Mr. / Chairman of the Board of Directors

Cairo, July 14, 2015

Dear Sir,

In the context of the pursuit to apply international best practices in banking supervision, particularly the requirements of the Basel Committee, the Board of Directors of the Central Bank of Egypt previously issued instructions regarding the minimum standard for capital adequacy in December 2012. To ensure continuous alignment with the latest developments in this field, we previously communicated with you in February 2014 a discussion paper concerning the Leverage Ratio to measure the adequacy of Tier 1 capital relative to the bank's total unweighted assets, as well as a Quantitative Impact Study (QIS) model to illustrate the impact of applying the proposed ratio on your bank.

In this regard, the Board of Directors of the Central Bank of Egypt issued the following decision at its meeting held on July 7, 2015:

"Approval of the attached supervisory instructions regarding the Leverage Ratio, with banks required to adhere to the minimum prescribed ratio (3%) on a quarterly basis, as follows:

• As a reference ratio from late September 2015 until 2017.
• As a binding supervisory ratio from 2018.

This is to pave the way for considering its inclusion within Pillar 1 of the Basel regulations (minimum capital adequacy standard) for the greater purpose of maintaining the strength and stability of the Egyptian banking sector and keeping pace with international supervisory practices in this regard."

Furthermore, the bank's leverage ratio statements will be monitored during the transitional period until 2017 according to (CD), and it is required to disclose the ratio and the components of the numerator and denominator for the attached model in the published financial statements.

Please be kind enough to alert regarding full compliance with the aforementioned instructions.

Accept our highest regards,

Hesham Ramzy Abdel Hafez

Central Bank of Egypt
Supervision and Inspection Sector
Supervisory Instructions Regarding
The Leverage Ratio

In light of the Central Bank of Egypt's commitment to applying the latest international practices in the Egyptian banking sector, with the aim of enhancing its competitiveness and fortifying it against potential financial crises, and following the Basel Committee on Banking Supervision's update in January 2014 regarding the leverage ratio, which proposed a simple, non-risk-based complement to the capital adequacy standard as a measure calculated according to risk weights, the following supervisory instructions were prepared to be applied during the transitional period proposed by the aforementioned Committee from late September 2015 until 2017. This is the period designated for disclosing the ratio for reference in evaluating the components and amount of the ratio, paving the way for the "minimum capital adequacy standard" under Pillar 1 of the Basel regulations as a binding supervisory ratio from 2018. This aims to reflect the relationship between Tier 1 capital used in the capital adequacy standard (after exclusions) and the bank's assets (on and off-balance sheet) unweighted by risk weights, which must not be less than 3%, as will be detailed later.

1. Scope of Application

• These instructions apply to all banks operating in the Arab Republic of Egypt, excluding branches of foreign banks subject to the supervision of the Central Bank of Egypt, on an individual or consolidated basis in line with previous supervisory instructions issued in December 2012 regarding the minimum standard for capital adequacy within the framework of implementing Basel regulations.

• Banks must adhere to a leverage ratio of not less than 3%, which reflects the adequacy of Tier 1 capital (after exclusions) used in the capital adequacy standard to cover the bank's assets unweighted by risk weights, according to the following:

Tier 1 Capital after Exclusions
Leverage Ratio = ≥ 3%
Total On and Off-Balance Sheet Assets Unweighted by Risk

• Banks must apply a leverage ratio of not less than 3% during a transitional period until January 2017. During this period, emphasis will be placed on monitoring the leverage ratio data for banks (according to Leverage Ratio Model No. 2).

• Banks must disclose the leverage ratio and the components of the numerator and denominator in their financial statements.

2. Components of the Ratio

2.1 Components of the Numerator

The numerator of the ratio consists of Tier 1 capital (after exclusions) used in the numerator of the capital adequacy standard currently applied in accordance with the Central Bank of Egypt instructions mentioned above.

2.2 Components of the Denominator

a) The denominator of the ratio consists of all the bank's assets on and off the balance sheet - referred to in financial statements as "Bank Exposures" - and includes the sum of the following:

1. On-balance sheet items exposures after deducting certain exclusions of Tier 1 of the capital base as shown in Model No. (2).
2. Exposures resulting from derivative contracts.
3. Exposures resulting from securities financing transactions.
4. Off-balance sheet exposures.

Banks must process the aforementioned exposures as follows:

1. On-balance sheet items exposures after deducting certain exclusions of Tier 1 capital:

• Include all balance sheet assets within the measurement of exposures in the leverage ratio, excluding derivatives listed on the balance sheet and securities financing transactions, which will be included under the item of exposures resulting from derivative contracts and exposures resulting from securities financing transactions, observing the following:

• On-balance sheet items must be included in asset exposures net of the impairment loss allowance for non-performing accounts and taking into account any valuations resulting from the application of recognized accounting rules.

• The use of credit risk mitigation techniques, as well as collateral and guarantees, is not permitted to reduce on-balance sheet item exposures.

• Netting between loans and secured deposits is not permitted.

Calculation of exposures resulting from derivative contracts (exposure resulting from the underlying derivative contract and exposure resulting from counterparty risk):

By calculating the current replacement cost of the exposure (RC) plus the potential future exposure (PFE), as follows:

Exposure Measurement = Replacement Cost (RC) + Potential Future Exposure (PFE)

Where:

Replacement Cost (RC): Represents the positive value of the contract (i.e., unfavorable to the bank in the event of default), obtained from market valuations.

Potential Future Exposure (PFE): Represents the product of the notional value (contractual value) of the contract and the percentages specified in the following table:

Remaining Period	Until Maturity
Interest Rate Contracts
Less than 1 year	0%
More than 1 year up to 5 years	0.5%
More than 5 years	1.5%
Foreign Exchange Contracts
Less than 1 year	1%
More than 1 year up to 5 years	5%
More than 5 years	7.5%
Equity Contracts
Less than 1 year	6%
More than 1 year up to 5 years	8%
More than 5 years	10%

3. Exposures resulting from securities financing transactions:

• Exposures resulting from securities financing transactions include those resulting from:

  1. Margin lending operations.
  2. Securities lending and borrowing operations.
  3. Sale and repurchase agreements and their reverse operations.

• Banks must measure the value of exposures for this type of operation as follows:

a) If the Bank is a Principal Party:

• Total exposures reported in the accounting consideration: Assets of the bank resulting from the operation, excluding the value of securities delivered to the bank within the scope of the securities financing operation if the bank records these securities on the asset side.

According to the definitions provided in the Executive Bylaws of Capital Market Law No. 95 of 1992 or those replaced by Minister of Investment Decision No. 84 of 2007.

• Add the difference between amounts due to the counterparty and amounts due from the same counterparty (if positive - unfavorable to the bank), provided the following conditions are met:
  • These transactions have a unified and explicit final settlement date.
  • The right to netting with the counterparty is legally enforceable in normal circumstances or in the event of non-payment, default, or bankruptcy.
  • There is a mutual desire between the counterparties to settle the value of delivered and received amounts related to securities financing transactions on a net basis and on the same settlement date through a single payment system, and settlement arrangements are supported by the availability of liquidity and/or credit facilities during the day to ensure the completion of the settlement process at the end of the day.

b) Counterparty Risk Value:

Calculated without taking into account the Potential Future Exposure (PFE), based on the positive difference between the fair value of securities or lent amounts and the fair value of securities or borrowed amounts with the same counterparty for each operation individually.

b) If the Bank is an Agent:

In this case, the value of exposures arising from these operations is measured and recorded by calculating the positive difference between the fair value of securities or cash provided by the bank's client (whom the bank guarantees) to the other party for the operation, and the fair value of securities or cash received from the other party.

4. Off-balance sheet exposures:

• Include off-balance sheet items, which include cancellable and non-cancellable commitments, letters of credit, documentary credits, and guarantee letters, etc., in the denominator of the leverage ratio after applying appropriate conversion factors (according to the table of conversion factors used for off-balance sheet items - Annex No. 1).

• Off-balance sheet items are included net of the impairment loss allowance for non-performing accounts and cash coverages.

Annex No. (1)

Item	Conversion Factor (CCF)
A. Cancellable Commitments
Documentary credits - Import	20%
Documentary credits - Export	20%
Guarantee letters	50%
Construction guarantee letters based on bank orders or their guarantees	50%
Cancellable commitments for general credit facilities and similar guarantees	100%
Accepted bills	100%
Commercial papers re-issued	100%
All exposures related to securitization operations	100%
B. Irrevocable Commitments
Capital commitments	100%
Quasi-equity claims	100%
Commitments related to operating lease contracts	100%
Commitments related to loans and facilities for banks/customers (unused portion) with original maturity *:
a. Non-cancellable	20% (if > 1 year), 50% (if ≤ 1 year)
b. Cancellable without conditions by the bank without prior notice or which fall within the scope of self-cancellation due to deterioration of the borrower's creditworthiness.	100%

*The maturity period is calculated from the original maturity date from the date of entry into the operation.

Leverage Ratio Model

Item	Total
First	Tier 1 Capital after exclusions
From the Capital Adequacy Standard Model
Second	Total On and Off-Balance Sheet Exposures
0
Total On-Balance Sheet Exposures and Financial Derivatives and Securities Financing
0
1.1	On-balance sheet items exposures after deducting exclusions of Tier 1
0	Includes:
1.1.1	Cash reserves and reserves at the Central Bank of Egypt
1.1.2	Other reserves at the Central Bank
0	Reserves due from banks
0	Current accounts and deposits
Loans
...	...

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