Capital Adequacy Regulatory Framework for Banks Operating in Lebanon and International Financial Reporting Standard no. 9 (IFRS 9)

Circular No. 649 For Banks

We enclose a copy of Circular Decision No. 13502 dated 24/11/2022 regarding the amendment of:

• Decision No. 6939 dated 25/3/1998 (Regulatory Framework for the Capital Adequacy of Banks Operating in Lebanon) attached to Circular No. 44.
• Decision No. 12713 dated 7/11/2017 regarding the application of International Financial Reporting Standard No. 9 (IFRS 9) attached to Circular No. 143.

Beirut, on November 24, 2022 Governor of the Central Bank of Lebanon Riad T. Salam

Circular Decision No. 13502 Amendment of Decision No. 6939 dated 25/3/1998 and Decision No. 12713 dated 7/11/2017

The Governor of the Central Bank of Lebanon, based on the Monetary and Banking Law, particularly Articles 174 and 70 thereof, and based on Decision No. 6939 dated 25/3/1998 and its amendments regarding the Regulatory Framework for the Capital Adequacy of Banks Operating in Lebanon, and based on Decision No. 12713 dated 7/11/2017 and its amendments regarding the application of International Financial Reporting Standard No. 9 (IFRS 9), and in view of the exceptional circumstances prevailing, and based on the resolution of the Central Council of the Central Bank of Lebanon taken in its meeting held on 9/11/2022, hereby decides as follows:

The text of the "second" paragraph of "Article 1" from "Article 12 bis" dated 25/3/1998 of Decision No. 6939 is repealed and replaced with the following text: Banks may, exceptionally, when calculating capital adequacy ratios, add to their own funds a portion of the value of losses resulting from operations purchasing US dollars from the Central Bank of Lebanon to settle banknotes (Banknotes) in Lebanese Lira with a view to reducing the central bank's positions prior to 17/11/2022, as follows:

• In the year 2022: at a rate of 66% of their value, up to a maximum.
• In the year 2023: at a rate of 33% of their value, up to a maximum.

Article Two: The following text is added to "Article 12 bis" of Decision No. 6939 dated 25/3/1998: The "third" paragraph: Banks shall disclose in their annual reports the adoption of the procedures referred to in both the "first" and "second" paragraphs of this Article and their impact on capital adequacy ratios.

Article Three: The text of Annexes No. (1) and No. (6) attached to Decision No. 6939 dated 25/3/1998 is repealed and replaced by the new annexes attached to this Decision.

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Article Four: The text of Item (2) of the third paragraph of Article 6 of Decision No. 12713 dated 7/11/2017 is repealed and replaced with the following text: « 2- The provisions referred to above shall be gradually established over a period ending on 31/12/2026, whereas regarding banks granted a 10-year period to establish these provisions, they are required to establish them over a period ending on 31/12/2029.»

Article Five: This Decision shall take effect upon its issuance. Article Six: This Decision shall be published in the Official Gazette.

Beirut, on November 24, 2022 Governor of the Central Bank of Lebanon Riad T. Salam

Annex No. 1: Common Equity Tier 1 (CET1) Rights consist of the following elements:

1. The nominal value of ordinary shares and other capital instruments meeting the conditions for elements accepted within Common Equity Tier 1 rights.
2. Capital reserves.
3. Ordinary share issuance costs and other capital instruments meeting the conditions for elements accepted within Common Equity Tier 1 rights, and merger costs.
4. Cash advances allocated to capital on which interest is paid.
5. Funds allocated to real estate investments referred to in Article Seven of this Decision.
7. Statutory and regulatory reserves, and other reserves including real estate liquidation reserves and special reserves against doubtful, bad, and unsettled debts according to Decision No. 7694 dated 18/10/2000, excluding the reserve established against unrealized profits on shares classified as Fair Value Through Other Comprehensive Income (FVTOCI) approved by the Central Council in accordance with the provisions of the second paragraph of Article 8 bis of this Decision.
8. Retained prior results, current financial year result, and income/expense accounts.
9. Reserves related to other comprehensive income elements, including:

• Differences resulting from revaluation of real estate or other fixed assets accepted within Common Equity Tier 1 rights, excluding properties held to settle debts in accordance with Article 154 of the Monetary and Banking Law.
• Net unrealized profits or losses on financial instruments classified at fair value through other comprehensive income (Cumulative Change in the Fair Value of Financial Instruments Classified as Fair Value Through OCI).
• Cumulative valuation differences from translating financial assets into foreign currency (Foreign Currency Translation Adjustment).
• Revaluation reserve for hedging instruments (Cash Flow Hedge Reserves).
• Reserve for changes in own credit risk.
• Other reserves related to other comprehensive income elements.

10. Minority interest in Common Equity Tier 1 rights accepted within CET1 (Interest Minority).
11. "Regulatory Adjustments", which include: a. The following deductions:
    • Current financial year result, if positive, and income/expense accounts, if positive.
    • Total unrealized profits on financial instruments classified as fair value through other comprehensive income (Positive Changes in Fair Value of the Financial Instruments Classified as Fair Value Through OCI).
    • Cumulative positive valuation differences from translating financial assets into foreign currency (Positive Foreign Currency Translation Adjustments).
    • Negative or positive reserve resulting from revaluation of hedging instruments (Cash Flow Hedge Reserves).
    • Negative or positive reserve resulting from changes in own credit risk (Own Credit Risk Reserves).
    • Other positive reserves related to other comprehensive income elements.
    • Shortfall in the required real estate and liquidation reserves.
    • Shortfall in the special reserves required against doubtful, bad, and unsettled debts according to Decision No. 7694 dated 18/10/2000.
    • Ordinary shares and debt instruments related to own funds repurchased directly or indirectly.
    • Goodwill and net other intangible fixed assets (Other Intangible Assets).
    • Shortfall in required provisions.
    • Negative difference between available provision balances and the total expected losses on financial assets within the balance sheet and off-balance-sheet financial liabilities, produced and unproduced.*
    • Excess over the provisions of Articles 152 or 153 of the Monetary and Banking Law (whichever is greater).
    • Total cross-holdings (ordinary shares and related cash advances and other capital instruments meeting the conditions for elements accepted within Common Equity Tier 1 rights) in banks, financial institutions, and insurance companies, deductible from CET1 (Reciprocal Cross Holdings).
    • Shortfall in the reserve established against unrealized profits on shares classified as FVTOCI approved by the Central Council in accordance with the provisions of the second paragraph of Article 8 bis of this Decision, which must be established. b. The following additions:
    • Provisions established on financial assets within the balance sheet and off-balance-sheet financial liabilities, produced (Stage 1) and unproduced (Stage 2), with no significant increase in credit risk, except provisions established on the portfolio of investments in Lebanese State Treasury bonds and the Central Bank of Lebanon investment portfolio, in accordance with the provisions of the "first" paragraph of Article 12 bis** including deposit certificates.
    • 75% of unrealized profits on shares classified as FVTOCI approved by the Central Council in accordance with the provisions of the second paragraph of Article 8 bis of this Decision. c. Losses resulting from operations purchasing US dollars from the Central Bank of Lebanon to settle banknotes (Banknotes) in Lebanese Lira with a view to reducing the Central Bank's positions, in accordance with the provisions of the "second" paragraph of Article 12 bis.

Notes:

• The application of this item is suspended until the end of 2024 based on the limit specified in the "first" paragraph of Article 12 bis. ** This item applies until the end of 2024, in accordance with the limit specified in the "first" paragraph of Article 12 bis.

Annex No. 6 Table of Applied Rates for Calculating Expected Systemic Losses

Investments at the Central Bank of Lebanon in Lebanese Lira (including deposit certificates): 0% Investments at the Central Bank of Lebanon in foreign currency, maturity less than one year: 1.89% Investments at the Central Bank of Lebanon in foreign currency (including deposit certificates) - maturity more than one year: 1.89% Investments at foreign central banks in local currency: 0% Investments at foreign central banks in foreign currency:

• In BBB and above rated countries: 0.03%
• In below BBB and unrated countries: 0.72% Investments in Lebanese Treasury bonds in Lebanese Lira: 0% Investments in Lebanese Treasury bonds in foreign currency: 75% Investments in foreign government bonds in local currency: 0% Investments in foreign government bonds in foreign currency:
• In BBB and above rated countries: 0.03%
• In below BBB and unrated countries: 0.72% Investments at resident banks (including issued debt securities): 1.89% Investments at non-resident banks (including issued debt securities):
• Rated BBB and above: 0.15%
• Rated below BBB and unrated: 0.72% Portfolio of loans granted to public sector institutions (treated as sovereign investments) in Lebanon in Lebanese Lira: 0% Portfolio of loans granted to public sector institutions (treated as sovereign investments) in Lebanon in foreign currency: 75% Portfolio of loans granted to public sector institutions (treated as sovereign investments) abroad in local currency: 0% Portfolio of loans granted to public sector institutions (treated as sovereign investments) abroad in foreign currency:
• In BBB and above rated countries: 0.03%
• In below BBB and unrated countries: 0.72% Portfolio of loans granted to public sector institutions (treated as corporate loan portfolio):
• Resident: 75%
• Non-resident: 0.72% Corporate loan portfolio (including issued debt securities) - Resident: 9.45% Corporate loan portfolio (including issued debt securities) - Non-resident: 0.72% SME loan portfolio (including issued debt securities):
• Resident: 3%
• Non-resident: 0.6% Retail loan portfolio - Resident: 1.75% Retail loan portfolio - Non-resident: 0.35% Residential loan portfolio - Resident: 1.75% Residential loan portfolio - Non-resident: 0.35% Commercial real estate-backed loan portfolio (used properties) - Resident: 3.6% Commercial real estate-backed loan portfolio (used properties) - Non-resident: 0.72% Other assets subject to IFRS 9: 0.72% Note: Investments and loans include, where applicable, off-balance-sheet financial liabilities after applying appropriate credit conversion factors.