BASEL II PILLAR 3 REPORT FOR THE FINANCIAL YEAR ENDED 31 ... · Pillar 3 - covers disclosure and external communication of risk and capital information by banks. The Bank maintains

BASEL II PILLAR 3 REPORT

FOR THE FINANCIAL YEAR ENDED 31 MARCH 2012

ALLIANCE ISLAMIC BANK BERHAD(776882-V)

BASEL II PILLAR 3 REPORT FOR THE FINANCIAL YEAR ENDED 31 MARCH 2012

Overview

(a)

(b)

(c)

In summary, the capital management process involves the following:

(i)

(ii)

(iii)

Bank Negara Malaysia ("BNM") guidelines on capital adequacy require Alliance Islamic Bank Berhad ("the Bank") tomaintain an adequate level of capital to withstand potential losses arising from its operations. BNM's capitaladequacy guidelines covers 3 main aspects:

Pillar 1 - covers the calculation of risk-weighted assets for credit risk, market risk and operational risk.

Pillar 2 - involves assessment of other risks (eg. rate of return rate risk in the banking book, liquidity risk andconcentration risk) not covered under Pillar 1. This promotes adoption of forward-looking approaches to capitalmanagement and stress testing / risk simulation techniques.

Pillar 3 - covers disclosure and external communication of risk and capital information by banks.

The Bank maintains a strong capital base to support its current activities and future growth, to meet regulatorycapital requirements at all times and to buffer against potential losses.

To ensure that risks and returns are appropriately balanced, the Bank has implemented a Group-wide IntegratedRisk Management Framework, with guidelines for identifying, measuring, and managing risks. This process includes quantifying and aggregating various risks in order to ensure the Bank has sufficient capital to cushion unexpectedlosses and remain solvent.

Monitoring of regulatory capital and ensuring that the minimum regulatory requirements and approved internalratios are adhered to.

Estimation of capital requirements based on ongoing forecasting and budgeting process.

Regular reporting of regulatory and internal capital ratios to management.

In addition, the Bank's capital adequacy under extreme but plausible stress scenarios are periodically assessed viaa Group-wide stress test exercise. The results of the stress tests are reported to senior management, to providethem with an assessment of the financial impact of such events on the Group's earnings and capital.

The Bank's Pillar 3 Disclosure is governed by the Capital Adequacy Framework for Islamic Banks ("CAFIB") - Pillar3 which sets out the minimum disclosure standards, the approach for determining the appropriateness ofinformation disclosed and the internal controls over the disclosure process which covers the verification and reviewof the accuracy of information disclosed.

1

ALLIANCE ISLAMIC BANK MALAYSIA BERHAD(776882-V)

CONTENTS PAGE

1.0 Scope of Application 3

2.0 Capital 3 - 62.1 Capital Adequacy Ratios 42.2 Capital Structure 42.3 Risk-Weighted Assets and Regulatory Capital Requirements 5 - 6

3.0 Credit Risk 7 - 233.1 Distribution of Credit Exposures 8 - 123.2 Past due Financing and Advances Analysis 133.3 Impaired Financing and Advances Analysis 14 - 153.4 Assignment of Risk Weights for Portfolios

Under the Standardised Approach 16 - 203.5 Credit Risk Mitigation 21 - 223.6 Off-Balance Sheet Exposures and Counterparty Credit Risk 23

4.0 Market Risk 24 - 25

5.0 Operational Risk 26

6.0 Rate of Return Risk in the Banking Book 27 - 28

7.0 Shariah Governance Disclosures and Profit Sharing Investment Account ("PSIA") 28 - 29

2


1.0 Scope of Application

2.0 Capital

(i)

(ii)

(iii)

The capital adequacy information is computed in accordance with CAFIB. The Bank has adopted theStandardised Approach for credit risk and market risk, and Basic Indicator Approach for operational risk.

There are no significant restrictions or other major impediments on transfer of funds or regulatory capitalbetween the Bank and its holding company, Alliance Bank Malaysia Berhad.

There were no capital deficiencies in the Bank as at the financial period end.

The Basel II Pillar 3 Disclosure provided in this document is in respect of the Bank, which is involved in Islamicbanking financial services.

The capital management of the Bank is under the purview of Alliance Bank Group's ("the Group") capitalmanagement with the objectives:

to maintain sufficient capital resources to meet the regulatory capital requirements as set forth by BankNegara Malaysia,

to maintain sufficient capital resources to support the Bank’s risk appetite and to enable future businessgrowth, and

to meet the expectations of key stakeholders, including shareholders, investors, regulators and ratingagencies.

In line with this, the Bank aims to maintain capital adequacy ratios that are above the regulatory requirement,while balancing shareholders’ desire for sustainable returns and high standards of prudence.

The Bank carries out stress testing to estimate the potential impact of extreme but plausible events on theBank’s earnings, statement of financial position and capital. The results of the stress test are to facilitate theformation of action plans in advance if the stress test reveals that the Group’s capital will be adversely affected.The results of the stress test are tabled to the Group Risk Management Committee for deliberation and to theBoard for approval.

The Bank’s regulatory capital are determined under CAFIB and their capital ratios comply with the prescribecapital adequacy ratios.

3


2.0 Capital (contd.)

2.1 Capital Adequacy Ratios

The capital adequacy ratios of the Bank are as follows:

2012 2011Before deducting proposed dividendsCore capital ratio 12.35% 11.65%Risk-weighted capital ratio 14.19% 13.37%

After deducting proposed dividendsCore capital ratio 11.52% 11.65%Risk-weighted capital ratio 13.36% 13.37%

2.2 Capital Structure

The following tables present the components of Tier I and Tier II capital and deduction from capital.

2012 2011RM'000 RM'000

Tier I Capital (Core Capital)Paid-up share capital 300,000 300,000 Retained profits 118,621 82,222 Statutory reserves 122,122 85,806

540,743 468,028 Less: Deferred tax assets (1,716) (17,781)Total Tier I capital 539,027 450,247

Tier II CapitalCollective assessment allowance 80,534 66,564 Total Tier II capital 80,534 66,564 Total Capital Base 619,561 516,811

Under Pillar I, the Bank adopted the Standardised Approach in determining the capital requirements forcredit risk and market risk and applied the Basic Indicator Approach for operational risk. Under theStandardised Approach, risk-weights are used to assess the capital requirements for exposures in creditrisk and market risk whilst the capital required for operational risk under the Basic Indicator Approach iscomputed as a fixed percentage of the Bank's average gross income.

The following table represents the Bank's capital position. Details on capital resources, including sharecapital and reserves are found in Note 18 and 19 of the audited financial statements.

4



2.3 Risk Weighted Assets ("RWA") and Capital Requirements

Regulatory Capital Requirements

The following table presents the minimum regulatory capital requirement of the Bank:

Risk-Gross Net Weighted Capital

2012 Exposures Exposures Assets RequirementsExposure Class RM'000 RM'000 RM'000 RM'000

(i) Credit RiskOn-balance sheet exposures:Sovereigns/Central banks 1,279,533 1,279,533 - - Banks, Development Financial Institutions ("DFIs") and Multilateral Development Banks ("MDBs") 457,869 457,869 91,574 7,326 Insurance Companies, Securities Firm and Fund Managers 29 29 29 2 Corporates 1,147,219 1,122,312 1,076,207 86,097 Regulatory retail 2,364,940 2,326,327 1,754,558 140,365 Residential Real Estate ("RRE") financing 1,045,689 1,045,041 499,903 39,992 Higher risk assets 95 95 142 11 Other assets 43,368 43,368 43,368 3,469 Defaulted exposures 38,711 38,711 50,883 4,071 Total on-balance sheet exposures 6,377,453 6,313,285 3,516,664 281,333

Off-balance sheet exposures:Credit-related off-balance sheet exposures 588,880 588,023 452,870 36,230 Defaulted exposures 6,319 6,319 9,479 758 Total off-balance sheet exposures 595,199 594,342 462,349 36,988

Total on and off-balance sheet exposures 6,972,652 6,907,627 3,979,013 318,321

(ii) Market Risk (Note 4.0)

Rate of return risk 2,492 199

(iii) Operational Risk - - 383,373 30,670

Total RWA and capital requirements 6,972,652 6,907,627 4,364,878 349,190

Long Position

Short Position

149,693 -

5



2.3 RWA and Capital Requirements (contd.)

Regulatory Capital Requirements (contd.)

Risk-Gross Net Weighted Capital

2011 Exposures Exposures Assets RequirementsExposure Class RM'000 RM'000 RM'000 RM'000

(i) Credit RiskOn-balance sheet exposures:Sovereigns/Central banks 665,467 665,467 - - Banks, DFIs and MDBs 842,385 842,385 168,477 13,478 Corporates 1,020,132 1,001,856 969,301 77,544 Regulatory retail 2,302,765 2,274,495 1,705,872 136,470 RRE financing 724,235 723,491 336,682 26,935 Higher risk assets 114 114 171 14 Other assets 34,477 34,477 34,477 2,758 Defaulted exposures 19,907 19,312 25,350 2,028 Total on-balance sheet exposures 5,609,482 5,561,597 3,240,330 259,227

Off-balance sheet exposures:Credit-related off-balance sheet exposures 349,873 349,475 294,030 23,522 Defaulted exposures 322 322 484 39

Total off-balance sheet exposures 350,195 349,797 294,514 23,561

Total on and off-balance sheet exposures 5,959,677 5,911,394 3,534,844 282,788

(ii) Market Risk (Note 4.0)

Rate of return risk 3,725 298

(iii) Operational Risk - - 326,118 26,089

Total RWA and capital requirements 5,959,677 5,911,394 3,864,687 309,175

Note:

The following table presents the minimum regulatory capital requirement of the Bank (contd.):

The Bank does not use Profit-sharing Investment Account ("PSIA") as a risk absorbent mechanism.

The Bank does not have exposure to any Large Exposure Risk for equity holdings specified in BNM'sGuidelines on Investment in Shares, Interest-in-Shares and Collective Investment Schemes.

Long Position

Short Position

598,554 -

6


3.0 Credit Risk

Risk Governance

Credit Risk Management

Credit risk is the risk of financial loss arising from the failure of a customer or counterparty to meet itsobligations. Credit risk arises mainly from financing and advances activities and holding of debt securities.

The Board has overall responsibility for credit risk oversight of the Bank through the Group Risk ManagementCommittee ("GRMC"). The GRMC, supported by the Credit Risk Working Group ("CRWG"), reviews and aligns credit risk management framework and policies to business strategies, ensuring appropriate balancing in risktaking and risk appetite. In addition, the CRWG reviews and assesses asset quality and risk profilereports/dashboards and direct implementation of prompt corrective measures in the event of anyexceptions/anomalies.

Credit risk management process includes establishing framework, policies and guidelines for activities in theGroup which attracts credit risk. The Credit Risk Management Framework ("CRMF") sets the broad basedrequirement for credit risk taking activities; under which, comprehensive policies and guidelines are developedfor the credit approving hierarchy and discretionary approving authority, development, application andvalidation of credit rating tools, acceptable credit and negative list, acceptable collateral and margin, creditreview and monitoring, early warning and rehabilitation, and impairment and recovery.

Credit risk management begins with initial underwriting and continues through the customer’s credit cycle.Statistical techniques in conjunction with experiential judgement are used in portfolio management, coveringunderwriting guidelines, product pricing, setting credit limits, operating processes and metrics to quantify andbalance risks and returns. In addition, credit facility limits and credit concentration limits are applied to preventover-concentration of risks. Concentration risk is managed by limiting exposure to single customer/group,credit rating grade and industry segments. These limits are aligned with business strategies of the respectiveunits, taking into consideration the regulatory constraints.

Credit facilities are reviewed regularly; corporate exposures on group exposure basis and retail exposures onportfolio basis. Problem financing and financing with early warning signs are subject to early warning reportingframework.

Business Risk and Business Portfolio Management functions ensure that credit risks are being taken andmaintained in compliance with group-wide credit policies and guidelines. These functions ensure properactivation of approved limits, appropriate endorsement of excesses and policy exceptions, monitor compliancewith credit standards and/or credit covenants established by management and/or regulators. These functionsalso subject all credit facilities to regular review including the conduct of accounts and rating; facilities withindications of deterioration in quality are subject to the early warning frameworks. Recovery of problem orimpaired loans are managed by specialists who are independent of the business units.

An independent credit review team conducts regular review of credit applications. These reviews providesenior management with assurance that the Bank's credit policies/limits are adhered to.

Stress testing are used to ascertain the size of probable losses under a range of scenarios for the financingportfolio and the impact to bottom lines and capital. These stress tests are performed using different marketand economic assumptions to assess possible vulnerability and effective mitigating actions, when required.

7


3.0 Credit Risk (contd.)

Impaired Financing and Provisions

3.1 Distribution of Credit Exposures

Geographical Distribution

EastNorthern Central Southern Malaysia

2012 RM'000 RM'000 RM'000 RM'000Cash and short-term funds - 213,329 - - Deposits and placements with banks and other financial institutions - 169 - - Financial assets held-for-trading - 149,693 - - Financial investments available-for-sale - 1,063,812 - - Financial investments held-to-maturity - 444,669 - - Financing and advances 223,897 3,521,530 401,719 312,058 Total on-balance sheet 223,897 5,393,202 401,719 312,058 Financial guarantees 18,820 40,455 6,499 3,280 Credit related commitments and contingencies 65,292 1,029,765 128,398 466,233 Total credit exposure 308,009 6,463,422 536,616 781,571

Geographical region

The following tables represent the Bank's major type of gross credit exposure by geographical distribution.Exposure are allocated to the region in which the customer is located and are disclosed before takingaccount of any collateral held or other credit enhancements and after allowance for impairment whereapplicable.

FRS 139 has been adopted for the treatment of impaired financing and financing loss provision. Please referto Note 2(g)(i) of the audited financial statements for accounting policies of impaired financing.

Past due accounts are financing accounts with any payment of principal and/or profit due and not paid, but arenot classified as impaired. Financing are classified as impaired if the judgmental or mandatory triggers aretriggered.

Individual assessments are performed on impaired accounts with principal outstanding RM1 million andabove. Discounted cashflow method will be used to determine the recoverable amounts. The remainingfinancing portfolio are then collectively assessed for impairment allowance provision. The Bank appliedtransitional arrangement as prescribed in the guideline issued by BNM for collective assessment, based on1.5% of total outstanding financing, net of individual assessment allowance.

8



3.1 Distribution of Credit Exposures (contd.)

Geographical Distribution (contd.)

EastNorthern Central Southern Malaysia

2011 RM'000 RM'000 RM'000 RM'000Cash and short-term funds - 149,234 - - Deposits and placements with banks and other financial institutions - 163 - - Financial assets held-for-trading - 598,554 - - Financial investments available-for-sale - 1,320,722 - - Financial investments held-to-maturity - 105,811 - - Financing and advances 257,597 3,151,401 336,067 270,045 Total on-balance sheet 257,597 5,325,885 336,067 270,045 Financial guarantees 11,159 39,285 6,308 2,752 Credit related commitments and contingencies 54,322 681,544 58,428 190,125 Total credit exposure 323,078 6,046,714 400,803 462,922

Geographical region

9

(776882-V)



(b) Industry Distribution

The following table represents the Bank's major type of gross credit exposure by sector. The analysis are based on the sector in which the customer is engaged.

Financial, Agriculture,Government Insurance and Transport, Manufacturing, Motor Otherand Central Business Storage and Wholesale & Residential Vehicle Consumer

Bank Services Communication Retail Trade Construction Financing Financing Financing Total2012 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000Cash and short-term funds 163,321 50,008 - - - - - - 213,329 Deposits and placements with banks and other financial institutions - 169 - - - - - - 169 Financial assets held-for-trading 149,693 - - - - - - - 149,693 Financial investments available-for-sale 489,287 506,324 11,614 56,587 - - - - 1,063,812 Financial investments held-to-maturity 439,463 - 5,206 - - - - - 444,669 Financing and advances - 300,313 29,453 1,018,797 32,952 1,423,177 297,018 1,357,494 4,459,204

Total on-balance sheet 1,241,764 856,814 46,273 1,075,384 32,952 1,423,177 297,018 1,357,494 6,330,876

Financial guarantees - 3,209 91 64,084 1,391 - - 279 69,054 Credit related commitments and contingencies - 170,413 779 510,846 28,500 617,150 225 361,775 1,689,688 Total credit exposure 1,241,764 1,030,436 47,143 1,650,314 62,843 2,040,327 297,243 1,719,548 8,089,618

ALLIANCE ISLAMIC BANK BERHAD

10

(776882-V)ALLIANCE ISLAMIC BANK BERHAD



(b) Industry Distribution (contd.)

The following table represents the Bank's major type of gross credit exposure by sector. The analysis are based on the sector in which the customer is engaged. (contd.)

Financial, Agriculture,Government Insurance and Transport, Manufacturing, Motor Otherand Central Business Storage and Wholesale & Residential Vehicle Consumer

Bank Services Communication Retail Trade Construction Financing Financing Financing Total2011 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000Cash and short-term funds 48,873 100,361 - - - - - - 149,234 Deposits and placements with banks and other financial institutions - 163 - - - - - - 163 Financial assets held-for-trading 598,554 - - - - - - - 598,554 Financial investments available-for-sale 495,598 803,293 21,831 - - - - - 1,320,722 Financial investments held-to-maturity 100,575 - 5,236 - - - - - 105,811 Financing and advances - 282,104 38,348 942,700 35,260 930,421 346,808 1,439,469 4,015,110

Total on-balance sheet 1,243,600 1,185,921 65,415 942,700 35,260 930,421 346,808 1,439,469 6,189,594

Financial guarantees - 1,789 2,189 46,795 8,387 - - 344 59,504 Credit related commitments and contingencies - 136,656 5,893 336,062 55,986 329,153 1,096 119,573 984,419 Total credit exposure 1,243,600 1,324,366 73,497 1,325,557 99,633 1,259,574 347,904 1,559,386 7,233,517

11

(776882-V)



(c) Residual Contractual Maturity

Up to 1 month >1-3 months >3-6 months >6-12 months >1 year Total2012 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000Cash and short-term funds 213,329 - - - - 213,329 Deposits and placements with banks and other financial institutions - - 169 - - 169 Financial investments 297,422 282,793 1,447 5,007 1,071,505 1,658,174 Financing and advances 589,316 272,648 182,874 204,191 3,154,795 4,403,824 Other asset balances 17,167 1 2 4 215,551 232,725 Total on-balance sheet exposure 1,117,234 555,442 184,492 209,202 4,441,851 6,508,221

Up to 1 month >1-3 months >3-6 months >6-12 months >1 year Total2011 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000Cash and short-term funds 149,234 - - - - 149,234Deposits and placements with banks and other financial institutions - - 163 - - 163Financial investments 632,783 839,322 174,616 15,016 363,350 2,025,087Financing and advances 454,335 256,546 182,338 193,263 2,891,829 3,978,311Other asset balances 1,661 - - - 68,644 70,305Total on-balance sheet exposure 1,238,013 1,095,868 357,117 208,279 3,323,823 6,223,100

ALLIANCE ISLAMIC BANK BERHAD

The following table represents the residual contractual maturity for major types of gross credit exposures for on-balance sheet exposures of financial assets of theBank:

12



3.2 Past Due Financing and Advances Analysis

(a)

Past due financing and advances are analysed as follows:2012 2011

RM'000 RM'000

Past due up to 1 month 306,214 265,878 Past due > 1 - 2 months 60,128 61,255 Past due > 2 - 3 months 15,017 13,635

381,359 340,768

Past due financing and advances analysed by sector are as follows:2012 2011

RM'000 RM'000

Financial, insurance and business services 984 1,354 Transport, storage and communication 1,503 2,233 Agriculture, manufacturing, wholesale & retail trade 7,009 9,443 Construction 5,430 1,594 Residential financing 56,794 38,288 Motor vehicle financing 86,090 98,109 Other consumer financing 223,549 189,747

381,359 340,768

Past due financing and advances analysed by significantgeographical areas:

2012 2011RM'000 RM'000

Northern region 19,900 27,068 Central region 298,800 244,250 Southern region 46,052 45,447 East Malaysia region 16,607 24,003

381,359 340,768

Past due but not impaired financing and advances are financing where the customer has failed to make aprincipal or profit payment when contractually due, and includes financing which are due one or more daysafter the contractual due date but less than 3 months.

13



3.3 Impaired Financing and Advances Analysis

Impaired financing and advances analysed by sectors:2012 2011

RM'000 RM'000

Transport, storage and communication 79 6,252 Agriculture, manufacturing, wholesale & retail trade 34,922 24,929 Construction 4,238 5,681 Residential financing 15,151 9,564 Motor vehicle financing 2,582 3,341 Other consumer financing 12,151 11,602

69,123 61,369

Impairment allowances on impaired financing and advances analysed by sectors:

Individualimpairment net Individual

Individual Collective (write-back)/ impairmentimpairment impairment charge for write-offallowance allowance the year for the year

RM'000 RM'000 RM'000 RM'0002012Transport, storage & communication 2 4,945 (64) (18) Agriculture, manufacturing, wholesale & retail trade 10,707 15,432 2,635 (1,264) Construction 1 495 (53) (16) Residential financing 1,256 21,359 (154) (416) Motor vehicle financing 663 4,476 (45) (2,633) Other consumer financing 12,676 34,484 23,218 (22,358)

25,305 81,191 25,537 (26,705)

2011Transport, storage & communication 84 4,801 (1,179) (179) Agriculture, manufacturing, wholesale & retail trade 9,336 14,131 7,980 (181) Construction 70 527 (1,281) (664) Residential financing 1,910 13,981 980 (934) Motor vehicle financing 3,341 5,209 2,708 (4,771) Other consumer financing 11,732 28,438 22,309 (20,466)

26,473 67,087 31,517 (27,195)

14



3.3 Impaired Financing and Advances Analysis (contd.)

Impaired financing and advances and impairment allowances by geographical areas:

Impaired Individual Collectivefinancing and impairment impairment

advances allowance allowance2012 RM'000 RM'000 RM'000

Northern region 25,364 9,576 3,384 Central region 38,984 14,276 67,100 Southern region 3,539 993 6,026 East Malaysia region 1,236 460 4,681

69,123 25,305 81,191

2011

Northern region 19,754 8,766 4,006 Central region 37,668 15,435 53,989 Southern region 3,154 1,996 5,041 East Malaysia region 793 276 4,051

61,369 26,473 67,087

Movement in financing impairment allowances are analysed as follows:

2012 2011RM'000 RM'000

Individual impairment allowance:

At beginning of year 26,473 22,151 Allowance made during the year (net) 25,537 31,517 Amount written-off (26,705) (27,195) At end of year 25,305 26,473

Collective impairment allowance:

At beginning of year 67,087 58,919 Allowance made during the year (net) 14,104 8,168 At end of year 81,191 67,087

15



3.4 Assignment of Risk-Weights for Portfolio Under the Standardised Approach

Insurance Totalcompanies, exposures

Securities after Total 2012 Sovereigns Banks, firms and Higher netting and Risk-Risk- /Central DFIs and Fund Regulatory RRE risk Other credit risk WeightedWeights banks MDBs managers Corporates retail financing assets assets mitigation Assets

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

0% 1,339,533 - - - - - - - 1,339,533 - 20% - 457,869 - 57,631 - - - - 515,500 103,100 35% - - - - - 460,416 - - 460,416 161,146 50% - - - - 339 400,139 - - 400,478 200,239 75% - - - - 2,586,165 185,488 - - 2,771,653 2,078,740 100% - - 29 1,298,310 39,514 7,341 - 43,368 1,388,562 1,388,562 150% - - - 21,881 9,467 - 137 - 31,485 47,226

Total exposures 1,339,533 457,869 29 1,377,822 2,635,485 1,053,384 137 43,368 6,907,627 3,979,013

Risk-weighted assets by exposures - 91,574 29 1,342,657 1,993,507 507,673 205 43,368 3,979,013

Average risk-weight - 20% 100% 97% 76% 48% 150% 100% 58%

Deduction from Capital base - - - - - - - - -

Exposures after netting and credit risk mitigation

The following tables present the credit exposures by risk-weights and after credit risk mitigation:

16



3.4 Assignment of Risk-Weights for Portfolio Under the Standardised Approach (contd.)

Insurance Totalcompanies, exposures

Securities after Total 2011 Sovereigns Banks, firms and Higher netting and Risk-Risk- /Central DFIs and Fund Regulatory RRE risk Other credit risk WeightedWeights banks MDBs managers Corporates retail financing assets assets mitigation Assets

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

0% 683,467 - - - - - - - 683,467 - 20% - 842,385 - 40,694 - - - - 883,079 176,616 35% - - - - - 332,164 - - 332,164 116,257 50% - - - - 21 292,602 - - 292,623 146,312 75% - - - - 2,423,831 98,930 - - 2,522,761 1,892,071 100% - - - 1,145,190 1,316 3,739 - 34,477 1,184,722 1,184,722 150% - - - 5,109 7,313 - 156 - 12,578 18,866

Total exposures 683,467 842,385 - 1,190,993 2,432,481 727,435 156 34,477 5,911,394 3,534,844

Risk-weighted assets by exposures - 168,477 - 1,160,992 1,830,170 340,494 234 34,477 3,534,844

Average risk-weight - 20% - 97% 75% 47% 150% 100% 60%

Deduction from Capital base - - - - - - - - -

Exposures after netting and credit risk mitigation

The following tables present the credit exposures by risk-weights and after credit risk mitigation (contd.):

17



3.4 Assignment of Risk-Weights for Portfolio Under the Standardised Approach (contd.)

2012

(a) Ratings of corporate by approved ECAIs

(b) Short-term ratings of banking institutions and corporate by approved ECAIs

Moody's Aaa to Aa3 A1 to A3 Baa1 to Ba3 B1 to C UnratedS&P AAA to AA- A+ to A- BBB+ to BB- B+ to D UnratedFitch AAA to AA- A+ to A- BBB+ to BB- B+ to D UnratedRAM AAA to AA3 A+ to A3 BBB1 to BB3 B to D Unrated

MARC AAA to AA- A+ to A- BBB+ to BB- B+ to D UnratedRM'000 RM'000 RM'000 RM'000 RM'000

On and Off-Balance Sheet Exposures

Credit Exposures (using Corporate Risk-Weights)

- - - - -

Insurance Cos, Securities Firms & Fund Managers - - - - 29

Corporates 151,457 - - - 1,251,742

Total 151,457 - - - 1,251,771

Exposure Class

Ratings of Corporate by Approved ECAIs

Public Sector Entities (applicable for entities risk-weighted based on their external ratings as corporates)

Moody's P-1 P-2 P-3 Others UnratedS&P A-1 A-2 A-3 Others UnratedFitch F1+, F1 F2 F3 B to D UnratedRAM P-1 P-2 P-3 NP Unrated

MARC MARC-1 MARC-2 MARC-3 MARC-4 UnratedRM'000 RM'000 RM'000 RM'000 RM'000


Banks, MDBs and FDIs 214,206 - - - 243,663

- - - - -

Insurance Cos, Securities Firms & Fund Managers - - - - -

Corporates - - - - -

Total 214,206 - - - 243,663

Rated Credit Exposures (using Corporate Risk-Weights)

Exposure Class

Short term Ratings of Banking Institutions and Corporate by Approved ECAIs

Public Sector Entities (applicable for entities risk- weighted based on their external ratings as corporates)

The following tables shows the rated exposures according to rating by Eligible Credit AssessmentInstitutions ("ECAIs"):

For the purpose of determining counterparty risk-weights, the Bank uses external credit assessments fromRating Agency Malaysia ("RAM"), Malaysian Rating Corporation ("MARC"), Standard and Poor's ("S&P"),Moody's and Fitch. In the context of the Bank's portfolio, external credit assessments are mainly applicableto banks/financial institutions and rated corporations. The Bank follows the process prescribed under BNMCAFIB-Basel II to map the ratings to the relevant risk-weights. The ratings are monitored and updatedregularly to ensure that the latest and most appropriate risk-weights are applied in the capital computation.

18



3.4 Assignment of Risk Weights for Portfolio Under the Standardised Approach (contd.)

The following tables show the rated exposures according to rating by ECAIs (contd):

2012

(c) Ratings of Sovereigns and Central banks by approved ECAIs

2011

(a) Ratings of corporate by approved ECAIs

Moody's Aaa to Aa3 A1 to A3 Baa1 to Ba3 Ba1 to B3 Caa1 to C UnratedS&P AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D UnratedFitch AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D Unrated

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000On and Off-Balance Sheet Exposures

Sovereigns and Central Banks 1,339,533 - - - - -

Total 1,339,533 - - - - -

Ratings of Sovereigns and Central Banks by Approved ECAIs

Exposure Class

Moody's Aaa to Aa3 A1 to A3 Baa1 to Ba3 B1 to C UnratedS&P AAA to AA- A+ to A- BBB+ to BB- B+ to D UnratedFitch AAA to AA- A+ to A- BBB+ to BB- B+ to D UnratedRAM AAA to AA3 A+ to A3 BBB1 to BB3 B to D Unrated

MARC AAA to AA- A+ to A- BBB+ to BB- B+ to D UnratedRM'000 RM'000 RM'000 RM'000 RM'000


Credit Exposures (using Corporate Risk-Weights)

- - - - -


Corporates 67,899 - - - 1,142,030

Total 67,899 - - - 1,142,030

Exposure Class

Ratings of Corporate by Approved ECAIs


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3.4 Assignment of Risk Weights for Portfolio Under the Standardised Approach (contd.)

The following tables show the rated exposures according to rating by ECAIs (contd):

2011

(b) Short-term ratings of banking institutions and corporate by approved ECAIs

(c) Ratings of Sovereigns and Central banks by approved ECAIs

Moody's P-1 P-2 P-3 Others UnratedS&P A-1 A-2 A-3 Others UnratedFitch F1+, F1 F2 F3 B to D UnratedRAM P-1 P-2 P-3 NP Unrated

MARC MARC-1 MARC-2 MARC-3 MARC-4 UnratedRM'000 RM'000 RM'000 RM'000 RM'000


Banks, MDBs and FDIs 541,867 - - - 300,518

- - - - -


Corporates - - - - -

Total 541,867 - - - 300,518

Rated Credit Exposures (using Corporate Risk-Weights)

Exposure Class

Short term Ratings of Banking Institutions and Corporate by Approved ECAIs


Note:There is no outstanding securitisation contract at the Bank that required disclosure of ratings and shortterm rating of securitisation by approved ECAIs.

Moody's Aaa to Aa3 A1 to A3 Baa1 to Ba3 Ba1 to B3 Caa1 to C UnratedS&P AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D UnratedFitch AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D Unrated

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000On and Off-Balance Sheet Exposures

Sovereigns and Central Banks 683,467 - - - - -

Total 683,467 - - - - -

Exposure Class

Ratings of Sovereigns and Central Banks by Approved ECAIs

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3.5 Credit Risk Mitigation ("CRM")

Exposures Exposurescovered by covered by Exposures

guarantees/ eligible covered byExposure credit financial other eligible

2012 before CRM derivatives collateral collateralExposure Class RM'000 RM'000 RM'000 RM'000

Credit RiskOn-balance sheet exposures:Sovereigns/Central banks 1,279,533 - - - Banks, DFIs and MDBs 457,869 - - - Insurance Companies, Securities Firm and Fund Managers 29 - - - Corporates 1,147,219 - 24,906 - Regulatory retail 2,364,940 - 38,613 - RRE financing 1,045,689 - 648 - Higher risk assets 95 - - - Other assets 43,368 - - - Defaulted exposures 38,711 - - - Total on-balance sheet exposures 6,377,453 - 64,167 -

Off-balance sheet exposuresOff-balance sheet exposures other than OTC derivatives or credit derivatives 588,880 - 857 - Defaulted exposures 6,319 - - - Total off-balance sheet exposures 595,199 - 857 -

Total on and off-balance sheet exposures 6,972,652 - 65,024 -

The following tables represent the Bank's credit exposure including off-balance sheet items under thestandardised approach, the total exposure (after, where applicable, eligible netting benefits) that is coveredby eligible guarantees and credit derivatives; and eligible collateral after haircuts, allowed under theCAFIB.

The Bank uses a wide range of collaterals to mitigate credit risks. For the purpose of computing Basel IIcapital charge for credit risk, the process of using guarantees and eligible collaterals as credit riskmitigants are as prescribed in the CAFIB.

In the course of financing, the Bank does accept collaterals that are not eligible under the RWCAF. Theprocess of taking collaterals whether or not eligible under RWCAF, including valuation method andfinancing to value are defined in the Credit and Product Programmme; and the Credit Risk ManagementFramework. Main collaterals acceptable to the Bank include cash, guarantees, commercial and residentialreal estates, and physical collateral / financial collateral for example motor vehicles or shares. Guaranteeson financings are accepted after the financial viability of the guarantors have been ascertained.

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3.5 Credit Risk Mitigation ("CRM") (contd.)

Exposures Exposurescovered by covered by Exposures

guarantees/ eligible covered byExposure credit financial other eligible

2011 before CRM derivatives collateral collateralExposure Class RM'000 RM'000 RM'000 RM'000

Credit RiskOn-balance sheet exposures:Sovereigns/Central banks 665,467 - - - Banks, DFIs and MDBs 842,385 - - - Corporates 1,020,132 - 18,277 - Regulatory retail 2,302,765 - 28,270 - RRE financing 724,235 - 743 - Higher risk assets 114 - - - Other assets 34,477 - - - Defaulted exposures 19,907 - 595 - Total on-balance sheet exposures 5,609,482 - 47,885 -

Off-balance sheet exposures:Off-balance sheet exposures other than OTC derivatives or credit derivatives 349,873 - 398 - Defaulted exposures 322 - - - Total off-balance sheet exposures 350,195 - 398 - Total on and off-balance sheet exposures 5,959,677 - 48,283 -

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3.6 Off-Balance Sheet Exposures and Counterparty Credit Risk

PositiveFair Value Credit Risk-

Principal of Derivative Equivalent WeightedAmount Contracts Amount Assets

2012 RM'000 RM'000 RM'000 RM'000

Credit-related exposures

Direct credit substitutes 42,270 - 42,270 42,270 Transaction-related contingent items 23,756 - 11,878 11,878 Short-term self-liquidating trade- related contingencies 26,784 - 5,357 5,357 Irrevocable commitments to extent credit:- maturity exceeding one year 675,024 - 337,512 267,528 - maturity not exceeding one year 990,908 - 198,182 135,316

1,758,742 - 595,199 462,349

PositiveFair Value Credit Risk-

Principal of Derivative Equivalent WeightedAmount Contracts Amount Assets

2011 RM'000 RM'000 RM'000 RM'000

Credit-related exposures

Direct credit substitutes 34,805 - 34,805 34,805 Transaction-related contingent items 20,332 - 10,166 10,166 Short-term self-liquidating trade- related contingencies 24,699 - 4,940 4,940 Irrevocable commitments to extent credit:- maturity exceeding one year 358,223 - 179,111 146,165 - maturity not exceeding one year 605,864 - 121,173 99,438

1,043,923 - 350,195 295,514

The off-balance sheet exposures and their related counterparty credit risk of the Bank are as follows:

Off-balance sheet exposures of the Bank are mainly from the commitments to extend credit including theunutilised or undrawn portions of credit facilities.

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4.0 Market Risk

Risk Governance

Market Risk Management

(i)

(ii)

(iii)

(iv)

(v)

For the Islamic bank, market risk refers to fluctuations in values of tradable, marketable or leaseable assets(including sukuk) and in off-balance sheet individual portfolios such as restricted investment accounts. Rate ofreturn risk and displaced commercial risk are commonly associated with Islamic banking.

The governance structure for market risk management starts with the Board of Directors which has the overalloversight on market risk management and defines the risk philosophy, principles and core policies. The Boardis in turn assisted by the Group Risk Management Committee ("GRMC") which is principally responsible tooversee management activities in managing risks. Its responsibilities include reviewing and approving riskmanagement policies, risk exposures and limits whilst ensuring the necessary infrastructure and resources arein place. At Senior Management level, the Group Assets and Liabilities Management Committee ("GALCO")manages the Bank’s market risk by reviewing and recommending market risk frameworks and policies;ensuring that market risk limits and parameters are within the approved thresholds; and aligning market riskmanagement with business strategy and planning.

Organisationally, market risks are managed collectively via the 3 lines of defence concept. Financial Marketsas the risk taking unit assumes ownership of the risk and manages the risk within the approved policies, risklimits and parameters as set by the GRMC or GALCO. The risk control function is undertaken by Group RiskManagement which provides independent monitoring, valuation and reporting of the market exposures. This issupplemented by periodic audit checking/sampling by Internal Audit.

For the Bank, market risk is managed on an integrated approach which involves the following processes:

identification of market risk in new products and changes in risk profiles of existing exposures.

assessment of the type and magnitude of market risks which takes into account the activity and marketrole undertaken.

adoption of various market risk measurement tools and techniques to quantify market risk exposures. Forexample, Value-at-Risk ("VaR"), price value of a basis point ("PV01") and repricing gap analysis.

adoption of 3 Lines of Defense concept for monitoring of market risk; Business Units forming the 1st Line,Group Market Risk Management as the 2nd Line and Internal Audit functioning as the 3rd Line.

scheduled and exception reporting on market risk exposures.

Market risk exists in the Bank's activities in bonds and money market instruments which are transactedprimarily by Financial Markets (treasury) department. Trading positions are held intentionally for short-termresale and with the intent of benefiting from actual or expected short-term price movements while banking bookpositions are held until maturity or as available-for-sale. Hence, these positions are susceptible to marketmovements.

These exposures are governed by approved policies, risk limits and pararmeters such as notional measures,sensitivity limits, value-at-risk measures, tenor limits and holding period. The limits and parameters are set vis-a-vis the Bank's risk appetite and strategy. Besides that, treasury activities are monitored and reportedindependently by Group Market Risk on a daily basis. Any limit breaches or exceptions are reported to GALCOand GRMC.

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4.0 Market Risk (contd.)

Market risk capital charge

Regulatory capital requirements

Risk- Weighted Capital

Assets Requirements2012 RM'000 RM'000

Profit rate risk- General profit rate risk 2,492 199 - Specific profit rate risk - -

2,492 199

Equity risk- General profit rate risk - - - Specific profit rate risk - -

- -

Foreign exchange risk - - 2,492 199

2011

Profit rate risk- General profit rate risk 3,725 298 - Specific profit rate risk - -

3,725 298

Equity risk- General profit rate risk - - - Specific profit rate risk - -

- -

Foreign exchange risk - - 3,725 298

The risk-weighted assets and capital requirements for the various categories of risk under market risk are asfollows:

For the Bank, the market risk charge is computed on the standardised approach and the capital charges aremainly on the Islamic bonds/sukuk.

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5.0 Operational Risk

Risk Governance

(i) Oversight and implementation of the Operational Risk Management ("ORM") Framework;(ii) Establishment of risk appetite and the provision of strategic and specific directions;(iii) Regular review of operational initiatives, risks reports and profiles;(iv) Addressing operational risk issues; and(v) Ensuring compliance with regulatory and internal requirements including disclosures.

Operational Risk Management

The Bank has adopted the following guiding principles for operational risk management:(i)

(ii) Board and Senior Management oversight.(iii) Defined responsibilities for all staff.(iv)

(v) Regular dashboard reports are submitted to Senior Management and Risk Management Committee.(vi)

- Risk and Control Self Assessment- Control Self Assessment- Loss Event Data Collection- Key Risk Indicator

Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes,people and systems or from external events.

Management, escalation and reporting of operational risks are instituted through committees such as the Group Operational Risk Management Committee and the Group Risk Management Committee as well as the Board.

The responsibilities of the Committees and Board include the following:

Sound risk management practices as outlined in the Islamic ORM Framework. This is in accordance withBasel II and complied with the Islamic Financial Services Board ("IFSB") and relevant regulatory bodies.

Established operational risk methodologies and processes applied in the identification, assessment,measurement, control and monitor of risks.

Continuous cultivation of an organisational culture that places great emphasis on effective operational riskmanagement and adherence to sound operating controls.

The ORM framework is supported by a comprehensive Group-wide integrated Operational Risk Managementsystem which include the adoption of the following tools:

The Bank actively promotes operational risk awareness by requiring all staff to attend training on the topic. Inaddition, business continuity and disaster recovery exercises are regularly conducted to verify the adequacyand reliability of the plans. Internal audit provides independent assurance of the implementation of theFramework through their regular audit reviews and independent reporting to the Group Audit Committe.

The Bank adopts Basic Indicator Approach for computation of operational RWA.

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6.0 Rate of Return Risk in the Banking Book

Risk Governance

RORBB Management

The guiding principles in managing RORBB include:

(i)

(ii)

(iii) setting of proper gapping limits and the limits monitored closely.

(iv)

(i)

(ii)

(iii)

Rate of return risk in the banking book ("RORBB") arise from exposure of banking book positions to profit ratemovements. Changes in profit rate affect the Bank's earnings by changing its net profit income and the level ofother profit rate sensitive income and expenses. It also affect the underlying value of banking assets, liabilitiesand off-balance sheet instruments as the present value of future cash flows change when profit rate change.

RORBB is managed collectively by GALCO, Financial Markets, Group Finance and Group Risk Management.Each of the above parties has clearly defined roles and responsibilities to provide oversight and manageRORBB within the defined framework and structure as approved by the Board of Directors/GRMC. GALCOassumes the overall responsibility in managing RORBB by setting the directions, strategy and risklimits/parameters for the Bank. On the ground, Financial Markets is tasked to execute the approved strategy bymanaging the asset liabilities as well as the funding and liquidity needs of the Bank. Group Finance and GroupRisk Management provide support in respect of risk monitoring and reporting of the banking book exposures;and ensuring regulatory as well as accounting requirements are met.

prudent approach in management of RORBB that commensurate with the Bank's size and businessactivities. This is achieved via establishing robust RORBB policies, measures and strategies which iscomplemeted by regular monitoring and reporting.

RORBB are accurately measured and any mismatches identified, reviewed and reported monthly toGALCO.

The Bank uses a range of tools, including the following primary measures to quantify and monitor RORBB:

Repricing gap analysis to measure interest rate/profit rate from the earnings perspective i.e. impact ofprofiit rate changes to earnings in the short term.

Net profit income simulation to assess the impact of profit rate changes on short term earnings volatility.

Economic value of equity (EVE) simulation which measures long term profit rate exposure throughdeterioration in capital base based on an adverse profit rate movements.

comprehensive RORBB reporting and review process which provide aggregate information and sufficientsupporting detail to enable assessment of the Bank's sensitivity to changes in market conditions.

Group Risk Management performs independent monitoring of the profit rate benchmarks to ensure compliance.Any exceptions are reported and appropriate remedial actions are taken, where necessary. Schedule reportingvia risk dashboards are provided to senior management and Board committees monthly. The risk dashboardsprovide a visual gauge ("dashboard view") on the RORBB of the Bank.

The Bank is guided by BNM's guidelines and Basel standards on management of RORBB.

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6.0 Rate of Return Risk in the Banking Book (contd.)

- 100 bps + 100 bps - 100 bps + 100 bpsIncrease/(Decrease) Increase/(Decrease)

RM'000 RM'000 RM'000 RM'000Impact on net profit incomeRinggit Malaysia (1,399) 1,399 5,945 (5,945)

Impact on Economic valueRinggit Malaysia (76,233) 76,233 92,500 (92,500)

7.0 Shariah Governance Disclosures and Profit Sharing Investment Account ("PSIA")

Displaced Commercial Risk

i)

ii)

Shariah Governance Disclosure

(i)

(ii)

(iii)

(iv)

(v) Well-defined responsibilities for all lines of business of the Bank.

2012 2011

The following tables present the Bank's projected sensitivity to a 100 basis point parallel shock to profit ratesacross all maturities applied on the Bank's profit sensitivity gap as at reporting date.

Displaced commercial risk refers to the risk of losses which an Islamic Bank absorbs to make sure thatInvestment Account Holders ("IAH") are paid with a competitive rate of return. This risk arises when the actualrate of return is lower than returns expected by IAH of an Islamic Bank.

The profit equalization reserve ("PER") is used as a mechanism to smoothen the returns. This mitigates thedisplaced commercial risk for an Islamic Bank so that a competitive rate of return can be distributed to its IAH.

In the event there is no PER balance to be distributed, the Bank may employ the following techniques:-

The Shariah Compliance Risk is a risk arising from a Bank’s failure to comply with the Shariah rules andprinciples determined by the relevant Shariah regulatory councils. To manage the risks, the Bank has adoptedthe following guiding principles:

A sound Shariah Compliance Framework which outlines the roles of key functionalities within the Bank,including but not limited to the Shariah risk management process. This is in line with the ShariahGovernance Framework issued by BNM.

The Board of Directors, Shariah Committee and Senior Management provide oversight on Shariahcompliance aspects of the Islamic Bank’s overall operations.

Appointment of two Shariah Committee member as a member of the Board of Directors to serve as a‘bridge’ between the Board and the Shariah Committee.

Qualified Shariah Committee members who are able to deliberate the Shariah issues brought before themand provide sound Shariah decisions.

to forgo part or all of the Bank's share of profit to the IAH by way of varying the percentage of profit taken inorder to increase the share attributed to the IAH in any particular period; and/or

to transfer the Bank's current year profits or retained earnings to the IAH on the basis of hibah.

28


7.0 Shariah Governance Disclosures and Profit Sharing Investment Account ("PSIA") (contd.)

Shariah Governance Disclosure (contd.)

(vi)

(vii)

The responsibilities of the Board and Shariah Committee include the following:(i) Oversight and implementation of the Shariah Compliance Frameworks.(ii) Regular review of non-Shariah compliance income and issues.(iii) Addressing non-Shariah compliance findings.(iv) Ensuring compliance with regulatory and internal requirements including disclosures.

(i)

(ii)

(iii)

Emplacement of the Head of Shariah Compliance & Secretariat Department in the Credit Committeemeeting to advise the committee on any Shariah-related matters.

Well-established Shariah Review and Training and Islamic operational risk methodologies and processesapplied in the identification, assessment, measurement, control and monitor of risks.

A robust Shariah compliance function which include review, training, research and secretariat under theShariah Compliance & Secretariat Department where the roles include:

Regular assessment on Shariah compliance in the activities and operations of the Bank by qualifiedofficers.

Performing an in-depth research and studies on Shariah issues, including providing day-to-day Shariahadvice and consultancy to relevant parties.

Conducting Shariah-related training to all parties within the Bank and engaging with the relevant partieswho wish to seek further deliberations on Shariah requirements.

Escalation and reporting processes of non-Shariah compliance income and issues are well instituted throughvarious committees such as the Shariah Committee and the Board.

Islamic new product or services are subject to risk review and sign-off process by Shariah Committee and bythe Board for approval.

Establishment of Shariah Review and Audit function which conduct periodic assessment on the Bankoperations. This provide an independent assessment and objective assurance designed to add value andimprove the degree of compliance in business operations. The Shariah Review and Audit function provideregular audit reviews which are reported to the Shariah Committee and Audit Committee respectively.

Shariah review and audit exercise will highlight any potential Shariah non-compliance which will be highlightedto the Shariah Committee for decision. Any rectification process is upon consultation with the ShariahCommittee and any non-compliant income discovered during the review exercise will be channeled to charity.

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Documents

BASEL II PILLAR 3 REPORT FOR THE FINANCIAL YEAR ENDED 31 ... · Pillar 3 - covers disclosure and external communication of risk and capital information by banks. The Bank maintains