Stress Testing Data for Banks as of End of 2019

1

Stress Testing Data for Banks as of End of 2019

First: Sensitivity Analysis Tests

A. Credit Risk

These tests aim to measure the impact of the economic cycle on specific factors in the bank, and thus on the potential increase in credit risk in the bank, while preparing the tests such that the impact is calculated on the bank's profitability and on the regulatory capital adequacy ratio as a percentage of Tier 1 capital.

1. Shock: Increase in Indirect Facilities

Assumed Increase Percentage:

• Moderate Intensity: 50%
• Medium Intensity: 100%
• Severe Intensity: 150%

2. Shock: Increase in Indirect Facilities for the Five Largest Economic Sectors

Excluding facilities obtained directly from the bank.

Assumed Increase Percentage:

• Moderate Intensity: 10%
• Medium Intensity: 25%
• Severe Intensity: 50%

3. Shock: Increase in Indirect Facilities Granted to the Real Estate Sector

Assumed Increase Percentage:

• Moderate Intensity: 10%
• Medium Intensity: 25%
• Severe Intensity: 50%

4. Shock: Default of the Bank's Largest Borrower

Excluding facilities guaranteed by the Jordanian Government (before them, facilities are classified as credit granted to them).

Assumed Default Factor:

• Moderate Intensity: Default of the largest borrower
• Medium Intensity: Default of the 3 largest borrowers
• Severe Intensity: Default of the 6 largest borrowers

Note: Banks must attach a list of names and values of the six largest granted facilities, excluding facilities guaranteed by the Jordanian Government (before them) used in applying the above tests.

5. Shock: Default of the Bank's Largest Borrower

Excluding facilities guaranteed by the Jordanian Government and facilities guaranteed by the Jordanian Oil Refinery Company and electricity companies (before them, facilities are classified as credit granted to them).

Assumed Default Factor:

• Moderate Intensity: Default of the largest borrower
• Medium Intensity: Default of the 3 largest borrowers
• Severe Intensity: Default of the 6 largest borrowers

Note: Banks must attach a list of names and values of the six largest granted facilities, excluding facilities guaranteed by the Jordanian Government, facilities guaranteed by the Jordanian Oil Refinery Company, and facilities guaranteed by electricity companies (before them) used in applying the above tests.

6. Shock: Decrease in the Value of Collateral Placed Against Indirect Facilities

Assumed Decrease Percentage:

• Moderate Intensity: 10%
• Medium Intensity: 20%
• Severe Intensity: 30%

B. Market Risk

The primary objective of conducting market risk sensitivity analysis tests is to know the potential changes in market prices and losses on profits and on the regulatory capital adequacy ratio as a percentage of Tier 1 capital.

The bank must conduct the following tests on the bank:

1. Shock: Exchange Rate Risk

• Decrease in the Jordanian Dinar Exchange Rate: Assumed Decrease:

  • Moderate Intensity: 15% decrease in the Jordanian Dinar exchange rate against other currencies
  • Medium Intensity: 20% decrease in the Jordanian Dinar exchange rate against other currencies
  • Severe Intensity: 25% decrease in the Jordanian Dinar exchange rate against other currencies

• Increase in the Jordanian Dinar Exchange Rate: Assumed Increase:

  • Moderate Intensity: 15% increase in the Jordanian Dinar exchange rate against other currencies
  • Medium Intensity: 20% increase in the Jordanian Dinar exchange rate against other currencies
  • Severe Intensity: 25% increase in the Jordanian Dinar exchange rate against other currencies

2. Shock: Interest Rate Risk

Changes in interest rates in the market may negatively affect the bank's financial position. In addition to the direct impact on the bank's net interest income (bank revenues), there is a medium to long-term impact on the market value of the bank's assets and liabilities.

Sensitivity tests are applied to instruments related to interest rates, whether classified in the trading portfolio or the banking portfolio, with fixed or variable interest rates. The tests are conducted by analyzing the specific gaps as follows:

Gap Analysis Tests:

These tests aim to determine the bank's position regarding interest rate sensitive assets and liabilities. The tests are conducted as follows:

Assumed Decrease/Increase:

• Moderate Intensity: 100 basis points decrease/increase in interest rates
• Medium Intensity: 150 basis points decrease/increase in interest rates
• Severe Intensity: 200 basis points decrease/increase in interest rates

3. Shock: Share Price Decrease Risk

The bank must conduct the following tests:

Assumed Decrease:

• Moderate Intensity: 10% decrease in share prices held by the bank as an investor
• Medium Intensity: 20% decrease in share prices held by the bank as an investor
• Severe Intensity: 30% decrease in share prices held by the bank as an investor

C. Liquidity Risk

The liquidity in the bank depends significantly on its ability to meet its obligations. In addition, the bank must conduct cash flow forecasts to determine cash requirements under normal operating conditions. The bank must conduct tests on liquidity, specifically by conducting cash flow tests based on "What if" scenarios under stress conditions:

1. Outflows Tests

• Withdrawal of a portion of Stable Individual Deposits: Assumed Decrease:

  • Moderate Intensity: 5% withdrawal of a portion of stable individual deposits
  • Medium Intensity: 10% withdrawal of a portion of stable individual deposits
  • Severe Intensity: 20% withdrawal of a portion of stable individual deposits

• Withdrawal of a portion of Unstable Individual Deposits: Assumed Decrease:

  • Moderate Intensity: 10% withdrawal of a portion of unstable individual deposits
  • Medium Intensity: 20% withdrawal of a portion of unstable individual deposits
  • Severe Intensity: 30% withdrawal of a portion of unstable individual deposits

• Withdrawal of a portion of Stable Corporate Deposits: Assumed Decrease:

  • Moderate Intensity: 5% withdrawal of a portion of stable corporate deposits
  • Medium Intensity: 10% withdrawal of a portion of stable corporate deposits
  • Severe Intensity: 20% withdrawal of a portion of stable corporate deposits

• Withdrawal of a portion of Unstable Corporate Deposits: Assumed Decrease:

  • Moderate Intensity: 10% withdrawal of a portion of unstable corporate deposits
  • Medium Intensity: 20% withdrawal of a portion of unstable corporate deposits
  • Severe Intensity: 30% withdrawal of a portion of unstable corporate deposits

• Withdrawal of a portion of Unused Limits on Facilities for Individuals and Small and Medium Enterprises: Assumed Decrease:

  • Moderate Intensity: 5% withdrawal of a portion of unused limits on facilities for individuals and small and medium enterprises
  • Medium Intensity: 10% withdrawal of a portion of unused limits on facilities for individuals and small and medium enterprises
  • Severe Intensity: 20% withdrawal of a portion of unused limits on facilities for individuals and small and medium enterprises

• Withdrawal of a portion of Unused Limits on Facilities for Non-Financial Companies: Assumed Decrease:

  • Moderate Intensity: 10% withdrawal of a portion of unused limits on facilities for non-financial companies
  • Medium Intensity: 20% withdrawal of a portion of unused limits on facilities for non-financial companies
  • Severe Intensity: 40% withdrawal of a portion of unused limits on facilities for non-financial companies

• Withdrawal of a portion of Unused Limits on Facilities for Financial Companies: Assumed Decrease:

  • Moderate Intensity: 40% withdrawal of a portion of unused limits on facilities for financial companies
  • Medium Intensity: 80% withdrawal of a portion of unused limits on facilities for financial companies
  • Severe Intensity: 100% withdrawal of a portion of unused limits on facilities for financial companies

• Withdrawal of the Largest Deposit: Assumed Decrease:

  • Moderate Intensity: Withdrawal of the largest deposit
  • Medium Intensity: Withdrawal of the three largest deposits
  • Severe Intensity: Withdrawal of the five largest deposits

Note: Banks must attach a list of names and values of the five largest deposits with the bank, along with the results of applying the withdrawal test.

• Decrease in Liquid Assets: Assumed Decrease:
  • Moderate Intensity: 5% decrease in liquid assets held by the bank
  • Medium Intensity: 10% decrease in liquid assets held by the bank
  • Severe Intensity: 20% decrease in liquid assets held by the bank

Note: The bank may refer to Basel III standards regarding the use of a specific methodology for determining stable deposits, providing details of the method used by the bank to determine these deposits, with the necessity of providing this to the Central Bank.

D. Operational Risk

The bank must assume three minimum assumptions for operational risk tests to measure their potential impact on the bank's profitability and regulatory capital adequacy ratio as a percentage of Tier 1 capital.

These tests include:

1. Test regarding the probability of the spread of the Corona Virus (COVID-19): The bank must assess and measure its impact by assuming a work disruption period (shorter than 5 days) or a more severe assumption (longer work disruption period, more than 5 days).

2. Occurrence of a Cyber Attack on the Bank.

3. Armed robbery on one of the bank's branches, internal fraud, or fire in the bank's infrastructure.

4. Change in behavior of correspondent banks, or lawsuits filed against the bank affecting its reputation, such as a penalty imposed by the regulatory authority, or a significant violation of laws by the host or home country, etc.

5. Engaging in unsafe or unsound banking practices, or violating regulations or instructions.

E. Additional Stress Tests

In addition to the specified tests above, the bank must conduct additional tests, not less than one additional test for each type of risk faced, commensurate with the nature and volume of the risks referred to above.

Second: Scenario Tests

The macro scenarios are designed to assess the banks' ability to withstand shocks, assuming a worsening of regional conditions surrounding the Kingdom, a significant impact on the financial conditions of Gulf Arab countries, and a significant impact on Jordan due to a noticeable decline in the volume of remittances from Jordanians in these countries, in addition to a decline in oil prices. This may lead to a noticeable slowdown in growth rates, a decline in tourism income and direct investment, and an increase in unemployment levels. Also, assuming an increase in interest rates faster than expected, and the US Dollar appreciating significantly, which may negatively affect the attractiveness of the Dinar as a currency, thereby negatively affecting economic growth in the Kingdom.

The impact of these assumptions on banks is usually measured using the Gross Domestic Product (GDP) growth rate as one of the main economic variables affecting non-performing loans. This impact is measured on the regulatory capital adequacy ratio as a percentage of Tier 1 capital, where the bank has non-performing loans. Economic research indicates that a decrease in the economic growth rate leads to an increase in non-performing loans, and consequently a decline in customers' ability to repay their debts due to a decline in economic activity. Other variables such as the non-performing loans ratio, inflation rate, unemployment rate, and interest rates can also be used to predict the non-performing loans ratio for the coming year.

A Multiple Regression Analysis methodology is used to predict the non-performing loans ratio for the coming year according to the following model:

NPL = ß0 + ß1NPL(-1) + ß2X1 + ß3X2 + … + ßn+1Xn + e

Where:

• NPL: Non-performing loans ratio for the coming year
• ß0: Constant
• NPL(-1): Non-performing loans ratio for the previous year
• X1-Xn: Macroeconomic variables used to predict the non-performing loans ratio (e.g., economic growth rate, unemployment rate, interest rates, share prices, etc.)
• ß1-ßn: Regression Coefficients

The Central Bank will conduct the following scenarios, and banks must provide the Central Bank with the required scenarios annually, which may differ from bank to bank.

A. Current Situation Scenario (Baseline Scenario): The macroeconomic variables were based on the International Monetary Fund's forecasts, as shown in Appendix (3).

• Economic Growth Rate: 2.4%
• Unemployment Rate: 19.1%
• Interest Rates: 8.2%

B. Medium Macro Stress Scenario:

• Economic Growth Rate in the Kingdom decreases to 0.16%
• Unemployment Rate increases to 21.0%
• Interest Rates increase by 100 basis points

C. Severe Macro Stress Scenario:

• Economic Growth Rate in the Kingdom decreases to -2.1%
• Unemployment Rate increases to 23.0%
• Interest Rates increase by 200 basis points

The following methodology was used to reach the above ratios:

• Medium Macro Scenario: The expected economic growth rate for 2020 is subtracted by one standard deviation of the economic growth rate data during the period (1994-2019), and one standard deviation of the unemployment rate data during the period (1994-2019) is added to the 2019 unemployment rate.

• Severe Macro Scenario: The expected economic growth rate for 2020 is subtracted by two standard deviations of the economic growth rate data during the period (1994-2019), and two standard deviations of the unemployment rate data during the period (1994-2019) are added to the 2019 unemployment rate.

Regarding the assumptions used, the interest rate gradients were prepared in accordance with the guidelines in the "Stress Testing Data for Banks in Jordan" dated 1/1/2016, regarding the standard shock for interest rate risk, and Basel Committee guidelines dated 6/12/2016.

Tests related to the impact of the spread of the Corona Virus were added to some scenarios, considering the concerns about the medium to long-term effects of the spread of the Corona Virus inside or outside the Kingdom. Banks must calculate the impact of the following scenarios on their capital adequacy ratios and profit provisions (Multi Factor shock):

• Medium Intensity Scenario:

  1. 25% default on facilities granted to the Tourism and Transport sectors, classified as non-performing facilities.
  2. 5% default on facilities granted to individuals, classified as non-performing facilities.
  3. 20% decrease in share prices held by the bank as an investor.
  4. 20% decrease in profits of the bank's branches and companies abroad, such as companies with external branches or subsidiaries in countries affected by the virus spread (e.g., Germany, France, Spain, South Korea, Iran, Italy, China, etc.).

• Severe Intensity Scenario:

  1. 50% default on facilities granted to the Tourism and Transport sectors, classified as non-performing facilities.
  2. 10% default on facilities granted to individuals, classified as non-performing facilities.
  3. 40% decrease in share prices held by the bank as an investor.
  4. 40% decrease in profits of the bank's branches and companies abroad, such as companies with external branches or subsidiaries in countries affected by the virus spread (e.g., Germany, France, Spain, South Korea, Iran, Italy, China, etc.).

Appendix (1): Sensitivity Analysis Models

Credit Risk

Shock Intensity	Before Shock	After Shock
Regulatory Capital Adequacy Ratio	Tier 1 Capital Adequacy Ratio	Risk-Weighted Assets
Before Shock	After Shock	Before Shock
Increase in Non-Performing Loans (%)
Moderate (50)
Medium (100)
Severe (150)
Increase in Non-Performing Loans for the Five Largest Economic Sectors Obtained from the Bank (%)
Moderate (10)
Medium (25)
Severe (50)
Increase in Non-Performing Loans Granted to the Real Estate Sector (%)
Moderate (10)
Medium (25)
Severe (50)
Default of the Largest Borrower from the Bank (Number of Borrowers) *
Moderate (1)
Medium (3)
Severe (6)
Default of the Largest Borrower from the Bank (Number of Borrowers) **
Moderate (1)
Medium (3)
Severe (6)
Decrease in the Value of Collateral Placed Against Non-Performing Loans (%)
Moderate (10)
Medium (20)
Severe (30)

• Banks must attach a list of names and values of the six largest granted facilities, excluding facilities guaranteed by the Jordanian Government (before them) used in applying the default test of the largest borrower from the bank. ** Banks must attach a list of names and values of the six largest granted facilities, excluding facilities guaranteed by the Jordanian Government, facilities guaranteed by the Jordanian Oil Refinery Company, and facilities guaranteed by electricity companies (before them) used in applying the default test of the largest borrower from the bank.

Market Risk

Shock Intensity	Before Shock	After Shock
Regulatory Capital Adequacy Ratio	Tier 1 Capital Adequacy Ratio	Risk-Weighted Assets
Before Shock	After Shock	Before Shock
Exchange Rate Risk - Decrease in Dinar Exchange Rate (%)
Moderate (15)
Medium (20)
Severe (25)
Exchange Rate Risk - Increase in Dinar Exchange Rate (%)
Moderate (15)
Medium (20)
Severe (25)
Interest Rate Risk - Gap Analysis Test: Decrease/Increase in Interest Rate (Basis Points)
Moderate (100)
Medium (150)
Severe (200)
Share Price Risk - Decrease in Share Prices (%)
Moderate (10)
Medium (20)
Severe (30)

Liquidity Risk

Shock Intensity	Legal Liquidity Ratio Before Shock	Legal Liquidity Ratio After Shock
Withdrawal of a portion of Stable Individual Deposits
Withdrawal of a portion of Stable Corporate Deposits
Withdrawal of a portion of Unused Limits on Facilities for Financial Companies
Moderate	5	5
Medium	10	10
Severe	20	20
Withdrawal of a portion of Unstable Individual Deposits
Withdrawal of a portion of Unstable Corporate Deposits
Withdrawal of a portion of Unused Limits on Facilities for Non-Financial Companies
Moderate	10
Medium	20
Severe	30	30
Withdrawal of a portion of Unused Limits on Facilities for Individuals and Small and Medium Enterprises
Decrease in Liquid Assets
Withdrawal of the Largest Deposit *
Moderate	5	1
Medium	10	3
Severe	20	5

• Banks must attach a list of names and values of the five largest deposits with the bank, along with the results of applying the withdrawal test of the largest deposit.

Appendix (2): Scenario Tests Model

Shock Intensity	Before Shock	After Shock
Additional Provisions Resulting from Applying the Shock	Impact on Profits/Losses	Regulatory Capital Adequacy Ratio
Before Shock	After Shock	Before Shock
Current Situation Scenario
Economic Growth Rate	2.4%
Unemployment Rate	19.1%
Interest Rates	8.2%
Medium Macro Stress Scenario
Economic Growth Rate	0.16%
Unemployment Rate	21.0%
Interest Rates Increase	100 Basis Points
Severe Macro Stress Scenario
Economic Growth Rate	-2.1%
Unemployment Rate	23.0%
Interest Rates Increase	200 Basis Points

Corona Virus Spread Impact Test

Shock Intensity	Before Shock	After Shock
Additional Provisions Resulting from Applying the Shock	Impact on Profits/Losses	Regulatory Capital Adequacy Ratio
Before Shock	After Shock	Before Shock
Medium Intensity Scenario

1. 25% default on facilities granted to the Tourism and Transport sectors, classified as non-performing facilities. | | | | | | | | | | | | |
2. 5% default on facilities granted to individuals, classified as non-performing facilities. | | | | | | | | | | | | |
3. 20% decrease in share prices held by the bank as an investor. | | | | | | | | | | | | |
4. 20% decrease in profits of the bank's branches and companies abroad, such as companies with external branches or subsidiaries in countries affected by the virus spread (e.g., Germany, France, Spain, South Korea, Iran, Italy, China, etc.). | | | | | | | | | | | | | Severe Intensity Scenario | | | | | | | | | | | | |
5. 50% default on facilities granted to the Tourism and Transport sectors, classified as non-performing facilities. | | | | | | | | | | | | |
6. 10% default on facilities granted to individuals, classified as non-performing facilities. | | | | | | | | | | | | |
7. 40% decrease in share prices held by the bank as an investor. | | | | | | | | | | | | |
8. 40% decrease in profits of the bank's branches and companies abroad, such as companies with external branches or subsidiaries in countries affected by the virus spread (e.g., Germany, France, Spain, South Korea, Iran, Italy, China, etc.). | | | | | | | | | | | | |

Appendix (3): Macroeconomic Variables

Year	Real Economic Growth Rate	Unemployment Rate	Weighted Average Interest Rates on Credit Facilities (Loans)	Inflation Rate
1994	3.60	10.4	15.80	4.98
1995	2.20	10.7	15.40	6.19
1996	6.60	11.6	13.10	2.08
1997	3.00	12.6	14.40	3.32
1998	3.10	12.9	13.50	3.01
1999	0.60	12.7	14.38	3.38
2000	0.70	11.4	13.71	4.25
2001	1.70	10.5	14.69	5.27
2002	1.90	9.9	15.33	5.79
2003	2.40	8.9	14.44	4.18
2004	2.60	7.6	14.70	8.56
2005	3.50	8.1	14.80	8.14
2006	6.30	8.6	14.00	8.09
2007	4.70	8.9	13.10	8.18
2008	13.90	9.5	12.70	7.23
2009	-0.70	9.1	12.90	5.48
2010	5.10	9.0	12.50	2.31
2011	4.40	8.7	12.90	2.59
2012	4.60	9.0	12.20	2.65
2013	5.60	9.0	12.60	2.80
2014	2.90	8.8	11.90	3.10
2015	-0.90	8.2	13.00	2.50
2016	-0.80	7.8	15.30	2.00
2017	3.30	8.6	18.3	2.00
2018	4.50	8.7	18.6	2.00
2019	0.30	8.2*	19.1*	1.90
2020	2.50**	2.4**

• As of 30/9/2019 ** According to IMF estimates