of Bank of Sharjah PJSC as at 31 December 2023 is as follows:

					Country
	Proportion of	Year of	Year of	of
Name of Subsidiary	ownership interest	incorporation	acquisition	incorporation	Principal activities
	2023	2022
Emirates Lebanon Bank SAL	100%	100%	1965	2008	Lebanon	Financial institution
El Capital FZC	100%	100%	2007	2017	U.A.E.	Investment in a financial institution
BOS Real Estate FZC	100%	100%	2007	2007	U.A.E.	Real estate development activities
BOS Capital FZC	100%	100%	2007	2007	U.A.E.	Investment
Polyco General Trading LLC	100%	100%	2008	2008	U.A.E.	General trading
Borealis Gulf FZC	100%	100%	2010	2010	U.A.E.	Investment & Real estate
development activities
BOS Funding Limited	100%	100%	2015	2015	Cayman Islands	Financing activities
Muwaileh Capital FZC	90%	90%	2010	2017	U.A.E.	Developing of real estate & related
activities
BOS Repos Limited	100%	100%	2018	2018	Cayman Islands	Financing activities
BOS Derivatives Limited	100%	100%	2018	2018	Cayman Islands	Financing activities
GTW Holding LTD	100%	100%	2022	2022	U.A.E. (ADGM)	Facilitate the sale of real estate assets
GDLR Holding LTD	100%	100%	2022	2022	U.A.E. (ADGM)	Facilitate the sale of real estate assets
BOS Real Estate Egypt	100%	-	2023	2023	Egypt	Real estate development activities
						4

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

3. Overview of Pillar III

Pillar III complements the minimum capital requirements and the supervisory review process. Its aim is to encourage market discipline by developing disclosure requirements which allow market participants to assess certain specified information on the scope of application of Basel III, capital, particular risk exposures and risk assessment processes, and hence the capital adequacy of the institution. Disclosures consist of both quantitative and qualitative information and are provided on the consolidated level.

The CBUAE issued Basel III capital regulations, which came into effect from 1 February 2017 introducing minimum capital requirements at three levels, namely Common Equity Tier 1 ('CET1'), Additional Tier 1 ('AT1') and Total Capital.

The minimum capital adequacy requirements as set out by the Central Bank of UAE are as follows:

• Minimum common equity tier 1 (CET 1) ratio of 7% of risk weighted assets (RWAs).
• Minimum tier 1 ratio of 8.5% of RWAs.
• Total capital adequacy ratio of 10.5% of RWAs.

In addition to CET 1 ratio of 7% of RWAs, a capital conservation buffer (CCB) of 2.5% of RWAs shall be maintained in the form of CET 1. Further, counter cyclical buffer (CCyB) requirement shall be met by using CET 1. The level of CCyB to be notified by 'the Central Bank'. There is no CCyB requirement during the current year. The Group has not complied with all the externally imposed capital requirements and has prepared the capital adequacy ratios excluding the hyperinflation impact and currency translation resulting from the Lebanese operations.

Following are the changes in the revised standards which have been adopted:

• The Tier Capital Supply Standard
• Tier Capital Instruments Standard
• Pillar 2 Standard: Internal Capital Adequacy Assessment Process (ICAAP)
• Credit Risk, Market Risk and Operational Risk
• Equity Investment in Funds, Securitisation, Counterparty Credit Risk, Leverage Ratio
• Credit Value Adjustment (CVA) for Pillar I and III

CBUAE requires the Pillar 2 - Supervisory Review Process to focus on each bank's Internal Capital Adequacy Assessment Process (ICAAP) in addition to Pillar 1 Capital calculations. The ICAAP should include a risk based forward looking view of, but not limited to, Credit, Market and Operational Risk Capital.

3.1 Verification

The Pillar 3 Disclosures for the year 2023 have been reviewed by the Group's internal and statutory auditors.

3.2 Implementation of Basel III standards and guidelines

The Group is compliant with Standardised Approach for Credit, Market and the Basic Indicator Approach for Operational Risk (Pillar 1) as applicable in 2023.

5

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

4. Key Metrics (KM1)

Key prudential regulatory metrics have been included in the following table:

		Dec 2023		Sep 2023		Jun 2023		Dec 2022
Available capital (amounts)	AED 000		AED 000		AED 000		AED 000
1	Common Equity Tier 1 (CET1)	3,700,274		3,912,860		4,003,001		3,247,735
1a	Fully loaded ECL accounting model	3,651,240		3,856,939		3,956,383		3,134,690
2	Tier 1	3,700,274		3,912,860		4,003,001		3,247,735
2a	Fully loaded ECL accounting model Tier 1	3,651,240		3,856,939		3,956,383		3,134,690
3	Total capital	4,024,445		4,240,350		4,334,303		3,618,792
3a	Fully loaded ECL accounting model total capital	3,975,411		4,184,429		4,287,685		3,505,747
Risk-weighted assets (amounts)
4	Total risk-weighted assets (RWA)	27,437,506		27,905,075		28,205,402		31,428,477
Risk-based capital ratios as a percentage of RWA
5	Common Equity Tier 1 ratio (%)	13.49%		14.02%		14.19%		10.33%
5a	Fully loaded ECL accounting model CET1 (%)	13.31%		13.82%		14.03%		9.97%
6	Tier 1 ratio (%)	13.49%		14.02%		14.19%		10.33%
6a	Fully loaded ECL accounting model Tier 1 ratio (%)	13.31%		13.82%		14.03%		9.97%
7	Total capital ratio (%)	14.67%		15.20%		15.37%		11.51%
7a	Fully loaded ECL accounting model total capital ratio (%)	14.49%		15.00%		15.20%		11.15%
Additional CET1 buffer requirements as a percentage of RWA
8	Capital conservation buffer requirement (2.5% from 2019) (%)	2.50%		2.50%		2.50%		2.50%
9	Countercyclical buffer requirement (%)	-	-	-	-
10	Bank D-SIB additional requirements (%)	-	-	-	-
11	Total of bank CET1 specific buffer requirements (%) (row 8 + row	2.50%		2.50%		2.50%		2.50%
	9+ row 10)
12	CET1 available after meeting the bank's minimum capital	4.17%		4.70%		4.87%		1.01%
	requirements (%)
Leverage Ratio
13	Total leverage ratio measure	40,742,956		39,735,830		40,863,645		43,531,026
14	Leverage ratio (%) (row 2/row 13)	9.08%		9.85%		9.80%		7.46%
14a	Fully loaded ECL accounting model leverage ratio (%) (row	8.96%		9.71%		9.68%		7.20%
	2A/row 13)
14b	"Leverage ratio (%) (excluding the impact of any applicable	9.08%		9.85%		9.80%		7.46%
	temporary exemption of central bank reserves)"
Liquidity Coverage Ratio
15	Total HQLA	-		-		-		-
16	Total net cash outflow	-		-		-		-
17	LCR ratio (%)	-		-		-		-
Net Stable Funding Ratio
18	-	-		-		-		-
19	Total required stable funding	-		-		-		-
20	NSFR ratio (%)	-		-		-		-
ELAR
21	Total HQLA	6,068,218	4,407,093		3,958,740		4,853,306
22	Total liabilities	36,269,375		35,056,917		32,176,995		36,222,861
23	Eligible Liquid Assets Ratio (ELAR) (%)	16.73%		12.57%		12.30%		13.40%
ASRR
24	Total available stable funding	31,721,223	31,057,765		30,688,053		30,413,466
25	Total Advances	24,284,750		24,296,922		24,158,111		25,554,239
26	Advances to Stable Resources Ratio (%)	76.56%		78.23%		78.72%		84.02%

6

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

5. Overview of Risk Management and Risk Weighted Assets (OVA)

Please refer Note 36 of the Group's annual financial statements for the risk management framework including: risk governance structure, risk profile and risk measurement systems of the Bank, risk reporting to the board and senior management and risk mitigation.

The Group operates a wide-ranging stress testing program that support risk management and capital planning. It includes execution of stress tests mandated by regulators. The group's stress testing is supported by dedicated teams and infrastructure. The testing program assesses capital strength and enhances resilience to external shocks, thereby helping to understand and mitigate risks and informed decision making on capital levels.

5.1 Overview of Risk Weighted Assets (RWAs) (OV1)

The following table provides an overview of total RWAs forming the denominator of the risk-based capital requirements. Further breakdown of RWAs are presented in subsequent parts.

						Minimum
						capital
			RWA		requirements
		Dec 2023			Sep 2023	Dec 2023
		AED 000			AED 000	AED 000
1	Credit risk (excluding counterparty credit risk)	25,877,852		26,155,121	2,717,174
2	Of which: standardised approach (SA)	25,877,852		26,155,121	2,717,174
3	Of which: foundation internal ratings-based(F-IRB) approach	-			-	-
4	Of which: supervisory slotting approach	-			-	-
5	Of which: advanced internal ratings-based(A-IRB) approach	-			-	-
6	Counterparty credit risk (CCR)	-			-	-
7	Of which: standardised approach for counterparty credit risk	-			-	-
8	Of which: Internal Model Method (IMM)	-			-	-
9	Of which: other CCR	-			-	-
10	Credit valuation adjustment (CVA)	55,817		44,109	5,861
11	Equity positions under the simple risk weight approach	-			-	-
12	Equity investments in funds - look-through approach	-			-	-
13	Equity investments in funds - mandate-based approach	-			-	-
14	Equity investments in funds - fall-back approach	-			-	-
15	Settlement risk	-			-	-
16	Securitisation exposures in the banking book	-			-	-
17	Of which: securitisation internal ratings-based approach (SEC-	-			-	-
IRBA)
18	Of which: securitisation external ratings-based approach (SEC-	-			-	-
ERBA)
19	Of which: securitisation standardised approach (SEC-SA)	-			-	-
20	Market risk	272,735		298,052	28,637
21	Of which: standardised approach (SA)	272,735		298,052	28,637
22	Of which: internal models' approach (IMA)	-			-	-
23	Operational risk	1,231,102		1,407,793	129,266
24	Amounts below thresholds for deduction (subject to 250% risk	-			-	-
weight)
25	Floor adjustment	-			-	-
26	Total (1+6+10+11+12+13+14+15+16+20+23)	27,437,506		27,905,075	2,880,938

7

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

5. Overview of Risk management (continued)

5.1 Overview of Risk Management and Risk Weighted Assets (RWA) (continued)

Pursuant to the above regulation, CBUAE issued a regulation for a 'Prudential Filter' that permits Banks to add back increase in IFRS 9 provisions (stage 1 and stage 2) to the regulatory capital over a transition period of 5 years, on a proportionate basis. The increase in IFRS 9 provision requirements is determined by calculating the difference between the IFRS 9 provision as of 31 December 2019 and the IFRS 9 provision as at the respective reporting date. The proportion of the increase in IFRS 9 provisions that is permitted to be added-back to regulatory capital from 1 January 2020 onwards will be phased out over a 5-year transition period as follows:

Years	2020	2021	2022	2023	2024
Proportion of provision	100%	100%	75%	50%	25%

5.2 Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories (LI1)

The consolidated financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and comply with relevant laws of the U.A.E. For December 2022, differences are arising for the reason that the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and the application of IAS 29 Financial reporting in Hyperinflationary Economies and IAS 21 The Effect of Changes in Foreign Exchange Rates. However, the capital adequacy ratio is computed based on circulars issued by the U.A.E. Central Bank, and thus the computation of the capital adequacy ratio does not include the effect of IAS 29 and IAS 21, currency translation resulting from the Lebanese operations.

8

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

5. Overview of Risk management (continued)

5.2 Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories (LI1) (continued)

				Carrying values of items:
								Not subject to
	Carrying values as	Carrying values						capital
31 December 2023	reported in	under scope of		Subject to	Subject to the			requirements or
	published financial	regulatory	Subject to credit	counterparty credit	securitisation		Subject to market	subject to deduction
	statements	consolidation	risk framework	risk framework	framework		risk framework	from capital
	AED 000	AED 000	AED 000	AED 000	AED 000		AED 000	AED 000
Assets
Cash and balances with central Banks	4,558,295	4,558,295	4,558,295	-	-		-	-
Deposits and balances due from Banks	618,633	618,633	618,633	-	-		-	-
Loans and advances, net	22,067,850	22,067,850	22,067,850	-	-		-	-
Investments measured at fair value	359,472	359,472	359,472	-	-		134,706	-
Investments measured at amortised cost	7,367,938	7,367,938	7,367,938	-	-		-	-
Investment properties	1,102,753	1,102,753	1,102,753	-	-		-	-
Other intangible assets	-	-	-	-	-		-	-
Assets acquired in settlement of debt	1,078,084	1,078,084	1,078,084	-	-		-	-
Other assets	1,252,050	1,252,050	1,252,050	-	-		-	-
Derivative assets held for risk management	202	202	202	-	-		-	-
Property and equipment	209,613	209,613	209,613	-	-		-	-
Subsidiary held for sale	844,790	844,790	844,790	-	-		-	-
Total Assets	39,459,680	39,459,680	39,459,680	-	-		134,706	-
Liabilities
Customers' deposits	26,342,597	26,342,597	-	-	-		-	26,342,597
Deposits and balances due to Banks	1,916,341	1,916,341	-	-	-		-	1,916,341
Repo borrowings	1,702,312	1,702,312	-	-	-		-	1,702,312
Other liabilities	1,987,917	1,987,917	-	-	-		-	1,987,917
Derivative liabilities held for risk management	-	-	-	-	-		-	-
Issued bonds	4,004,998	4,004,998	-	-	-		-	4,004,998
Total Liabilities	35,954,165	35,954,165	-	-	-		-	35,954,165
								9

Bank of Sharjah P.J.S.C.

Pillar III Disclosure for the year ended 31 December 2023

5. Overview of Risk management (continued)

5.2 Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories (LI1) (continued)

				Carrying values of items:
								Not subject to
	Carrying values as	Carrying values						capital
31 December 2022	reported in	under scope of		Subject to	Subject to the			requirements or
	published financial	regulatory	Subject to credit	counterparty credit	securitisation		Subject to market	subject to deduction
	statements	consolidation	risk framework	risk framework	framework		risk framework	from capital
	AED 000	AED 000	AED 000	AED 000	AED 000		AED 000	AED 000
Assets
Cash and balances with central Banks	3,949,107	7,086,256	7,086,256	-	-		-	-
Deposits and balances due from Banks	113,897	146,389	146,389	-	-		-	-
Loans and advances, net	21,623,267	22,811,098	22,811,098	-	-		-	-
Investments measured at fair value	434,308	464,158	464,158	-	-		154,367	-
Investments measured at amortised cost	7,335,160	7,390,969	7,390,969	-	-		-	-
Investment properties	1,158,109	1,158,109	1,158,109	-	-		-	-
Other intangible assets	22,055	22,111	-	-	-		-	22,111
Assets acquired in settlement of debt	1,227,821	1,259,863	1,259,863	-	-		-	-
Other assets	1,254,145	1,351,327	1,351,327	-	-		-	-
Derivative assets held for risk management	6,388	6,388	6,388	-	-		-	-
Property and equipment	278,074	293,340	293,340	-	-		-	-
Total Assets	37,402,331	41,990,008	41,967,897	-	-		154,367	22,111
Liabilities
Customers' deposits	25,281,131	27,772,968	-	-	-		-	27,772,968
Deposits and balances due to Banks	662,333	662,797	-	-	-		-	662,797
Repo borrowings	5,003,552	5,003,552	-	-	-		-	5,003,552
Other liabilities	1,901,538	2,074,822	-	-	-		-	2,074,822
Derivative liabilities held for risk management	-	-	-	-	-		-	-
Issued bonds	3,059,421	3,059,421	-	-	-		-	3,059,421
Total Liabilities	35,907,975	38,573,560	-	-	-		-	38,573,560
								10