STRICTLY CONFIDENTIAL

E-DISCLAIMER ATTACHED IS AN ELECTRONIC COPY OF THE INFORMATION MEMORANDUM DATED 22 NOVEMBER 2019 (“INFORMATION MEMORANDUM”), IN CONNECTION WITH THE PROPOSED ISSUE, OFFER OR INVITATION TO SUBSCRIBE FOR OR PURCHASE OF SENIOR SUKUK WAKALAH (“SENIOR SUKUK WAKALAH”); AND/OR TIER-2 SUKUK WAKALAH (“TIER-2 SUKUK WAKALAH”); AND/OR ADDITIONAL TIER-1 CAPITAL SUKUK WAKALAH (“AT-1 SUKUK WAKALAH”) (COLLECTIVELY REFERRED TO AS “SUKUK WAKALAH”) OF UP TO RINGGIT TEN BILLION (RM10,000,000,000.00) IN NOMINAL VALUE PURSUANT TO A SUKUK PROGRAMME UNDER THE SHARIAH PRINCIPLE OF WAKALAH BI AL-ISTITHMAR (“SUKUK WAKALAH PROGRAMME”) BY MBSB BANK BERHAD (REGISTRATION NO. 200501033981) (COMPANY NO. 716122-P) (“ISSUER”). BY OPENING AND ACCEPTING THIS ELECTRONIC TRANSMISSION CONTAINING THE INFORMATION MEMORANDUM, THE RECIPIENT AGREES TO BE BOUND BY ALL THE TERMS AND CONDITIONS BELOW. IF YOU DO NOT AGREE TO ANY OF THE TERMS AND CONDITIONS, PLEASE DELETE THIS ELECTRONIC TRANSMISSION IMMEDIATELY. THIS INFORMATION MEMORANDUM IS STRICTLY CONFIDENTIAL AND ANY DISTRIBUTION OF THIS INFORMATION MEMORANDUM WITHOUT THE PRIOR CONSENT OF THE ISSUER, THE JOINT PRINCIPAL ADVISERS, THE JOINT LEAD ARRANGERS AND THE JOINT LEAD MANAGERS ARE UNAUTHORISED. THE PERSON RECEIVING THIS ELECTRONIC TRANSMISSION FROM THE ISSUER, THE JOINT PRINCIPAL ADVISERS, THE JOINT LEAD ARRANGERS, THE JOINT LEAD MANAGERS AND ITS/THEIR RESPECTIVE AGENTS IS PROHIBITED FROM DISCLOSING THIS INFORMATION MEMORANDUM, ALTERING THE CONTENTS OF THIS INFORMATION MEMORANDUM OR FORWARDING A COPY OF THIS INFORMATION MEMORANDUM OR ANY PORTION THEREOF BY ELECTRONIC MAIL OR OTHERWISE TO ANY PERSON. THIS INFORMATION MEMORANDUM IS NOT A PROSPECTUS AND HAS NOT BEEN REGISTERED NOR WILL IT BE REGISTERED AS A PROSPECTUS UNDER THE CAPITAL MARKETS AND SERVICES ACT, 2007 (ACT 671) AS AMENDED FROM TIME TO TIME (“CMSA”). AT ISSUANCE, THE SUKUK WAKALAH MAY ONLY BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED DIRECTLY OR INDIRECTLY TO A PERSON WHO FALLS WITHIN THE CATEGORIES AS DESCRIBED UNDER THE SELLING RESTRICTIONS AS PROVIDED IN THIS INFORMATION MEMORANDUM. THIS TRANSMISSION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SUKUK WAKALAH IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL UNDER THE LAWS OF SUCH JURISDICTIONS. TRANSMISSION OVER THE INTERNET MAY BE SUBJECT TO INTERRUPTIONS, TRANSMISSION BLACKOUT, DELAYED TRANSMISSION DUE TO INTERNET TRAFFIC, INCORRECT DATA TRANSMISSION DUE TO THE PUBLIC NATURE OF THE INTERNET, DATA CORRUPTION, INTERCEPTION, UNAUTHORISED AMENDMENT, TAMPERING, VIRUSES OR OTHER TECHNICAL, MECHANICAL OR SYSTEMIC RISKS ASSOCIATED WITH INTERNET TRANSMISSIONS. THE ISSUER, THE JOINT PRINCIPAL ADVISERS, THE JOINT LEAD ARRANGERS, THE JOINT LEAD MANAGERS OR ITS/THEIR RESPECTIVE AGENTS HAVE NOT ACCEPTED AND WILL NOT ACCEPT ANY RESPONSIBILITY AND/OR LIABILITY FOR ANY SUCH INTERRUPTION, TRANSMISSION BLACKOUT, DELAYED TRANSMISSION, INCORRECT DATA TRANSMISSION, DATA CORRUPTION, INTERCEPTION, AMENDMENT, TAMPERING OR VIRUSES OR ANY CONSEQUENCES THEREOF WHICH MAY RESULT IN A DIFFERENCE BETWEEN THE INFORMATION MEMORANDUM DISTRIBUTED TO YOU IN ELECTRONIC FORMAT AND THE HARD COPY VERSION AVAILABLE TO YOU ON REQUEST FROM US. THE FOREGOING IS IN ADDITION TO AND WITHOUT PREJUDICE TO ALL OTHER DISCLAIMERS AND AGREEMENTS WHICH A RECIPIENT OF THIS INFORMATION MEMORANDUM SHALL BE DEEMED TO HAVE AGREED TO OR BE BOUND BY AS PROVIDED IN THIS INFORMATION MEMORANDUM.

Strictly Private and Confidential

MBSB BANK BERHAD

(Registration No. 200501033981) (Company No. 716122-P)

INFORMATION MEMORANDUM

PROPOSED ISSUE OF, OFFER FOR SUBSCRIPTION OR PURCHASE OF, OR INVITATION TO SUBSCRIBE FOR OR PURCHASE OF SENIOR SUKUK

WAKALAH; AND/OR TIER-2 SUKUK WAKALAH; AND/OR ADDITIONAL TIER-1 CAPITAL SUKUK WAKALAH OF UP TO RM10.0 BILLION IN NOMINAL VALUE PURSUANT TO A SUKUK PROGRAMME UNDER THE SHARIAH PRINCIPLE

OF WAKALAH BI AL-ISTITHMAR

Joint Principal Advisers / Joint Lead Arrangers / Joint Lead Managers

AmINVESTMENT BANK BERHAD (Registration No. 197501002220)

(Company No. 23742-V)

RHB INVESTMENT BANK BERHAD (Registration No. 197401002639)

(Company No. 19663-P)

This Information Memorandum is dated 22 November 2019

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RESPONSIBILITY STATEMENT This Information Memorandum has been approved by the directors of MBSB Bank Berhad (Registration No. 200501033981) (Company No. 716122-P) (“MBSB Bank” or the “Issuer”) and they collectively and individually accept full responsibility for the accuracy of the information given and confirm that, after having made all reasonable enquiries in the circumstances, and to the best of their knowledge, information and belief, there are no false or misleading statements or other material facts the omission of which would make any statement in this Information Memorandum false or misleading and that there are no material omissions in this Information Memorandum.

IMPORTANT NOTICE AND GENERAL STATEMENTS OF DISCLAIMER The Issuer has authorised AmInvestment Bank Berhad and RHB Investment Bank Berhad as the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers to distribute this Information Memorandum, which is now being provided by the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers on a confidential basis to potential investors falling within any one of the categories of persons specified in Part I of Schedule 6 (or Section 229(1)(b)); and Part I of Schedule 7 (or Section 230(1)(b)); read together with Schedule 9 (or Section 257(3)) of the Capital Markets and Services Act, 2007 (Act 671) as amended from time to time (“CMSA”), for the sole purpose of assisting them to decide whether to subscribe for or purchase the Senior sukuk wakalah (“Senior Sukuk Wakalah”); and/or Tier-2 sukuk wakalah (“Tier-2 Sukuk Wakalah”) and/or Additional Tier-1 capital sukuk wakalah (“AT-1 Sukuk Wakalah”) (collectively referred to as “Sukuk Wakalah”) of up to Ringgit Ten Billion (RM10,000,000,000.00) in nominal value pursuant to a sukuk programme under the Shariah principle of Wakalah Bi Al-Istithmar (“Sukuk Wakalah Programme”) by the Issuer. This Information Memorandum may not be, in whole or in part, reproduced or used for any other purpose, or shown, given, copied to or filed with any other person including, without limitation, any government or regulatory authority except with the prior consent of the Issuer or as required under Malaysian laws, regulations or guidelines. No person is authorised to give any information or data or to make any representation or warranty other than as contained in this Information Memorandum and, if given or made, any such information, data, representation or warranty must not be relied upon as having been authorised by the Issuer, the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers or any other person. This Information Memorandum has not been and will not be made to comply with the laws of any country (including its territories, all jurisdictions within that country and any possession areas subject to its jurisdiction), other than Malaysia (“Foreign Jurisdiction”), and has not been and will not be lodged, registered or approved pursuant to or under any legislation (or with or by any regulatory authorities or other relevant bodies) of any Foreign Jurisdiction and it does not constitute an issue or offer of, or an invitation to subscribe for or purchase the Sukuk Wakalah or any other securities of any kind by any party in any Foreign Jurisdiction. This Information Memorandum is not and is not intended to be a prospectus. Unless otherwise specified in this Information Memorandum, the information contained in this Information Memorandum is current as at the date hereof.

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The distribution or possession of this Information Memorandum in or from certain Foreign Jurisdictions may be restricted or prohibited by law. Each recipient is required by the Issuer, the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers to seek appropriate professional advice regarding, and to observe, any such restriction or prohibition. Neither the Issuer, the Joint Principal Advisers, the Joint Lead Arrangers nor the Joint Lead Managers accept any responsibility or liability to any person in relation to the distribution or possession of this Information Memorandum in or from any Foreign Jurisdiction. By accepting delivery of this Information Memorandum, each recipient agrees to the terms upon which this Information Memorandum is provided to such recipient as set out in this Information Memorandum, and further agrees and confirms that (a) it will keep confidential all of such information and data, (b) it is lawful for the recipient to subscribe for or purchase the Sukuk Wakalah under all jurisdictions to which the recipient is subject, (c) the recipient has complied with all applicable laws in connection with such subscription or purchase of the Sukuk Wakalah, (d) the Issuer, the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers and their respective directors, officers, employees and professional advisers are not and will not be in breach of the laws of any jurisdiction to which the recipient is subject to, as a result of such subscription or purchase of the Sukuk Wakalah, and they shall not have any responsibility or liability in the event that such subscription or purchase of the Sukuk Wakalah is or shall become unlawful, unenforceable, voidable or void, (e) it is aware that the Sukuk Wakalah can only be offered, sold, transferred or otherwise disposed of directly or indirectly in accordance with the relevant selling restrictions and all applicable laws, (f) it has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of subscribing or purchasing Sukuk Wakalah, and is able and is prepared to bear the economic and financial risks of investing in or holding the Sukuk Wakalah, (g) it is subscribing or accepting the Sukuk Wakalah for its own account, and (h) it is a person falling within one of the categories of persons specified in Part I of Schedule 6 (or Section 229(1)(b)); and Part I of Schedule 7 (or Section 230(1)(b)); read together with Schedule 9 (or Section 257(3)) of the CMSA. Each recipient is solely responsible for seeking all appropriate expert advice as to the laws of all jurisdictions to which it is subject. This Information Memorandum or any document delivered under or in relation to the issue, offer and sale of the Sukuk Wakalah is not, and should not be construed as, a recommendation by the Issuer, the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers or any other party to the recipient to subscribe for or purchase the Sukuk Wakalah. This Information Memorandum is not a substitute for, and should not be regarded as, an independent evaluation and analysis and does not purport to be all inclusive. Each recipient should perform and is deemed to have made its own independent investigation and analysis of the Issuer, the Sukuk Wakalah and all other relevant matters, and each recipient should consult its own professional advisers. Neither the delivery of this Information Memorandum nor the offering, sale or delivery of any Sukuk Wakalah shall in any circumstance imply that the information contained herein concerning the Issuer is correct at any time subsequent to the date hereof or that any other information supplied in connection with the Sukuk Wakalah is correct as of any time subsequent to the date indicated in the document containing the same. The Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers expressly do not undertake to review the financial condition or affairs of the Issuer or its group of companies during the life of the Sukuk Wakalah or to advise any investor in the Sukuk Wakalah of any information coming to their attention. The recipient of this Information Memorandum or the potential investors should review, amongst others, the most recently published documents incorporated by reference into this Information Memorandum when deciding whether or not to purchase any Sukuk Wakalah.

iii

FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE “INVESTMENT CONSIDERATIONS” IN SECTION 4 HEREOF. This Information Memorandum includes certain historical information, estimates or reports thereon derived from sources mentioned in this Information Memorandum and other parties with respect to the Malaysian economy, the material businesses in which the Issuer operates and certain other matters. Such information, estimates or reports have been included solely for illustrative purposes. No representation or warranty is made as to the accuracy or completeness of any information, estimate and or report thereon derived from such and other third party sources. This Information Memorandum includes “forward looking statements”. These statements include, among other things, discussions of each of the Issuer’s business strategy and expectation concerning its position in the Malaysian economy, future operations, profitability, liquidity, capital resources and financial position. All these statements are based on estimates and assumptions made by the Issuer and third party consultants that, although believed to be reasonable, are subject to risks and uncertainties that may cause actual events and the future results of the Issuer to be materially different from that expected or indicated by such statements and estimates and no assurance can be given that any of such statements or estimates will be realised. In light of these and other uncertainties, the inclusion of a forward looking statement in this Information Memorandum should not be regarded as a representation or warranty by the Issuer or any other person that the plans and objectives of the Issuer will be achieved. All discrepancies (if any) in the tables included in this Information Memorandum between the listed amounts and totals thereof are due to, and certain numbers appearing in this Information Memorandum are shown after rounding.

STATEMENT OF DISCLAIMER ON THE SHARIAH PRONOUNCEMENT

AmBank Islamic Berhad and RHB Islamic Bank Berhad, as the Joint Shariah Advisers, have approved the structure and mechanism of the Sukuk Wakalah and their compliance with Shariah principles via the Shariah pronouncements dated 8 July 2019. However, the approval is only an expression of the view of the Joint Shariah Advisers based on their experience in the subject. There can be no assurance as to the Shariah permissibility of the structure of the Sukuk Wakalah and the trading of the Sukuk Wakalah and neither the Issuer, the Joint Principal Advisers, Joint Lead Arrangers, Joint Lead Managers nor any other person makes any representation of the same. Investors are reminded that, as with any Shariah views, differences in opinion are possible. Investors are advised to obtain their own independent Shariah advice as to whether the structure meets their individual standards of compliance and make their own determination as to the future tradability of the Sukuk Wakalah on any secondary market.

STATEMENTS OF DISCLAIMER – SECURITIES COMMISSION MALAYSIA The issue, offer or invitation in relation to the Sukuk Wakalah in this Information Memorandum is subject to the fulfilment of various conditions precedent including without limitation the endorsement of the SC’s Shariah Advisory Council (“SAC”) and the lodgement pursuant to the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework issued by the SC on 9 March 2015 (effective on 15 June 2015 and revised on 11 October 2018) (the “LOLA Guidelines”) in relation to the proposed establishment of the Sukuk Wakalah Programme and the issuance of the Sukuk Wakalah thereunder and each recipient of this Information

iv

Memorandum acknowledges and agrees that the lodgement with the SC shall not be taken to indicate that the SC recommends the subscription or purchase of the Sukuk Wakalah. The endorsement from the SAC was obtained via SAC’s letters dated 12 July 2019, 22 July 2019 and 18 November 2019 respectively and the lodgement with the SC pursuant to the LOLA Guidelines in relation to the proposed establishment of the Sukuk Wakalah Programme was made on 20 November 2019. The SC shall not be liable for any non-disclosure on the part of the Issuer and assumes no responsibility for the correctness of any statements made or opinions or reports expressed in the Information Memorandum.

EACH TRANCHE OF THE SUKUK WAKALAH WILL CARRY DIFFERENT RISKS AND ALL INVESTORS SHOULD RELY ON THEIR OWN EVALUATION TO ASSESS THE MERITS AND RISKS OF THE INVESTMENT. IN CONSIDERING THE INVESTMENT, INVESTORS WHO ARE IN ANY DOUBT AS TO THE ACTION TO BE TAKEN SHOULD CONSULT PROFESSIONAL ADVISERS IMMEDIATELY.

DOCUMENTS INCORPORATED BY REFERENCE The following documents published or issued from time to time after the date hereof shall be deemed to be incorporated in, and to form part of, this Information Memorandum: (a) the most recently published annual audited financial statements and, if published later,

the most recently published interim consolidated financial statements (if any) of the Issuer; and

(b) all supplements or amendments to this Information Memorandum circulated by the

Issuer, if any, save that any statement contained herein or in a document which is deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purpose of this Information Memorandum to the extent that a statement contained in any such subsequent document which is deemed to be incorporated by reference herein modifies or supersedes such earlier statement (whether expressly, by implication or otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Information Memorandum.

The Issuer will provide, without charge, to each person to whom a copy of this Information Memorandum has been properly delivered, upon the request of such person, a copy of any or all of the documents deemed to be incorporated herein by reference unless such documents have been modified or superseded as specified above. Requests for such documents should be directed to the Issuer.

CONFIDENTIALITY This Information Memorandum and its contents are strictly confidential and the information herein contained is given to the recipient strictly on the basis that the recipient shall ensure the same remains confidential. Accordingly, this Information Memorandum and its contents, or any information, which is made available to the recipient in connection with any further enquiries, must be held in complete confidence.

v

This Information Memorandum is submitted to selected persons specifically in reference to the Sukuk Wakalah, falling within one of the categories of persons specified in Part I of Schedule 6 (or Section 229(1)(b)); and Part I of Schedule 7 (or Section 230(1)(b)); read together with Schedule 9 (or Section 257(3)) of the CMSA. In the event that there is any contravention of this confidentiality undertaking or there is reasonable likelihood that this confidentiality undertaking may be contravened, the Issuer may, at its discretion, apply for any remedy available to the Issuer whether at law or equity, including without limitation, injunctions. The Issuer is entitled to fully recover from the contravening party all costs, expenses and losses incurred and/or suffered, in this regard. For the avoidance of doubt, it is hereby deemed that this confidentiality undertaking shall be imposed upon the recipient, the recipient’s professional advisers, directors, employees and any other persons who may receive this Information Memorandum (or any part of it) from the recipient. The recipient must return this Information Memorandum and all reproductions thereof whether in whole or in part and any other information in connection therewith to the Joint Principal Advisers, the Joint Lead Arrangers or the Joint Lead Managers promptly upon the Joint Principal Advisers, the Joint Lead Arrangers and/or the Joint Lead Managers’s request, unless that recipient provides proof of a written undertaking satisfactory to the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers with respect to destroying these documents as soon as reasonably practicable after the said request from the Joint Principal Advisers, the Joint Lead Arrangers and/or the Joint Lead Managers.

PRIVACY NOTICE

The Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers are committed to comply with the Personal Data Protection Act 2010 which came into force on 15 November 2013. The Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers are required to issue the Privacy Notice to any person for the use and processing of personal information of such person. The Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers’ Privacy Notice is available at the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers’ websites at https://www.amequities.com.my/gcAMShtml/privacy-policy.html and http://www.rhbinvest.com/page/site/public/english/privacy.html respectively. In respect of a person which is a body corporate, the consent and authority of their directors, shareholders, authorised signatories and officers are deemed to have been duly obtained to provide the personal data (as defined under the Personal Data Protection Act 2010) as required by the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers.

THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK

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TABLE OF CONTENTS

Headings Pages

E-DISCLAIMER ............................................................................................................... i

RESPONSIBILITY STATEMENT ..................................................................................... i

IMPORTANT NOTICE AND GENERAL STATEMENTS OF DISCLAIMER ..................... i

STATEMENT OF DISCLAIMER ON THE SHARIAH PRONOUNCEMENT ................... iii

STATEMENTS OF DISCLAIMER – SECURITIES COMMISSION MALAYSIA ............. iii

DOCUMENTS INCORPORATED BY REFERENCE ...................................................... iv

CONFIDENTIALITY ....................................................................................................... iv

PRIVACY NOTICE .......................................................................................................... v

TABLE OF CONTENTS .................................................................................................. 1

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS ................................................ 4

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS (Cont’d) ................................. 5

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS (Cont’d) ................................. 6

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS (Cont’d) ................................. 7

1.0 EXECUTIVE SUMMARY ........................................................................................ 8

1.1 Introduction ................................................................................. 8

1.2 The Sukuk Wakalah Programme ......................................................... 8

1.3 Utilisation of Proceeds .................................................................. 13

1.4 Rating ....................................................................................... 13

1.5 Regulatory Approvals Required ........................................................ 14

2.0 PRINCIPAL TERMS AND CONDITIONS OF THE SUKUK WAKALAH PROGRAMME ..................................................................................................... 15

3.0 SELLING RESTRICTIONS................................................................................... 64

3.1 Selling Restrictions at Issuance: ....................................................... 64

3.2 Selling Restrictions After Issuance: ................................................... 64

4.0 INVESTMENT CONSIDERATIONS ..................................................................... 65

4.1 Considerations Relating to the Issuer and its Business ............................ 65

4.2 Considerations Relating to the Sukuk Wakalah ..................................... 73

4.3 Considerations relating to Malaysian Banking Industry ........................... 85

4.4 General Considerations ................................................................. 88

5.0 DESCRIPTION OF THE ISSUER ......................................................................... 90

5.1 Introduction ............................................................................... 90

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5.2 Shareholder ............................................................................... 91

5.3 MBSB Bank’s Strategy .................................................................... 91

5.4 Board of Directors and Management of the Issuer ................................. 93

5.5 Employees ................................................................................ 103

6.0 SELECTED FINANCIAL INFORMATION .......................................................... 104

7.0 FUNDING AND CAPITAL ADEQUACY ............................................................. 108

7.1 Funding ................................................................................... 108

7.2 Capital Adequacy ........................................................................ 109

8.0 ASSET QUALITY ............................................................................................... 110

8.1 Non Performing Financing (NPF) ..................................................... 110

8.2 Financing and Advances ............................................................... 110

8.3 Movement in Gross Financing and Advances ....................................... 111

8.4 Movement in ECL for Financing and Advances .................................... 112

8.5 Movement in Impaired Financing and Advances .................................. 113

9.0 RISK MANAGEMENT ........................................................................................ 114

9.1 Risk Governance Structure ............................................................ 114

9.2 Capital Management .................................................................... 138

9.3 Risk Management Objectives and Policies .......................................... 139

9.4 Credit Risk ................................................................................ 140

9.5 Market Risk ............................................................................... 142

9.6 Liquidity Risk ............................................................................ 144

9.7 Operational Risk ......................................................................... 145

9.8 Shariah Non-Compliance Risk ......................................................... 146

9.9 Business Continuity Risk ............................................................... 148

9.10 Disclosure on Capital Adequacy ...................................................... 149

10.0 MALAYSIAN BANKING INDUSTRY OVERVIEW .............................................. 150

10.1 Economic Outlook 2019 - Monetary and Financial Developments ............. 150

10.2 BNM – Economic and Financial Developments in the Malaysian Economy in the

Second Quarter of 2019 ............................................................... 156

10.3 BNM – Financial Stability and Payment Systems Report 2018 - Risk

Developments and Assessment of Financial Stability in 2018 .................. 163

11.0 OTHER INFORMATION ..................................................................................... 165

11.1 Material Contracts ...................................................................... 165

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11.2 Material Litigation....................................................................... 165

11.3 Commitments and Contingencies .................................................... 165

11.4 Related Party Transaction ............................................................. 165

11.5 Conflict of Interest and Appropriate Mitigating Measures ....................... 165

APPENDIX 1 ............................................................................................................... 168

Audited Financial Statements for the Financial Year Ended 31 December 2018 .. 168

APPENDIX 2 ............................................................................................................... 169

Unaudited Interim Financial Statements for the Financial Period Ended 30

September 2019 ................................................................................ 169

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GLOSSARY OF DEFINITIONS AND ABBREVIATIONS

Except where the context otherwise requires, the following abbreviations shall apply throughout this Information Memorandum:

“AmInvestment Bank” AmInvestment Bank Berhad (Registration No. 197501002220) (Company No. 23742-V)

“AT-1 Sukuk Wakalah” The Additional Tier-1 capital sukuk wakalah to be issued pursuant to the Sukuk Wakalah Programme

“AT-1 Sukuk Wakalah Trust Deed”

A trust deed made between the Issuer and the Sukuk Trustee in relation to the AT-1 Sukuk Wakalah pursuant to the Sukuk Wakalah Programme

“AT-1 Sukukholders” The bearer of that tranche of AT-1 Sukuk Wakalah or the person entitled to that tranche of AT-1 Sukuk Wakalah

“BNM” Bank Negara Malaysia

“Board” Board of directors of MBSB Bank

“Business Day” A day (other than a Saturday, Sunday or public holiday) on which financial institutions are open for business in Kuala Lumpur

“CAFIB” or “Capital Adequacy Framework for Islamic Banks”

Capital Adequacy Framework for Islamic Banks (Capital Components) issued on 2 February 2018 by BNM, as amended from time to time

“CMSA” Capital Markets and Services Act, 2007 (Act 671) or any statutory modification, amendment or re-enactment thereof for the time being in force

“Companies Act” Companies Act, 2016 (Act 777) or any statutory modification, amendment or re-enactment thereof for the time being in force

“Facility Agent” RHB Investment Bank

“FSA” Financial Services Act 2013 (Act 758) or any statutory modification, amendment or re-enactment thereof for the time being in force

“Government” Government of Malaysia

“IFSA” Islamic Financial Services Act 2013 (Act 759) or any statutory modification, amendment or re-enactment thereof for the time being in force

5

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS (Cont’d)

“IM” or “Information Memorandum”

This Information Memorandum dated 22 November 2019 in relation to the Sukuk Wakalah Programme

“Junior Obligations” Any ordinary share of the Issuer

“Joint Lead Arrangers” AmInvestment Bank and RHB Investment Bank

“Joint Lead Managers” AmInvestment Bank and RHB Investment Bank

“Joint Principal Advisers” AmInvestment Bank and RHB Investment Bank

“Joint Shariah Advisers” AmBank Islamic Berhad (Registration No. 199401009897) (Company No. 295576-U) and RHB Islamic Bank Berhad (Registration No. 200501003283) (Company No. 680329-V)

“Latest Practicable Date” or “LPD”

31 October 2019

“LOLA Guidelines” Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework issued by the SC on 9 March 2015, effective on 15 June 2015 and revised on 11 October 2018, as amended from time to time

“MBSB” Malaysia Building Society Berhad (Registration No. 197001000172) (Company No. 9417-K)

“MBSB Bank” or “Bank” or “Issuer”

MBSB Bank Berhad (Registration No. 200501033981) (Company No. 716122-P)

“MBSB Group” Collectively, MBSB and MBSB Bank

“MBSB Group of Companies” Collectively, MBSB and its subsidiaries

“Parity Obligations” The the most junior class of preference shares and any security or other similar obligations issued, entered into or guaranteed by the Issuer that constitutes or could qualify as Additional Tier-1 capital of the Issuer on an unconsolidated or consolidated basis, pursuant to the relevant requirements set out in the CAFIB, or otherwise ranks or is expressed to rank, by its terms or by operation of law, pari passu with the AT-1 Sukuk Wakalah

“PayNet” Payments Network Malaysia Sdn Bhd (Registration No. 200801035403) (Company No. 836743-D)

6

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS (Cont’d)

“PayNet Procedures” The Operational Procedures for Securities Services, issued by PayNet

“PayNet Rules” The Participation and Operation Rules for Payment and Securities Services, issued by PayNet

“PayNet Rules and Procedures”

Collectively, the PayNet Rules and PayNet Procedures

“PIDM” Malaysia Deposit Insurance Corporation

“PTC” The draft principal terms and conditions of the Sukuk Wakalah Programme as set out in Section 2 of this IM

“RAM” RAM Rating Services Berhad (Registration No. 200701005589) (Company No. 763588-T)

“RENTAS” Real Time Electronic Transfer of Funds and Securities, a system operated by PayNet on behalf of BNM

“RHB Investment Bank” RHB Investment Bank Berhad (Registration No. 197401002639) (Company No. 19663-P)

“RM” or “Ringgit” Ringgit, the lawful currency of Malaysia

“SAC” Shariah Advisory Council of the SC

“SC” Securities Commission Malaysia

“Senior Creditors” (i) Creditors of the Issuer (including holders of any security or other similar obligation issued, entered into or guaranteed by the Issuer that constitutes Tier-2 Capital Instruments) other than those whose claims rank or are expressed to rank, by its terms or by operation of law, pari passu or junior to the claims of the AT-1 Sukukholders; and

(ii) any class of the Issuer’s share capital (excluding the most junior class of preference shares and ordinary shares)

“Senior Sukuk Wakalah” The senior sukuk wakalah to be issued pursuant to the Sukuk Wakalah Programme

7

GLOSSARY OF DEFINITIONS AND ABBREVIATIONS (Cont’d)

“Senior Sukuk Wakalah Trust Deed”

A trust deed made between the Issuer and the Sukuk Trustee in relation to the Senior Sukuk Wakalah pursuant to the Sukuk Wakalah Programme

“Senior Sukukholders” The bearer of that tranche of Senior Sukuk Wakalah or the person entitled to that tranche of Senior Sukuk Wakalah

“Subordinated Sukuk Wakalah” Collectively, the Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah

“Subordinated Sukukholders” The bearer of that tranche of Subordinated Sukuk Wakalah or the person entitled to that tranche of Subordinated Sukuk Wakalah

“subsidiaries” Has the meaning ascribed to it in the Companies Act 2016

“Sukuk Trustee” Malaysian Trustees Berhad (Registration No. 197501000080) (Company No. 21666-V)

“Sukuk Wakalah” Collectively, the Senior Sukuk Wakalah, Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah

“Sukuk Wakalah Programme”

The sukuk wakalah programme of up to RM10.0 billion in nominal value under the Shariah principle of Wakalah Bi Al-

Istithmar for the issuance of the Senior Sukuk Wakalah and/or Tier-2 Sukuk Wakalah and/or AT-1 Sukuk Wakalah

“Sukukholders” Collectively, the Senior Sukukholders, the Tier-2 Sukukholders and the AT-1 Sukukholders

“Tier-2 Capital Instruments”

Any Tier-2 capital instrument issued by the Issuer, pursuant to the relevant requirements set out in the CAFIB

“Tier-2 Sukuk Wakalah” The Tier-2 sukuk wakalah to be issued pursuant to the Sukuk Wakalah Programme

“Tier-2 Sukuk Wakalah Trust Deed”

A trust deed made between the Issuer and the Sukuk Trustee in relation to the Tier-2 Sukuk Wakalah pursuant to the Sukuk Wakalah Programme

“Tier-2 Sukukholders” The bearer of that tranche of Tier-2 Sukuk Wakalah or the person entitled to that tranche of Tier-2 Sukuk Wakalah

“Trust Deeds” Collectively, the Senior Sukuk Wakalah Trust Deed, the Tier-2 Sukuk Wakalah Trust Deed and the AT-1 Sukuk Wakalah Trust Deed

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1.0 EXECUTIVE SUMMARY

The summary below aims to provide an overview of the information contained in this Information Memorandum. As such, it does not contain all the information that may be important to you and should therefore be read with this entire Information Memorandum.

1.1 Introduction

The Issuer is a wholly-owned subsidiary of MBSB and serves as the Islamic banking and financing arm of the MBSB Group of Companies. The Issuer was incorporated under the Companies Act 1965, on 28 November 2005 as Asian Finance Bank Berhad. The Issuer was successfully acquired by MBSB and commenced operations as a member of the MBSB Group of Companies on 7 February 2018. The Issuer has been granted a license by BNM to undertake Islamic banking and finance business and is regulated and supervised by BNM under the IFSA. The Issuer is a full-fledged Islamic bank which offers a wide range of Islamic banking products and services to retails and corporates, such as treasury services, home and personal financing, term financing, internet banking, cashline, debit cards, wealth management products and trade finance. Mobile banking and cash management services will be in place by end of the year. The Issuer, the core subsidiary of MBSB, had been accounted for around 5%-6% of the Islamic banking system’s financing and deposits as at end-December 2018. The acquisition of the Issuer has enabled MBSB to fulfil its aspirations of becoming a fully-fledged Islamic bank, providing the latter access to new funding sources such as current account deposits as well as the ability to offer banking products such as trade finance and treasury business. Apart from its strength as a provider of personal financing to civil servants, the Issuer intends to position itself as a real estate end-to-end specialist, encompassing the affordable housing segment. The Issuer actively supported initiatives that enable home ownership at all levels of society. Programmes that the Issuer actively participated in were Perumahan Penjawat Awam Malaysia (PPAM), Skim Rumah Pertamaku, partnered with Cagamas and the Skim Pembiayaan Perumahan Bersama partnered with the Public Sector Home Financing Board (LPPSA). Within the SME segment, the Issuer has focused on providing equipment financing for the construction or logistics sectors.

1.2 The Sukuk Wakalah Programme

Brief Structure of the Sukuk Wakalah Programme The Sukuk Wakalah Programme has been structured to provide the Issuer with the flexibility to issue, from time to time, Senior Sukuk Wakalah and/or Tier-2 Sukuk Wakalah and/or AT-1 Sukuk Wakalah under the Shariah principle of Wakalah Bi Al-Istithmar (a Shariah principle and concept approved by the SAC).

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The issuance of Senior Sukuk Wakalah provides the Issuer with senior funding for its general banking purposes whilst the Subordinated Sukuk Wakalah is structured to comply with the CAFIB in relation to the requirements of a Tier-2 capital instrument and an Additional Tier-1 capital instrument respectively. The Tier-2 Sukuk Wakalah is intended to qualify as Tier-2 regulatory capital and the AT-1 Sukuk Wakalah as Additional Tier-1 regulatory capital of the Issuer. Programme Limit and Option to Upsize The Sukuk Wakalah Programme has a combined limit where the combined outstanding nominal value of the Senior Sukuk Wakalah, Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah shall not at any time exceed Ringgit Ten Billion (RM10,000,000,000.00) in nominal value. The Issuer shall have the option to increase the programme limit of the Sukuk Wakalah Programme, provided that:

(i) such increase will not result in any adverse impact on the rating of the

respective Sukuk Wakalah; (ii) the relevant requirements under the LOLA Guidelines in relation to such

upsizing have been complied with; and (iii) the relevant regulatory approvals have been obtained (if applicable).

The Trust Deeds will provide that the Sukukholders shall be deemed to have consented to any upsizing of the Sukuk Wakalah Programme limit from time to time. Accordingly, no further consent will be required from the Sukukholders, the Sukuk Trustee or from any other party under the Sukuk Wakalah Programme for the Issuer to exercise the option to increase the limit of the Sukuk Wakalah Programme from time to time. Tenure The Sukuk Wakalah Programme has a perpetual tenure. The tenure of the Sukuk Wakalah is as below: (i) Senior Sukuk Wakalah

Each tranche of the Senior Sukuk Wakalah shall have a finite tenure of at least one (1) year from the date of issue and the tenure shall be determined prior to each issuance of the Senior Sukuk Wakalah. For the avoidance of doubt, Call Option is not applicable in respect of the Senior Sukuk Wakalah.

(ii) Tier-2 Sukuk Wakalah

Each tranche of the Tier-2 Sukuk Wakalah shall have a finite tenure of at least five (5) years from the date of issue and the tenure shall be determined prior to each issuance of the Tier-2 Sukuk Wakalah.

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The Tier-2 Sukuk Wakalah may be issued with a Call Option (as defined in the PTC) where the Call Option shall be determined prior to each issuance of the Tier-2 Sukuk Wakalah.

In respect of each tranche of the Tier-2 Sukuk Wakalah which contains a Call Option, the Issuer may, at its option, redeem in whole or in part such tranche of Tier-2 Sukuk Wakalah on any Periodic Distribution Date (as defined in the PTC) on or after the fifth (5th) anniversary of the issue date of that tranche of Tier-2 Sukuk Wakalah (on or after the First Call Date (as defined in the PTC)) at the Dissolution Distribution Amount (as defined in the PTC) subject to the Redemption Conditions (as defined in the PTC) being satisfied (if applicable for the relevant tranche). The optional redemption of one tranche of the Tier-2 Sukuk Wakalah does not trigger the redemption of other tranche(s) of the Tier-2 Sukuk Wakalah.

The Tier-2 Sukuk Wakalah may also be redeemed at the Dissolution Distribution Amount at the option of the Issuer in whole or in part, and subject to the Redemption Conditions being satisfied, at any time, if a Regulatory Redemption (as defined in the PTC) or Tax Redemption (as defined in the PTC) has occurred.

(iii) AT-1 Sukuk Wakalah Each tranche of the AT-1 Sukuk Wakalah shall be perpetual. The AT-1 Sukuk Wakalah may be issued with a Call Option (as defined in the PTC) where the Call Option shall be determined prior to each issuance of the AT-1 Sukuk Wakalah. In respect of each tranche of the AT-1 Sukuk Wakalah which contains a Call Option, the Issuer may, at its option, redeem in whole or in part such tranche of AT-1 Sukuk Wakalah on any Periodic Distribution Date on or after the fifth (5th) anniversary of the issue date of that tranche of AT-1 Sukuk Wakalah (on or after the First Call Date) at the Dissolution Distribution Amount subject to the Redemption Conditions being satisfied (if applicable for the relevant tranche). The optional redemption of one tranche of the AT-1 Sukuk Wakalah does not trigger the redemption of other tranche(s) of the AT-1 Sukuk Wakalah.

The AT-1 Sukuk Wakalah may also be redeemed at the Dissolution Distribution Amount at the option of the Issuer in whole or in part, and subject to the Redemption Conditions being satisfied, at any time, if a Regulatory Redemption or Tax Redemption has occurred.

Status (i) Senior Sukuk Wakalah The Senior Sukuk Wakalah will constitute direct, unconditional,

unsecured and unsubordinated obligations of the Issuer ranking pari passu without any preference amongst themselves and pari passu with all other present and future unsecured and unsubordinated obligations of the Issuer, except those preferred by law.

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(ii) Tier-2 Sukuk Wakalah The Tier-2 Sukuk Wakalah will constitute direct, unconditional,

unsecured and subordinated obligations of the Issuer ranking pari passu without any preference amongst themselves.

In the event of the winding-up or liquidation of the Issuer, the claims of

the Tier-2 Sukukholders against the Issuer in respect of the Tier-2 Sukuk Wakalah will be subordinated in right of payment to the claims of depositors and all other unsubordinated creditors of the Issuer and will rank at least pari passu in right of payment with all other Subordinated Indebtedness (as defined in the PTC), present and future, of the Issuer. Claims in respect of the Tier-2 Sukuk Wakalah will rank in priority to the rights and claims of holders of subordinated liabilities which by their terms rank or expressed to rank in right of payment junior to the Tier-2 Sukuk Wakalah and all classes of equity securities of the Issuer, including holders of preference shares.

(iii) AT-1 Sukuk Wakalah The AT-1 Sukuk Wakalah will constitute direct, unconditional, unsecured

and subordinated obligations of the Issuer ranking pari passu without any preference among themselves.

In the event of the winding-up or liquidation of the Issuer, the claims of the AT-1 Sukukholders against the Issuer in respect of the AT-1 Sukuk Wakalah will be subordinated in right of payment to the claims of all Senior Creditors (which includes, but is not limited to, holders of Tier-2 Capital Instruments) and will rank senior to all Junior Obligations (as defined in the PTC). The AT-1 Sukuk Wakalah will rank pari passu with Parity Obligations (as defined in the PTC).

Loss Absorption Only applicable to the Subordinated Sukuk Wakalah: (i) Write-off mechanism in the case of a Breach of Common Equity Tier-1

(“CET1”) Capital Ratio (only applicable to AT-1 Sukuk Wakalah)

If the CET1 Capital Ratio (as determined by the CAFIB) of the Issuer, at the consolidated or entity level (whichever is applicable), falls below 5.125% (or such other percentage as may be prescribed by the CAFIB), the Issuer shall, without the need for the consent of the Sukuk Trustee or the AT-1 Sukukholders, write-off the AT-1 Sukuk Wakalah (in whole or in part). The aggregate amount of AT-1 Sukuk Wakalah to be written-off must be at least the amount required to restore the Issuer’s and its consolidated CET1 Capital Ratio to at least 5.75% (or such other percentage as may be prescribed by the CAFIB). If this is not possible, then the full principal value of the AT-1 Sukuk Wakalah will be written-off.

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(ii) Non-Viability Loss Absorption (applicable to Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah)

The Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah shall also be subject to non-viability loss absorption mechanism on the occurrence of a Non-Viability Event (as defined in the PTC). If a Non-Viability Event occurs, the Issuer shall irrevocably, without the need for the consent of the Sukuk Trustee or the Subordinated Sukukholders, write-off the Subordinated Sukuk Wakalah (in whole or in part) if so required by BNM and/or PIDM at their full discretion. Such write-off shall not constitute a Dissolution Event (as defined in the PTC), nor would it trigger a cross-default clause under any other outstanding Subordinated Sukuk Wakalah.

Limitation on Payment of Periodic Distributions (only applicable to AT-1 Sukuk Wakalah) The payment of Periodic Distributions (as defined in the PTC) under the AT-1 Sukuk Wakalah shall be at the Issuer’s sole and absolute discretion and is subject to: (i) such payment not resulting in a breach of the capital requirements

applicable to the Issuer under the relevant BNM’s capital guidelines; (ii) the Issuer is solvent at the time of payment of the Periodic Distributions

and the payment of the Periodic Distributions will not result in the Issuer becoming, or likely to become insolvent; and

(iii) such payment being made from Distributable Reserves (as defined in the

PTC) only. In the event that there is profit for distribution, and the Issuer decided not to distribute the profit pursuant to this paragraph, the AT-1 Sukukholders hereby agree to waive (tanazul) their right to receive Periodic Distributions for such Periodic Distribution Date (as defined in the PTC). If the Issuer is unable to meet any of the conditions (i), (ii) or (iii) above, the Issuer shall cancel the Periodic Distributions which would otherwise have been payable on such Periodic Distribution Date provided always in the case where conditions (i) and (ii) are met but the Distributable Reserves are insufficient to pay the Periodic Distributions in full, the Issuer may elect to pay a part of the Periodic Distributions up to the amount available from the Distributable Reserves and cancel the other part of the Periodic Distributions which would otherwise have been payable on such Periodic Distribution Date. Any such cancellation will not constitute or be deemed a default by the Issuer or constitute an Enforcement Event (as defined in the PTC) for any purpose whatsoever nor would it trigger a cross-default under any other outstanding AT-1 Sukuk Wakalah issued under the Sukuk Wakalah Programme.

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If the Issuer does not make a Periodic Distribution on the relevant Periodic Distribution Date (or if the Issuer elects to make a payment of a portion, but not all, of such Periodic Distribution), such non-payment or part-payment shall serve as evidence of the Issuer's exercise of its discretion to cancel such Periodic Distribution (or the portion of such Periodic Distribution not paid), and accordingly such Periodic Distribution (or the portion thereof not paid) shall not be due and/or accrued, and shall not be payable (subject to the AT-1 Sukuk Wakalah being recognised as an Additional Tier-1 capital instrument of the Issuer).

If practicable, the Issuer shall provide notice of any cancellation of Periodic Distribution (in whole or in part) to the AT-1 Sukukholders (via the Sukuk Trustee) on or prior to the relevant Periodic Distribution Date. If practicable, the Issuer shall endeavour to provide such notice at least five (5) business days prior to the relevant Periodic Distribution Date. Failure to provide such notice will not have any impact on the effectiveness of, or otherwise invalidate, any such cancellation of Periodic Distribution, or give the AT-1 Sukukholder any rights as a result of such failure. Any such cancellation will not constitute or be deemed a default by the Issuer or constitute an Enforcement Event for any purpose whatsoever nor would it trigger a cross-default under any other outstanding AT-1 Sukuk Wakalah issued under the Sukuk Programme.

The detailed PTC is set out in Section 2 of this IM. This includes the “Distribution Stopper” provisions relating to non-payment of Periodic Distributions (scheduled to be made on Periodic Distribution Date) due to the “Limitation on Payment” provision above.

1.3 Utilisation of Proceeds

The proceeds from the issuance of the Sukuk Wakalah under the Sukuk Wakalah Programme will be utilised by the Issuer for its Shariah-compliant general banking purposes and to refinance its outstanding capital instruments.

1.4 Rating The Sukuk Wakalah has been assigned the respective final long-term rating by RAM pursuant to its letter to the Issuer dated 3 September 2019.

Sukuk Wakalah Credit Rating

Senior Sukuk Wakalah* A2

Tier-2 Sukuk Wakalah* A3

AT-1 Sukuk Wakalah* BBB2

*subject to a combined limit of RM10.0 billion

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1.5 Regulatory Approvals Required

(a) SAC had via its letter dated 12 July 2019, 22 July 2019 and 18

November 2019 respectively endorsed the proposed establishment of the Sukuk Wakalah Programme;

(b) BNM had via its letter dated 14 November 2019 approved the proposed

establishment of the Sukuk Wakalah Programme in respect of the Subordinated Sukuk Wakalah. It is to be noted that prior notification has to be given to BNM for each issuance of the Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah from time to time.

(c) The lodgement with the SC pursuant to the LOLA Guidelines in relation

to the proposed establishment of the Sukuk Wakalah Programme was made on 20 November 2019.

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2.0 PRINCIPAL TERMS AND CONDITIONS OF THE SUKUK WAKALAH PROGRAMME

Words and expressions used and defined in this Section 2 shall, in the event of any inconsistency with the definition section of this Information Memorandum, only be applicable for this Section 2.

(1) Name of facility : Sukuk programme of up to RM10.0 billion in nominal value (“Sukuk Wakalah Programme”) under the Shariah principle of Wakalah Bi Al-Istithmar for the issuance of: (i) Senior sukuk wakalah (“Senior Sukuk Wakalah”); and/or

(ii) Tier-2 sukuk wakalah (“Tier-2 Sukuk Wakalah”); and/or (iii) Additional Tier-1 capital sukuk wakalah (“AT-1 Sukuk

Wakalah”).

(2) One-time issue or

programme : ☐ One-time issue

☒ Programme

(3) Shariah principles (for

sukuk) : 1. Wakalah Bi Al-Istithmar

2. Murabahah (via Tawarruq arrangement)

(4) Facility description (for

ringgit denominated sukuk, to provide description as cleared by the SC)

: The Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah are intended to qualify respectively as Tier-2 and Additional Tier-1 regulatory capital of the Issuer and shall comply with Bank Negara Malaysia’s (“BNM”) Capital Adequacy Framework for Islamic Banks (Capital Components) issued on 2 February 2018 (as amended from time to time) (“CAFIB”) with respect to the requirements of Tier-2 capital instruments and Additional Tier-1 capital instruments respectively. The Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah are collectively referred to as “Subordinated Sukuk Wakalah”). The Senior Sukuk Wakalah, Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah are collectively referred to as “Sukuk Wakalah”). The issuance of each tranche of the Sukuk Wakalah shall be effected as follows: 1. Pursuant to a wakalah agreement (“Master Wakalah

Agreement”) entered into between the Sukuk Trustee (acting on behalf of the investors (“Sukukholders”)) and the Issuer, the Sukuk Trustee shall appoint the Issuer to act as its agent (“Investment Wakeel”) to invest the Sukuk Proceeds (as defined herein) provided by the Sukukholders from subscription of the Sukuk Wakalah, into the Wakalah Investments (as defined below). The Issuer shall, from time to time, issue Sukuk Wakalah

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and the Sukukholders shall subscribe to the Sukuk Wakalah by paying the issue price (“Sukuk Proceeds”).

2. The Issuer, in its capacity as the Investment Wakeel, shall declare a trust over the Sukuk Proceeds and over the Wakalah Investments acquired using the Sukuk Proceeds for the benefit of the Sukukholders. The Sukuk Wakalah shall represent the Sukukholders’ undivided and proportionate beneficial interests in the Trust Assets (as defined in item (xiii) of the section entitled “Other terms and conditions”). The Investment Wakeel shall utilise the Sukuk Proceeds received from the Sukukholders as follows:

(i) investment in the Shariah-compliant general business of the Issuer, which undertakes the Islamic banking business (“Shariah-compliant Business”); and

(ii) investment in Shariah-compliant Commodities (as defined in item (xiii) of the section entitled “Other terms and conditions”) to be sold to the Issuer as Buyer (as defined below) under the Shariah principle of Murabahah (via Tawarruq arrangement) (“Commodity Murabahah Investment”).

The investments described in items (i) and (ii) above shall collectively be referred to as the “Wakalah Investments”.

Shariah-compliant Business

Pursuant to an investment agreement (“Investment Agreement”) to be entered into between the Issuer, the Investment Wakeel and the Sukuk Trustee, the Investment Wakeel shall invest part of the Sukuk Proceeds into the Shariah-compliant Business of the Issuer.

The value of the Wakalah Investments in respect of the Shariah-compliant Business shall be at least 33% of the aggregate value of the overall Wakalah Investments, subject to the valuation principles set out in the Master Wakalah Agreement.

For the avoidance of doubt, the above ratio of at least 33% of the value of the Wakalah Investments is only applicable at the point of initial investment for each tranche of the respective Sukuk Wakalah, and is not required to be maintained throughout the tenure of the respective Sukuk Wakalah.

However, the Investment Wakeel shall ensure that the Shariah-compliant Business shall at all times be a component of the Wakalah Investments.

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Commodity Murabahah Investment The remaining balance of the Sukuk Proceeds shall be invested into the Commodity Murabahah Investment. (a) Pursuant to the commodity murabahah master

agreement (“Commodity Murabahah Master Agreement”) to be entered into between the Issuer (as the “Buyer”), the Investment Wakeel and the Sukuk Trustee, the Buyer shall issue a purchase order (“Purchase Order”) to the Investment Wakeel and the Sukuk Trustee (all acting on behalf of the Sukukholders) to irrevocably undertake to purchase the Commodities from the Sukukholders at the Deferred Sale Price (as defined below).

(b) Pursuant to the Purchase Order, the Investment Wakeel

(on behalf of the Sukukholders), shall appoint the Facility Agent under the Facility Agency Agreement to purchase the Commodities via the commodity trading participant (“CTP”) on spot basis from a commodity seller (“Commodity Seller”) in the Bursa Suq Al-Sila’ commodity trading platform or such other commodity trading platform acceptable to the Joint Shariah Advisers at a purchase price equivalent to the remaining balance of the Sukuk Proceeds (“Commodity Purchase Price”).

(c) Upon acquiring the Commodities, the Investment

Wakeel (on behalf of the Sukukholders), shall appoint the Facility Agent under the Facility Agency Agreement to sell those Commodities to the Buyer for a price equivalent to the Commodity Purchase Price plus the profit and shall be payable on a deferred payment basis (“Deferred Sale Price”).

(i) In respect of Senior Sukuk Wakalah and Tier-2

Sukuk Wakalah: The Deferred Sale Price shall be equal to the aggregate of Expected Periodic Distribution Amount (as defined below) and the nominal value of the Senior Sukuk Wakalah or Tier-2 Sukuk Wakalah.

(ii) In respect of AT-1 Sukuk Wakalah:

The Deferred Sale Price shall be equivalent to the nominal value of the AT-1 Sukuk Wakalah. For the avoidance of doubt, the Deferred Sale Price for AT-1 Sukuk Wakalah shall be payable for a period of 99 years, and the Issuer shall be given the right to defer such payment upon request made by the Issuer or if required by BNM subject to the issuance notice of deferment.

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(d) Upon the purchase of the Commodities, the Buyer via the CTP, will immediately sell the Commodities to a commodity buyer in the Bursa Suq Al-Sila’ commodity trading platform or such other commodity trading platform acceptable to the Joint Shariah Advisers (“Commodity Buyer”), on spot basis for cash, equivalent to the Commodity Purchase Price.

3. During the tenure of the Sukuk Wakalah, any income

generated from the Wakalah Investments up to the Expected Periodic Distribution Amount shall be distributed periodically in the form of periodic distributions (“Periodic Distributions”) based on the periodic distribution rate (“Periodic Distribution Rate”). The Periodic Distributions shall be made on each Periodic Distribution Date (as defined below). Any returns from the Wakalah Investments in excess of the Expected Periodic Distribution Amount distributable under the Sukuk Wakalah shall be waived by the Sukukholders and retained by the Investment Wakeel as incentive fee for its services in managing the Wakalah Investments under the Master Wakalah Agreement. In relation to the AT-1 Sukuk Wakalah, in the event income generated from Wakalah Investments is insufficient to pay the Expected Periodic Distribution Amount, the Investment Wakeel may, at its sole and absolute discretion, provide hibah (without any obligation) to the Sukuk Trustee (on behalf of the holders of the AT-1 Sukuk Wakalah (“AT-1 Sukukholders”)).

4. The Issuer (as the “Obligor”) shall grant a master purchase undertaking (“Purchase Undertaking”) to the Sukuk Trustee (for the benefit of the Sukukholders), in which the Obligor shall purchase the Sukukholders’ undivided and proportionate beneficial interest in the Shariah-compliant Business at the relevant Exercise Price (as defined below) by entering into the sale agreement (“Sale Agreement”), upon the occurrence of the following: (i) In respect of the Senior Sukuk Wakalah:

a maturity date (“Scheduled Dissolution Date”) or the dissolution declaration date (“Dissolution Declaration Date”), whichever is the earlier,

(ii) In respect of the Tier-2 Sukuk Wakalah:

a Scheduled Dissolution Date or upon a declaration of an Enforcement Event (as defined in the section entitled “Events of default or enforcement events, where applicable, including

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recourse available to investors”), whichever is the earlier,

(iii) In respect of the AT-1 Sukuk Wakalah:

upon a declaration of an Enforcement Event or the occurrence of the Capital Disqualification Event (as defined in item (vii) of the section entitled “Other terms and conditions”) (as the case maybe).

5. The Sukuk Trustee (on behalf of the holders of the Tier-

2 Sukuk Wakalah and holders of the AT-1 Sukuk Wakalah (collectively referred to as the “Subordinated Sukukholders”)) shall issue a master sale undertaking (“Sale Undertaking”) to the Issuer, in respect of the Subordinated Sukuk Wakalah, where the Sukuk Trustee (on behalf of the Subordinated Sukukholders) shall sell the Subordinated Sukukholders’ undivided and proportionate beneficial interest in the Shariah-compliant Business at the relevant Exercise Price upon redemption of the respective Subordinated Sukuk Wakalah pursuant to the Call Option (as defined in the section entitled “Call option and details, if applicable”), Tax Redemption (as defined in the section entitled “Provision on early redemption, if applicable”) and Regulatory Redemption (as defined in the section entitled “Provision on early redemption, if applicable”) (in accordance to the terms as set out herein) by entering into the Sale Agreement .

6. Pursuant to the Purchase Undertaking or the Sale

Undertaking, the proceeds from the Wakalah Investments including the Deferred Sale Price, the Exercise Price and any returns generated from the Wakalah Investments shall be utilised to redeem the Sukuk Wakalah at the relevant Dissolution Distribution Amount (as defined in item (iii) of the section entitled “Other terms and conditions”). However, in respect of the AT-1 Sukuk Wakalah, this is subject to no disqualification of the AT-1 Sukuk Wakalah as Additional Tier-1 capital of the Issuer.

7. The relevant trust in respect of the Trust Assets will be dissolved and the relevant Sukuk Wakalah held by the Sukukholders will be cancelled upon the occurrence of the following events: (i) full payment of all amounts due and payable

under the Sukuk Wakalah; (ii) a write-off pursuant to Non-Viability Event (as

defined in item (xi) of the section entitled “Other terms and conditions”) in respect of the Subordinated Sukuk Wakalah; or

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(iii) a write-off pursuant to Breach of CET-1 Capital

Ratio (as defined in item (x) of the section entitled “Other terms and conditions”) in respect of the AT-1 Sukuk Wakalah.

8. Any excess in respect of proceeds from the Wakalah

Investments over or above the Dissolution Distribution Amount of the relevant Sukuk Wakalah shall be waived by the Sukukholders and retained by the Investment Wakeel as the incentive fee. The “Exercise Price” refers to the price for the purchase or sale of the Sukukholders’ undivided and proportionate interest in the Shariah-compliant Business under the relevant Sukuk Wakalah pursuant to exercise of the Purchase Undertaking or Sale Undertaking respectively, and shall be equal to the market or fair value of the Shariah-compliant Business at the Scheduled Dissolution Date or Dissolution Declaration Date or Enforcement Event date or Capital Disqualification Event date or relevant redemption date pursuant to the Call Option, Tax Redemption and Regulatory Redemption, which shall be determined based on the valuation principles as set out in the Master Wakalah Agreement. The “Expected Periodic Distribution Amount” refers to the expected periodic distribution amount based on the Periodic Distribution Rate payable on any relevant Periodic Distribution Date on nominal value of such Sukuk Wakalah on the basis of the actual number of days over three hundred and sixty-five (365) days in the relevant period. The “Periodic Distribution Date” refers to the dates for the payment of Periodic Distributions which is a date falling semi-annually or such other period to be agreed between the Issuer and the Joint Lead Managers prior to each issuance of the Sukuk Wakalah.

Please refer to Appendix 1 for the diagrammatic illustration of the underlying structure.

(5) Currency : Ringgit. (6) Expected facility/

programme size (for programme, to state the option to upsize)

: ☒ Up to MYR10,000,000,000.00

☐ Combined limit with

☐ Sub-limit of

(6A) Option to upsize

: ☒ Yes

☐ No

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Additional Notes: The Issuer shall have the option to increase the size of the Sukuk Wakalah Programme provided that: (i) such increase will not result in any adverse impact on the

rating of the respective Sukuk Wakalah; (ii) the relevant requirements under the Guidelines on

Unlisted Capital Market Products under the Lodge and Launch Framework (issued by the Securities Commission Malaysia (“SC”) on 9 March 2015, effective on 15 June 2015 and revised on 11 October 2018) as amended from time to time (“LOLA Guidelines”) in relation to such upsizing have been complied with; and

(iii) the relevant regulatory approvals have been obtained (if

applicable). The Trust Deeds (as defined in item (xvii) of the section entitled “Other terms and conditions”) will provide that the Sukukholders shall be deemed to have consented to any upsizing of the Sukuk Wakalah Programme limit from time to time. Accordingly, no further consent will be required from the Sukukholders, the Sukuk Trustee or from any other party under the Sukuk Wakalah Programme for the Issuer to exercise the option to increase the limit of the Sukuk Wakalah Programme from time to time.

(7) Tenure of facility/ programme

: Perpetual. Year(s) – Not applicable Month(s) – Not applicable

Day(s) – Not applicable

(8) Availability period of

debt or sukuk programme

: The Sukuk Wakalah shall be available for issuance from the period commencing from the date all conditions precedent are fulfilled to the satisfaction of the Joint Lead Arrangers (“JLAs”) (unless waived by the JLAs) as set out in the Transaction Documents (as defined in item (xvii) of the section entitled “Other terms and conditions”) so long as the Sukuk Wakalah Programme subsists. The first issuance of the Sukuk Wakalah under the Sukuk Wakalah Programme shall be made within sixty (60) business days from the date of the lodgement of the required information and documents in relation to the Sukuk Wakalah Programme with the SC (“Lodgement”) as required under the LOLA Guidelines.

(9) Clearing and settlement

platform : Payments Network Malaysia Sdn Bhd (“PayNet”).

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(10) Mode of issue : ☒ Private/direct placement

☒ Bought deal

☒ Book building

☐ Tender

(11) Selling restrictions : (i) At Issuance

☐ Exclusively to persons outside Malaysia

☒ Part 1 of Schedule 6 of the Capital Markets & Services Act, 2007 (CMSA)

☒ Part 1 of Schedule 7 of the CMSA

☒ Read together with Schedule 9 of CMSA

☐ Schedule 8 of CMSA

☐ Section 2(6) of the Companies Act 2016

☐ Other

(ii) After Issuance

☐ Exclusively to persons outside Malaysia

☒ Part 1 of Schedule 6 of the CMSA

☒ Read together with Schedule 9 of CMSA

☐ Schedule 8 of CMSA

☐ Section 2(6) of the Companies Act 2016

☐ Other

Additional Notes: Selling Restrictions at Issuance The Sukuk Wakalah under the Sukuk Wakalah Programme may only be offered, sold, transferred or otherwise disposed directly or indirectly to persons to whom an offer or invitation to subscribe the Sukuk Wakalah and to whom the Sukuk Wakalah may be made and to whom the Sukuk Wakalah are issued falling within Part 1 of Schedule 6 (or Section 229(1)(b)) of the Capital Markets and Services Act 2007 as amended from time to time (“CMSA”) and Part 1 of Schedule 7 (or Section 230(1)(b)) of the CMSA, to be read together with Schedule 9 (or Section 257(3)) of the CMSA. Selling Restrictions Thereafter The Sukuk Wakalah under the Sukuk Wakalah Programme may only be offered, sold, transferred or otherwise disposed directly or indirectly to persons to whom an offer or invitation to purchase the Sukuk Wakalah falling within Part 1 of Schedule 6 (or Section 229(1)(b)) of the CMSA to be read together with Schedule 9 (or Section 257(3)) of the CMSA.

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(12) Tradability and transferability

: ☒ Tradable & transferable

MYR 10,000,000,000.00

☐ Non-tradable & non-transferable

☐ Restricted transferability (13) Details of security/

collateral pledged, if applicable

: ☒ Unsecured

☐ Secured/ combination of unsecured and secured, details as follows:

(14) Details of guarantee, if

applicable : ☒ Not guaranteed

☐ Guaranteed, details as follows:

(15) Convertibility of

issuance and details of the convertibility, if applicable

: ☒ Non-convertible

☐ Convertible, details as follows:

(16) Exchangeability of

issuance and details of the exchangeability, if applicable

: ☒ Non-exchangeable

☐ Exchangeable, details as follows:

(17) Call option and details,

if applicable : ☐ No call option

☒ Call option, details as follows:

Senior Sukuk Wakalah Not applicable. Subordinated Sukuk Wakalah Each tranche of the Subordinated Sukuk Wakalah issued may have a call option (to be determined prior to the relevant issue date) (“Call Option”) to allow the Issuer, at its option, to redeem that tranche of the Subordinated Sukuk Wakalah (in whole or in part) on the Call Date (as defined below) at the Dissolution Distribution Amount subject to the Redemption Conditions (as defined in the section entitled “Provisions on early redemption, if applicable”) being satisfied (if applicable for the relevant tranche). “Call Date” means any Periodic Distribution Date on or after the fifth (5th) anniversary of the issue date of that tranche of Subordinated Sukuk Wakalah, on or after the First Call Date (as defined below). “First Call Date” shall refer to the first Periodic Distribution Date where such date shall be determined prior to issuance and must fall on or after the fifth (5th) anniversary of the issue date of that tranche of Subordinated Sukuk Wakalah.

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The optional redemption of one tranche of the Subordinated Sukuk Wakalah does not trigger the redemption of other tranche(s) of the Subordinated Sukuk Wakalah. The Sale Undertaking will be triggered pursuant to the exercise of the Call Option. Pursuant to the Sale Undertaking, the Trust Assets would be dissolved.

(18) Put option and details,

if applicable : ☒ No put option

☐ Put option, details as follows:

(19) Details of covenants : Positive covenant

☐ No positive covenant

☒ Positive covenant, details as follows:

Positive covenants typical and customary for a transaction of this nature including but not limited to the following: (i) The Issuer shall at all times perform all its obligations

and promptly comply with the provisions of the Transaction Documents and immediately notify the Sukuk Trustee in the event that the Issuer is unable to fulfil or comply with any of the provisions of the Transaction Documents;

(ii) The Issuer shall at all times comply with any and all

requirements and rules, regulations and guidelines as may be issued and/or imposed by the SC and BNM from time to time and the applicable provisions of the CMSA;

(iii) The Issuer shall at all times maintain a Paying Agent

who is based in Malaysia; (iv) The Issuer shall procure that the Paying Agent shall

notify the Sukuk Trustee, through the Facility Agent, in the event that the Paying Agent does not receive payment from the Issuer on the due dates and in the manner as required under the Transaction Documents and the terms and conditions of the relevant Sukuk Wakalah;

(v) The Issuer shall at all times keep proper books and

accounts at all times on a basis consistently applied in accordance with the laws of Malaysia and generally accepted accounting principles and standards in Malaysia and provide the Sukuk Trustee and any person appointed by it access to such books and accounts to the extent permitted by law;

(vi) The Issuer shall at all times maintain its corporate legal

existence and exercise reasonable diligence in carrying out its business and affairs in a proper and efficient

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manner and in accordance with sound financial and commercial standards and practices which should ensure, amongst others, that all necessary approvals and relevant licences are obtained and maintained;

(vii) The Issuer shall ensure that the Transaction Documents

and the information memorandum do not contain any matter or information which is inconsistent between them; and

(viii) Such other positive covenants as required under the

SC’s Trust Deeds Guidelines (revised and effective on 12 August 2011) (“Trust Deeds Guidelines”) or as may be advised by the Solicitors and to be mutually agreed between the JLAs and the Issuer.

Negative covenant

☐ No negative covenant

☒ Negative covenant, details as follows:

Senior Sukuk Wakalah Negative covenants, to include but not limited to the following: (i) The Issuer shall not, unless it has obtained BNM’s

approval, reduce or alter (except increase) its issued and paid-up capital whether by varying the amount, structure or value thereof or the rights attached thereto or convert any of its share capital into stock, or by consolidation, dividing or sub-dividing all or any of its shares. For the avoidance of doubt, this covenant shall not restrict the Issuer from dividing or sub-dividing all or any of its shares provided that its authorised and paid-up share capital is not reduced, pursuant to such dividing or sub-dividing of its shares;

(ii) The Issuer shall not: (a) consolidate or amalgamate with or merge with

any other person or into another entity or transfer all or substantially all its assets to another entity; or

(b) enter into any de-merger, reconstruction or winding up unless the successor person or entity expressly assumes the Issuer’s obligations under the Transaction Documents and after giving effect to such transaction, no Dissolution Event (as defined in the section entitled “Events of default or enforcement events, where applicable, including recourse available to investors”) has occurred or is continuing or would occur,

26

unless BNM has granted its approval in respect of the relevant events set out in items (a) and (b) above (which event may include but is not limited to an exercise in respect of which Malaysia Building Society Berhad‘s group of companies (the “MBSB Group”) change from a financial holding company structure to one which is a bank holding company structure where the latter will result in the Issuer becoming the holding company of the MBSB Group);

(iii) The Issuer shall not cause itself to take steps to be

voluntarily wound up or to dissolve itself and/or its respective affairs;

(iv) The Issuer shall not do or permit to occur or omit to do any act or omission, or execute or omit to execute any document which may render any of the Transaction Documents to be illegal, void, voidable or unenforceable;

(v) The Issuer shall not use the proceeds derived from the

issuance of the Senior Sukuk Wakalah hereunder except for the purposes set out in the Lodgement and the Transaction Documents;

(vi) The Issuer shall not add, delete, amend or substitute its

memorandum and articles of association/ constitution in a manner inconsistent with the provisions of the Transaction Documents;

(vii) The Issuer shall not enter into any transaction, whether directly or indirectly with interested person (including any of its directors or its related corporation’s directors, substantial shareholders or persons connected with any of them) (collectively, “Interested Persons”) (for the purpose of this covenant, the term “transaction” shall have the same meaning as ascribed to “related party transaction” in the Main Market Listing Requirements issued by Bursa Malaysia Securities Berhad (“MMLR”)) unless:

(a) such transaction shall be on terms that are no

less favourable to the Issuer than those which could have been obtained in a comparable transaction from persons who are not Interested Persons; and

(b) with respect to transactions involving an

aggregate payment or value equal to or exceeding five per cent. (5%) of the relevant percentage ratio prescribed by Chapter 10 of the MMLR (as shown in the latest audited consolidated accounts of Malaysia Building Society Berhad (Registration No. 197001000172) (9417-K) in any financial year, as provided and computed based on the MMLR, the Issuer shall

27

obtain certification from an independent adviser appointed by the Issuer that the transaction is carried out on fair and reasonable terms,

provided that the Issuer certifies to the Sukuk Trustee that the transaction complies with subparagraph (a) above, where applicable, that the Issuer has received the certification referred to in this subparagraph (b) above, and that the transaction has been approved by the majority of its board of directors and, where applicable, shareholders at a general meeting; and

(viii) Such other negative covenants as required under the Trust Deeds Guidelines or as may be advised by the Solicitors and to be mutually agreed between the JLAs and the Issuer.

Subordinated Sukuk Wakalah No negative covenants.

Financial covenant

☒ No financial covenant

☐ Financial covenant, details as follows:

Information covenant

☐ No information covenant

☒ Information covenant, details as follows:

Information covenants typical and customary for a transaction of this nature but not limited to the following:

(i) The Issuer shall deliver to the Sukuk Trustee:

(a) A copy of its annual audited consolidated financial statements within 180 days after the end of each financial year, its semi-annual unaudited consolidated financial statements within 90 days after the end of each half of its financial year end and copies of any other accounts, reports, notices, statements or circulars issued to its shareholders; and

(b) annually, a certificate that the Issuer has complied with its obligations under the relevant Transaction Documents and the terms and conditions of the Sukuk Wakalah and that there did not exist or had not existed, from the date the first relevant Sukuk Wakalah were issued or from the date of the last certificate, any Dissolution Event or Enforcement Event (as the case may be) and if such is not the case, to specify the same;

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(ii) The Issuer shall notify the Sukuk Trustee in the event that the Issuer becomes aware of the following: (a) any Dissolution Event or Enforcement Event (as

the case may be) or that such other right or remedy under the terms, provisions and covenants of the relevant Sukuk Wakalah and Trust Deeds have become immediately enforceable;

(b) any circumstance that has occurred that would materially prejudice the Issuer or any security included in or created by the Sukuk Wakalah or the Trust Deeds;

(c) any substantial change in the nature of the

business of the Issuer;

(d) any change in the utilisation of proceeds from the relevant Sukuk Wakalah other than for the purpose stipulated in the information memorandum and the relevant Transaction Documents;

(e) any change in the withholding tax position or tax

jurisdiction of the Issuer; or

(f) any other matter that may materially prejudice the interest of the Sukukholders;

(iii) The Issuer shall give to the Sukuk Trustee such

information relating to the Issuer’s affairs as the Sukuk Trustee may reasonably require, in order to discharge its duties and obligations as the Sukuk Trustee, to the extent permitted by law; and

(iv) Such other information covenants as required under the Trust Deeds Guidelines or as may be advised by the Solicitors and to be mutually agreed between JLAs and the Issuer.

(20) Details of designated

account(s), if applicable, including –

: ☒ No Designated account

☐ Designated account(s) as follows:

(a) names of accounts;

(b) parties

responsible for opening the account;

(c) parties

responsible for maintaining/

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operating the account;

(d) signatories to the

account;

(e) sources and utilisation of funds; and

(f) diagram

illustrating the flow of monies and conditions for disbursement

(21) Details of credit rating,

if applicable : ☐ Not rated

☐ Combination of rated and unrated as follows:

☒ Rated as follows:

Additional Notes:

The respective Sukuk Wakalah have been assigned the following final ratings by RAM of up to RM10.0 billion in nominal value each:

(i) Senior Sukuk Wakalah – A2

(ii) Tier-2 Sukuk Wakalah – A3

(iii) AT-1 Sukuk Wakalah – BBB2

For the avoidance of doubt, the issuance of the Sukuk Wakalah is subject to an aggregate limit of RM10.0 billion in nominal value.

Credit Rating Agency

Credit Rating

Final/ Indicative

Name of Tranche/ Series /

Class

Partial rating

Amount Rated

RAM A2 Final rating - No MYR10.0 billion

RAM A3 Final rating - No MYR10.0 billion

RAM BBB2 Final rating - No MYR10.0 billion

(22) Conditions precedent : Including but not limited to the following:

Conditions Precedent for the Establishment of the Sukuk Wakalah Programme

(i) The relevant Transaction Documents in relation to the Sukuk Wakalah Programme have been duly executed and, where applicable, stamped (unless otherwise exempted) and presented for registration;

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(ii) Certified true copies of the certificate of incorporation and the constitution or its equivalent of the Issuer;

(iii) Certified true copies of the Return for Allotment of Shares (or Form 24 as prescribed under the Companies Act 1965), the Notification of Change in the Registered Address (or Form 44 as prescribed under the Companies Act 1965), Notification of Change in the Register of Directors, Managers and Secretaries (or Form 49 as prescribed under the Companies Act 1965) of the Issuer;

(iv) Certified true copy of the board resolution of the Issuer authorising, amongst others, the establishment of the Sukuk Wakalah Programme, issuance of the Sukuk Wakalah and the execution of all relevant documents thereto;

(v) A list of the Issuer’s authorised signatories and their respective specimen signatures;

(vi) A report of the relevant company search conducted on the Issuer;

(vii) A report of the relevant winding up search conducted on the Issuer;

(viii) Evidence that all relevant regulatory approvals and acknowledgements have been obtained, including but not limited to written approval from BNM in relation to the establishment of the Sukuk Wakalah Programme, endorsement from the Shariah Advisory Council (“SAC”) of the SC in respect of the Sukuk Wakalah Programme and the acknowledgement by the SC of the Lodgement;

(ix) Evidence that the respective Sukuk Wakalah under the Sukuk Wakalah Programme has obtained the minimum rating as stated in the section entitled “Credit rating of facility/programme, if applicable”;

(x) Evidence that: (a) the TRAs (as defined in item (xviii) of the section entitled “Other terms and conditions”) have been opened; and (b) the TRAs each have been established and the deposit of Ringgit Thirty Thousand (RM30,000.00) has been made therein;

(xi) Legal opinion from the Solicitors with respect to the legality, validity and enforceability of the Transaction Documents and confirmation that all conditions precedent thereto have been fulfilled or waived, as the case may be;

(xii) Receipt of the Shariah pronouncement(s) from the Joint Shariah Advisers that the structure and mechanism of the Sukuk Wakalah and the Transaction Documents are in compliance with Shariah principles; and

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(xiii) Such other conditions precedent as advised by the Solicitors and mutually agreed between the JLAs and the Issuer.

Conditions Precedent for Each Issuance of Senior Sukuk Wakalah (i) Confirmation from the Issuer that all representations and

warranties remain true and accurate in all material respects;

(ii) No Dissolution Event has occurred or is continuing or

would occur as a result of an issuance of Senior Sukuk Wakalah under the Sukuk Wakalah Programme;

(iii) Evidence that the rating for the Senior Sukuk Wakalah shall be at least the minimum rating as stated in the section entitled “Credit rating of facility/programme, if applicable”; and

(iv) Such other conditions for issuance as advised by the

Solicitors. Conditions Precedent for Each Issuance of Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah (i) Evidence that prior notification has been given to BNM

for the issuance of the relevant tranche of Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah;

(ii) Confirmation from the Issuer that all representations and

warranties remain true and accurate in all material respects;

(iii) No Enforcement Event has occurred or is continuing or

would occur as a result of an issuance of Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah (as the case may be) under the Sukuk Wakalah Programme;

(iv) Evidence that the rating for the Tier-2 Sukuk Wakalah or

AT-1 Sukuk Wakalah (as the case may be) shall be at least the minimum rating as stated in the section entitled “Credit rating of facility/programme, if applicable”; and

(v) Such other conditions for issuance as advised by the Solicitors.

(23) Representations and

warranties : Representation and warranties usual and customary for the

transaction of this nature, which shall include but not limited to the following: (i) The Issuer is a company duly incorporated and validly

existing under the laws of Malaysia and has the power and authority to carry out its business;

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(ii) The Issuer has the power to enter into, exercise its rights and perform its obligations under the Transaction Documents;

(iii) The Issuer’s entry into, exercise of its rights and

performance under the Transaction Documents do not and will not violate any existing law or agreements to which it is a party;

(iv) The issuance of the Sukuk Wakalah has been duly authorised, and when issued and delivered pursuant to the Transaction Documents, will have been duly executed, authenticated, issued and delivered and will constitute valid and binding obligations of the Issuer enforceable in accordance with its terms;

(v) The Issuer has all licenses, franchises, permits,

authorisations, approvals, orders and other concessions of and from all governmental and regulatory officials and bodies that are necessary to own or lease its properties and conduct its business, other than where the failure to obtain such licenses, franchises, permits, authorisations, approvals, orders and other concessions would not have a Material Adverse Effect (as defined below);

(vi) The Transaction Documents create valid and binding

obligations which are enforceable on and against the Issuer;

(vii) All necessary actions, authorisations and consents

required under the Transaction Documents have been taken, fulfilled and obtained and remain in full force and effect;

(viii) No litigation or arbitration is current or, to the Issuer’s

knowledge, is threatened, which if adversely determined would have a Material Adverse Effect;

(ix) The audited financial statements of the Issuer are

prepared in accordance with generally accepted accounting principles and standards and they fairly represent its financial position;

(x) The financial statements and other information supplied

are true and accurate in all material aspects and not misleading except that, when the warranted information is a forecast, the warranty will be to the effect that the forecast has been made on the basis of assumptions which were reasonable at the time when they were made and after due enquiry;

(xi) No event has occurred which could constitute a Dissolution Event and/or Enforcement Event and/or which with the giving of notice or the lapse of time or fulfilment of the relevant requirement(s) as contemplated

33

under the relevant Transaction Documents would constitute a Dissolution Event and/or Enforcement Event;

(xii) No step has been taken by the Issuer, its creditors or

any of its shareholders or any other person on its behalf nor have any legal proceedings or applications been started or threatened under Section 366 of the Companies Act 2016;

(xiii) There has been no change in the business or condition

(financial or otherwise) of the Issuer or its subsidiaries (if any) since the date of its last audited financial statements which might have a Material Adverse Effect; and

(xiv) Such other representations and warranties as may be

advised by the Solicitors and to be mutually agreed between the JLAs and the Issuer.

“Material Adverse Effect” means the occurrence of any event which materially and adversely affects the ability of the Issuer to perform any of its obligations under any of the Transaction Documents or which materially and adversely affects the business, financial position, shareholders’ funds or results of the operations of the Issuer.

(24) Events of default or

enforcement events, where applicable, including recourse available to investors

: Senior Sukuk Wakalah The dissolution events (“Dissolution Events” and each a “Dissolution Event”) shall encompass the following: (i) the Issuer fails to pay any amount in respect of the Senior

Sukuk Wakalah when the same shall become due and payable in accordance with the Transaction Documents and the Issuer fails to remedy such default within a period of seven (7) business days after the Issuer became aware or has been notified by the Sukuk Trustee of the default;

(ii) a winding-up order has been made against the Issuer or a

resolution to wind-up the Issuer has been passed; (iii) a scheme of arrangement under Section 366 of the

Companies Act 2016 has been instituted against the Issuer;

(iv) an encumbrancer takes possession or a receiver or similar

officer is appointed over the whole or a substantial part of the assets or undertaking of the Issuer;

(v) there has been a breach by the Issuer of any obligation

under any of the Issuer’s existing obligations which may materially and adversely affect the Issuer’s ability to perform its obligations under the Transaction Documents, and if in the reasonable opinion of the Sukuk Trustee is

34

capable of being remedied, the Issuer does not remedy the breach within a period of thirty (30) calendar days after the Issuer became aware or has been notified by the Sukuk Trustee of the failure;

(vi) any other indebtedness of the Issuer becomes due and

payable prior to its stated maturity or where the security created for any other indebtedness of the Issuer becomes enforceable or any guarantee obligations of the Issuer is not discharged when it is due and payable;

(vii) where there is revocation, withholding, invalidation or

modification of any license, authorisation, approval or consent which in the reasonable opinion of the Sukuk Trustee may have a Material Adverse Effect;

(viii) there has been a breach by the Issuer of any term or

condition in the Transaction Documents or the Issuer fails to observe or perform its obligation under any of the Transaction Documents (other than an obligation referred to in (i) above) and in the case of a breach or failure which in the reasonable opinion of the Sukuk Trustee is capable of being remedied, the Issuer does not remedy the failure within a period of thirty (30) calendar days after the Issuer became aware or has been notified by the Sukuk Trustee of the failure;

(ix) any representations and warranties made or given by the

Issuer under the Transaction Documents or any certificate or document furnished pursuant to the terms of any Transaction Documents, proves to have been incorrect or misleading in any material respect on or as at the date made or given, and in the case of such event which in the reasonable opinion of the Sukuk Trustee is capable of being remedied, the Issuer does not remedy it within a period of thirty (30) calendar days after the Issuer became aware or has been notified by the Sukuk Trustee of the failure;

(x) at any time any of the provisions of the Transaction

Documents is or becomes illegal, void, voidable or unenforceable; and

(xi) such other events of defaults as may be advised by the

Solicitors and to be mutually agreed between the JLAs and the Issuer.

Upon the occurrence of any of the above, the Sukuk Trustee may or shall (if so directed to do so by a special resolution of the relevant Sukukholders) declare (by giving written notice to the Issuer) that a Dissolution Event has occurred and all sums payable under the Senior Sukuk Wakalah are immediately due and payable at Dissolution Distribution Amount and the Sukuk Trustee may enforce its rights under the Senior Sukuk Wakalah Transaction Documents (as defined in item (xvii) of the section

35

entitled “Other terms and conditions”), by requiring the Obligor to purchase the interest in the Shariah-compliant Business at the Exercise Price from the holders of the Senior Sukuk Wakalah (the “Senior Sukukholders”) and to enter into a Sale Agreement for such purchase, and the Buyer to pay the outstanding Deferred Sale Price (subject to Ibra’, if any). Subordinated Sukuk Wakalah There are no Dissolution Events applicable for the Subordinated Sukuk. However, the following enforcement events (“Enforcement Events” and each an “Enforcement Event”) are applicable: (i) the Issuer fails to pay any amount in respect of the

Subordinated Sukuk Wakalah when due and payable and the Issuer fails to remedy such default within a period of seven (7) business days after the Issuer became aware or has been notified by the Sukuk Trustee of the default. For the avoidance of doubt, no Periodic Distributions made under the AT-1 Sukuk Wakalah will be due and payable if such Periodic Distributions have been cancelled or are deemed cancelled (in each case, in whole or in part) as described in the section entitled “Limitation on Payment”. Accordingly, no default in payment under the AT-1 Sukuk Wakalah will have occurred or be deemed to have occurred in such circumstances; or

(ii) an order is made for the winding-up of the Issuer and such order is not stayed or set aside within sixty (60) days of such order being made or where so stayed, such stay lapses, or an effective resolution is passed for the winding-up of the Issuer except where such order is made or such resolution is passed for the purpose of a reconstruction or amalgamation, the terms of which have been approved by the relevant Sukukholders by way of special resolution.

Upon occurrence of item (i) above, subject to the terms of the Trust Deeds, the Sukuk Trustee may or shall (if directed to do so by a special resolution of the relevant Sukukholders) institute proceedings to enforce the payment obligations under that relevant tranche of the Subordinated Sukuk Wakalah and may institute proceedings in Malaysia for the winding-up of the Issuer, provided that neither the Sukuk Trustee nor any of the relevant Subordinated Sukukholders of that relevant tranche of the Subordinated Sukuk Wakalah shall have the right to accelerate payment of that relevant tranche of the Subordinated Sukuk Wakalah or any default in the performance of any condition, provision or covenant under that relevant tranche of the Subordinated Sukuk Wakalah or the Trust Deeds. Upon the occurrence of item (ii) above, subject to the terms of the Trust Deeds, the Sukuk Trustee may or shall (if so directed to do so by a special resolution of the relevant Sukukholders)

36

declare (by giving written notice to the Issuer) that an Enforcement Event has occurred and all sums payable under the Subordinated Sukuk Wakalah are immediately due and payable at the relevant Dissolution Distribution Amount and the Sukuk Trustee may enforce its rights under the Subordinated Sukuk Wakalah Transaction Documents (as defined in item (xvii) of the section entitled “Other term and conditions”) in relation to Subordinated Sukuk Wakalah, by requiring the Obligor to purchase the Subordinated Sukukholders’ interest in the Shariah-compliant Business at the Exercise Price and to enter into a Sale Agreement for such purchase and the Buyer to pay the outstanding Deferred Sale Price (subject to Ibra’, if any). For the avoidance of doubt, the occurrence or declaration of a Dissolution Event would not trigger an Enforcement Event under the Subordinated Sukuk Wakalah, unless such Dissolution Event would in itself be an Enforcement Event under the Subordinated Sukuk Wakalah. For the avoidance of doubt, the occurrence of an Enforcement Event under item (i) above for any tranche of the Subordinated Sukuk Wakalah will not trigger an Enforcement Event for other tranches of the outstanding Subordinated Sukuk Wakalah. However, the occurrence of an Enforcement Event under item (ii) above will trigger an Enforcement Event for all tranches of the outstanding Subordinated Sukuk Wakalah.

(25) Governing laws : Laws of Malaysia. (26) Provisions on buy-

back, if applicable

: ☐ No provision on buy-back

☒ Provisions on buy-back, details as follows:

Senior Sukuk Wakalah The Issuer or any of its subsidiaries or agent(s) of the Issuer may at any time purchase the Senior Sukuk Wakalah at any price in the open market or by private treaty. If purchases are made by tender, such tender must (subject to any applicable rules and regulations) be made available to all relevant Senior Sukukholders of the relevant tranche equally. All Senior Sukuk Wakalah redeemed or purchased by the Issuer or its subsidiaries or by agent(s) of the Issuer other than in the ordinary course of business shall be cancelled and shall not be resold. The Senior Sukuk Wakalah purchased by other related corporations (other than its subsidiaries) or any interested person of the Issuer, which includes the directors, major shareholders and chief executive officer, need not be cancelled but they will not entitle such related corporations or interested person of the Issuer to vote under the terms of the Senior Sukuk Wakalah subject to any exceptions in the Trust Deeds Guidelines.

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For avoidance of doubt, the Senior Sukuk Wakalah held by related corporations and the interested person of the Issuer shall not be counted for purposes of voting and for the purposes of forming a quorum subject to any exception in the Trust Deeds Guidelines. Subordinated Sukuk Wakalah The Issuer or any of its subsidiaries or agent(s) of the Issuer may at any time purchase (subject to the prior approval of BNM where applicable but which approval shall not be required for a purchase done in the ordinary course of business) the Subordinated Sukuk Wakalah at any price in the open market or by private treaty provided that no Non-Viability Event (as defined in item (xi) of the section entitled “Other terms and conditions”) has occurred prior to the date of such purchase. If purchases are made by tender, such tender must (subject to any applicable rules and regulations) be made available to all the relevant Subordinated Sukukholders of the relevant tranche equally. All Subordinated Sukuk Wakalah purchased by the Issuer or its subsidiaries or agent(s) of the Issuer (other than in the ordinary course of business) shall be cancelled and shall not be resold. All Subordinated Sukuk Wakalah purchased by other related corporations (other than the Issuer’s subsidiaries) or any interested person of the Issuer, which includes the directors, major shareholders and chief executive officer, need not be cancelled but they will not entitle such related corporations or interested person of the Issuer to vote under the terms of the Subordinated Sukuk Wakalah subject to any exceptions in the Trust Deeds Guidelines. For the avoidance of doubt, all Subordinated Sukuk Wakalah held by related corporations and the interested person of the Issuer shall not be counted for the purposes of voting and for the purposes of forming a quorum subject to any exceptions in the Trust Deeds Guidelines. For the purpose of this clause, the term “ordinary course of business” includes those activities performed by the Issuer, any of its subsidiaries or agents or any related corporations of the Issuer for third parties and excludes those performed for the own account of the Issuer, the Issuer’s subsidiaries or agents or such related corporations. Third parties herein refer to the Issuer’s, the Issuer’s subsidiaries’ and/or related corporations’ clients. The term “related corporation” has the same meaning given to it in the Companies Act, 2016.

(27) Provisions on early

redemption, if applicable

: ☐ No provision on early redemption

☒ Provisions on early redemption, details as follows:

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Subordinated Sukuk Wakalah

(i) Tax Redemption

If there is more than an insubstantial risk, as determined by the Issuer, that:

(i) the Issuer has or will become obliged to pay any additional taxes, duties, assessments or government charges of whatever nature in relation to the Subordinated Sukuk Wakalah; or

(ii) the Issuer would no longer obtain tax deductions for the purposes of Malaysian corporation tax for any payment in respect of the Subordinated Sukuk Wakalah,

as a result of a change in, or amendment to, the laws or regulations of Malaysia or any political subdivision or any authority thereof or therein having power to tax, or change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after the issue date and the Issuer cannot, by taking reasonable measures available to it, avoid such obligations (“Tax Event”), then the Issuer may, at its option, redeem the Subordinated Sukuk Wakalah (in whole or in part) at its Dissolution Distribution Amount, subject to the Redemption Conditions being satisfied.

The Sale Undertaking will be triggered pursuant to the Tax Redemption. Pursuant to the Sale Undertaking, the Trust Assets would be dissolved.

(ii) Regulatory Redemption

If there is more than an insubstantial risk, as determined by the Issuer, that: (i) any tranche of the Subordinated Sukuk Wakalah (in whole

or in part) will, either immediately or with the passage of time or upon either giving of notice or fulfilment of a condition, no longer qualify as Tier-2 capital (for Tier-2 Sukuk Wakalah)/ Additional Tier-1 capital (for AT-1 Sukuk Wakalah) of the Issuer for the purposes of BNM’s capital adequacy requirements under any regulations applicable to the Issuer; or

(ii) changes in law will make it unlawful for the Issuer to continue performing its obligations under any tranche of the Subordinated Sukuk Wakalah,

the Issuer may, at its option, redeem the Subordinated Sukuk Wakalah (in whole or in part) at its Dissolution Distribution Amount, subject to the Redemption Conditions being satisfied. The Sale Undertaking will be triggered pursuant to the Regulatory Redemption. Pursuant to the Sale Undertaking, the Trust Assets would be dissolved.

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Any redemption of the Subordinated Sukuk Wakalah (whether pursuant to the Call Option or otherwise) shall be subject to compliance of the following conditions (“Redemption Conditions”): (i) the Issuer is solvent at the time of any redemption of that

tranche of Subordinated Sukuk Wakalah or part thereof and immediately thereafter;

(ii) the Issuer has obtained the written approval of BNM prior

to redemption of that tranche of Subordinated Sukuk Wakalah or part thereof;

(iii) the Issuer is not in breach of BNM’s minimum capital

adequacy requirements and capital buffer requirements applicable to the Issuer after redemption of that tranche of Subordinated Sukuk Wakalah or part thereof; and

(iv) in respect of a Call Option only, the Issuer shall:

(a) replace that tranche of the Subordinated Sukuk

Wakalah or part thereof to be redeemed with capital of the same or better quality and the replacement of this capital shall be done at conditions which are sustainable for the income capacity of the Issuer; or

(b) demonstrate to BNM that its capital position is well

above the minimum capital adequacy and capital buffer requirements after redemption of such tranche of the Subordinated Sukuk Wakalah.

(28) Voting : Voting by the respective AT-1 Sukukholders, Tier-2

Sukukholders (as defined below) and Senior Sukukholders shall be carried out as follows: Prior to upsizing of the Sukuk Wakalah Programme: All matters which require consent from the AT-1 Sukukholders, Tier-2 Sukukholders and Senior Sukukholders shall be carried out on a collective basis by the AT-1 Sukukholders, Tier-2 Sukukholders and Senior Sukukholders respectively. Post upsizing of the Sukuk Wakalah Programme: All matters which require the consent of the AT-1 Sukukholders, Tier-2 Sukukholders and Senior Sukukholders shall be carried out on a “per series” basis by the AT-1 Sukukholders, Tier-2 Sukukholders and Senior Sukukholders respectively.

(29) Permitted investments,

if applicable : ☒ No permitted investments

☐ Permitted investments, details as follows:

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(30) Ta’widh : In the event, the Investment Wakeel breaches its fiduciary duty as an Investment Wakeel due to its failure to distribute any realised Periodic Distributions, and/or the Obligor/Buyer delays in the payment of any amounts due and payable to the Sukukholders under the Sale Agreement pursuant to the exercise of the Purchase Undertaking or the Sale Undertaking and/or the Deferred Sale Price, the Investment Wakeel and/or the Obligor/Buyer shall pay to the Sukuk Trustee (acting on behalf of the Sukukholders) Ta’widh (compensation) on such delay in payments at the rate and in the manner prescribed by the SAC from time to time. For avoidance of doubt, any Ta’widh (compensation) referred to above which is paid to the Sukukholders, can be treated and/or utilized by the Sukukholders at their absolute discretion in accordance with or as determined by their respective Shariah requirements (if any), which may include donation to any registered charitable organization or for any charitable purposes.

(31) Ibra’ : Ibra’ refers to an act of releasing absolutely or conditionally

one’s rights and claims on any obligation against another party which would result in the latter being discharged of his/its obligation or liabilities towards the former. The release may be either partially or in full. With respect to the Murabahah contract, Ibra’ refers to the release of rights on debts/ amount due and payable under the said contract. The Ibra’ shall be subject to the requirements stipulated under the LOLA Guidelines. Senior Sukuk Wakalah The Senior Sukukholders in subscribing to or purchasing the Senior Sukuk Wakalah consent to grant an Ibra’ (if any) on the Deferred Sale Price in the following events: (i) if the Senior Sukuk Wakalah are redeemed upon the

declaration of a Dissolution Event; or

(ii) if the Senior Sukuk Wakalah are redeemed upon the Scheduled Dissolution Date, in the case Senior Sukuk Wakalah issued with Periodic Distributions at floating rate.

The Ibra’ in relation to the Senior Sukuk Wakalah shall be as follows: (i) if the Senior Sukuk Wakalah are redeemed upon the

declaration of a Dissolution Event, the amount of Ibra’ shall be calculated as follows:

(a) in the case of Senior Sukuk Wakalah issued with Periodic Distributions at fixed rate, the Ibra’ for redemption shall be the unearned Expected Periodic Distribution Amount calculated from the date of declaration of Dissolution Event up to the respective Scheduled Dissolution Date(s) of Senior Sukuk Wakalah.

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(b) In the case of Senior Sukuk Wakalah issued

with Periodic Distributions at floating rate, the Ibra’ for redemption shall be the difference of Expected Periodic Distribution Amount calculated based on the Ceiling Profit Rate (as defined in item (v) of the section entitled “Other terms and conditions”) and Expected Periodic Distribution Amount calculated based on the Effective Profit Rate (as defined in item (v) of the section entitled “Other terms and conditions”), and the aggregate of the unearned Expected Periodic Distribution Amount calculated from the date of declaration of Dissolution Event up to the respective Scheduled Dissolution Date(s) of Senior Sukuk Wakalah.

(ii) if the Senior Sukuk Wakalah are redeemed upon the

Scheduled Dissolution Date, in the case of Senior Sukuk Wakalah issued with Periodic Distributions at floating rate, the Ibra’ for redemption shall be the difference of Expected Periodic Distribution Amount calculated based on the Ceiling Profit Rate and Expected Periodic Distribution Amount calculated based on the Effective Profit Rate. For avoidance of doubt, Ibra’ is not applicable for redemption of Senior Sukuk Wakalah issued with Periodic Distributions at fixed rate on the Scheduled Dissolution Date.

Tier-2 Sukuk Wakalah The holders of the Tier-2 Sukuk Wakalah (“Tier-2 Sukukholders”) in subscribing to or purchasing the Tier-2 Sukuk Wakalah consent to grant an Ibra’ (if any) on the Deferred Sale Price in the following events: (i) if the Tier-2 Sukuk Wakalah are redeemed upon a (a)

declaration of Enforcement Event or (b) redemption pursuant to Call Option, Tax Redemption or Regulatory Redemption;

(ii) if the Tier-2 Sukuk Wakalah are redeemed upon the Scheduled Dissolution Date, in the case Tier-2 Sukuk Wakalah issued with Periodic Distributions at floating rate; or

(iii) if the Tier-2 Sukuk Wakalah are written-off (in whole or in

part) at the point of Non-Viability Event.

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The Ibra’ in relation to the Tier-2 Sukuk Wakalah shall be as follows: (i) if the Tier-2 Sukuk Wakalah are redeemed upon a (a)

declaration of Enforcement Event or (b) redemption pursuant to Call Option, Tax Redemption or Regulatory Redemption, the Ibra’ for redemption shall be as follows:

(a) in the case of Tier-2 Sukuk Wakalah issued with Periodic Distributions at fixed rate, the Ibra’ for redemption shall be the aggregate of unearned Expected Periodic Distributions Amount calculated from the date of declaration of Enforcement Event or redemption date pursuant to Call Option, Tax Redemption or Regulatory Redemption up to the respective Scheduled Dissolution Date(s) of Tier-2 Sukuk Wakalah.

(b) in the case of Tier-2 Sukuk Wakalah issued with Periodic Distributions at floating rate, the Ibra’ for redemption shall be the difference of Expected Periodic Distribution Amount calculated based on the Ceiling Profit Rate and Expected Periodic Distribution Amount calculated based on the Effective Profit Rate, and the aggregate of the unearned Expected Periodic Distribution Amount calculated from the date of declaration of Enforcement Event or redemption date pursuant to Call Option, Tax Redemption or Regulatory Redemption up to the respective Scheduled Dissolution Date(s) of Tier-2 Sukuk Wakalah.

(ii) if the Tier-2 Sukuk Wakalah are redeemed upon the

Scheduled Dissolution Date, in the case Tier-2 Sukuk Wakalah issued with Periodic Distributions at floating rate, the Ibra’ for redemption shall be the difference of Expected Periodic Distribution Amount calculated based on the Ceiling Profit Rate and Expected Periodic Distribution Amount calculated based on the Effective Profit Rate. For avoidance of doubt, Ibra’ is not applicable for redemption of Tier-2 Sukuk Wakalah issued with Periodic Distributions at fixed rate on the Scheduled Dissolution Date.

(iii) if the Tier-2 Sukuk Wakalah are written-off (in whole or in

part) at the point of Non-Viability Event, the Tier-2 Sukukholders shall waive their rights to the payment of the outstanding Deferred Sale Price due from the Buyer, such amount corresponding to the aggregate principal amount and the Expected Periodic Distribution Amount of the Tier-2 Sukuk Wakalah required to be written off. The Tier-2 Sukukholders hereby waive (tanazul) their rights to receive capital invested and profit (if any) in or from the Shariah-compliant Business.

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AT-1 Sukuk Wakalah The AT-1 Sukukholders in subscribing to or purchasing the AT-1 Sukuk Wakalah consent to grant an Ibra’ (if any) on the Deferred Sale Price if the AT-1 Sukuk Wakalah are written-off (in whole or in part, as the case maybe) in the event of occurrence of (i) Non-Viability Event or (ii) Breach of CET-1 Capital Ratio. The Ibra' in relation to the AT-1 Sukuk Wakalah shall be as follows: (i) If the AT-1 Sukuk Wakalah are written-off (in whole or in

part) at the point of Non-Viability Event, the AT-1 Sukukholders shall waive their rights to the payment of the outstanding Deferred Sale Price due from the Buyer, such amount corresponding to the aggregate principal amount and the Expected Periodic Distribution Amount of the AT-1 Sukuk Wakalah required to be written off. The AT-1 Sukukholders hereby waive (tanazul) their rights to receive capital invested and profit (if any) in or from the Shariah-compliant Business.

(ii) If the AT-1 Sukuk Wakalah are written-off pursuant to Breach of CET-1 Capital Ratio, the AT-1 Sukukholders shall waive their rights to the aggregate amount of AT-1 Sukuk Wakalah required to restore the Issuer’s and its consolidated CET-1 Capital Ratio to at least 5.75% (or such other percentage as may be prescribed by the BNM CAFIB). If this is not possible, then the AT-1 Sukukholders shall waive their right to the full principal value of the AT-1 Sukuk Wakalah. The AT-1 Sukukholders hereby waive (tanazul) their rights to receive capital invested and profit (if any) in or from the Shariah-compliant Business.

(32) Kafalah : Not applicable.

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(33) Other terms and conditions

:

(i) Tenure of Issuance : Senior Sukuk Wakalah Minimum tenure of at least one (1) year. Tier-2 Sukuk Wakalah Subject to the Call Option, minimum tenure of at least five (5) years. AT-1 Sukuk Wakalah Subject to the Call Option, perpetual tenure. For the avoidance of doubt, the Senior Sukuk Wakalah and Tier-2 Sukuk Wakalah are not perpetual in nature as each of the Senior Sukuk Wakalah and Tier-2 Sukuk Wakalah shall have finite tenures and maturity dates which are to be determined prior to each issuance of the Senior Sukuk Wakalah and Tier-2 Sukuk Wakalah.

(ii) Utilisation of proceeds

: The proceeds from the issuance of the Sukuk Wakalah under the Sukuk Wakalah Programme will be utilised by the Issuer for its Shariah-compliant general banking purposes and to refinance its outstanding capital instruments.

(iii) Dissolution Distribution Amount

: Senior Sukuk Wakalah and Tier-2 Sukuk Wakalah

On the Scheduled Dissolution Date:

The Dissolution Distribution Amount shall be equivalent to:

(i) the nominal value of the Senior Sukuk Wakalah/ Tier-2

Sukuk Wakalah; plus

(ii) the accrued but unpaid Expected Periodic Distribution

Amount (if any), accrued up to the Scheduled Dissolution Date.

Senior Sukuk Wakalah

On the Dissolution Declaration Date:

The Dissolution Distribution Amount shall be equivalent to:

(i) the nominal value of the Senior Sukuk Wakalah; plus

(ii) the accrued but unpaid Expected Periodic Distribution

Amount (if any), accrued up to the Dissolution Declaration Date.

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Subordinated Sukuk Wakalah Upon a declaration of an Enforcement Event: The Dissolution Distribution Amount shall be equivalent to: (i) the nominal value of the Subordinated Sukuk Wakalah;

plus (ii) the accrued but unpaid Periodic Distributions (if any) (in

the case of the Tier-2 Sukuk Wakalah) and/or accrued and uncancelled but unpaid Periodic Distributions (if any) (in the case of the AT-1 Sukuk Wakalah) up to the date of Enforcement Event.

On the redemption date pursuant to the Call Option, Tax Redemption or Regulatory Redemption: The principal amount of the outstanding Subordinated Sukuk Wakalah, together with any accrued but unpaid Periodic Distributions (if any) (in the case of the Tier-2 Sukuk Wakalah) and/or accrued and uncancelled but unpaid Periodic Distributions (if any) (in the case of the AT-1 Sukuk Wakalah) up to (but not including) the redemption date pursuant to the Call Option, Tax Redemption or Regulatory Redemption.

(iv) Purchase and selling price/ rental, (where applicable) – compliance with asset pricing requirements

: Commodity Purchase Price In relation to the Commodity Murabahah Investment, the Commodity Purchase Price shall be determined prior to each issuance of the Sukuk Wakalah and shall be priced equivalent to the remaining balance of the Sukuk Proceeds after taking into account the Shariah-compliant Business. Deferred Sale Price In relation to the Commodity Murabahah Investment, the Deferred Sale Price shall be determined prior to each issuance of the Sukuk Wakalah and shall comprise the Commodity Purchase Price plus the profit and shall be payable on a deferred payment basis. (i) In respect of the Senior Sukuk Wakalah and Tier-2 Sukuk

Wakalah:

The Deferred Sale Price shall be equal to the aggregate of Expected Periodic Distribution Amount and the nominal value of the Senior Sukuk Wakalah or Tier-2 Sukuk Wakalah.

(ii) In respect of the AT-1 Sukuk Wakalah:

The Deferred Sale Price shall be equivalent to the nominal value of the AT-1 Sukuk Wakalah. For the avoidance of doubt, the Deferred Sale Price for AT-1

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Sukuk Wakalah shall be payable for a period of 99 years, and the Issuer shall be given the right to defer such payment upon request made by the Issuer or if required by BNM subject to the issuance notice of deferment.

(v) Profit rate/ Coupon/ Rental Rate (fixed or floating)

: Senior Sukuk Wakalah The Periodic Distribution Rate for the Senior Sukuk Wakalah may be at fixed or floating rate (based on Effective Profit Rate) and shall be determined prior to the issuance of each tranche and is applicable throughout the tenure of the tranche of the Senior Sukuk Wakalah. Tier-2 Sukuk Wakalah The Periodic Distribution Rate for the Tier-2 Sukuk Wakalah shall be determined prior to the issuance of each tranche of the Tier-2 Sukuk Wakalah. The Periodic Distribution Rate applicable to each tranche of the Tier-2 Sukuk Wakalah shall be: (i) a fixed rate applicable throughout the tenure of the Tier-2

Sukuk Wakalah; or (ii) a floating rate based on the aggregate of a benchmark

rate plus a credit spread (“Effective Profit Rate”), subject to a reset of the benchmark rate provided that:

(a) the first reset date and frequency of subsequent

resets shall be determined prior to each issuance; (b) the credit spread in the profit rate shall be

maintained at all times; and (c) the basis for determining the benchmark rate shall

be the same throughout the tenure of the Tier-2 Sukuk Wakalah.

The Periodic Distribution Rate for the purpose of calculating the Expected Periodic Distribution Amount on each Periodic Distribution Date herein shall be applicable throughout the tenure of the tranche of the Tier-2 Sukuk Wakalah. For avoidance of doubt, there is no step-up profit rate after the Call Date of the Tier-2 Sukuk Wakalah, in the event the Call Option is not exercised by the Issuer. For the avoidance of doubt, where the Periodic Distribution Rate is on floating rate basis, the aggregate Expected Periodic Distribution Amount in determining the Deferred Sale Price is calculated based on the Ceiling Profit Rate, from issuance date up to the Scheduled Dissolution Date. If the Effective Profit Rate is higher than the Ceiling Profit Rate, the Issuer is obliged to make an Expected Periodic Distribution Amount at the Ceiling Profit Rate only.

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“Ceiling Profit Rate” is a rate to be agreed between the Issuer and the Joint Lead Managers for the purpose of calculating the aggregate Expected Periodic Distribution Amount in determining the relevant Deferred Sale Price for the relevant tranche of the Senior Sukuk Wakalah and Tier-2 Sukuk Wakalah where the Periodic Distribution Rate is on floating rate basis.

AT-1 Sukuk Wakalah

Subject to the section entitled “Limitation on Payment”, the AT-1 Sukuk Wakalah confer a right to receive Periodic Distributions from (and including) the issue date at the applicable Periodic Distribution Rate payable on Periodic Distribution Date, out of the Distributable Reserves (as defined in item (vii) of the section entitled “Other terms and conditions”) of the Issuer.

The Periodic Distribution Rate shall be determined prior to the issuance of each tranche of the AT-1 Sukuk Wakalah.

The Periodic Distribution Rate applicable to each tranche of the AT-1 Sukuk Wakalah shall be:

(i) in respect of the period from (and including) the issue

date of that tranche to (but excluding) the First Call Date of that tranche, at either of the following (to be determined prior to issuance):

(a) a fixed rate per annum of the nominal value of that

tranche; or

(b) a floating rate, to be reset semi-annually or such

other frequency to be determined prior to issuance, at a rate per annum i.e. at the Initial Spread for Floating Rate (as defined below) above the Relevant Floating Rate Benchmark (as defined below), of the nominal value of that tranche; and

(ii) in respect of the period from (and including) the First

Call Date of that tranche to (but excluding) the immediately following Reset Date (as defined below) of that tranche and every equivalent period thereafter, at either of the following rate (to be determined prior to issuance):

(a) a fixed rate at the Relevant Reset Distribution

Rate (as defined below) of the nominal value of that tranche; or

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(b) a floating rate, to be reset semi-annually or such other frequency to be determined prior to issuance, at a rate per annum, i.e. at the Initial Spread for Floating Rate above the Relevant Floating Rate Benchmark, of the nominal value of that tranche.

“Initial Spread for Fixed Rate” means the initial spread for fixed rate to be determined at the point of issuance of the relevant tranche of the AT-1 Sukuk Wakalah, where applicable, and expressed as a rate in per cent. per annum, being the initial spread above the profit rate swap rate in per cent. per annum for the relevant Reference Period. The Initial Spread for Fixed Rate shall be calculated at the point of issuance and shall be applicable throughout the tenure of the relevant AT-1 Sukuk Wakalah. “Initial Spread for Floating Rate” means the initial spread for the floating rate to be determined at the point of issuance of the relevant tranche of the AT-1 Sukuk Wakalah, where applicable, and expressed as a rate in per cent. per annum, being the initial spread above the Relevant Floating Rate Benchmark. The Initial Spread for the Floating Rate shall be calculated at the point of issuance and shall be applicable throughout the tenure of the relevant AT-1 Sukuk Wakalah. “Reference Period” means, in relation to a tranche of the AT-1 Sukuk Wakalah, a period of time equal to that commencing on the issue date of that tranche and ending on the date immediately before the First Call Date of that tranche (“Initial Period”), and being a minimum period of five (5) years and shall also include every subsequent period of time after the First Call Date equivalent to the Initial Period. “Relevant Floating Rate Benchmark” means Kuala Lumpur Interbank Offered Rates (KLIBOR) for six-months (or such other relevant period) Ringgit deposits. “Relevant Reset Distribution Rate” means a fixed rate per annum equal to the relevant prevailing profit rate swap rate in per cent. per annum for the relevant Reference Period with respect to the relevant Reset Date plus the Initial Spread for Fixed Rate. The profit rate swap rate shall be determined and notified by the Facility Agent (or any other similar agency) to the Issuer and the AT-1 Sukukholders as published by a recognised industry body or a relevant authority at or about the time prescribed by the recognised industry body or the relevant authority on the second (2nd) business day preceding the relevant Reset Date. “Reset Date” means each date falling on the first day of each Reference Period after the First Call Date of the relevant tranche of the AT-1 Sukuk Wakalah.

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(vi) Status

: Senior Sukuk Wakalah The Senior Sukuk Wakalah will constitute direct, unconditional, unsecured and unsubordinated obligations of the Issuer ranking pari passu without any preference amongst themselves and pari passu with all other present and future unsecured and unsubordinated obligations of the Issuer, except those preferred by law. Tier-2 Sukuk Wakalah The Tier-2 Sukuk Wakalah will constitute direct, unconditional, unsecured and subordinated obligations of the Issuer ranking pari passu without any preference among themselves. In the event of the winding-up or liquidation of the Issuer, the claims of the Tier-2 Sukukholders against the Issuer in respect of the Tier-2 Sukuk Wakalah will be subordinated in right of payment to the claims of depositors and all other unsubordinated creditors of the Issuer and will rank at least pari passu in right of payment with all other Subordinated Indebtedness (as defined below), present and future, of the Issuer. Claims in respect of the Tier-2 Sukuk Wakalah will rank in priority to the rights and claims of holders of subordinated liabilities which by their terms rank or expressed to rank in right of payment junior to the Tier-2 Sukuk Wakalah and all classes of equity securities of the Issuer, including holders of preference shares. AT-1 Sukuk Wakalah The AT-1 Sukuk Wakalah will constitute direct, unconditional, unsecured and subordinated obligations of the Issuer ranking pari passu without any preference among themselves. In the event of the winding-up or liquidation of the Issuer, the claims of the AT-1 Sukukholders against the Issuer in respect of the AT-1 Sukuk Wakalah will be subordinated in right of payment to the claims of all Senior Creditors (as defined below, which includes but is not limited to, holders of Tier-2 Capital Instruments (as defined below)) and will rank senior to all Junior Obligations (as defined below). The AT-1 Sukuk Wakalah will rank pari passu with Parity Obligations (as defined below). “Junior Obligations” means any ordinary share of the Issuer. “Parity Obligations” means the most junior class of preference shares and any security or other similar obligation issued, entered into or guaranteed by the Issuer that constitutes or could qualify as Additional Tier-1 capital of the Issuer on an unconsolidated or consolidated basis, pursuant to the relevant requirements set out in the BNM CAFIB, or otherwise ranks or is expressed to rank, by its terms or by operation of law, pari passu with the AT-1 Sukuk Wakalah.

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“Senior Creditors” means (i) creditors of the Issuer (including holders of any security or other similar obligation issued, entered into or guaranteed by the Issuer that constitutes Tier-2 Capital Instruments) other than those whose claims rank or are expressed to rank, by its terms or by operation of law, pari passu or junior to the claims of the AT-1 Sukukholders; and (ii) any class of the Issuer’s share capital (excluding the most junior class of preference shares and ordinary shares). “Subordinated Indebtedness” means all indebtedness which is subordinated, in the event of the winding-up or liquidation of the Issuer, in right of payment to the claims of depositors and other unsubordinated creditors of the Issuer, and for this purpose indebtedness shall include all liabilities, whether actual or contingent (other than those whose claims rank or are expressed to rank, by its terms or by operation of law, pari passu or junior to the claims of the AT-1 Sukukholders). “Tier-2 Capital Instruments” means any Tier-2 capital instrument issued by the Issuer, pursuant to the relevant requirements set out in the BNM CAFIB.

(vii) Limitation on Payment (only applicable to AT-1 Sukuk Wakalah)

: The payment of Periodic Distributions under the AT-1 Sukuk Wakalah shall be at the Issuer’s sole and absolute discretion and is subject to: (i) such payment not resulting in a breach of the capital

requirements applicable to the Issuer under the relevant BNM’s capital guidelines;

(ii) the Issuer is solvent at the time of payment of the

Periodic Distributions and the payment of the Periodic Distributions will not result in the Issuer becoming, or likely to become insolvent; and

(iii) such payment being made from Distributable Reserves

only. In the event that there is profit for distribution, and the Issuer decided not to distribute the profit pursuant to this paragraph, the AT-1 Sukukholders hereby agree to waive (tanazul) their right to receive Periodic Distributions for such Periodic Distribution Date. If the Issuer is unable to meet any of the conditions (i), (ii) or (iii) above, the Issuer shall cancel the Periodic Distributions which would otherwise have been payable on such Periodic Distribution Date provided always in the case where conditions (i) and (ii) are met but the Distributable Reserves are insufficient to pay the Periodic Distributions in full, the Issuer may elect to pay a part of the Periodic Distributions up to the amount available from the Distributable Reserves and cancel the other part of the Periodic Distributions which would otherwise have been payable on such Periodic Distribution Date. Any such cancellation will not constitute or be deemed a

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default by the Issuer or constitute an Enforcement Event for any purpose whatsoever nor would it trigger a cross-default under any other outstanding AT-1 Sukuk Wakalah issued under the Sukuk Wakalah Programme. “Distributable Reserves” means at any time, the amounts for the time being available to the Issuer for distribution as a dividend as of the date of the Issuer's latest audited financial statements in compliance with Section 131 of the Companies Act 2016 (or its equivalent under any successor laws) provided that if the Issuer reasonably believes that the available amounts as of any Distribution Determination Date (as defined below) are lower than the available amounts as of the date of the Issuer's latest audited financial statements and are insufficient to pay the Periodic Distributions and for payments of any dividends or other distributions in respect of other liabilities or obligations of the Issuer which by their terms or by operation of law, rank pari passu with the AT-1 Sukuk Wakalah, on the relevant Periodic Distribution Date, then two (2) directors of the Issuer shall provide a certificate to the Sukuk Trustee (acting on behalf of the AT-1 Sukukholders), on or prior to the relevant Periodic Distribution Date, setting out the available amounts as of such Distribution Determination Date (which certificate of the two (2) directors will be binding absent of manifest error) and the Distributable Reserves as of such Distribution Determination Date for the purposes of such Periodic Distributions will mean the available amounts as set forth in such certificate. “Distribution Determination Date” means, with respect to any Periodic Distribution Date, the day falling two (2) business days prior to that Periodic Distribution Date. If the Issuer does not make a Periodic Distribution on the relevant Periodic Distribution Date (or if the Issuer elects to make a payment of a portion, but not all, of such Periodic Distribution), such non-payment or part-payment shall serve as evidence of the Issuer's exercise of its discretion to cancel such Periodic Distribution (or the portion of such Periodic Distribution not paid), and accordingly such Periodic Distribution (or the portion thereof not paid) shall not be due and/or accrued, and shall not be payable. If practicable, the Issuer shall provide notice of any cancellation of Periodic Distribution (in whole or in part) to the AT-1 Sukukholders (via the Sukuk Trustee) on or prior to the relevant Periodic Distribution Date. If practicable, the Issuer shall endeavour to provide such notice at least five (5) business days prior to the relevant Periodic Distribution Date. Failure to provide such notice will not have any impact on the effectiveness of, or otherwise invalidate, any such cancellation of Periodic Distribution, or give the AT-1 Sukukholder any rights as a result of such failure.

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Any such cancellation will not constitute or be deemed a default by the Issuer or constitute an Enforcement Event for any purpose whatsoever nor would it trigger a cross-default under any other outstanding AT-1 Sukuk Wakalah issued under the Sukuk Programme. Circumstances for Cumulative Periodic Distribution

Notwithstanding the above, if (i) the AT-1 Sukuk Wakalah or any tranche thereof no longer qualify as Additional Tier-1 capital of the Issuer (“Capital Disqualification Event”), (in whole and not in part) for the purposes of BNM’s minimum capital adequacy requirements under any applicable regulations, and such disqualification has been confirmed by BNM in writing, and (ii) the Issuer is not in breach of BNM’s minimum capital adequacy ratio requirements applicable to the Issuer, any Periodic Distribution payable after the date of notification from BNM of such disqualification (“Disqualification Date”) may be deferred, in whole or in part, at the Issuer’s sole and absolute discretion but shall not be cancelled in accordance with the provisions of this paragraph. Any portion of the Periodic Distribution payable on a Periodic Distribution Date occurring after the Disqualification Date, but deferred at the Issuer’s sole and absolute discretion shall start to become cumulative and such deferred amount shall be entitled to earn profit at the Periodic Distribution Rate from (and including) the said Periodic Distribution Date (“Deferred Periodic Distribution Date”) up to the date of actual payment of such deferred Periodic Distribution. In such circumstances, the deferred Periodic Distribution, together with accrued amounts will become due and payable no later than ten (10) years from the Deferred Periodic Distribution Date, or upon redemption of the AT-1 Sukuk Wakalah, whichever is earlier.

For the avoidance of doubt, any Periodic Distribution payable prior to the Disqualification Date shall be paid or cancelled in accordance with this section entitled “Limitation on Payment”.

Upon the occurrence of the Capital Disqualification Event, the Wakalah Investments shall be dissolved at a relevant dissolution distribution amount (“AT-1 Dissolution Distribution Amount”) which shall be equal to 100% of the nominal value of the AT-1 Sukuk Wakalah together with accrued but unpaid Periodic Distributions. For the avoidance of doubt, the dissolution of the Wakalah Investment shall not constitute the redemption of the AT-1 Sukuk Wakalah.

The Investment Wakeel shall distribute the relevant portion of the AT-1 Dissolution Distribution Amount to pay for any accrued but unpaid Periodic Distributions prior to the Capital Disqualification Event. The AT-1 Sukukholders irrevocably authorise the Investment Wakeel to, in its sole discretion, invest the balance of the AT-1 Dissolution Distribution Amount (which is equal to 100% of the nominal value of the AT-1 Sukuk Wakalah) in identified assets of the Issuer under the Mudharabah transaction (“Identified Assets”). Profits

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generated from the Identified Assets and Additional Identified Assets (where applicable) will be shared and distributed between the AT-1 Sukukholders as the Rabb al-mal and the Issuer as the Mudharib according to a pre-agreed profit sharing ratio to be determined. The loss shall be borne solely by the Rabb al-mal. The Issuer shall distribute to the AT-1 Sukukholders the profit generated from the Identified Assets (“Identified Asset Profit”) and Additional Identified Assets (“Additional Assets Profit”) in the form of Periodic Distribution on the Periodic Distribution Date. As agreed by the AT-1 Sukukholders, the Issuer may at its sole discretion elect to make payment of all or some of the Expected Periodic Distribution Amount on the Periodic Distribution Date. If the Issuer does not make a Periodic Distribution on the relevant Periodic Distribution Date (or if the Issuer elects to make a payment of a portion, but not all, of such Periodic Distribution) after the Disqualification Date, such non-payment or part-payment shall serve as evidence of the Issuer’s exercise of its discretion to defer such Periodic Distribution (or the portion of such Periodic Distribution not paid). If practicable, the Issuer shall provide notice of the deferment of Periodic Distribution (in whole or in part) to the AT-1 Sukukholders (via the Sukuk Trustee) on or prior to the relevant Periodic Distribution Date. If practicable, the Issuer shall endeavour to provide such notice at least five (5) business days prior to the relevant Periodic Distribution Date. Failure to provide such notice will not have any impact on the effectiveness of, or otherwise invalidate, any such deferment of Periodic Distribution, or give the AT-1 Sukukholders any rights as a result of such failure. Any such deferment will not constitute or be deemed a default by the Issuer or constitute an Enforcement Event for any purpose whatsoever nor would it trigger a cross-default under any other outstanding AT-1 Sukuk Wakalah issued under the Sukuk Wakalah Programme. Periodic Distribution on each Periodic Distribution Date (a) If the Identified Assets Profit and Additional Identified

Assets Profit (where applicable) are equal to or in excess of the relevant Expected Periodic Distribution Amount for the applicable Periodic Distribution period,

(i) Full Deferral: The Identified Assets Profit and

Additional Identified Assets Profit (where applicable) up to such Expected Periodic Distribution Amount will be applied towards investing in Additional Identified Assets.

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(ii) Partial Deferral: The Identified Assets Profit and Additional Identified Assets Profit (where applicable) up to the Expected Periodic Distribution Amount which is not deferred will be distributed to the AT-1 Sukukholders and the remaining will be applied towards investing in Additional Identified Assets.

(iii) Non-Deferral: The Identified Assets Profit and

Additional Identified Assets Profit (where applicable) up to such Expected Periodic Distribution Amount due and payable will be distributed to the AT-1 Sukukholders.

Any excess will be paid to the Investment Wakeel as an incentive fee.

The Identified Assets and Additional Identified Assets are referring to the investment in the same Shariah-compliant Business of the Issuer. The term “Additional” is used to differentiate the amount to be invested i.e. normal value amount for Identified Assets and the amount of periodic distribution to be deferred in relation to cumulative periodic distribution for Additional Identified Assets.

(b) If the Identified Assets Profit and Additional Identified Assets Profit (where applicable) is insufficient to pay the relevant portion of the Expected Periodic Distribution Amount for the applicable distribution period, pursuant to a shortfall purchase undertaking granted upfront by the Obligor, the investment in the Identified Assets, (and additional Identified Assets, if applicable) and the Mudharabah venture will be dissolved and a relevant shortfall sale agreement shall be executed to effect the sale of Identified Assets (and Additional Identified Assets, if applicable) by the Investment Wakeel (on behalf of the AT-1 Sukukholders) to the Obligor at the relevant exercise price. The relevant exercise price shall be an amount equal to the outstanding nominal value of the AT-1 Sukuk Wakalah together with accrued but unpaid Periodic Distributions.

(i) Full Deferral: The Investment Wakeel shall use the proceeds of the relevant exercise price to invest in another identified asset (“New Identified Assets”), which shall not comprise the previous Identified Assets that have been dissolved.

(ii) Partial Deferral: The Investment Wakeel shall use the proceeds of the relevant exercise price to distribute such Periodic Distributions which are not deferred and the remaining to be applied towards investing in New Identified Assets, which shall not comprise the previous Identified Assets that have been dissolved.

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(iii) Non Deferral: The Investment Wakeel shall use the proceeds of the relevant exercise price to distribute the relevant portion of the Periodic Distributions and the remaining balance will be applied towards investing in New Identified Assets, which shall not comprise the previous Identified Assets that have been dissolved.

The new Mudharabah venture will be created when the proceeds of the relevant exercise price are applied towards investment in the New Identified Assets. The accounting entries associated with the payment of the relevant exercise price pursuant to the shortfall purchase undertaking and investment in the New Identified Assets shall be made in the books of the Issuer as the Mudharib under the Mudharabah transaction.

(viii) Distribution Stopper (only applicable to AT-1 Sukuk Wakalah)

: If, on any Periodic Distribution Date, payment of Periodic Distributions scheduled to be made on such date is not made by reason of the “Limitation on Payment” clause, the Issuer shall not:

(i) declare or pay, any dividends or other distributions in respect of Junior Obligations (or contribute any moneys to a sinking fund for the payment of any dividends or other distributions in respect of any such Junior Obligations);

(ii) declare or pay, any dividends or other distributions in respect of Parity Obligations the terms of which provide that the Issuer is not required to make payments of such dividends or other distributions in respect thereof (or contribute any moneys to a sinking fund for the payment of any dividends or other distributions in respect of any such Parity Obligations);

(iii) redeem, reduce, cancel, buy-back or acquire, any Junior Obligations (or contribute any moneys to a sinking fund for the redemption, capital reduction, buyback or acquisition of any such Junior Obligations); or

(iv) redeem, reduce, cancel, buy-back or acquire, any Parity Obligations the terms of which provide that the Issuer is not required to redeem, reduce, cancel, buyback or acquire such Parity Obligations (or contribute any moneys to a sinking fund for the redemption, capital reduction, buy-back or acquisition of any such Parity Obligations),

in each case, until (a) the next scheduled Periodic Distributions to be paid in respect of such number of consecutive Periodic Distribution periods as shall be equal to or exceed twelve (12) calendar months have been paid in full (or an amount equivalent thereto has been paid, or irrevocably set aside in a separately designated trust account for payment to the AT-1 Sukukholders); or (b) the Issuer is permitted to do so by an extraordinary resolution of the AT-1 Sukukholders.

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(ix) No equity conversion : The Sukuk Wakalah shall not entitle the Sukukholders to receive any form of equity interest in the Issuer at any point in time and the Issuer is not obliged to allot or issue any shares to or for the account of the Sukukholders upon the occurrence of a Non-Viability Event or otherwise. The Sukukholders shall not be entitled to participate in any distributions or entitlements to the Issuer’s shareholders or to attend or vote at any general meeting of the Issuer.

(x) Breach of CET-1 Capital Ratio (only applicable to AT-1 Sukuk Wakalah)

: If the CET-1 Capital Ratio (as determined by the BNM CAFIB) of the Issuer, at the consolidated or entity level (whichever is applicable), falls below 5.125% (or such other percentage as may be prescribed by the BNM CAFIB), the Issuer shall, without the need for the consent of the Sukuk Trustee or the AT-1 Sukukholders, write-off the AT-1 Sukuk Wakalah (in whole or in part). Details of the Loss Absorption Mechanism are set out below.

(xi) Non-Viability Event (only applicable to Subordinated Sukuk Wakalah)

: If a Non-Viability Event occurs, the Issuer shall irrevocably, without the need for the consent of the Sukuk Trustee or the Subordinated Sukukholders, write-off the Subordinated Sukuk Wakalah (in whole or in part) if so required by BNM and/or Malaysia Deposit Insurance Corporation (“PIDM”) at their full discretion. Such write-off shall not constitute a Dissolution Event, nor would it trigger a cross default under any other outstanding Subordinated Sukuk Wakalah. A Non-Viability Event shall be deemed to have occurred on the day on which the Issuer received the notification from the Relevant Malaysia Authority (as defined below) or on the day the public announcement is made, as the case may be. Details of the Loss Absorption Mechanism are set out below. Upon the occurrence of a Non-Viability Event, the Issuer is required to give notice to the Subordinated Sukukholders (via the Sukuk Trustee) and the rating agency in accordance with the terms of the Subordinated Sukuk Wakalah. “Non-Viability Event” means the earlier of the following: (i) BNM, jointly with PIDM, so long as the Issuer is a

Member Institution (as defined in the Malaysia Deposit Insurance Corporation Act 2011), or BNM, if the Issuer is no longer a Member Institution (“Relevant Malaysian Authority”) notifying the Issuer in writing that the Relevant Malaysian Authority is of the opinion that a write-off or conversion into ordinary shares is necessary, without which the Issuer would cease to be viable; or

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(ii) the Relevant Malaysian Authority publicly announces that a decision has been made by BNM, PIDM or any other federal or state government in Malaysia, to provide a capital injection or equivalent support to the Issuer, without which the Issuer would cease to be viable.

(xii) Loss Absorption Mechanism (only applicable to Subordinated Sukuk Wakalah)

: (i) Write-off mechanism in the case of a Breach of CET-1 Capital Ratio (only applicable to AT-1 Sukuk Wakalah)

Upon a breach of the CET-1 Capital Ratio, the aggregate amount of AT-1 Sukuk Wakalah to be written-off must be at least the amount required to restore the Issuer’s and its consolidated CET-1 Capital Ratio to at least 5.75% (or such other percentage as may be prescribed by the BNM CAFIB). If this is not possible, then the full principal value of the AT-1 Sukuk Wakalah will be written-off.

(ii) Write-off mechanism in the case of a Non-Viability Event

Upon the occurrence of a Non-Viability Event, then as of the relevant write-off date:

(i) the write-off shall reduce:

(a) the claim of the Subordinated Sukuk Wakalah in liquidation. The Subordinated Sukukholders will be automatically deemed to irrevocably waive their right to receive, and no longer have any rights against the Issuer with respect to, any payment of the aggregate nominal value of the Subordinated Sukuk Wakalah written off;

(b) the amount paid when a call option is exercised; and

(c) Periodic Distribution of the Subordinated Sukuk Wakalah; and

(ii) the write-off shall be permanent and the full or part (as the case may be) of the nominal value of the Subordinated Sukuk Wakalah will automatically be written-off and the whole or part (as the case may be) of the Subordinated Sukuk Wakalah will be cancelled.

Each of the Subordinated Sukukholders hereby irrevocably waives its right to receive payment of the principal amount of the Subordinated Sukuk Wakalah which are written off pursuant to the above, and also irrevocably waives its right to any Periodic Distribution (including Periodic Distributions accrued but unpaid up to the date of the occurrence of a Breach of CET-1 Capital Ratio or Non-Viability Event).

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In the case of write-off of full nominal value, the Subordinated Sukukholders agree to waive their rights on the full/ outstanding Deferred Sale Price and the Investment Wakeel on behalf of the Subordinated Sukukholders agrees to transfer the Subordinated Sukukholders’ interest in the Shariah-compliant Business to the Issuer with no consideration. Whilst in the case of write-off of partial nominal value, the Subordinated Sukukholders agree to waive their rights on the Deferred Sale Price equivalent to the partial nominal value being written off and Sukukholders shall retain their interest in the Shariah-compliant Business. After write-off of partial nominal value, the remaining portion of the tranche will remain as Subordinated Sukuk Wakalah complying with the BNM CAFIB in relation to requirements of a Tier-2/ Additional Tier-1 capital instrument. Such write-off shall not constitute a Dissolution Event, nor would it trigger a cross-default under any other outstanding Subordinated Sukuk Wakalah.

(xiii) Identified Assets/ Trust Assets

: Trust Assets The Trust Assets shall comprise: (i) the Sukuk Proceeds;

(ii) the Wakalah Investments (comprising the Shariah-

compliant Business and the Commodity Murabahah Investment); and

(iii) the rights, title, interest, entitlement and benefit in, to

and under the Transaction Documents. The “Commodities” in relation to the Commodity Murabahah Investment shall be Shariah-compliant commodities, which include but are not limited to crude palm oil or such other acceptable commodities (excluding ribawi items in the category of medium of exchange such as currency, gold and silver) which are provided through the Bursa Suq Al-Sila’ commodity trading platform or such other commodity trading platform acceptable to the Joint Shariah Advisers which will be identified from time to time, at or around the time of issuance of the Sukuk Wakalah. However, if applicable, pursuant to the “Limitation on Payment” clause with respect to the Capital Disqualification Event, the following will be part of the identified assets under the Mudharabah transaction. Identified Assets/ Additional Identified Assets: Shariah-compliant Business of the Issuer.

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New Identified Assets: Any financial assets that belong to the Issuer such as Ijarah financing assets, which are not the previous identified assets that have been dissolved.

(xiv) Profit/ coupon/ rental payment basis

: Actual number of days over three hundred and sixty five (365) days in the relevant period.

(xv) Listing status and types of listing, where applicable

: Not listed.

(xvi) Form and Denomination

: The Sukuk Wakalah shall be issued in accordance with:

(a) the “Participation and Operation Rules for Payments and Securities Services” issued by PayNet;

(b) the “Operational Procedures for Securities Services”

issued by PayNet, as amended or replaced from time to time; and

(c) any procedures/guidelines/rules issued by the relevant authorities from time to time (as the same may be amended and/or substituted from time to time).

Form

The Sukuk Wakalah shall be represented by global certificate(s) to be deposited with BNM and may be exchanged for definitive bearer form only in certain limited circumstances.

Denomination

The denomination of the Sukuk Wakalah shall be RM1,000.00 or in multiples of RM1,000.00 at the time of issuance.

(xvii) Transaction Documents

: The Transaction Documents shall include but not limited to the following documents: Senior Sukuk Wakalah (i) the Programme Agreement (governing the Sukuk

Wakalah);

(ii) the Senior Sukuk Wakalah Trust Deed; (iii) the Securities Lodgement Form (in respect of the

Sukuk Wakalah); (iv) the Senior Sukuk Wakalah represented by the Global

Certificates or the Definitive Certificates; (v) relevant Islamic documents; and

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(vi) any other relevant documentation in connection with the Senior Sukuk Wakalah which may be advised by the Solicitors acting for the Joint Principal Advisers (“JPAs”)/Joint Lead Arrangers (“JLAs”) and mutually agreed by the Issuer and JLAs, and includes any amendments, variations and/or supplementals made or entered into from time to time and references to “Senior Sukuk Wakalah Transaction Documents” shall mean any one of them.

Tier-2 Sukuk Wakalah

(i) the Programme Agreement (governing the Sukuk

Wakalah);

(ii) the Tier-2 Sukuk Wakalah Trust Deed;

(iii) the Securities Lodgement Form (in respect of the

Sukuk Wakalah);

(iv) the Tier-2 Sukuk Wakalah represented by the Global Certificates or the Definitive Certificates;

(v) relevant Islamic documents; and

(vi) any other relevant documentation in connection with

the Tier-2 Sukuk Wakalah which may be advised by the Solicitors acting for the JPAs/JLAs and mutually agreed by the Issuer and JLAs, and includes any amendments, variations and/or supplementals made or entered into from time to time and references to “Tier-2 Sukuk Wakalah Transaction Documents” shall mean any one of them.

AT-1 Sukuk Wakalah

(i) the Programme Agreement (governing the Sukuk

Wakalah);

(ii) the AT-1 Sukuk Wakalah Trust Deed;

(iii) the Securities Lodgement Form (in respect of the

Sukuk Wakalah);

(iv) the AT-1 Sukuk Wakalah represented by the Global Certificates or the Definitive Certificates;

(v) relevant Islamic documents; and

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(vi) any other relevant documentation in connection with the AT-1 Sukuk Wakalah which may be advised by the Solicitors acting for the JPAs/JLAs and mutually agreed by the Issuer and JLAs, and includes any amendments, variations and/or supplementals made or entered into from time to time and references to “AT-1 Sukuk Wakalah Transaction Documents” shall mean any one of them.

The Senior Sukuk Wakalah Trust Deed, Tier-2 Sukuk Wakalah Trust Deed and AT-1 Sukuk Wakalah Trust Deed shall collectively be referred to as the “Trust Deeds”.

The Senior Sukuk Wakalah Transaction Documents, Tier-2 Sukuk Wakalah Transaction Documents and AT-1 Sukuk Wakalah Transaction Documents shall collectively be referred to as the “Transaction Documents”. Tier-2 Sukuk Wakalah Transaction Documents and AT-1 Sukuk Wakalah Transaction Documents shall collectively be referred to as the “Subordinated Sukuk Wakalah Transaction Documents”.

(xviii) Sukuk Trustees’ Reimbursement Accounts (“TRAs”)

: Senior Sukuk Wakalah

The Issuer shall, or the Sukuk Trustee shall on behalf of the Issuer, set up and maintain a profit-bearing Shariah-compliant account (“Senior Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account”) with a financial institution with a sum of RM30,000.00 to be deposited therein (which shall be maintained at all times throughout the tenure of the Sukuk Wakalah Programme).

The Senior Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account shall be operated by the Sukuk Trustee and the monies shall only be used strictly by the Sukuk Trustee in carrying out its duties in relation to the occurrence or declaration of a Dissolution Event as provided in the Senior Sukuk Wakalah Trust Deed.

The monies in the Senior Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account may be invested in the manner provided in the Senior Sukuk Wakalah Trust Deed, with profit from the investment to accrue to the Issuer. The monies in the Senior Sukuk Wakalah – Sukuk Trustee’s Reimbursement Account shall be returned to the Issuer upon cancellation of the Sukuk Wakalah Programme.

Tier-2 Sukuk Wakalah

The Issuer shall, or the Sukuk Trustee shall on behalf of the Issuer, set up and maintain a profit-bearing Shariah-compliant account (“Tier-2 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account”) with a financial institution with a sum of RM30,000.00 to be deposited therein (which shall be maintained at all times throughout the tenure of the Sukuk Wakalah Programme).

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The Tier-2 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account shall be operated by the Sukuk Trustee and the monies shall only be used strictly by the Sukuk Trustee in carrying out its duties in relation to the occurrence or declaration of an Enforcement Event as provided in the Tier-2 Sukuk Wakalah Trust Deed. The monies in the Tier-2 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account may be invested in the manner provided in the Tier-2 Sukuk Wakalah Trust Deed, with profit from the investment to accrue to the Issuer. The monies in the Tier-2 Sukuk Wakalah – Sukuk Trustee’s Reimbursement Account shall be returned to the Issuer upon cancellation of the Sukuk Wakalah Programme. AT-1 Sukuk Wakalah The Issuer shall, or the Sukuk Trustee shall on behalf of the Issuer, set up and maintain a profit-bearing Shariah-compliant account (“AT-1 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account”) with a financial institution with a sum of RM30,000.00 to be deposited therein (which shall be maintained at all times throughout the tenure of the Sukuk Wakalah Programme). The AT-1 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account shall be operated by the Sukuk Trustee and the monies shall only be used strictly by the Sukuk Trustee in carrying out its duties in relation to the occurrence or declaration of an Enforcement Event as provided in the AT-1 Sukuk Wakalah Trust Deed. The monies in the AT-1 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account may be invested in the manner provided in the AT-1 Sukuk Wakalah Trust Deed, with profit from the investment to accrue to the Issuer. The monies in the AT-1 Sukuk Wakalah - Sukuk Trustee’s Reimbursement Account shall be returned to the Issuer upon cancellation of the Sukuk Wakalah Programme.

(xix) Jurisdiction : The Issuer shall unconditionally and irrevocably submit to the exclusive jurisdiction of the courts of Malaysia.

(xx) Taxation : All payments by the Issuer shall be made without withholding or deductions for or on account of any present or future tax, duty or charge of whatsoever nature imposed or levied or on behalf of the Government of Malaysia or other applicable jurisdictions, or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law, in which event the payor shall be required to make such additional amount so that the payee would receive the full amount which the payee would have received if no such withholding or deductions are made.

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(xxi) Cost and Expenses : All legal fees, stamp duties (if any) and reasonable expenses incurred in connection with the Sukuk Wakalah Programme, including professional fees and fees payable to the SC, where applicable, shall be for the account of the Issuer.

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3.0 SELLING RESTRICTIONS

The Sukuk Wakalah are tradable and transferable, subject to the following selling restrictions:

3.1 Selling Restrictions at Issuance: The Sukuk Wakalah may only be offered, sold, transferred or otherwise disposed directly or indirectly to persons to whom an offer or invitation to subscribe the Sukuk Wakalah may be made and to whom the Sukuk Wakalah are issued would fall within: (i) Part I of Schedule 6 (or Section 229(1)(b)); and (ii) Part I of Schedule 7 (or Section 230(1)(b)); read together with (iii) Schedule 9 (or Section 257(3)), of the CMSA.

3.2 Selling Restrictions After Issuance: The Sukuk Wakalah may only be offered, sold, transferred or otherwise disposed directly or indirectly to persons to whom an offer or invitation to subscribe the Sukuk Wakalah may be made and to whom the Sukuk Wakalah are issued would fall within: (i) Part I of Schedule 6 (or Section 229(1)(b)); read together with (ii) Schedule 9 (or Section 257(3)), of the CMSA.

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4.0 INVESTMENT CONSIDERATIONS

An investment in the Sukuk Wakalah involves risks and such investment is only suitable for investors who have knowledge and experience in financial and business matters necessary to enable them to evaluate the risks and merits of such an investment. Prospective investors of the Sukuk Wakalah should consider carefully all information set out in this Information Memorandum and, in particular, the following risks involved. The Sukuk Wakalah are subject to certain risks that could adversely affect the business of the Issuer. The following section summarises certain risks associated with the investment in the Sukuk Wakalah and does not purport to be complete or exhaustive. Prospective investors are strongly encouraged to undertake their own investigation and analysis on the Issuer, its business and risks associated with the Sukuk Wakalah. In addition to the other information contained in this Information Memorandum, prospective investors of the Sukuk Wakalah are strongly advised to read and carefully consider, in light of their own financial circumstances and investment objectives, the factors discussed below and to conduct their own independent investigation of the risks posed by the Sukuk Wakalah and consult their own professional advisors on the risks associated with the investment in the Sukuk Wakalah prior to making an investment in the Sukuk Wakalah.

The information contained in this Information Memorandum includes forward-looking statements, which implies risks and uncertainties. The Issuer’s actual results could differ materially from those anticipated in these forward-looking statements and/or otherwise projected as a result of certain factors, including but not limited to those set forth in this section.

Each of the Sukuk Wakalah will carry different risks and all potential investors are strongly encouraged to evaluate each of the Sukuk Wakalah on its own merit before investing in such Sukuk Wakalah.

4.1 Considerations Relating to the Issuer and its Business

4.1.1 Credit Risks

Credit risks arising from adverse changes in the credit quality and recoverability of financing, advances and amounts due from counterparties are inherent in a wide range of the Issuer’s businesses. Credit risks could arise from deterioration in the credit quality of specific counterparties of the Issuer, general deterioration in local or global economic conditions or systemic risks with the financial systems, all of which could affect the recoverability of its assets and other credit exposures. Asset quality is a key driver of a bank’s performance. The Issuer has developed credit risk management policies to manage its asset quality. The Issuer recognises that credit policies need to be responsive to the changing environment and diverse market conditions. Additionally, the establishment and application of financing rules, policies and guidelines are consistently applied throughout MBSB Bank. The Issuer appreciates that financing pricing has to reflect the cost of risk in order to generate an optimal return on capital.

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Although the Issuer believes that it has adopted a prudent asset quality management system, there is no assurance that the system will remain effective or adequate in the future. A significant deterioration of asset quality or material non-compliance with its credit risk management policies or asset quality management system may adversely affect the business, financial condition and results of operations of the Issuer.

4.1.2 The application of the Malaysian Financial Reporting Standards 9 (“MFRS 9”) may affect future financial performance

The International Accounting Standards Board, which is responsible for developing and revising international accounting standards, issued the International Financial Reporting Standard 9 “Financial Instrument” (“IFRS 9”) and a series of amendments in November 2009, October 2010 and July 2014. The new standard has taken effect on 1 January 2018 and replaces the International Accounting Standard 39/Financial Reporting Standard 139 “Financial Instruments: Recognition and Measurement” (“IAS 39”/”MFRS 139”). The Malaysian Accounting Standards Board has issued MFRS 9, which is equivalent to IFRS 9, and this has taken effect on 1 January 2018. Entities that comply with MFRS 9 will simultaneously be in compliance with IFRS 9. MFRS 9 replaces the existing IAS 39. MFRS 9 establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss (“FVTPL”) and fair value through other comprehensive income (“FVOCI”). The basis of classification depends on the entity’s business model and the cash flow characteristics of the financial asset. Investments in equity instruments are always measured at FVTPL with an irrevocable option at inception to present changes in fair value in other comprehensive income (provided that instrument is not held for trading). A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. In addition, MFRS 9 introduces probability weighted forward-looking economic scenario based on expected credit loss models in estimating loss allowances for significant financial assets not measured in FVTPL portfolios. Upon adopting MFRS 9, there is no guarantee that credit costs of the Issuer will not increase. Any increase in credit cost may result in the reduction of the Issuer’s capital adequacy ratios. Meanwhile, the Issuer’s financial performance for subsequent financial years will be more sensitive to prevailing economic conditions and the future economic outlook in addition to the credit risk profile of the financial assets in scope.

4.1.3 Impairment of financial assets MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit losses model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised.

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The new impairment model requires the recognition of impairment allowances based on expected credit losses (“ECL”) rather than only incurred credit losses as is the case under MFRS 139. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, financing commitments and financial guarantee contracts. Under MFRS 9, impairment is measured on each reporting date according to a three-stage expected credit losses impairment model:

• Stage 1 – from initial recognition of financial assets to the date on which

the credit risk of the asset has increased significantly relative to its initial

recognition, a loss allowance is recognised equal to the credit losses

expected to result from defaults occurring over the next 12 months (12-

month ECL).

• Stage 2 – following a significant increase in credit risk relative to the

initial recognition of the financial assets, a loss allowance is recognised

equal to the credit losses expected over the remaining life of the asset

(Lifetime ECL).

• Stage 3 – when a financial asset is considered to be credit-impaired, a

loss allowance equal to full lifetime expected credit losses is to be

recognised (Lifetime ECL).

As all financial assets within the scope of MFRS 9 impairment model will be assessed for at least twelve (12) month ECL, and the population of financial assets to which full lifetime ECL applies is larger than the population of impaired financings for which there is objective evidence of impairment in accordance with MFRS 139, the total allowance for credit losses is expected to increase under MFRS 9 relative to the allowance for credit losses under MFRS 139. In addition, changes in the required credit losses allowance, including the impact of movements between Stage 1 (twelve (12) month ECL) and Stage 2 (Lifetime ECL) and the application of forward-looking information, is recorded in profit or losses and allowance for credit losses will be more volatile under MFRS 9.

4.1.4 Liquidity Risks and Sources of Funding Liquidity risks could arise from the inability of the Issuer to anticipate and provide for unforeseen decreases or changes in funding sources which could have adverse consequences on the Issuer’s ability to meet its obligations when they fall due. The Issuer has a diversified liability structure to meet its funding requirements. The primary sources of funding include customer deposits, interbank deposits, Structured Covered Sukuk Murabahah and securitisation of its financing to Cagamas Berhad. The Issuer has a stable customer deposit base as its main source of long term funding. Additionally, the Issuer has access to interbank lines established with various counterparty banks.

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Although the Issuer’s policy is to maintain prudent liquidity risk management, a diversified and stable source of sustainable funding and minimal undue reliance on any particular funding source, there is no assurance that such a policy can be maintained and that there will not be a liquidity crisis affecting the Issuer, and the failure to maintain such adequate sources of funding may adversely affect the business, financial condition and results of operations of the Issuer.

4.1.5 Rate of Return Risks

The Issuer’s exposure to rate of return risk arises from its balance sheet positions that are indexed against certain profit rates, such as financing and securities. Fluctuations in rates of return will affect the Issuer’s earnings stream and level of income through changes in net fund-based income. Adverse impact on net fund-based income resulting from the movements of market rates can be caused by differences in the timing of accrual changes (repricing risk), changing rate and yield curve relationships (basis and yield curve risks). Measures such as rate of return risk limits have been established to control and manage the potential loss of income from adverse rate of return movements. Strategies and mitigating actions are regularly reviewed and executed interchangeably to improve its operation under various rate of return scenarios. Strategies adopted include adjusting the maturity tenor or repricing tenor of assets and liabilities, re-strategising new business growth, securing long term fixed rate funding and entering into profit rate derivative contracts. The impact on earnings is measured against the approved earnings at risk limit where new business and hedging strategies will be formulated and implemented to manage the rate of return risk exposure through approved frameworks and policies, which benchmark against international best practice, i.e., Bank for International Settlement (“BIS”) standards such as Basel II and Basel III. Although the Issuer believes that it has adopted sound rate of return management strategies and intends to maintain them, no assurance can be given that such strategies will remain effective or adequate in the future.

4.1.6 Operational Risks Operational risks and losses can result from fraud, error by employees, failure to document transactions properly or to obtain proper internal authorisation, failure to comply with regulatory requirements and conduct of business rules, the failure of internal systems, equipment and external systems (e.g. those of the MBSB Bank’s counterparties or vendors) and occurrence of natural disasters. Although the Issuer has implemented risk controls and loss mitigation strategies and substantial resources are devoted to developing efficient procedures, it is not possible to entirely eliminate any of the operational risks. In addition, the Issuer and MBSB Group of Companies seek to protect its computer systems and network infrastructure from physical break-ins as well as security breaches and other disruptive problems caused by the increased use of the internet in the MBSB Group of

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Companies. Computer break-ins and power disruptions could affect the security of information stored in, and transmitted through, these computer systems and network infrastructure. The Issuer and MBSB Group of Companies employ security systems, including firewalls and password encryption, designed to minimise the risk of security breaches. There can be no assurance that these security measures will be adequate or successful. A significant fraud, system failure, calamity or failure in security measures could have a material adverse effect on the Issuer’s business, financial condition, results of operations and prospects. In addition, the Issuer’s reputation could be adversely affected by significant frauds committed by employees, customers or other third parties.

4.1.7 Deterioration in collateral values or inability to realise collateral value may necessitate an increase in the Issuer’s financing loss provisions The Issuer’s financing portfolio consists of secured and unsecured financing. The Issuer’s secured financing are secured by collateral such as real estate and securities, the values of which may decline with a downturn in global economic conditions and/or outlook. Any downward adjustment in collateral values may lead to a portion of the Issuer’s financing exceeding the value of the underlying collateral. Such downward adjustment which will impact the future cash flow recovery and combined with a deterioration in the general credit worthiness of customers, may result in an increase in the Issuer’s financing loss provisions and potentially reducing its financing recoveries from foreclosures of collateral, which could have an adverse effect on the business, financial condition and results of operations of the Issuer.

4.1.8 Issuer’s business is inherently subject to the risk of market fluctuations The Issuer’s business is inherently subject to risks in financial markets and in the wider economy, including changes in and increased volatility of, exchange rates, interest / profit rates, inflation rates, credit spreads, commodity, equity, bond / Sukuk and property prices and the risk that its customers act in a manner which is inconsistent with business, pricing and hedging assumptions. Market movements may have an impact on the Issuer in a number of key areas. For example, changes in interest rate levels, yield curves and spreads affect the profit rate margin realised between financing income and financing costs. Historically, there have been periods of high and volatile interbank financing margins over official rates (to the extent banks have been willing to provide financing at all), which have exacerbated such risks. Competitive pressures on fixed rates or product terms in existing financings and deposits sometimes restrict the Issuer in its ability to change profit rates applying to customers in response to changes in official and wholesale market rates. Any failure by the Issuer to implement, or consistently follow, its risk management systems may adversely affect its financial condition and results of operations, and there can be no assurance that the Issuer’s risk management systems will be effective. In addition, the Issuer’s risk management systems may not be fully effective in mitigating risk exposure in all market environments or against all types of risks, including risks that are

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unidentified or unanticipated. Some methods of managing risk are based upon observed historical market behaviour. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicated.

4.1.9 Implementation of BNM’s Capital Adequacy Framework for Islamic Banks Pursuant to the CAFIB, which is derived from internationally-agreed standards on capital adequacy promulgated by the Basel Committee on Banking Supervision (“BCBS”) and the Islamic Financial Services Board, BNM requires all Islamic banks in Malaysia to maintain the following minimum capital adequacy ratio requirements as at the LPD: (i) CET1 Capital Ratio of at least 4.5%; (ii) a Tier-1 Capital Ratio of at least 6.0%; and (iii) a Total Capital Ratio of at least 8.0%. The capital requirements would be supplemented by a leverage ratio, a liquidity coverage ratio and a net stable funding ratio. In addition, such banks will be required to maintain a capital conservation buffer based on a percentage of total risk weighted assets, above the minimum capital adequacy ratio requirements. The capital conservation buffer being 1.875% in calendar year 2018 and 2.5% in calendar year 2019 onwards. Separately, such banks will be required to maintain a countercyclical capital buffer (“CCyB”), determined as the weighted average of the prevailing CCyB rates applied in the jurisdictions in which banks have credit exposures. As at the date of this Information Memorandum, BNM has not specified the CCyB rate for exposures in Malaysia. The CAFIB also provides for the gradual phasing out of the regulatory capital recognition of outstanding non-CET1 and Tier-2 capital instruments that no longer meet, in full, the requirements set out in the CAFIB. Fixing the base at the nominal amount of such instruments outstanding (such base being the outstanding amount as at 1 January 2013) that is eligible to be included in the relevant tiers of capital under the previous iterations of the CAFIB, their recognition is capped at 90% with effect from 1 January 2013, with this cap being reduced by 10 percentage points in each subsequent year, eventually resulting in such instruments fully derecognised by 1 January 2022.

BNM had on 25 August 2016 issued its Liquidity Coverage Ratio (“LCR”) framework as per Basel III requirements, which calls on banking institutions to maintain sufficient stock of high quality liquid assets (“HQLA”) to buffer an acute liquidity stress scenario over a 30-day period. In addition, on 31 July 2019, BNM released the Net Stable Funding Ratio (“NSFR”) guidelines which will come into effect on 1 July 2020. The NSFR is a minimum standard that requires banking institutions to maintain a stable funding profile to support their assets and off balance-sheet activities. A stable funding profile reduces the likelihood of a banking institution’s liquidity position being severely eroded by material disruptions to its regular sources of funding. Under such circumstances, the viability of the banking institution may be put, or

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perceived to be, at risk. This could subsequently lead to broader systemic stress. On periodic basis, the Issuer has been monitoring and reporting its NSFR as required by BNM notwithstanding its effective date on 1 July 2020.

Furthermore, BNM had on 8 December 2017 issued a policy on the Leverage Ratio (“LR”) framework as per Basel III requirements which seek to restrict the build-up of excessive levels of leverage in banking institutions to avoid destabilising deleveraging processes that can damage the broader financial system and reinforce the risk-based CAFIB with a non-risk adjusted based backstop measure. The policy came into effect on 1 January 2018. As at 30 September 2019, the Issuer’s CET1 and Tier-1 Capital Ratio was 11.617% and Total Capital Ratio was 12.835%. Please refer to Section 7 of this Information Memorandum on ‘Funding and Capital Adequacy’ for more information. The Issuer's capital base and capital adequacy ratios and when applicable, required capital buffers, may deteriorate in the future if its results of operations or financial condition deteriorates for any reason, including as a result of any deterioration in the asset quality of its financings, or if the Issuer is not able to deploy its funding into suitably low-risk assets. If any of the Issuer's capital adequacy ratio and when applicable, required capital buffers, deteriorates, it may be required to obtain additional Tier-1 or Tier-2 capital in order to remain in compliance with the applicable capital adequacy guidelines. However, the Issuer may not be able to obtain additional capital on favourable terms, or at all. Additionally, there can be no assurance that BCBS will not amend the package of reforms described above or that BNM will not amend the CAFIB, LCR, NSFR and LR framework or introduce new regulatory frameworks in a manner which imposes additional capital and liquidity requirements on, or otherwise affects the capital adequacy and liquidity requirements relating to Malaysian banks. As such, there is no assurance that the Issuer will not face increased pressure on its capital in the future to comply with Basel III (as referred to below) standards which may have an adverse effect on the Issuer’s business, financial condition, results of operations and prospects. “Basel III” refers to, collectively, two documents released on 16 December 2010 by the BCBS entitled “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (revised June 2011)” and “Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring” and a press release issued on 13 January 2011 by BCBS entitled “Basel Committee issues final elements of the reforms to raise the quality of regulatory capital”.

4.1.10 Ownership Profile As at the LPD, the Issuer is wholly-owned by MBSB and has an issued share capital of RM4,625,859,288 comprising 4,625,859,288 ordinary shares. The sole shareholder of the Issuer is Malaysia Building Society Berhad.

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4.1.11 Management

The Issuer is committed towards business integrity and professionalism and firmly supports effective corporate governance and development of best practices. The Board through various committees manages the business and affairs of the Issuer in a manner consistent with the objectives of good corporate governance and accountability towards the enhancement of shareholder value. The Issuer's senior management team consists of members with a broad range of experiences. The experienced senior management team allows effective planning and execution of the Issuer's long-term vision.

4.1.12 MBSB’s Vesting of Shariah-compliant Assets and Liabilities to MBSB Bank

On 2 April 2018, MBSB had via the first tranche transfer, completed the

transfer of all of its Shariah-compliant assets and liabilities (“Identified A&L”) to MBSB Bank. The transfer of the Identified A&L was implemented through a members' scheme of arrangement pursuant to Section 366 of the Companies Act by way of a Vesting Order dated 28 February 2018 from the High Court of Malaya.

As stated in the circular dated 31 December 2017, MBSB will endeavour to convert its remaining identified conventional assets and liabilities into Shariah-compliant assets and liabilities for the same to be transferred to MBSB Bank in subsequent tranches. All residual conventional financial assets and liabilities which cannot be converted into Shariah-compliant assets and liabilities and non-financial subsidiaries of MBSB (“Residual A&L”) will be disposed to third parties. The subsequent tranches of the proposed transfer of Identified A&L and the disposal of the Residual A&L are expected to be completed within three (3) years from 2 April 2018.

THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK

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4.2 Considerations Relating to the Sukuk Wakalah

4.2.1 Ratings of the Sukuk Wakalah

The following ratings have been accorded to the respective Sukuk Wakalah by RAM pursuant to its letter to the Issuer dated 3 September 2019:

(i) a final rating of A2 in respect of the Senior Sukuk Wakalah; (ii) a final rating of A3 in respect of the Tier-2 Sukuk Wakalah; and (iii) a final rating of BBB2 in respect of the AT-1 Sukuk Wakalah. A rating is not a recommendation to purchase, hold or sell the Sukuk Wakalah and may not reflect the potential impact of all risks related to the structure, market, additional factors discussed above and other factors that may affect the value of the Sukuk Wakalah.

Although the Issuer will endeavour to maintain the credit rating, there is no assurance that the rating will remain in effect for any given period of time or that the rating will not be lowered or withdrawn entirely if the circumstances in the future so warrant. In the event that the rating initially assigned to the Sukuk Wakalah are subsequently lowered or withdrawn for any reason, no person or entity will be obligated to provide any additional credit enhancement with respect to the Sukuk Wakalah. Any reduction or withdrawal of the rating will not constitute an event of default or enforcement event under the Sukuk Wakalah. Any reduction or withdrawal of the rating may have an adverse effect on the liquidity and market price of the Sukuk Wakalah. There is no obligation on the part of the Issuer, Joint Principal Advisers, Joint Lead Arrangers, Joint Lead Managers or the Sukuk Trustee or any other person or entity to maintain or procure maintenance of the ratings for the Sukuk Wakalah.

4.2.2 No prior market for the Sukuk Wakalah

There is no existing market for the respective Sukuk Wakalah and there can be no assurance that a secondary market for the respective Sukuk Wakalah will develop, or if a secondary market does develop, that it will provide the Sukukholders with liquidity of investment or that it will continue for the life of the respective Sukuk Wakalah. Accordingly, no assurance can be given as to the liquidity of, or trading market for, the Sukuk Wakalah and an investor in the Sukuk Wakalah must be prepared to hold the Sukuk Wakalah for an indefinite period of time or until redemption. Further, no assurance can be given on the ability of the Sukukholders to sell the Sukuk Wakalah, or the prices at which the Sukukholders would be able to sell the Sukuk Wakalah.

4.2.3 The market value of the Sukuk Wakalah may be subject to fluctuation Trading prices of the Sukuk Wakalah are subject to fluctuations and may be influenced by numerous factors, including the prevailing interest / profit rates, the market for similar securities, the operating results and/or the financial condition of the Issuer, political, economic, financial and any other factors that can affect the capital markets or the industry in which the Issuer is

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operating in. Consequently, any sale of the Sukuk Wakalah by the Sukukholders in any secondary market which may develop may be at prices that may be higher or lower than the initial offering price. Adverse economic developments could also have a material adverse effect on the market value of the Sukuk Wakalah.

4.2.4 An investment in the Sukuk Wakalah is subject to profit rate risks The Sukukholders may suffer unforeseen losses due to fluctuations in profit rates. The Sukuk Wakalah are fixed income securities and may therefore see their prices fluctuate due to fluctuations in profit rates. Generally, a rise in profit rates may cause a fall in bond prices. The Sukuk Wakalah may be similarly affected resulting in a capital loss for the Sukukholders. Conversely, when profit rates fall, bond prices and the prices at which the Sukuk Wakalah trade may rise. The Sukukholders may enjoy a capital gain but the profit received may be reinvested for lower returns.

4.2.5 An investment in the Sukuk Wakalah is subject to inflation risks

The Sukukholders may suffer erosion on the return of their investments due to inflation. The Sukukholders would have an anticipated rate of return based on expected inflation rates on the purchase of the Sukuk Wakalah. An unexpected increase in inflation could reduce the actual return to the Sukukholders.

4.2.6 Suitability of investments

As the Sukuk Wakalah are complex financial instruments, the Sukuk Wakalah may not be a suitable investment for all investors. Each potential Sukukholder must determine the suitability of that investment in light of its own circumstances. In particular, each potential Sukukholder should:

(i) have sufficient knowledge and experience to make a meaningful evaluation of the Sukuk Wakalah, the merits and risks of investing in the Sukuk Wakalah and the information contained in this Information Memorandum;

(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Sukuk Wakalah and the impact the Sukuk Wakalah will have on its overall investment portfolio;

(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Sukuk Wakalah, including where the currency of payment is different from the potential Sukukholder’s currency;

(iv) understand thoroughly the terms of the Sukuk Wakalah and be familiar with the behaviour of any relevant indices and financial markets; and

(v) be able to evaluate (either alone or with the help of a legal, financial and other advisers) possible scenarios for economic and other factors that may affect its investment and its ability to bear the applicable risks.

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4.2.7 The Issuer may raise other capital which affects the price of the Sukuk Wakalah

The Issuer may raise additional capital through the issue of other securities or other means. There are no restriction, contractual or otherwise, on the amount of securities or other liabilities which the Issuer may issue or incur and which rank senior to, or pari passu with, the Sukuk Wakalah, and there are no restriction on the Issuer issuing securities with similar, different or no loss absorption event provisions. The issue of any such securities or the incurrence of any such other liabilities may reduce the amount (if any) recoverable by the Sukukholders on a dissolution or winding-up. The issue of any such securities or the incurrence of any such other liabilities might also have an adverse impact on the trading price of the Sukuk Wakalah and/or the ability of the Sukukholders to sell their Sukuk Wakalah.

4.2.8 Legal investment considerations may restrict certain investments

The investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent: (a) the Sukuk Wakalah are legal investments for it; (b) the Sukuk Wakalah can be used as collateral for various types of borrowing; and (c) other restrictions apply to their purchase or pledge of any Sukuk Wakalah. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of the Sukuk Wakalah under any applicable risk-based capital or similar rules.

4.2.9 No right to set-off under the Sukuk Wakalah

No Sukukholder may exercise, claim or plead any right of set-off, deduction, withholding or retention in respect of any amount owed to it by the Issuer in respect of, or arising under or in connection with, the Sukuk Wakalah, and the Sukukholder shall, by virtue of his holding of any Sukuk Wakalah, be deemed to have waived all such rights of set-off, deduction, withholding or retention against the Issuer in relation to the Sukuk Wakalah to the fullest extent permitted by law. If at any time the Sukukholder receives payment or benefit of any sum in respect of the Sukuk Wakalah (including any benefit received pursuant to any such set-off, deduction, withholding or retention) other than in accordance with the terms of the Sukuk Wakalah, the payment of such sum or receipt of such benefit shall, to the fullest extent permitted by law, be deemed void for all purposes and the Sukukholder by virtue of his holding of any Sukuk Wakalah, shall, agree as a separate and independent obligation to immediately pay an amount equal to the amount of such sum or benefit so received to the Issuer (or, in the event of its winding-up or administration, the liquidator or, as appropriate, administrator of the Issuer) and, until such time as payment is made, shall hold such amount in trust for the Issuer (or the liquidator or, as appropriate, administrator of the Issuer) and accordingly any payment of such sum or receipt of such benefit shall be deemed not to have discharged any of the obligations under the Sukuk Wakalah.

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4.2.10 Global financial turmoil may lead to volatility in international capital markets which in turn may adversely affect the market price of the Sukuk Wakalah

Global financial turmoil may result in substantial and continued volatility in the global and domestic capital markets. Any deterioration in global financial conditions could have a material adverse effect on worldwide financial markets, which in turn may adversely affect the prices of the Sukuk Wakalah.

4.2.11 Shariah certification The Joint Shariah Advisers has issued pronouncements confirming, among others, that the structure and mechanism of the Sukuk Wakalah are Shariah-compliant as of the date of such pronouncement. However, there can be no assurance that the structure and mechanism of the Sukuk Wakalah will be deemed to be Shariah-compliant by any other Shariah board or Shariah scholar. Potential investors should obtain their own independent Shariah advice as to the Shariah compliance of among others, the structure and mechanism of the Sukuk Wakalah and tradability of the Sukuk Wakalah in the secondary market. No representation, warranty or undertaking, express or implied, is given by the Issuer, the Joint Principal Advisers, Joint Lead Arrangers and Joint Lead Managers as to the status of the Sukuk Wakalah’s compliance with Shariah and the Issuer, the Joint Principal Advisers, Joint Lead Arrangers and the Joint Lead Managers shall not be liable for any consequences of such reliance and/or assumption of any such compliance.

4.2.12 All capitalised terms used in this section are defined in the PTC under Section 2 of this IM

(a) The Sukuk Wakalah Programme has a perpetual tenure and the

Issuer may upsize the programme limit

The Sukuk Wakalah Programme has a perpetual tenure. The Issuer has the option to upsize the Sukuk Wakalah Programme provided that: 1. such increase will not result in any adverse impact on the

rating of the Sukuk Wakalah Programme; 2. the relevant requirements under the LOLA Guidelines in

relation to such upsizing have been complied with; and 3. the relevant regulatory approvals have been obtained (if

applicable). No consent will be required from the Sukukholders, the Sukuk Trustee or from any other party under the Sukuk Wakalah Programme for the Issuer to exercise the option to increase the limit of the Sukuk Wakalah Programme from time to time.

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(b) Sukukholders have no rights to require redemption

The Senior Sukukholders have no ability to require the Issuer to redeem their Senior Sukuk Wakalah as there is no Call Option in respect of Senior Sukuk Wakalah. The Subordinated Sukukholders have no ability to require the Issuer to redeem their Subordinated Sukuk Wakalah whereas the Issuer, in respect of the Subordinated Sukuk Wakalah may, subject to the Redemption Conditions being satisfied, at its sole discretion elect to exercise its option to redeem any tranche of the Subordinated Sukuk Wakalah, in whole or in part, pursuant to the Call Option, Regulatory Redemption and/or Tax Redemption. However, the Issuer is under no obligation to redeem the Subordinated Sukuk Wakalah at any time.

This means that Sukukholders have no ability to cash in their investment, except if the Issuer exercises its right to redeem the Sukuk Wakalah (in the case of the Subordinated Sukuk Wakalah) or by selling their Sukuk Wakalah in the secondary market. However, there can be no guarantee that the Issuer will be able to meet the Redemption Conditions (in the case of the Subordinated Sukuk Wakalah). Noteholders who wish to sell their Sukuk Wakalah may be unable to do so at a price at or above the amount they have paid for them, or at all, if insufficient liquidity exists in the market for the Sukuk Wakalah.

(c) The Issuer may redeem the Subordinated Sukuk Wakalah at the

Dissolution Distribution Amount under certain circumstances

In respect of each tranche of Subordinated Sukuk Wakalah with a Call Option, the Issuer may, at its sole discretion, and subject to the Redemption Conditions being satisfied, redeem that tranche of Subordinated Sukuk Wakalah (in whole or in part) on the Call Date at the Dissolution Distribution Amount. An optional redemption feature is likely to limit the market value of Subordinated Sukuk Wakalah. During any period when the Issuer may elect to redeem the Subordinated Sukuk Wakalah, the market value of those Subordinated Sukuk Wakalah generally will not rise substantially above the price at which they can be redeemed. This also may be true prior to any redemption period. The Issuer may be expected to redeem the Subordinated Sukuk Wakalah; such decision may be due to a myriad of reasons including but not limited to obtaining new financing at lower than the profit /distribution rate of the Subordinated Sukuk Wakalah. There can be no assurance that Subordinated Sukukholders will be able to reinvest the amount received upon redemption at a rate that will provide the same rate of return as their investment in the Subordinated Sukuk Wakalah. Potential investors should consider reinvestment risk in light of other investments available at that time, their individual financial circumstances or tax position.

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The Issuer may also, at its option, exercise its right to redeem the Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah (as the case may be) as a result of Tax Redemption or Regulatory Redemption, subject to the Redemption Conditions being satisfied. The redemption of one tranche of the Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah (as the case may be) pursuant to the Optional Redemption, Regulatory Redemption or Tax Redemption shall not trigger the redemption of other tranche of the Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah (as the case may be). In the case of a partial redemption of a tranche of Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah, the selection of the Tier-2 Sukuk Wakalah or AT-1 Sukuk Wakalah to be redeemed will be made by the Sukuk Trustee on a pro rata basis, by lot or by such other method as the Sukuk Trustee (with the agreement of the Issuer) will deem to be fair and appropriate. The provisions on Optional Redemption, Tax Redemption and Regulatory Redemption are set out in items (17) and (27) of the PTC.

(d) The AT-1 Sukuk Wakalah may be written-off upon breach of CET1 Capital Ratio If the CET1 Capital Ratio of the Issuer (consolidated or entity level, whichever is applicable) falls below 5.125% (or such other percentage as may be prescribed by the CAFIB), the Issuer shall, without the need for the consent of the Sukuk Trustee or the AT-1 Sukukholders, write-off the AT-1 Sukuk Wakalah (in whole or in part). The aggregate amount to be written-off must be at least the amount required to restore the Issuer’s and its consolidated CET1 Capital Ratio to at least 5.75% (or such other percentage as may be prescribed by the CAFIB). If this is not possible, then the full principal value of the AT-1 Sukuk Wakalah will be written-off. Such write-off shall not constitute an event of default or Dissolution Event, nor would it trigger a cross-default under any other outstanding Sukuk Wakalah. As there is no precedent for the application of such write-off requirement in respect of a financial institution in Malaysia, there is uncertainty as to the manner in which such requirement would be applied and the results thereof. The AT-1 Sukukholders should note that any amount that is written-off upon the occurrence of such event in accordance with the terms of the AT-1 Sukuk Wakalah is permanent and will not be restored under any circumstances, even after the CET1 Capital Ratio is restored to at least 5.75% (or such other percentage as may be prescribed by the CAFIB). Accordingly, there is a potential risk that an investor of the AT-1 Sukuk Wakalah will lose all or some of his investment and will not receive a full or any return of the principal amount or any unpaid amounts due under the AT-1 Sukuk Wakalah should the requirement be applied. For the avoidance of doubt, the Issuer, the Joint Principal Advisers, Joint

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Lead Arrangers, Joint Lead Managers and the Sukuk Trustee are not liable for any liabilities arising upon the Issuer’s CET1 Capital Ratio (consolidated or entity level) falling below 5.125% (or such other percentage as may be prescribed by the CAFIB).

(e) The Tier-2 Sukuk Wakalah and/or AT-1 Sukuk Wakalah may be written-off upon the occurrence of a Non-Viability Event

The purpose of the Basel III rules is to ensure greater stability of the banking institutions by requiring them to hold more capital to serve as a buffer against losses and reduce the likelihood of bank failures, and, ultimately, government intervention. The Basel III rules are intended to ensure that all classes of capital instruments can, as fully as possible, absorb losses at the point in time of non-viability of the banking institution. The CAFIB require that the terms and conditions of all Additional Tier-1 and Tier-2 capital instruments issued from 1 January 2013 onwards must contain features that ensure loss absorbency at the point of non-viability. All Additional Tier-1 and Tier-2 capital instruments shall have a provision that requires such instruments to be either written-off in whole or in part or converted in whole or in part into ordinary shares upon the occurrence of a Non-Viability Event. The terms of the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah provides that upon the occurrence of a Non-Viability Event, the instrument will be fully or partially written off if so required by BNM and PIDM at their full discretion. In the event a Non-Viability Event occurs, potential investors should consider the risk that the Tier-2 Sukukholders and AT-1 Sukukholders may lose all of their investment in the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah, including the principal amount plus any Periodic Distribution (including Periodic Distributions accrued but unpaid up to the date of the occurrence of a Non-Viability Event).

(f) The occurrence of a Non-Viability Event may be inherently unpredictable and may depend on a number of factors which may be outside of the Issuer’s control

The occurrence of a Non-Viability Event is dependent on a determination by BNM and PIDM. As a result, BNM and PIDM may require or may cause a write-off in circumstances that are beyond the control of the Issuer and with which the Issuer does not agree. Due to the inherent uncertainty regarding BNM and PIDM’s determination of whether a Non-Viability Event exists, it will be difficult to predict when, if at all, a write-off will occur. Accordingly, the trading behaviour in respect of the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah which have such a non-viability loss absorption feature is not necessarily expected to follow trading behaviour associated with other types of securities. Any indication that the

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Issuer may potentially be moving towards a Non-Viability Event could have a material adverse effect on the market price of the relevant Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah.

(g) Regulations on non-viability loss absorption are new, untested and subject to interpretation and application by BNM and PIDM The regulations on non-viability loss absorption are new and untested, and will be subject to the interpretation and application by BNM and PIDM. It is uncertain how BNM and PIDM would determine the occurrence of a Non-Viability Event, and it is possible that the grounds that constitute a Non-Viability Event may change (including that additional grounds may be introduced). Accordingly, the operation of any such future legislation, guidelines or regulations may have an adverse effect on the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah and the interests of the Subordinated Sukukholders. A potential investor should not invest in the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah unless it has the knowledge and expertise to evaluate how the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah will perform under changing conditions, the resulting effects on the likelihood of a write-down and the value of the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah, and the impact this investment will have on the potential investor’s overall investment portfolio. Prior to making an investment decision, potential investors should consider carefully, in light of their own financial circumstances and investment objectives, all the information contained in this Information Memorandum.

(h) No equity conversion for the Sukuk Wakalah

The Sukuk Wakalah shall not entitle the Sukukholders to receive any form of equity interest in the Issuer at any point in time and the Issuer is not obliged to allot or issue any shares to or for the account of the Sukukholders upon the occurrence of a Non-Viability Event (in the case of Subordinated Sukuk Wakalah) or otherwise. The Sukukholders shall not be entitled to participate in any distributions or entitlements to the Issuer’s shareholders or to attend or vote at any general meeting of the Issuer.

(i) The payment of the Periodic Distribution of the AT-1 Sukuk Wakalah are discretionary, non-cumulative (subject to the AT-1 Sukuk Wakalah being recognised as an Additional Tier-1 capital instrument of the Issuer) and may be cancelled The Issuer may, at its sole discretion and without prior notice to the AT-1 Sukukholders, taking into account its specific financial and solvency condition, elect to cancel any payment of Periodic Distribution, in whole or in part. The Issuer may make such election for any reason.

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Any payment of the Periodic Distribution Payment that has been cancelled shall be no longer due and payable at any time thereafter by the Issuer and shall not accrue thereafter, whether or not funds are or subsequently become available. The AT-1 Sukukholders will have no right thereto whether in a winding up situation or otherwise. Cancellation of a payment of the Periodic Distribution shall not constitute an Enforcement Event for any purpose whatsoever nor would it trigger a cross-default under any outstanding AT-1 Sukuk Wakalah issued under the Sukuk Wakalah Programme and does not entitle the Sukukholders to petition for the insolvency or winding-up of the Issuer.

In addition, the Issuer will not be obliged to pay, and will not pay, any payment of the Periodic Distribution if the Issuer has insufficient Distributable Reserves. The level of the Issuer’s Distributable Reserves is affected by a number of factors - principally the ability of the Issuer to remain profitable from its operations in a manner which creates Distributable Reserves. Consequently, the Issuer's future Distributable Reserves, and therefore its ability to make payment of the Periodic Distribution, are a function of its existing Distributable Reserves and the future profitability of the Issuer. In addition, the Issuer’s Distributable Reserves may also be adversely affected by the servicing of more senior instruments.

The Issuer’s Distributable Reserves, and therefore its ability to make payment of the Periodic Distribution, may be adversely affected by the performance of the Issuer’s business in general, factors affecting its financial position (including capital and leverage), the economic environment in which the Issuer operates and other factors outside of the Issuer’s control. In addition, adjustments to earnings, as determined by the Board, may fluctuate significantly and may materially adversely affect Distributable Reserves. The level of the Issuer’s Distributable Reserves may be further affected by changes to regulation or the requirements and expectations of applicable regulatory authorities. Any such potential changes could adversely affect the Issuer’s Distributable Reserves in the future. If, on any Periodic Distribution Date, payment of Periodic Distribution scheduled to be made on such date is not made by reason of this provision, the Dividend Stopper shall be applicable. Such non-payment or part-payment of Periodic Distribution shall serve as evidence of the Issuer’s exercise of its discretion to cancel such Periodic Distribution (or the portion of such Periodic Distribution not paid), and accordingly such Periodic Distribution (or the portion thereof not paid) shall not be due and/or accrued, and shall not be payable (subject to the AT-1 Sukuk Wakalah being recognised as an Additional Tier-1 capital instrument of the Issuer).

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If the payment of the Periodic Distribution is not paid for whatever reason, the AT-1 Sukuk Wakalah may trade at a lower price. If an AT-1 Sukukholder sells his AT-1 Sukuk Wakalah during such a period, he may not receive the same return on investment as an AT-1 Sukukholder who continues to hold his AT-1 Sukuk Wakalah until the payment of the Periodic Distribution are resumed.

(j) The Issuer’s obligations under the Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah are subordinated

The Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah will constitute direct and unsecured obligations of the Issuer and subordinated in right and priority of payment, to the extent and in the manner provided in the Tier-2 Sukuk Wakalah and the AT-1 Sukuk Wakalah, and shall at all times, rank pari passu and rateably, without discrimination, preference or priority amongst themselves. Subject to the insolvency laws in Malaysia and other applicable laws, the Tier-2 Sukuk Wakalah will be subordinated in right of payment to the claims of depositors and all other unsubordinated creditors of the Issuer and will rank at least pari passu in right of payment with all other Subordinated Indebtedness and the AT-1 Sukuk Wakalah will, in the event of a winding up or liquidation of the Issuer, be subordinated in right and priority of payment to all claims of the Senior Creditors (which includes, but is not limited to, holders of Tier-2 Capital Instruments) and will rank senior to all Junior Obligations. The AT-1 Sukuk Wakalah will rank pari passu with Parity Obligations. Further, the obligations or responsibilities under the Sukuk Wakalah will not be imposed on any other person other than the Issuer and shall not be imposed on any of the Issuer’s subsidiaries or affiliates or any other person involved or interested in the Sukuk Wakalah. None of such persons will accept any liability whatsoever to the Sukukholders in respect of any failure by the Issuer to pay any amount due under the Sukuk Wakalah.

(k) Limited remedies for non-payment of the Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah

The Tier-2 Sukuk Wakalah being Tier-2 capital instruments, and the

AT-1 Sukuk Wakalah, being Additional Tier-1 capital instruments, do not provide for any events of default which would ordinarily trigger a right to accelerate the securities under other securities issuance. Notwithstanding any of the provisions relating to non-payment defaults, the only remedy for non-payment is to institute proceedings for winding-up of the Issuer.

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(l) Investors should pay attention to any modification and waivers The terms and conditions of the respective Sukuk Wakalah contain

provisions for calling meetings of the respective Sukukholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all the relevant Sukukholders, including the Sukukholders who did not attend and vote at the relevant meeting and the Sukukholders who voted in a manner contrary to the majority.

(m) No limitation on issuing other Tier-2 or Additional Tier-1 capital instruments or incurring senior indebtedness

The Issuer may raise additional capital through the issue of other securities or other means. There are no restrictions, contractual or otherwise, on the amount of securities or other liabilities which the Issuer may issue or incur and which rank pari passu or senior to the Sukuk Wakalah. The issue of any such securities or the incurrence of any such other liabilities may reduce the amount (if any) recoverable by the Sukukholders on a dissolution or winding-up of the Issuer. The issue of any such securities or the incurrence of any such other liabilities might also have an adverse impact on the trading price of the Sukuk Wakalah and/or the ability of the Sukukholders to sell their Sukuk Wakalah.

(n) No step-up in the Periodic Distribution Rate for the Tier-2 Sukuk

Wakalah and AT-1 Sukuk Wakalah

The Periodic Distribution Rate for the Tier-2 Sukuk Wakalah and AT-1 Sukuk Wakalah will be determined prior to each issuance and there shall be no step-up of Periodic Distribution for the Tier-2 Sukuk Wakalah after the Call Date of the Tier-2 Sukuk Wakalah, in the event the Call Option is not exercised by the Issuer (where applicable).

4.2.13 Change of law or regulations

The Sukuk Wakalah and the transaction documents are based on and subject to, Malaysian law, practices and regulations in effect as at the date of this Information Memorandum. The Sukuk Wakalah are also based on, and subject to all other applicable tax law, practice and/or regulations in effect as at the date of this Information Memorandum, having regard to the expected tax treatment of all relevant statutes under such law, practices and/or regulations. No assurance can be given as to the impact of any possible judicial decision or change to Malaysian law, practices and regulations and/or to any other applicable tax law, practice and/or regulations after the date of this Information Memorandum, nor can any assurance be given as to whether any such change could adversely affect the ability of the Issuer to make payments under the Sukuk Wakalah, the structure of the transaction and/or the tax treatment of the Sukuk Wakalah and/or the proposed financing structure.

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4.2.14 Malaysian Taxation

Under present Malaysian law, all coupon payments in respect of the Sukuk Wakalah are exempted from withholding tax. However, there is no assurance that this present position will continue and in the event that such exemption is revoked, modified or rendered otherwise inapplicable, such coupon payments shall be subject to withholding tax at the then prevailing withholding tax rate. However, notwithstanding the foregoing, the Issuer shall be obliged pursuant to the terms of the Sukuk Wakalah, in the event of any such withholding, to pay such additional amounts to the parties entitled thereto so as to ensure that the parties entitled thereto receive the full amount which they would have received had no such withholding been imposed.

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4.3 Considerations relating to Malaysian Banking Industry

4.3.1 Regulatory Environment The Issuer is regulated by BNM, the central bank of Malaysia which is directly involved in the regulation and supervision of Malaysia’s financial system. Its principal functions are to (i) formulate and conduct monetary policy in Malaysia; (ii) issue currency in Malaysia; (iii) regulate and supervise financial institutions which are subject to the laws enforced by BNM; (iv) provide oversight over money and foreign exchange markets; (v) exercise oversight over payment systems; (vi) promote a sound, progressive and inclusive financial system; (vii) hold and manage the foreign reserves of Malaysia; (viii) promote an exchange rate regime consistent with the fundamentals of the economy; and (ix) act as financial adviser, banker and financial agent of the Government. BNM and the Ministry of Finance Malaysia have extensive powers to regulate the Malaysian banking industry and Islamic banking industry under the FSA and IFSA. This includes the power to limit the rates of return charged by banks on certain types of financing, establish caps on lending to certain sectors of the Malaysian economy and establish priority lending guidelines in furtherance of certain social and economic objectives. In addition to the FSA and IFSA, Malaysian licensed banks and financial institutions are subject to guidelines, practice notes and standards issued by BNM from time to time. Accordingly, potential investors should be aware that BNM could, in the future, set rates of return at levels or restrict credit in a way which may be adverse to the operations, financial condition or asset quality of banks and financial institutions in Malaysia, including the Issuer, and may otherwise significantly restrict the activities of the Issuer and Malaysian banks and financial institutions generally. The regulatory measures presently imposed, and as may be introduced from time to time, by the regulatory agencies could affect the Issuer’s business activities. These regulations place restrictions on the business of the Issuer and may cause the Issuer to scale down operations in the areas of its business most affected by these regulations. BNM also has broad investigative and enforcement powers. Contravention of BNM regulations and guidelines may expose the Issuer to enquiries from an investigation by BNM and other Malaysian regulatory agencies. These enquiries or investigations may result in sanctions including fines, corrective orders, restriction of business lines and possible loss of licenses required for the Issuer to operate its businesses and, in addition, may cause the Issuer’s reputation to be adversely affected. Contravention of regulations, policies or guidelines of BNM (or any other regulatory agency) therefore carries with it financial and reputational risks that could materially and adversely affect the Issuer’s business, financial condition, results of operations and prospects. The FSA and IFSA are legislations that provide for the regulation and supervision of financial institutions in Malaysia, payment systems and other relevant entities and also the oversight of the money market and foreign exchange market. There is no assurance that the FSA and IFSA will not be replaced by new legislations in the future, which may result in a stricter

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financial services regime, including the increase in duties and responsibilities of financial institutions and enhanced level of governance and disclosure. The Issuer has put in place compliance procedures to ensure compliance with such legislations, and effort is taken to ensure the Issuer meets the requirements of these regulations. There are no certainties or indications on the approach that will be taken by our regulators, and there may be additional compliance cost to the Issuer with the change and/or increase in regulations. Failure to comply with such rules and regulations may result in penalties, loss of regulatory licenses and permits and damage to business reputation, which may have a material adverse effect on the Issuer’s business, prospects, financial condition and/or results of operations. The Issuer is required to prepare its financial statements in accordance with MFRS, IFRS and the requirements of the Companies Act.

4.3.2 Increasing Competition and Market Liberalisation The banking industry’s transformation through a deregulation process as part of BNM’s implementation of its first Financial Sector Master Plan has resulted in the liberalisation of the banking industry to allow greater presence of foreign and Islamic banks as well as providing greater opportunities for banks to widen their scope of business beyond traditional commercial banking. BNM’s second Financial Sector Master Plan (2011-2020), which was released in December 2011, is more focused on strengthening the competition and efficiency of the banking sector. This liberalisation has also brought about greater competition among banking institutions with the trend being expected to continue. As a result, banking institutions are forced to become more efficient to serve the customers better and to explore greater usage of technology for further efficiency and explore cost effective solutions. The Competition Act 2010 (Act 712) (“Competition Act”), which took effect on 1 January 2012, was introduced to promote economic development by promoting and protecting the process of competition in order to maximise consumer welfare through the prohibition of anti-competition practices. The Competition Act applies to all commercial activities undertaken within Malaysia and those outside Malaysia which have effects on competition in the Malaysian market. The scope of the Competition Act includes prohibitions of anti-competition agreements and the abuse of dominant position.

The Issuer faces competition from other domestic banking groups as well as foreign banks operating in Malaysia. There can be no assurance that the Issuer will be able to maintain or increase its present market share in the future or that increased competition will not materially and adversely impact the business, financial conditions and results of operations or prospects of the Issuer.

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4.3.3 Scope and cost of deposit insurance in Malaysia

BNM is not required to act as lender of last resort to meet liquidity needs in the general banking system or for specific institutions. In the past, BNM has on a case-by-case basis provided a safety net for individual banks with an isolated liquidity crisis. However, there can be no assurance that BNM will provide such assistance in the future. Effective from 1 September 2005, BNM introduced a deposit insurance system (“Deposit Insurance System”). The Deposit Insurance System is administrated by PIDM, an independent statutory body. All licensed commercial banks (including subsidiaries of foreign banks operating in Malaysia) and Islamic banks are member institutions of the Deposit Insurance System. On 16 October 2008, the Government moved to guarantee all bank deposits in an effort to shore up confidence in the Malaysian financial system to curb potentially damaging capital outflows. BNM announced the guarantee for all local and foreign currency deposits from 16 October 2008 until 31 December 2010. With effect from 31 December 2010, the Malaysia Deposit Insurance Corporation Act 2011 (Act 720) (the “PIDM 2011 Act”) came into effect and replaced the PIDM 2005 Act. The PIDM 2011 Act was enacted to implement an enhanced financial consumer protection package, whereby, amongst other changes, the deposit insurance limit was increased to RM250,000 per depositor per member bank with such amount being inclusive of principal and interest. In addition, under the PIDM 2011 Act, foreign currency deposits will now benefit from deposit insurance protection. Under the Deposit Insurance System, explicit deposit protection is provided to eligible deposits up to the prescribed limit of RM250,000 per depositor, per member institution and such amount is inclusive of principal and interest effective as of 31 December 2010. A separate coverage for the same amount is provided for Islamic deposits (i.e. those accepted under Shariah principles), accounts held under joint ownership and trust accounts, sole proprietorships and partnerships. Notwithstanding the aforesaid, the fact that not all deposits are insured up to their full amount could lead to or exacerbate liquidity problems, which, if severe, could have an adverse effect on the Issuer’s business, financial condition, results of operations or prospects, or on the Malaysian financial markets generally. In addition, the Deposit Insurance System could potentially encourage risk taking on the part of the Issuer.

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4.4 General Considerations 4.4.1 Winding-up of the Issuer

Under Section 207 of the IFSA, no application for the winding-up of an

approved person (which includes the Issuer) may be presented to the High Court without the prior written approval of BNM.

In addition, a copy of such an application to the High Court must also be

delivered to BNM at the same time as it is presented to the High Court. Also, BNM shall be party to the winding-up proceedings and shall be entitled to appear and be heard in all proceedings relating to the application and to call, examine and cross-examine any witness. Failure to comply with such requirements is an offence and a person convicted of such offence is liable to imprisonment and/or a fine as stipulated in the said section in the IFSA.

As there is no precedent for the winding-up of a major financial institution in Malaysia, there is uncertainty as to the manner in which such proceeding would occur and the results thereof.

4.4.2 Economic Factors

The Issuer’s business, prospects, financial condition and results of operation may be adversely affected by social, political, regulatory and economic developments in Malaysia. Such political and economic uncertainties include, but are not limited to, the risks of war, terrorism, nationalism, nullification of contract, changes in rates of return, imposition of capital controls and methods of taxation. Negative developments in Malaysia’s socio-political environment may adversely affect the business, financial condition, results of operations and prospects of the Issuer. Please refer to Section 10 of this Information Memorandum on the “Malaysian Banking Industry Overview”.

4.4.3 Force Majeure

An event of force majeure is an event which is not within the control of the party affected, which that party is unable to prevent, avoid or remove and shall include war and acts of terrorism, riot and disorders, natural catastrophes and others. Force majeure events do not include economic downturn, non-availability of or insufficient or lack of financing on the part of the Issuer. The occurrence of a force majeure event may have a material impact on the Issuer’s business.

4.4.4 Forward-Looking Statements

Certain statements in this Information Memorandum are forward-looking in nature. These statements include, among other things, discussions of the Issuer’s business strategy and expectation concerning its position in the Malaysian economy, future operations, profitability, liquidity, capital resources and financial position. All forward-looking statements are based on estimates and assumptions made by the Issuer and third party consultants that, although believed to be reasonable, are subject to risks and

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uncertainties that may cause actual events and the future results of the Issuer to be materially different from that expected or indicated by such statements and estimates and no assurance can be given that any of such statements or estimates will be realised. In light of these and other uncertainties, the inclusion of forward-looking statements in this Information Memorandum should not be regarded as a representation or warranty by the Issuer or any other person that the plans and objectives of the Issuer will be achieved.

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5.0 DESCRIPTION OF THE ISSUER

5.1 Introduction

The Issuer is a wholly-owned subsidiary of MBSB and serves as the Islamic banking and financing arm of the MBSB Group of Companies. The Issuer was incorporated under the Companies Act 1965, on 28 November 2005 as Asian Finance Bank Berhad (AFB). AFB was successfully acquired by MBSB and commenced operations as a member of the MBSB Group of Companies on 7 February 2018.

The Issuer has been granted a license by BNM to undertake Islamic banking and finance business and is regulated and supervised by BNM under the IFSA. The acquisition of AFB has enabled MBSB to fulfil its aspirations of becoming a full-fledged Islamic bank, providing the latter access to new funding sources such as current account deposits as well as the ability to offer banking products such as trade finance and treasury business.

As a full-fledged Islamic bank, the Issuer offers a wide range of Islamic banking products and services to retails and corporates customers, such as treasury services, home and personal financing, term financing, internet banking, cashline, debit cards, wealth management products and trade finance. Mobile Banking and cash management services will be in place by end of the year.

As part of the expansion programme, the Issuer had set up new business hubs in Johor, Penang, Kota Kinabalu, Kuantan, Kuching and soon, Ipoh, in order to promote its equipment financing clientele base nationwide alongside with the introduction of Corporate Internet Banking (CIB) to provide corporate customers with self-service cash management capabilities. Once the cash management system is made available, it is anticipated to further increase the subscription and utilisation of this facility. Another new initiative is to support renewable energy sectors via the Corporate Financing offerings. The Issuer had approved the proposal to undertake the construction of a small hydro plant at thirty-seven locations identified across six states (i.e. Perak, Kelantan, Sabah, Pahang, Terengganu and Selangor) involving twenty-one companies. In the fourth quarter of 2018, a new trade finance platform has been established and was later rebranded to MTrade in order to create awareness and to make it more appealing to the market segment. The Issuer plans to widen its reach in the retail segment from just offering government servants’ financing to capturing transaction volume of a more technologically savvy population. Thus, digital offerings such as E-Wallet, Retail Internet Banking (RIB) and Mobile Banking are made available to serve as a new revenue streams for the Issuer. In creating digital frontier, the Issuer is in the midst of equipping all of its forty-six branches with technology capabilities such as Cash Recycling Machine (CRM), Queue Management System (QMS) and tablet for online application. As at September 2019, the Issuer has installed twenty CRM machines spread across ten branches.

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In line with the Issuer’s objective, debit card was introduced in April 2019 to drive current account and savings account (CASA) deposits, for both corporate and retail segments. In addition to that, Cashline-i facility which is a Shariah-Compliant overdraft facility has been introduced to help improve traction in deposit-taking activities. Notably, the Issuer, the core subsidiary of MBSB, had been accounted for around 5%-6% of the Islamic banking system’s financing and deposits as at end-December 2018.

5.2 Shareholder

As at the LPD, the Issuer is wholly-owned by MBSB and has an issued share capital of RM4,625,859,288 comprising 4,625,859,288 ordinary shares. MBSB has been listed on the Main Market of Bursa Securities since 14 March 1972. As at the LPD, the ultimate shareholder of MBSB is the Employees Provident Fund, which directly holds 64.48% of MBSB’s shares.

5.3 MBSB Bank’s Strategy

Moving forward, MBSB Bank sets to continue anchoring growth via corporate financing. MBSB Bank aims to focus on the area of transactional banking, digital capabilities and industrial hire purchase. MBSB Bank’s key target under its three-year business plan is to have fee-based income account for at least 25% of total income by the end of 2020. Since acquiring its banking license, MBSB Group via MBSB Bank has commenced 22 strategic initiatives, to be completed by 2020. These include exploring new revenue streams such as alternative financial services via digital technology. MBSB Group has invested around RM260 mil in its core banking platform and digital initiatives. Given its relatively lean structure with only 46 branches, MBSB Group deems its digital transformation of vital to its growth strategies going forward.

MBSB Bank plans to review its growth strategy for the personal financing portfolio to stem the contraction. Despite continued contraction in recent years, MBSB Bank’s personal financing portfolio still constitutes the largest portion of its gross financing at 56.2% as at 2Q ended June 2019. The figure, however, has decreased from 1Q ended March 2019 figure which recorded 58% of total gross loans and financing. Notwithstanding this, there is an increase in corporate financing disbursement in the 2Q as compared to the 1Q. The bulk of MBSB Bank’s personal financing (89%) is extended to civil servants. That said, the significant concentration of personal financing in the MBSB Group of Companies’ financing book renders it susceptible to adverse industry and regulatory developments. Notably, the decrease in personal financing and increase in corporate financing simultaneously has portrayed that MBSB Bank’s strategy is moving towards the right direction.

As secondary focus, MBSB Bank plans to further penetrate into SME and Trade Finance. These go-to market strategies will be supported by a dedicated team of in-house specialists in property development and capabilities in trade financing solutions for corporates and SMEs in Malaysia.

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For the consumer segment, MBSB Bank positions itself as a Public Sector Focus Bank, safeguarding Government Investment Companies/Government Linked Companies employees’ quality of life by offering financial advisory services and wealth management solutions to improve their financial health and awareness. MBSB Bank aims to offer a full suite of products to meet the everyday banking needs of consumers with a focus on building a CASA base to support the overall growth of the bank. In addition, MBSB Bank plans to serve the wholesale segment, positioning itself as an Islamic product specialist focusing on innovative Shariah-based offerings for large infrastructure projects.

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5.4 Board of Directors and Management of the Issuer

Profile of the Board of Directors

The member of the Board and their respective profiles as at the LPD are set out below:

(i) Tan Sri Abdul Halim bin Ali

CHAIRMAN, NON-INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/76/Male

Date of Appointment: 07 February 2018

Academic/Professional Qualification(s):

• Bachelor of Arts (Hons) in History, University of Malaya

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Chairman, Malaysia Building Society Berhad

• Chairman, Sedania Innovator Berhad

• Chairman, Universiti Teknologi Malaysia

Past Directorship(s) and/or Appointment(s):

• Chairman of IJM Corporation Berhad (2007-2019)

• Chairman of the Employees Provident Fund (2001-2007)

• Chief Secretary of the Government (1996-2001)

• Secretary General of the Ministry of Foreign Affairs (1996)

• Deputy Secretary General I (Political Affairs) (1991-1996)

• Malaysian Ambassador to Austria (1988-1991)

• Deputy Secretary General III (Administration) of the Ministry of Foreign Affairs (1985-1988)

• Malaysian Ambassador to Vietnam (1982-1985)

• Malaysia Deputy Permanent Representative to the United Nations (1978-1982)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• NIL

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94

(ii) Aw Hong Boo SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/69/Male

Date of Appointment: 07 February 2018

Academic/Professional Qualification(s):

• Member, Malaysian Institute of Accountants (MIA)

• Member, Malaysian Institute of Certified Public Accountant (MICPA)

• Fellow, Institute of Chartered Accountants in England & Wales (ICAEW)

Working Experience and Occupation Past Directorship(s) and/or Appointment(s):

• Director, Malaysia Building Society Berhad (2005-2018)

• Director, Quill Capita Management Sdn Bhd (2006-2015)

• Corporate Advisor, Quill Group of Companies (2004-2010)

• Director, KP Keningau Berhad (2000-2006)

• Director, RHB Finance Berhad (1995-1999)

• Director, RHB Leasing Sdn Bhd (1990-1999)

• Director, RHB Nominees Sdn Bhd (1983-1999)

• Senior General Manager, Branch Network/Risk Management, RHB Bank Berhad (1978-1999)

• Audit Senior/Manager, Ernst & Whinney (1974-1977)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Chairman, Board Audit Committee

• Member, Board Risk Management & Compliance Committee

• Member, Board Nominating & Remuneration Committee

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(iii) Datuk Johar bin Che Mat INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/67/Male

Date of Appointment: 19 December 2017

Academic/Professional Qualification(s):

• Bachelor of Economics, University of Malaya

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Chairman, MNRB Holdings Berhad

• Director, Rural Capital Berhad

• Director, Dagang NeXchange Berhad

• Director, Takaful Ikhlas Family Berhad

• Director, Takaful Ikhlas General Berhad

Past Directorship(s) and/or Appointment(s):

• Director, Malaysia Building Society Berhad (2017-2018)

• Director, Bank Pertanian Malaysia Berhad (Agro Bank) (2010-2016)

• Director, Amanah Raya Group (2010-2016)

• Director, Aseambankers (2000-2002)

• Director, Etiqa Insurance (2004-2010)

• Director, Maybank Trustee Berhad (2007-2010)

• Director, Maybank Islamic Berhad (2006-2010)

• Various Senior positions in Maybank Group (1976-2010)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Chairman, Board Investment & Credit Committee

• Chairman, Board Nominating & Remuneration Committee

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(iv) Dr. Loh Leong Hua INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/62/Male

Date of Appointment: 01 June 2018

Academic/Professional Qualification(s):

• PhD in Management Studies, Universiti Kebangsaan Malaysia (UKM)

• Advanced Management Program (AMP) Graduate, The Wharton School of University of Pennsylvania, USA

• International Banking Summer School (IBSS) Programme, Sorrento, Italy

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Director, Pacific & Orient Insurance Co. Berhad

• Member, Rating Committee, Malaysian Rating Corporation Berhad

Past Directorship(s) and/or Appointment(s):

• Director, Transnational Insurance Brokers (M) Sdn Bhd (2012-2019)

• Director, Asian Finance Bank Berhad (Mar 2017-Feb 2018)

• Director, WTK Holdings Berhad (2014-2018)

• Member, Board Risk Committee, Sarawak Economic Development Corporation (SEDC) (2013-2017)

• Director, YKGI Holdings Berhad (2015-2017)

• Director, YFG Berhad (2012-2015)

• Senior Director, Kenanga Investment Bank Berhad (2006-2011)

• Senior Vice President, Affin Merchant Bank Berhad (2006)

• Head, Commercial Banking, Eon Bank Berhad, HO, KL (2002-2005)

• Head, Sarawak & Sabah Region, Eon Bank Berhad (1996-2002)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Chairman, Board Risk Management & Compliance Committee

• Member, Board Audit Committee

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(v) Tunku Alina binti Raja Muhd Alias NON-INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/55/Female

Date of Appointment: 07 February 2018

Academic/Professional Qualification(s):

• Doctorate in Islamic Finance, International Centre for Education in Islamic Finance, Malaysia

• Green Templeton College – Advanced Management Programme, Oxford University

• Masters in Law (Corporate and Commercial Law), King’s College, London

• Bachelor of Laws, University Malaya

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Director, Malaysian Pacific Industries Berhad

• Director, IJM Corporaton Berhad

• Director, Batu Kawan Berhad

• Director, Joyous Waves Sdn Bhd

• Director, Preci Horizon Sdn Bhd

• Chairperson, JA Russel & Co. Sdn Bhd

• Trustee, Raja Alias Foundation

Past Directorship(s) and/or Appointment(s):

• Director, Malaysia Building Society Berhad (2017-2018)

• Partner, Wong Lu Peen & Tunku Alina, Advocates & Solicitors (1992-2011)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Member, Board Risk Management & Compliance Committee

• Member, Board Audit Committee

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(vi) Lynette Yeow Su-Yin INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/50/Female

Date of Appointment: 07 February 2018

Academic/Professional Qualification(s):

• Member, Malaysian Bar

• Member, Bar Council Malaysian Mediation Centre

• Master of Arts, University of Cambridge

• Bachelor of Arts (Hons), University of Cambridge

Working Experience and Occupation Present Directorship(s) and/or Present Appointment(s):

• Director, Malaysia Building Society Berhad

• Director, Themed Attractions Resorts and Hotels Sdn Bhd

• Panel of Mediators, Securities Industry Dispute Resolution Center (SIDREC)

• Consultant, Sanjay Mohan, Advocates & Solicitors

Past Directorship(s) and/or Appointment(s):

• Partner, Chua Associates, Advocates & Solicitors (2015-2018)

• Partner, Kadir Andri & Partners (2011-2015)

• Partner, Zaid Ibrahim & Co (2002-2011)

• Partner, Raslan Loong (2000-2002)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Member, Board Investment and Credit Committee

• Member, Board Nominating & Remuneration Committee

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(vii) Datuk Azrulnizam bin Abdul Aziz INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/49/Male

Date of Appointment: 01 March 2017

Academic/Professional Qualification(s):

• Executive Education, Harvard Business School

• Leadership Programme, Oxford University

• MBA, International Business, University of Hartford, Connecticut, USA

• BBA Marketing, Wichita State University, USA

• Diploma in Business Studies, UiTM Malaysia

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Director, Urban Setup Sdn. Bhd.

• Director, AmMetlife Takaful Berhad

• Executive Director, CR FinaCapital Sdn Bhd

• Director, Petrowangsa Sdn Bhd

Past Directorship(s) and/or Appointment(s):

• Group Strategic Financial Advisor, Syarikat Perumahan Negara Berhad (SPNB) (2018-2019)

• Director, Bintai KA Development Sdn Bhd (2017-2019)

• Executive Director, OCR Group Berhad (2016-2018)

• Chief Executive Officer, Al Rajhi Banking & Investment Corporation Malaysia Berhad (2012-2014)

• Chief Executive Officer, Standard Chartered Sa’adiq Berhad (2008-2011)

• Director & Head of Islamic Banking Division, Standard Chartered Bank Malaysia Berhad (2005-2008)

• Vice President, Citibank Malaysia Berhad (1996-2005)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Member, Board Investment & Credit Committee Meeting

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(viii) Sazaliza bin Zainuddin NON-INDEPENDENT EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/46/Male

Date of Appointment: 07 February 2018

Academic/Professional Qualification(s):

• ACCA (UK)

• BA Hons in Accounting & Finance, Southbank University, United Kingdom

• Diploma in Accountancy, UITM

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Chief Financial Officer of the Employees Provident Fund

Past Directorship(s) and/or Appointment(s):

• Director, Malaysia Building Society Berhad (2017-2018)

• Director, HSBC Amanah Takaful (Malaysia) Berhad (2013-2017)

• Senior Manager (Assurance), Pricewaterhouse Coopers (1997-2006)

Current Membership of Board Committee(s) in MBSB Bank Berhad1:

• Member, Board Investment & Credit Committee

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1 Encik Sazaliza bin Zainuddin does not hold any executive position and does not have any management responsibilities in MBSB

Bank. His designation as Non-Independent Executive Director of MBSB Bank is pursuant to the definition of “executive director” in BNM’s Guidelines on Corporate Governance where “executive director” refers to a director of a financial institution who has management responsibilities in the financial institution or any of its affiliates. The Employees Provident Fund is an affiliate of MBSB Bank and Encik Sazaliza bin Zainuddin has management responsibilities in the Employees Provident Fund.

101

(ix) Kamarulzaman bin Ahmad

INDEPENDENT NON-EXECUTIVE DIRECTOR

Nationality/Age/Gender: Malaysian/44/Male

Date of Appointment: 01 October 2019

Academic/Professional Qualification(s):

• British A-Levels, New College Cardiff, United Kingdom

• BEng (Hons) Electrical and Electronics Engineering, Imperial College of Science & Technology, London, United Kingdom

Working Experience and Occupation Present Directorship(s) and/or Appointment(s):

• Managing Director, LCTAsia Sdn Bhd

Past Directorship(s) and/or Appointment(s):

• Managing Director of a Military Cybersecurity Company (2014-2017)

• Managing Director, Endeavor Malaysia (2013-2014)

• CEO, CaterhamJet Malaysia (2013)

• Director, Asian Aviation Centre of Excellence (2011-2013)

• Regional Head of Customer Experience, AirAsia (2011-2013)

• Regional Head of Strategy and Planning, AirAsia (2010-2011)

• Various senior positions in PETRONAS Group (2006-2010)

• Formula 1 Electronics Engineer (2000-2005)

Current Membership of Board Committee(s) in MBSB Bank Berhad:

• Member, Board Risk Management and Compliance Committee

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Senior Management

As at the LPD, the senior management of the Issuer are as follows:

Name Position

Datuk Seri Ahmad Zaini bin Othman President and Chief Executive Officer

Tang Yow Sai Chief Financial Officer

Asrul Hazli bin Salleh Chief Operations Officer

Datuk Nor Azam bin M. Taib Chief Business Officer

Azlina binti Mohd Rashad Chief Corporate Officer

Lim Seong Soon Chief Risk Officer

Aniza binti Zakaria Chief Internal Auditor

Risham Akashah bin Kamaruzaman Chief Technology Officer

Tengku Khalizul bin Tengku Khalid Chief Compliance Officer

Other Key Management Personnel As at the LPD, the other key management personnel of the Issuer are as follows:

Name Position

Tina Koh Ai Hoon Executive Vice President - Company Secretary

Sheela Thaver Senior Vice President - Legal Department

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5.5 Employees

MBSB Bank consists of senior and experienced management team led by the President/Chief Executive Officer and supported by the combined workforce of 1861 staff across MBSB Group as at June year to date 2019. In 2017 and 2018, aggressive hiring was also done in order to equip MBSB Bank with the required talents and headcount as per MBSB Bank’s business plan, which saw a growth in headcount. Similar to other banks in Malaysia, MBSB Bank’s employees are of the executive and non-executive level. This means that the non-executive staff are represented by the following trade unions: (i) National Union of Bank Employees (Peninsular Malaysia); (ii) Sabah Banking Employees’ Union (Sabah); and (iii) Sarawak Bank Employee Union (Sarawak). In executing MBSB Bank’s strategy towards becoming a top progressive Islamic bank, senior management together with the Board have committed to investing in formal trainings that build Islamic finance capabilities across all levels and functions in the organisation. MBSB Bank will also continue to evolve employee capabilities in line with business priorities and to support in the successful delivery of future market positions. The main elements that will drive delivery will be the corporate culture, rewards and right talent mix.

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6.0 SELECTED FINANCIAL INFORMATION The unaudited interim financial statements of MBSB Bank for the period ended 30 September 2019 and the audited financial statements for the period ended 31 December 2018 are as follows. The unaudited interim financial statements should be read in conjunction with the audited financial statements of MBSB Bank for the financial year ended 31 December 2018. STATEMENTS OF FINANCIAL POSITION - THE BANK

Unaudited Audited

As at 30 September As at 31 December

2019 2018 2018 2017

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

Assets

Cash and short-term funds 1,273,359 3,746,172 3,237,276 478,674 Deposits and placements with banks and

other financial institutions

351,354

1,827 1,842

- Derivative financial assets 108 - 67 3,091 Financial investments available-for-sale - - - 227,086 Financial investments at fair value through profit or loss ("FVTPL")

10,158

- - -

Financial investments at fair value through other comprehensive income ("FVOCI")

10,211,747

3,855,126 5,097,105

-

Financial investments at amortised cost 20,101 601,038 20,350 - Financial investments held-to-maturity - - - 600,600 Financing and advances 33,036,852 31,830,718 31,806,617 1,035,668 Financial assets held-for-sale - 7,505 - - Sukuk Commodity Murabahah 2,852,422 3,171,992 2,924,734 - Other receivables 547,657 1,378,260 604,838 8,140 Statutory deposits with Bank Negara

Malaysia

1,235,000

1,029,287 1,053,000 26,774 Investment property 820 820 820 820 Property and equipment 23,090 13,392 20,923 965 Right use of assets 23,068 - - - Intangible assets 116,005 80,108 104,692 1,619 Deferred tax assets - 33,245 - 626 Tax recoverable 86,127 5,300 74,587 5,750

Total assets 49,787,868 45,754,791 44,946,851 2,389,813

105

STATEMENTS OF FINANCIAL POSITION - THE BANK

Unaudited Audited

As at 30 September As at 31 December

2019 2018 2018 2017

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

Liabilities

Deposits from customers 27,196,602 31,730,354 24,209,449 1,198,676 Deposits and placements of banks and other financial institutions

10,430,137

1,839,756 8,578,851 681,268

Derivative financial liabilities 410 50 2 777 Other payables 2,919,328 3,008,987 3,099,060 14,623 Lease liabilities 23,393 - - - Recourse obligation on financing sold 2,005,783 2,150,137 2,135,518 - Sukuk-MBSB Structured Covered ("SC") Murabahah

1,898,113

2,214,559 1,968,075 -

Provision for taxation - 6,618 - - Provision for zakat 15,344 3,707 13,000 - Deferred tax liabilities 73,658 10,156 41,552 -

Total liabilities 44,562,768 40,964,324 40,045,507 1,895,344

Equity Share capital 4,625,859 4,625,859 4,625,859 532,530 Reserves 599,241 164,608 275,485 (38,061)

Total equity 5,225,100 4,790,467 4,901,344 494,469

Total Liabilities and Equity 49,787,868 45,754,791 44,946,851 2,389,813

Commitments and contingencies 5,758,645 6,219,808 6,078,479 598,062

106

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME - THE BANK

Unaudited Audited

As at 30 September As at 31 December

2019 2018 2018 2017

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

Income derived from investment of depositors' funds

1,750,867

1,238,143 1,871,470 89,694

Income derived from investment of shareholders' funds

416,861

177,413 243,195 29,839

Net allowance for impairment on financing and advances and other financial assets

(324,827)

(87,519) (135,694) (12,451)

Total distributable income 1,842,901 1,328,037 1,978,971 107,082 Income attributable to depositors and others (1,329,959) (850,612) (1,260,384) (74,268)

Total net income 512,942 477,425 718,587 32,814 Personnel expenses (166,540) (120,079) (180,456) (19,864) Other overhead expenses (85,015) (66,585) (89,568) (16,630)

Profit before taxation and zakat 261,387 290,761 448,563 (3,680) Taxation (95,031) (72,585) (116,368) 74 Zakat (4,172) (3,976) (13,000) -

Profit for the financial period 162,184 214,200 319,195 (3,606)

Profit attributable to: Owners of the Bank 162,184 214,200 319,195 (3,606)

162,184 214,200 319,195 (3,606)

Profit for the financial period 162,184 214,200 319,195 (3,606) Other comprehensive income, net of tax 161,572 9,938 10,667 818

161,572 9,938 10,667 818

Total comprehensive income for the financial period

323,756

224,138 329,862 (2,788)

Total comprehensive income attributable to:

Owners of the Bank 323,756 224,138 329,862 (2,788)

323,756 224,138 329,862 (2,788)

107

KEY FINANCIAL RATIOS

The Bank

Unaudited as at

30 September 2019 (%)

Audited as at

31 December 2018 (%)

After-tax return on average assets 0.46% 1.02% After-tax return on average equity 4.27% 8.57% CET1 11.617% 12.271% Tier 1 11.617% 12.271% Total Capital 12.835% 13.503% Cost/Income Ratio 30.03% 31.61% Net Impaired Financing Ratio 1.22% 1.12% Financing Loss Reserve Ratio 148.97% 156.26%

108

7.0 FUNDING AND CAPITAL ADEQUACY

7.1 Funding MBSB Bank’s main source of funding is customer deposits. The types of customer deposits as at 30 September 2019 and 31 December 2018 are illustrated below. Unaudited Audited 30 September 2019 31 December 2018

RM'000 RM'000 By type of deposit:

Non-Mudharabah Funds: Commodity Murabahah Term Deposit 26,878,914 23,907,371 Demand deposits 203,590 225,520 Savings deposits 114,098 76,558

27,196,602 24,209,449

The deposit above are under the Islamic contract of Tawarruq.

Besides customer deposits, MBSB Bank also received non-depository funding through Recourse Obligation on Financing Sold to Cagamas and issuance of Structured Covered Sukuk Murabahah as follows: Unaudited Audited 30 September 2019 31 December 2018

RM'000 RM'000 Recourse obligation on financing sold to Cagamas

2,005,783 2,135,518

Structured Covered Sukuk Murabahah 1,898,113 1,968,075

3,903,896 4,103,593

Funding via Deposits and placements of banks and other financial institutions is as follows: Unaudited Audited

30 September 2019 31 December 2018

RM'000 RM'000 Deposits and placements of banks and other financial institutions 10,430,137 8,578,851

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109

7.2 Capital Adequacy

The capital adequacy ratios have been computed in accordance with BNM’s Capital Adequacy Framework (Capital Components and Basel II – Risk Weighted Assets). The total risk weighted assets are computed based on Standardised Approach for Credit and Market Risk and Basic Indicator Approach for Operational Risk.

The following tables set out the capital adequacy ratios of MBSB Bank as at 30 September 2019 (unaudited) and 31 December 2018. Unaudited Audited

30 September

2019 31 December

2018

RM'000 RM'000 Common Equity Tier I (''CET I'') Capital/Tier I Capital

Ordinary share capital 4,625,859 4,625,859

Retained earnings 259,543 259,543

Other reserve 177,514 15,942

5,062,916 4,901,344

Less : Regulatory adjustments

Deferred tax assets - -

Cumulative gains of financial investments at

FVOCI (119,025) (8,152)

Regulatory reserve (5,234) (5,234)

Intangible assets (116,005) (104,692)

Total CET I Capital/Tier I Capital 4,822,652 4,783,266

Tier II Capital Collective impairment allowance and regulatory reserve ^

505,708 480,046

505,708 480,046

Total capital base 5,328,360 5,263,312

^ Collective impairment allowance on non-credit impaired exposure and regulatory reserves is subject to a maximum of 1.25% of total credit RWA.

Breakdown of risk weighted assets in various categories of risk weights are as follows:

MBSB Bank

30 September 2019

31 December 2018

RM'000 RM'000

Total risk weighted assets ("RWA")

- Credit risk 40,456,651 38,403,661

- Market risk 11,725 2,136

- Operational risk 1,046,384 573,889

Total RWA 41,514,760 38,979,686

Capital adequacy ratios

CET I capital ratio 11.617% 12.271%

Tier I capital ratio 11.617% 12.271%

Total capital ratio 12.835% 13.503%

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110

8.0 ASSET QUALITY

The Issuer predominantly provides personal financing and it constitutes the highest composition for the overall financing.

8.1 Non Performing Financing (NPF)

As at Dec’18, the Gross and Net NPF ratio for the financing portfolios has improved from 10.2% to 2.4% and from 6.3% to 1.1% respectively. The performance deteriorated slightly in Sept’19 where the Gross NPF ratio increased by 0.6% to 3.0% and Net NPF ratio by 0.1% to 1.2%. The Bank expects the NPF rate to be manageable.

8.2 Financing and Advances

Unaudited Audited 30 September 2019 31 December 2018

RM'000 RM'000 By type

At amortised cost Term financing - Personal financing 20,324,771 20,562,117 - Other term financing 6,139,989 5,456,952 - Property financing 4,977,247 4,340,081 - Industrial hire purchase 805,994 781,118 - Bridging financing 702,986 716,015 - Auto Financing 174,628 213,898 Revolving Credit 874,186 743,218 Trade finance 533,650 138,473 Trusts receipts - 51,525 Cashline 1,849 - Staff financing 43,699 41,277

Gross financing and advances 34,578,999 33,044,674 Less: Expected credit losses ("ECL") - Stage 1 (445,023) (346,537) - Stage 2 (463,699) (455,639) - Stage 3 (633,425) (435,881)

Net financing and advances 33,036,852 31,806,617

Financing Portfolio

AFB: Pre-merger Dec 2017

MBSB Bank: Post-merger

Dec 2018

MBSB Bank: September 2019

Gross NPF (%)

Net NPF (%)

Gross NPF (%)

Net NPF (%)

Gross NPF (%)

Net NPF (%)

Overall Bank 10.2%

6.3%

2.4%

1.1%

3.0% 1.2%

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8.3 Movement in Gross Financing and Advances

30 September 2019 Unaudited

Stage 1 Stage 2 Stage 3 Total

RM'000 RM'000 RM'000 RM'000 Gross carrying amount as at 1 January 2019 28,314,877 3,937,504 792,293 33,044,674 Transfer to stage 1 598,110 (523,064) (75,046) - Transfer to stage 2 (1,344,077) 1,523,523 (179,446) - Transfer to stage 3 (143,986) (377,195) 521,181 - New financing / disbursement during the year 4,298,460 449,439 30,777 4,778,676 Repayment during the year (2,781,647) (586,402) (53,015) (3,421,064) Other changes to the carrying amount 125,874 52,374 (1,535) 176,713

Gross carrying amount as at 30 September 2019 29,067,611 4,476,179 1,035,209 34,578,999

31 December 2018 Audited

Stage 1 Stage 2 Stage 3 Total

RM'000 RM'000 RM'000 RM'000 Gross carrying amount as at 1 January 2018 729,499 247,871 111,424 1,088,794 Vested from holding company on 2 April 2018 27,853,305 3,060,833 735,137 31,649,275 Transfer to stage 1 686,430 (671,870) (14,560) - Transfer to stage 2 (1,411,984) 1,491,251 (79,267) - Transfer to stage 3 (204,425) (229,280) 433,705 - New financing / disbursement during the year 3,686,809 534,453 32,166 4,253,428 Repayment during the year (3,134,981) (427,040) (117,630) (3,679,651) Other changes to the carrying amount 109,548 (69,114) 141,075 181,509 Write-offs - - (566,310) (566,310) Transfer from asset held-for-sale 676 400 116,553 117,629

Gross carrying amount as at 31 December 2018 28,314,877 3,937,504 792,293 33,044,674

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112

8.4 Movement in ECL for Financing and Advances

30 September 2019 Unaudited

Stage 1 Stage 2 Stage 3 Total

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

ECL as at 1 January 2019 346,537 455,639 435,881 1,238,057

Charges to profit or loss, of which: 98,486 8,060 197,544 304,090

Changes in the loss allowance:

- Transfer to stage 1 66,337 (34,670) (31,667) -

- Transfer to stage 2 (21,251) 116,985 (95,734) -

- Transfer to stage 3 (1,496) (97,975) 99,471 -

New financing / disbursement during the year 94,248 26,229 21,304 141,781

Repayment during the year (83,263) (180,697) (48,021) (311,981)

Change in credit risk parameters 43,911 178,188 252,191 474,290

ECL as at 30 September 2019 445,023 463,699 633,425 1,542,147

31 December 2018 Audited

Stage 1 Stage 2 Stage 3 Total

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

ECL as at 1 January 2018 16,691 6,665 45,716 69,072

Vested from holding company 492,316 444,705 538,420 1,475,441

- ECL as at 2 April 2018 454,139 432,125 538,420 1,424,684

- Subsequent transfer of ECL* 38,177 12,580 - 50,757

Charged to profit or loss, of which: (163,136) 3,584 310,952 151,400

Changes in the loss allowance:

- Transfer to stage 1 12,696 (12,468) (228) -

- Transfer to stage 2 (164,406) 176,183 (11,777) -

- Transfer to stage 3 (81,168) (137,706) 218,874 -

New financing / disbursement during the year 72,027 43,512 26,587 142,126

Repayment during the year (180,772) (179,663) (98,714) (459,149)

Change in credit risk parameters 178,487 113,726 176,210 468,423

Write-offs - - (566,315) (566,315)

Transfer from asset held-for-sale 666 685 107,108 108,459

ECL as at 31 December 2018 346,537 455,639 435,881 1,238,057

* The holding company has had a revision of ECL on the financing and advances vested to the Bank post the vesting of assets and liabilities. The adjustment of the ECL amounting to RM50,757,000 was borne by the holding company and subsequently recognised by the Bank.

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113

8.5 Movement in Impaired Financing and Advances

Unaudited Audited 30 September 2019 31 December 2018

RM'000 RM'000 Balance as at 1 January 792,293 111,424 Impaired financing vested from holding company - 735,137 Classified as impaired during the period 551,958 465,871 Reclassified as non-impaired (254,492) (93,827) Amount recovered (53,015) (117,630) Amount written off - (566,310) Transfer from assets held-for-sale - 116,553 Other changes to the carrying amount (1,535) 141,075

Balance as at end of financial period 1,035,209 792,293 Gross impaired financing and advances as a % of gross financing and advances 2.99% 2.40%

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114

9.0 RISK MANAGEMENT

9.1 Risk Governance Structure

The Board is ultimately responsible for the Bank’s risk management activities and sets the strategic direction, risk appetite and relevant frameworks. The Board is assisted by various Board committees and control functions in ensuring that the risk management framework is effectively maintained. The Bank has established guiding principles, which form the basis and foundation for clear accountability and responsibility for effective risk management governance as follows: The Board have respectively put in place the Board Risk Management and Compliance Committee (“BRMCC”), as the driver for identifying significant risks and ensuring proper oversight of the management of risks which relate to the Bank’s processes and activities. The Board are ultimately responsible for risk oversight within the Bank through the BRMCC. The BRMCC undertakes the overall responsibility for risk oversight within the Bank which includes reviewing the risk management policies, risk exposures and limits as well as ensuring that all risks are well managed within the Bank’s risk appetite, by providing adequate infrastructure and resources to support the risk management activities. Primary objectives of the BRMCC is to assist the Board in fulfilling their fiduciary responsibilities particularly in the management of controls as well as to provide a focal point for communication between risk managers, the Board and Senior Management on matters in connection with reporting risks and controls and providing a forum for independent discussion. The BRMCC shall also undertake additional duties as may be deemed appropriate and necessary to assist the Board. The BRMCC is responsible for periodically reviewing risk management policies, risk exposures and limits whilst ensuring infrastructure and resources are in place. Management-led committees are set-up to assist the BRMCC to manage credit risk, operational risk, market risk, liquidity risk, Shariah risk, other material risks and compliance. The following committees were established in managing credit, operational, market, liquidity and Shariah risks:-

Board Committees Board Risk Management & Compliance Committee (“BRMCC”) With regards to Risk Management, the BRMCC is responsible for the following: i. Review operational policies and processes of MBSB Bank and to formulate new ones

where appropriate to improve efficiency, cost effectiveness and control over the resources.

ii. Review, monitor, mitigate and report the significant risks as identified by MBSB Group

Risk Management Division and their impact on the operations. iii. Review and propose the setting of the risk appetite/tolerance of MBSB Bank and to

ensure risk exposures are within the parameters set by the Board by:

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a. Reviewing and recommending changes to the Risk Appetite annually based on the macroeconomic environment, regulatory landscape, MBSB Bank’s liquidity and capital profile, etc.;

b. Providing oversight on the compliance of the approved Risk Appetite which is

reported annually; c. Being apprised of action plans in cases where there is non-compliance with the Risk

Appetite in accordance with approved policies and procedures; and d. Recommending the annual Risk Appetite Statement for Board approval.

iv. Review the allocation of risk-adjusted capital and broad-based limits across MBSB

Bank covering market, credit and operational risk. v. Ensure oversight of the Internal Capital Adequacy Assessment Process (“ICAAP”) by:

a. Ensuring adequacy of the capital management framework and policies in line with capital strategy and regulatory requirements;

b. Ensuring risk and capital management frameworks and policies are operating

effectively and complied with; c. Providing oversight on the risk and capital positions of MBSB Bank which are

reported on a quarterly basis; d. Assisting the Board to oversee the managing of ICAAP of MBSB Bank by:

• Ensuring that all relevant risks have been captured and there are sufficient

capital resources in place; • Ensuring that the impact of any material event has been incorporated and,

where appropriate, being apprised of the suitability of the risk assessment; and • Ensuring that the overall stress test programme is carried out.

vi. Ensure oversight of risk management disclosures by approving all disclosures,

disclosure policies and internal controls over the disclosure process in line with regulatory requirements.

vii. Ensure that there are clear and independent reporting lines and responsibilities for the

overall business activities and risk management functions. viii. Inculcate risk management culture within MBSB Bank so that risk management

processes and controls are applied and embedded in the day-to-day business and operational activities.

ix. Review and recommend risk policies, methodologies and strategies for measuring and

managing risks arising from the Bank’s business and operational activities, for Board’s approval.

x. Review new products and services to be submitted for Board’s approval and

highlighting the risk aspects to the Board.

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xi. Ensure infrastructure, resources and systems and other capabilities are in place for risk management and are adequate to maintain a satisfactory level of risk management and discipline.

xii. Review and assess the adequacy of risk management policies and framework

(including processes, systems and internal controls), in identifying, measuring, monitoring and controlling risk and the extent to which these are operating effectively.

xiii. Review management’s periodic reports on risk exposure, risk portfolio composition and

risk management activities. xiv. Review contingency plans for dealing with various extreme internal/external events and

disasters. xv. Support the Board in meeting the expectations on risk management as set out in

BNM’s policy document on Risk Governance. xvi. In assisting the implementation of a sound remuneration system, examine whether

incentives provided by the remuneration system take into consideration risks, capital, liquidity and the likelihood and timing of earnings, without prejudice to the tasks of the Board Nominating and Remuneration Committee.

xvii. Review and deliberate on Composite Risk Rating (CRR) issues raised by BNM prior to

reporting to Board. xviii. Review and deliberate on any Supervisory Assessment report by BNM as delegated by

Board, prior to onward reporting to Board. xix. Review and sanction any reply/responses/updating of reply or responses to BNM in

respect of CRR issues outstanding raised by BNM. xx. To provide oversight on the following, in relation to the independent credit review

function:

a. Review the adequacy of the scope, procedures, frequency, functions, resources and competency of the Independent Credit Review Department and that it has the necessary authority to carry out its duties. The credit review assessment will be as per the scope stated in Credit Risk Guideline issued by BNM.

b. Reviewing key independent credit review reports and ensuring the senior

management is taking necessary corrective actions in a timely manner to address control weaknesses, non-compliance with laws, regulatory requirements, policies and other problems identified by the independent credit review and other control functions.

c. Ensure the independence of the independent credit review function. d. Ensure the independent credit review function is well placed to undertake review or

investigation on behalf of the BRMCC, thus independent credit reviewers should have an appropriate standing within the institution.

e. The outcomes and recommendations arising from the review will be escalated to the

Board Audit Committee and the BRMCC for deliberation. f. The independent credit review will be subject to internal audit assessments.

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xxi. Receive ALCO and IAR minutes for notation. xxii. To undertake any other activities as authorised by the Board. With regards to Compliance, the BRMCC is responsible for the following:

i. Support the Board in overseeing the management of compliance risk within MBSB

Bank.

ii. Review and recommend compliance policies for Board’s approval, including AMLCFT

related policies, to facilitate the right compliance culture in the day-to-day business and operational activities.

iii. Review existing resources for compliance function to ensure sufficient staff with

competencies and experience in discharging their duties.

iv. Review management reporting to the Board on compliance risk issues and any material

incidences of non-compliance (for example, failures that may attract a significant risk of legal or regulatory sanction) to ensure such issues are resolve efficiently and expeditiously.

v. Evaluate the effectiveness of MBSB Bank’s compliance function and overall

management of compliance risk.

vi. Review and recommend the Compliance Annual Plan and AML/CFT annual risk

assessment to the Board for approval.

vii. Ensure that the Chief Compliance Officer (CCO) is provided with direct and unimpeded

access to the Board.

viii. Ensure infrastructure, resources and systems are in place for compliance function and

are adequate to maintain a satisfactory level of compliance and discipline.

ix. Ensure compliance function and the CCO are provided with appropriate standing,

authority and independence.

x. Ensure that the compliance function is able to secure assistance from other functions

with specific expertise, for example, Legal Division or Group Risk Management Division. In this respect, Compliance Division must have clear authority to engage with any officers and obtain access to relevant information for purposes of discharging its responsibilities.

xi. Review and recommend to Board for approval on all engagement with external

expertise to undertake compliance assessment in specific areas.

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Board Audit Committee (“BAC”) The BAC is responsible for the following: External Audit i. To review with external auditors, their audit plan, scope and nature of the audit.

ii. To review with external auditors, their audit report and audit findings and Management’s response including the status of previous audit recommendations.

iii. To recommend the nomination of a person or persons as external auditors.

iv. To consider the appointment of external auditors, their audit fee and any question of their resignation or dismissal and to make recommendations to the Board.

v. Assess the qualification, expertise, resources, effectiveness, suitability and independence of the external auditors.

vi. Monitor the effectiveness of the external auditors' performance and their independence and objectivity.

vii. Review the assistance given by MBSB Bank's officers to the external auditors and any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information.

viii. To approve the provision of non-audit services by the external auditors, evaluating whether such non-audit services would impair their independence.

ix. To ensure that there are proper checks and balances in place so that the provision of non-audit services does not interfere with the exercise of independent judgment of the auditors.

x. To meet with the external auditors at least once a year without the presence of the

management to discuss any key concerns and obtain feedbacks.

xi. To ensure that the financial statements are prepared in a timely and accurate manner with frequent reviews of the adequacy of provisions for financing impairments and values ascribed to financial instruments.

xii. Maintaining regular, timely, open and honest communication with the external auditor, and requiring the external auditor to report to the BAC on significant matters.

xiii. Ensuring that senior management is taking necessary corrective actions in a timely manner to address external audit findings and recommendations.

Financial Reporting

i. To review MBSB Bank’s quarterly financial statements and reports, MBSB Bank’s audited annual financial statements before submission to the Board for approval, focusing on: -

a. Changes in or implementation of major accounting policy changes;

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b. Significant matters highlighted including financial reporting issues, significant judgments made by management, significant and unusual events or transactions, and how these matters are addressed;

c. Compliance with accounting standards and other legal requirements; and

d. Review and provide advice whether the financial statements taken as a whole provide a true and fair view of the Bank’s financial position and performance.

Related Party Transaction i. Review any related party transactions and conflict of interest situation that may arise

within MBSB Bank including any transaction, procedures or course of conduct that raises questions on Management’s integrity and update the Board on all related party transactions.

ii. Monitor compliance with the Board’s conflicts of interest policy.

Internal Audit i. To establish an internal audit function and identify a Chief Internal Auditor who reports

directly to the Board Audit Committee. The Chief Internal Auditor will be responsible for the regular review and/or appraisal of the effectiveness of the risk management, internal control and governance processes within MBSB Group.

ii. To do the following, in relation to the internal audit functions:

a. Review the adequacy of the scope, procedures, frequency, functions, resources and competency of the Internal Audit Division and that it has the necessary authority to carry out its duties;

b. Reviewing key audit reports and ensuring the senior management is taking

necessary corrective actions in a timely manner to address control weaknesses, non-compliance with laws regulatory requirements, policies and other problems identified by the internal audit and other control functions;

c. To perform the appointment, transfer or removal of the Chief Internal Auditor. The

appraisal of the Chief Internal Auditor would be evaluated and moderated by the Chairman of the BAC;

d. To evaluate and review or assess the performance and decide on remuneration

package of internal auditors; e. Approve any appointment or termination of senior staff members of the internal audit

function; f. Take cognisance of resignations of senior internal audit staff members and provide

the resigning staff member an opportunity to submit his reasons for resigning; g. Ensure that the internal audit function is adequately resourced and staffed with

competent and well-trained officers. h. Ensure the independence of the internal audit function;

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i. On a regular basis, meet separately with the Chief Internal Auditor to discuss any matters that the committee or internal audit believes should be discussed privately;

j. To ensure the internal audit function is well placed to undertake review or

investigation on behalf of the BAC, thus internal auditors should have an appropriate standing within the institution and be placed under the direct authority and supervision of the BAC;

k. Review the effectiveness of the infrastructure for ensuring Shariah compliance; l. Exercise direct authority and supervision over the functions of the Internal Audit

Division and review its effectiveness and compliance with “BNM Guidelines on Internal Audit Function” requirement;

m. Noting significant disagreements between the Chief Internal Auditor and the rest of

the senior management team, irrespective of whether these have been resolved, in order to identify any impact the disagreements may have on the audit process or findings; and

n. Establishing a mechanism to assess the performance and effectiveness of the

internal audit function. Independent Credit Review i. To establish an independent credit review function and identify a Head of Independent

Credit Review who reports directly to the BAC. The Head of Independent Credit Review will be responsible for the regular review and/or appraisal of the effectiveness of the overall credit risk management arrangements within MBSB Group including the credit approval processes and scope of information obtained for credit decision.

ii. To do the following, in relation to the independent credit review functions:

a. Review the adequacy of the scope, procedures, frequency, functions, resources and competency of the Independent Credit Review Department and that it has the necessary authority to carry out its duties. The credit review assessment will be as per the scope stated in Credit Risk Guideline issued by BNM.

b. Reviewing key independent credit review reports and ensuring the senior

management is taking necessary corrective actions in a timely manner to address control weaknesses, non-compliance with laws, regulatory requirements, policies and other problems identified by the independent credit review and other control functions.

c. To perform the appointment, transfer or removal of the Head of Independent Credit

Review. The appraisal of the Head of Independent Credit Review would be evaluated and moderated by the Chairman of the BAC.

d. Ensure the independence of the independent credit review function. e. Ensure the independent credit review function is well placed to undertake review or

investigation on behalf of the BAC, thus independent credit reviewers should have an appropriate standing within the institution and be placed under the direct authority and supervision of the BAC.

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f. The outcomes and recommendations arising from the review will be escalated to the BAC, Management Investment and Credit Credit Committee and notified to the BRMCC and relevant Senior Management.

g. The independent credit review will be subject to internal audit assessments.

Others i. To undertake any other activities as authorised by the Board. ii. To review operational policies and processes of MBSB Bank and to formulate new

ones where appropriate with a view to improve efficiency, cost effectiveness and control over the resources of MBSB Bank.

iii. Review the accuracy and adequacy of the corporate governance disclosures, interim

financial reports and preliminary announcements in relation to the preparation of financial statements.

iv. Review third-party opinions on the design and effectiveness of the financial institution’s

internal control framework. Training i. All members of the Board Audit Committee should undertake continuous professional

development to keep themselves abreast of relevant developments in accounting and standards, practices and rules.

Board Nominating & Remuneration Committee (“BNRC”) The BNRC is responsible for the following: i. To nominate, assess and/or review and upon its satisfaction recommends to the Board

the following:

a. Potential candidates for appointment to the Board; b. Board and Board Committee’ composition; c. Potential candidate for appointment as PCEO of the Bank; d. Re-appointment of Director; e. Removal of a Director; f. Removal of the PCEO; g. Potential candidate for appointment as Shariah Advisory Committee members; h. Removal of Shariah Advisory Committee members; and i. Appointment/Promotion/Removal of C Suites as defined in the Fit and Proper

Requirements Policies and Procedures.

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ii. To identify the most suitable candidates by using variety of approaches and sources including recommendation from the existing Board members, Management, major shareholders as well as other external sources such as independent search firms. In making its recommendations, the BNRC should consider the following aspects/criteria:

a. professional experience; b. skills; c. knowledge; d. education and background; e. age; f. ethnicity; g. culture; h. gender; and i. in the case of candidates for the position of Independent Non-Executive Directors,

the BNRC should also evaluate the candidates’ ability to discharge such responsibilities/functions as expected from the Independent Non-Executive Directors.

iii. To assess and upon its satisfaction, recommends to the Board the remuneration

packages for directors of the Bank supported by: a. Assessment for directors’ responsibilities and commitment tailored towards the

Bank’s culture, objectives and strategy; and b. Taking into cognisance, a balance when determining the remuneration package,

which should be sufficient to attract and retain directors and employees of calibre, yet not excessive.

iv. Upon being sanctioned by the Board, the remuneration packages, including fees,

allowances, bonuses (if any), and benefits-in-kind for all directors are subject to shareholders’ approval.

v. To consider and to recommend to the Board the appointment, resignation, retirement

and other related issues involving the PCEO of the Bank; vi. To consider and recommend to the Board the appointment, promotion, resignation,

retirement, removal and other related issues involving the C Suites position and Company Secretary as defined in the Fit and Proper Requirements Policies and Procedures.

vii. To delegate to the PCEO the responsibility for fit and proper assessment and decision

on appointment, promotion, resignation, retirement, removal and other related issues involving the Head of Business functions as defined in the Fit and Proper Requirements Policies and Procedures.

viii. To consider and to recommend to the Board the promotion, remuneration package,

increment, bonuses and other related matters involving the PCEO;

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ix. To consider and recommend to the Board the promotion, remuneration package, increment, bonuses and other related matters involving the C Suites position as defined in the Fit and Proper Requirements Policies and Procedures.

x. To delegate to the PCEO the decision on the promotion, remuneration package,

increment, bonuses and other related matters involving the Head of Business functions as defined in the Fit and Proper Requirements Policies and Procedures.

xi. To recommend to the Board, candidates for the appointment as Shariah Advisory

Committee members. In making the recommendation, the BNRC should consider the following criteria:

a. The candidate considered should be a Muslim; b. The skills set of the candidates for the position; and c. Fulfil the fit and proper criteria as per the applicable guidelines by the relevant

authorities. xii. To conduct the annual review on the Performance of the Shariah Advisory Committee

members. xiii. To consider and recommend to the Board, the remuneration package and other related

matters involving the Shariah Advisory Committee. Other Functions of BNRC i. To establish clear, formal and transparent procedures for the re-election and

appointment of the directors. ii. To conduct annual review and establish minimum requirements for assembling the

Board, namely required mix of skills, experience, qualification, diversity and other core competencies required of each Director. The BNRC is also responsible for establishing the minimum requirements for the PCEO. The requirements and criteria should be approved by the Board.

iii. To provide oversight for the overall composition of the Board and the Board

Committees in terms of the appropriate size and skills, gender diversity and the balance between executive directors, non-executive directors and independent directors through annual reviews.

iv. To ensure compliance with Section 68 (1) of the IFSA when assessing directors for

reappointment, before an application for approval is submitted to BNM. The decision as to who shall be nominated should be the responsibility of the Board.

v. To assess the independence of directors on an annual basis and recommend the same

to the Board. vi. To assess and evaluate the suitability of any Independent Non-Executive Directors to

remain on the Board and Board Committees, when they have reached the maximum tenure of 9 (nine) years.

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vii. To implement a process with the Board, for assessing the effectiveness of the Board as a whole, the committees of the Board, and for assessing the contribution of each individual Director, including Independent Non-Executive Directors, as well as the PCEO. All assessment and evaluations carried out in the discharge of all its functions should be conducted annually and properly documented.

viii. To assess and recommend accordingly the training needs of the Board members and

any proposed changes to the training budget. ix. To ensure the Bank has a developed succession policy and that such policy is kept

under review. x. To assess, on an annual basis, to ensure that the directors and the PCEO remain in

compliance with the “fit and proper‟ criteria. xi. On a yearly basis, review the remuneration framework to ensure that the remuneration

packages support the Bank’s culture, objectives and strategy and should reflect the responsibility and commitment of the directors and employees so as to remain competitive in the industry to retain and also attract talents and high calibre individuals to the Bank.

Board Investment & Credit Committee (“BICC”) The BICC is responsible for the following:

Credit (Financing and Investment Applications) i To consider and if deem fit to veto within the Committee’s discretionary authority as

defined under item F of the Terms of Reference all Corporate and Consumer financing and investment applications forwarded by the customers of the Bank.

ii. To consider and if deem fit, to veto additional financing/investment and/or request for

changes to existing financing/ investment accounts with a remaining exposure within the Committee’s discretionary authority.

Credit (Non-Performing Financing/ Investment Accounts) i. To consider and if deem fit to grant 100% waivers on penalty and normal profit on all

the Bank's non-performing Corporate and Consumer financing/ investment accounts. ii. To consider and if deem fit to grant a waiver of up to 10% OR up to RM5.0 million

(whichever is the lower) on any part of the principal amount of a non-performing Corporate and Consumer financing/ investment account which has already been provided for in the books of the Bank.

iii. To consider and if deem fit to veto the rescheduling / restructuring or modification of

terms and conditions of Corporate Accounts within the Committee’s discretionary authority.

iv. To consider and if deem fit to veto additional financing to Corporate customers within

the Committee’s discretionary authority with rescheduled / restructured facilities.

v. To consider and if deem fit to veto any moratorium granted to Corporate customers within the Committee’s discretionary authority.

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vi. To exercise its discretion to impair an account that exhibits weaknesses, as and when necessary.

Others

i. To review, decide and do all such things that has been referred/delegated by the Board from time to time.

ii. To appoint external consultants / external legal counsels as and when necessary to assist the Committee in carrying out its responsibilities pursuant to its terms of reference.

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Shariah Committee The Shariah Committee is formed as legislated under the IFSA and as per the Shariah Governance Policy Document for Islamic Financial Institutions issued by BNM. The Shariah Committee has the responsibility to provide objective and sound advice to the IFI to ensure that its aims and operations, business, affairs and activities are in compliance with Shariah. Shariah Risk Management by Risk Management Division i. Systematically identify, measure, monitor and control of Shariah non-compliance risks

to mitigate any possible non-compliance events. ii. The Shariah Risk Management functions involve:

a. Facilitating the process of identifying, measuring, controlling and monitoring Shariah non-compliance risks inherent in the Bank’s operations and activities such as:

• Identify and understand inherent Shariah non-compliance risks and considering

existing controls in place and their effectiveness in mitigating risks. • Measure the potential impact of risks to the Bank based on historical and actual

de-recognise of income from Shariah non-compliance activities. • Monitor Shariah non-compliance risks – send report on Shariah non-compliance

risk indicators to the Board, Shariah Committee and management periodically. • Control to avoid recurrences – keep track of unrecognised income arising from

Shariah non-compliance activities and assess probability of occurrences in the future. Based on historical reviews and potential areas of Shariah non-compliance, the Bank may assess potential profits that cannot be recognised as eligible.

b. Formulate and recommend Shariah non-compliance risk management policies,

procedures and guidelines. c. Develop and implement processes for Shariah non-compliance risk awareness in

the Bank.

Shariah Compliance Review by Compliance Division i. Regular assessment on Shariah compliance activities and operations of the Bank by

qualified Shariah officers to ensure that activities and operations of the Bank do not contravene with Shariah.

ii. Examine and evaluate the Bank’s level of compliance to Shariah and remedial

rectification measures to resolve non-compliances and control mechanism to avoid recurrences.

iii. The scope will cover the Bank’s overall business operations, including the end-to-end

product development process, which start from product structuring to product offering.

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Shariah Research by Shariah Secretariat & Advisory Department i. Internal unit comprising of qualified Shariah officers. ii. Conduct pre-product approval process, research, vetting of issues for submission and

undertake administrative and secretarial matters relating to the Shariah Committee. iii. Shariah research and secretariat functions shall ensure proper deliberation and

dissemination of Shariah related matters. iv. Perform in-depth research and studies on Shariah issues, day to day Shariah advice

and consultancy to relevant parties - including product development. v. In conducting such research, advice and inputs from experts on technical matters (e.g.

accountants, actuaries) may be sought to ensure comprehensiveness and completeness in ensuring sound understanding of the relevant concepts and approaches.

vi. In terms of advisory and consultancy roles, the function shall assist and provide advice

to the relevant parties based on the decision by the Shariah Committee.

Shariah Secretariat by Shariah Secretariat & Advisory Department i. The establishment of Shariah Secretariat is to serve the Shariah Committee. ii. Shall include coordinating of meetings, compiling proposal papers, disseminating

Shariah decisions to relevant stakeholders and engaging with relevant parties who wish to seek further deliberations of issues from the Shariah Committee.

Shariah Audit by Internal Audit Division i. Periodical assessment conducted from time to time (at least on annual basis) by

providing an independent assessment and objective assurance designed to add value and improve the degree of compliance in relation to the Bank’s business operations, with the main objective of ensuring a sound and effective internal control system for Shariah compliance.

ii. Performed by internal auditors, who have acquired adequate Shariah-related

knowledge and training. It might engage with other business unit experts as long as the objectivity of the audit is not compromised.

iii. The size and capabilities of Shariah Audit function need to be enhanced in order to

serve for group structure. iv. Shariah audit may be conducted as part of the Bank’s thematic audit on specialised

areas such as management audit and Anti-Money Laundering (AML) audit, according to the risk level and materiality of the impact of Shariah non-compliance in these areas.

v. Shariah audit on critical areas shall be conducted at least once a year depending on

the risk profile of the Bank. vi. The Board Audit Committee, upon consultation with the Shariah Committee shall

determine the deliverables of the Shariah audit function and that shall be consistent with accepted auditing standards.

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vii. The scope of Shariah Audit shall cover all aspects of the Bank’s business operations and activities, including:

a. audit of financial statements; b. compliance audit on organisational structure, people, process and information

technology application systems; and c. review of adequacy of the Shariah governance process.

viii. The process of Shariah audit should cover, but is not limited to, the following:

a. Understand the business of the Bank to allow for better scoping of an audit exercise; b. Develop a comprehensive internal audit program or plan including objectives,

scope, personnel assignment, sampling, control and duration as well as establish proper audit processes, policies and procedures of the Bank’s operations;

c. Obtain and make references to relevant sources (i.e. Shariah Committee’s

published rulings in the financial report, the Shariah Committee’s decisions, fatwas, guidelines, the Shariah audit results and the internal Shariah checklist);

d. Conducting Shariah audit on periodic basis; e. Communicate to the Board Audit Committee and the Shariah Committee for any

result on assessment or findings; and f. Provide recommendations on rectification measures taken as well as follow–up on

the implementation by the Bank.

ix. BNM may appoint or employ an external party or person to conduct a Shariah audit on the operations of the Bank, if BNM considers it is desirable or in the interest of the Bank to do so, in which case the remuneration and expenses relating to the appointment shall be borne by the Bank.

Shariah Deliberation Team (SDT) i. Involves the roles of Shariah functions within the Bank (i.e. Shariah Risk Management,

Shariah Compliance Review, Shariah Research, Shariah Secretariat and Shariah Audit).

ii. The role by SDT is mainly to perform the Shariah screening process to determine its

validity as highlighted in the related Shariah non-compliance report. iii. SDT also needs to ensure the completeness of the Shariah non-compliance report. iv. SSA shall be the party that is responsible to coordinate the SDT meetings.

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Management Committees

The following Management Committees were established in managing the credit, operational, market, liquidity and Shariah risks.

• Management Committee (MANCO), which constitutes members of the Senior Management, acts as a platform for addressing all inherent risks to the Bank as well as the development of risk mitigation measures and strategies. In implementing the Risk Appetite Framework across the Bank, the Bank’s MANCO ensures timely escalation of all events which may materially impact the Bank’s financial condition or reputation for appropriate action. The committee is also responsible for identifying, discussing and resolving any operational, financial and key management issues.

• Management Investment and Credit Committee (MICC) deliberates and approves corporate financing and retail financing/investment accounts, within the authority limit delegated by the Bank’s Board. Where the prospective corporate financing and retail financing/investment accounts are not within MICC’s authority limit, it would recommend the financing to the relevant Bank Board Committees for approval.

• Asset Liability Committee (ALCO) serves as the primary oversight and decision making body that provides strategic direction for the management of market risk and liquidity risk. The committee also monitors capital adequacy through capital management. ➢ Capital Management Committee (CMC) is a sub-committee of ALCO and is

required to report to ALCO on the capital management of the Bank. In carrying out its responsibility, CMC is required to monitor capital adequacy through capital management, review policies, procedures and internal control measures for the management of risk in relation to capital adequacy of the Bank and ensure that these risks are measured and monitored.

• Initial Alert Report Committee (IAR), in attending to corporate and retail financing, the committee reviews and evaluates the position of financing accounts that are in arrears or require closer monitoring and determines the course of action to be taken for these accounts. On a portfolio level, the committee assesses the quality of the retail and corporate financing portfolios and evaluates any significant trends detected.

• IT Steering Committee (ITSC), as the senior governance and policy making body for information technology (IT) at the Bank, the committee ensures that the Bank’s planning for and investment in IT supports the organisation’s strategic goals.

• Project Steering Committee (PSC), is an ad-hoc committee which will be formed and its terms of reference will be established as and when a specific project is undertaken by the Bank’s Management.

These committees are responsible for overseeing the development and assessing the effectiveness of policies approved by the Bank’s Board. Senior Management oversees the execution and implementation of the policies. The areas of responsibilities of the abovesaid management committee are as follows:

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Asset Liability Committee (“ALCO”) The ALCO is responsible for the following: i. Maximise the profit margin of the Bank through effective management of profit rate

integrity and assess the impact of other risks such as liquidity and capital risk.

ii. Manage the Bank’s liquidity risk by focusing on the maturity gap, liquidity position,

deposit composition, depositor’s concentration, alternative funding sources, market

movements and funding limits.

iii. Manage the profit rate exposure and profit margin by reviewing the financing rate, cost

of funds, profit margin and the re-pricing gap.

iv. Manage market risk by reviewing and monitoring the Bank’s financing portfolio.

v. Monitor the funding requirements and focus on deposit mobilisation.

vi. Review the overall securitisation activities within the Bank.

vii. Monitor capital adequacy through capital management as follows :

a. Review the assessment on the nature and materiality of risk exposures.

b. Review the risk and capital adequacy monitoring and reporting process.

c. Review and approve methodologies for measuring internal capital required and key

assumptions adopted.

d. Establish policies and procedures relating to the ICAAP and establish a method for

compliance monitoring.

e. Ensure that a comprehensive assessment of capital adequacy is conducted at

least annually (or more frequently as required).

viii. Review policies, procedures and internal control measures for the management of

market risk and liquidity risk of the Bank and ensure that these risks are measured and

monitored.

ix. Serve as the primary oversight and decision making body that provides strategic

direction for management of market risk and liquidity risk.

x. Review policies and strategies on the on and off- balance sheet structure.

xi. Review and ensure effectiveness of the contingency funding plan.

xii. Review stress test results, including stress test scenarios, parameters and key

assumptions.

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xiii. Approve, review and monitor the execution of Trading and Banking Book activities for

fixed income portfolio.

xiv. Execute the business transfer pricing processes and ensure that they are consistently

applied within the Bank policies.

xv. Ensure optimisation of the economic performance of the Bank balance sheet through

managing the allocation of capital and liquidity.

xvi. Monitor the rolling performance of the current position vs. budget and also measure the

impact (current and projected).

xvii. Reviewing economics and market scenarios to assist in the formulation of strategies

and directions of the Bank especially with regard to the management of its assets and

liabilities.

xviii. Ensure compliance with internal policies and applicable regulatory guidelines for the

market risks, liquidity risks and capital management.

xix. Review policies, procedures and internal control measures for carrying out the treasury

portfolio management.

The ALCO has established a sub-committee known as the Capital Management Committee (“CMC”). The CMC is required to report to ALCO on the capital management of the Bank. In carrying out its responsibility, CMC is to carry out the following and to report its recommendations to ALCO:-

i. Monitor the capital adequacy through the capital management as follows:

a. Review on a yearly basis the assessment on the nature and materiality of risk exposures;

b. Review the risk and capital adequacy monitoring and reporting process; c. Review the methodologies for measuring internal capital required and key

assumptions adopted; d. Review policies and procedures relating to the Capital Adequacy and ensure

adequate compliance monitoring is in place; and e. Ensure that a comprehensive assessment of capital adequacy is conducted at

least annually (or more often as required).

ii. Review policies, procedures and internal control measures for the management of risk in relation to capital adequacy of the Bank and ensure that these risks are measured and monitored.

iii. Review stress test results, including stress test scenarios, parameters and key

assumptions. iv. Ensure optimisation of the economic performance of the Bank’s assets and liabilities

(balance sheet) through managing the allocation of capital.

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v. Monitor the rolling performance of the Bank’s current financial position versus budget

and measure its impact (current and projected). vi. Ensure compliance with internal policies and applicable regulatory guidelines for capital

management. Management Committee (“MANCO”) The MANCO is responsible for the following: i. To discuss and approve on issues relating to the organisation structure. ii. To discuss and recommend to the Board the strategy, strategic priorities and business

plan as well as annual targets. iii. To review and recommend to BRMCC/BICC for further recommendation to the Board,

the risk appetite and formulate appropriate policies for its implementation. iv. To discuss and recommend to the Board the annual budget. Within the budget, the

Committee shall approve budgets for each business line and operating division and when appropriate to revise the allocation of the budget.

v. To approve the key performance indicators for each business and supporting unit. vi. To review, deliberate and recommend MBSB Bank’s policies and framework to Board

Committees and Board. vii. To discuss monthly reports from Chief Financial Officer regarding the financial

performance of MBSB Bank and the progress in achieving the annual targets. viii. To approve the execution of expenditure of the annual budget approved by the Board. ix. To approve capital/operational expenditure not budgeted for, within MANCO’s

approving limits as detailed out in the Approving Authority Policy. x. To discuss and recommend to Board on the establishment of branches, agencies,

special purpose entities or subsidiary companies, the transfer of shares, winding up, merger or liquidation of the special purpose entities and subsidiary companies.

xi. To review and recommend to the Board any direct corporate-level investment and

business venture decisions (not customer-related). xii. To review legal and regulatory matters that may have a material impact on related

Bank’s compliance policies, programmes and reports received from Regulators. xiii. To review MBSB Bank’s takaful/insurance arrangement. xiv. To review and monitor compliance with MBSB Bank’s Code of Conduct. xv. To review reports from regulatory agencies and management’s responses.

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xvi. To review and recommend the proposal of the engagement of third parties service-providers e.g. legal services, litigation services, consulting services, due-diligence work, accounting advice on new accounting standards, regulations or policies, regulatory advice on new prudential standards or requirements, valuation services, IT system services etc.

xvii. To monitor the implementation and enforcement of business strategies, directives,

projects, programmes, products and action plans as approved by Board. xviii. To review, recommend and approve any general management issues related to

operational policies and processes with a view to improve efficiency, cost, effectiveness control over the resources and compliance with laws and regulations.

xix. To review reports on findings together with management’s responses and follow-up

actions on financial and other risk exposures including steps taken to monitor, control and report such exposures, including, without limitation, review of credit, market, liquidity, operational, reputation, fiduciary, fraud and strategic risks and evaluate risk exposure and tolerance and recommend appropriate limits.

xx. To review the credit rating system used by MBSB Bank and to ensure the back-testing

and validation exercises are performed as required by the regulator. xxi. To ensure MBSB Bank’s controls and compliance are in line with approved policies,

framework, standard operating procedures and guidelines. xxii. To review any Shariah non-compliance issue prior to escalation to Shariah Committee. xxiii. To review, deliberate and approve the standard operating procedures and guidelines. xxiv. To review any proposal for submission to Board Committees and Board for

recommendation or approval on any other matter outside of the coverage of other Management-level committees.

xxv. To review all compliance matters affecting MBSB Bank prior to submission to Board

Committees. xxvi. To review all matters related to Business Continuity Management. xxvii. To discuss and recommend to the Board, programmes/proposals to raise funds. Management Investment and Credit Committee (“MICC”) The MICC is responsible for the following: i. The MICC in attending to Corporate Financing and Retail Financing/Investment

accounts, is to deliberate and approve where applicable or recommend to the relevant Board/Board Committee the following, subject always to authority limits under Clause 8 of the Terms of Reference:-

a. For a fresh financing application, to decide whether to proceed with the

preparation of the Board/Board Investment and Credit Committee (BICC) paper based on the Credit Assessment Report submitted by the Relationship Manager from the Business Division or Global Markets Division.

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b. For any appeal on variations to the terms and conditions, to approve or exceeding the Committee’s approving limit, recommend the submission of the paper for the Board/BICC’s decision/veto.

c. May recommend additional information and/or terms to be included in the above

papers. d. Approve Corporate Financing and Retail Financing/Investment accounts or

request/review within the authority limit delegated by the Board. e. Approve additional financing/investment and/or request for changes to existing

Financing/Investment accounts with original exposure/a remaining exposure within the Committee’s approving limit, except for conditions specifically imposed by a higher Approving Authority, which will require the approval of said Approving Authority.

f. Review, deliberate and recommend course of actions for the improvement of

quality of credit processing/underwritings, and enhancement in credit controls over the entire credit spectrum.

ii. The MICC in attending to Early Care, Watchlist, Impaired accounts and Rehabilitation cases (where necessary) is to deliberate and:

a. Approve accounts proposed for Early Care, Watchlist or Impairment within the

requirements of the Bank’s policies; b. Identify accounts that exhibit weaknesses to be classified as Early Care, Watchlist

or Impaired, at MICC’s discretion; c. Deliberate and approve accounts proposed for re-classification from Early Care,

Watchlist or Impaired, within the requirements of the Bank’s policies; d. Approve the rescheduling/restructuring or modification of terms and conditions of

Corporate Accounts (within MICC’s limit); e. Approve the rescheduling/restructuring of accounts that are being

rescheduled/restructured more than once in two (2) years (within MICC’s limit); f. Approve the granting of additional financing to customers with

rescheduled/restructured facilities (within MICC’s limit); g. Approve any moratorium granted to customers (within MICC’s limit); h. Approve the submission of the relevant papers prepared by the

Corporate/Consumer Rehabilitation and Recovery Division/Department, for Board’s/BICC’s decision/veto;

i. Deliberate on the course of action to be taken for Impaired accounts as and when

required; j. To review/decide on the negotiation terms of any of the Impaired accounts within

its terms of reference; k. To review and assess the extent of recovery for the Impaired accounts;

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l. Where necessary, to provide a strategic plan of action to the Board/Board Committee, which includes an indicative recovery period necessary, for each Impaired account;

m. May recommend/impose additional information and/or terms to be included in the

relevant papers; and n. To review, evaluate and recommend to the Board/BICC all debt write-off that has

not been already delegated downwards.

iii. The MICC in attending to Connected Party Transactions:

a. Where necessary and in line with the delegated approving authorities, shall deliberate, review and recommend for approval by the Board on financing proposals and/or any variations to the terms and conditions and restructuring or rescheduling involving Connected Parties.

b. Members of the Committee who are deemed a connected party shall abstain from

participating directly or indirectly in the deliberation and decision-making process involving a credit transaction or management of the credit exposures in which he/she has an interest.

iv. In discharging the above duties, the MICC shall exercise prudence in deciding on the

credit proposals in line with the policies, directives, level of authorities and related guiding documents as approved by the Board and/or any other relevant authorities from time to time.

Information Technology (“IT”) Steering Committee (“ITSC”) The ITSC is to deliberate and recommend where applicable, the following to the relevant approving authority:- i. Ensure that the IT strategic plan supports the overall organisational strategic business

plan and, where necessary, the group IT strategic plan. ii. Establish priorities and monitor status of IT projects and compliance towards service

level agreements. iii. Formulate and recommend to the Board Risk Management and Compliance Committee

for further recommendation to the Board the key IT policies and procedures, such as:

a. IT Security Policy; b. Hardware/Software Acquisition; and c. System Development Lifecycle and Program Change Operations.

iv. Formulate IT risk management framework with the recommendation from Risk Management Division.

v. Monitor the effectiveness in implementing key IT policies, such as the IT security policy. vi. Monitor the overall efficiency, performance and effectiveness of IT services, utilisation

and identify obsolescence.

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vii. Review the adequacy and allocation of resources in terms of time, personnel, training

and equipment. viii. Review and deliberate the post-implementation review for all IT projects. Initial Alert Report Committee (“IAR”) The IAR is responsible for the following: i. The IAR in attending to Corporate Financing and Retail Financing, is to:-

a. Receive reports/ updates from Business Units and other relevant departments/ divisions such as Project Monitoring & Management Division (PMMD), Retail Collection & Management Division, Corporate Recovery & Project Rehabilitation Division and Risk Management Division and identify accounts facing difficulties that may require closer monitoring.

b. Review and evaluate the position of financing accounts that are in arrears or

require closer monitoring. c. Assess the quality of the retail and corporate financing portfolios and evaluate

any significant trends detected. d. Review and assess the extent of recovery of accounts in arrears and the status

of collections of these accounts. e. Deliberate on the course of action to be taken on accounts in arrears.

f. Assess and strategise on plans to improve the collections process.

g. Monitor the progress of corporate projects as reported by PMMD.

ii. In deliberating on accounts and customers on the Early Care List, the IAR is to:

a. Discuss and express opinion on accounts and customers under the Early Care List.

b. Assess and determine the course of action to be taken in ensuring closer monitoring of these accounts.

iii. In deliberating on financing accounts and customers on the Watchlist, the IAR is to:

a. Discuss and express opinion on accounts and customers under the Watchlist.

b. Assess and determine the course of action to be taken in ensuring closer monitoring of these accounts.

iv. In deliberating on financing accounts and customers on accounts classified as Impaired, the Committee is to discuss and express opinion on accounts and customers classified as Impaired.

v. At the IAR’s discretion, the IAR may identify financing accounts that exhibit weaknesses and may need to be assessed to be classified as Early Care, Watchlist or Impaired.

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Project Steering Committee (“PSC”) PSC is an ad-hoc committee which will be formed and its terms of reference will be established as and when a specific project is undertaken by the Bank’s Management.

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9.2 Capital Management Internal Capital Adequacy Assessment Process (“ICAAP”)

In line with BNM’s guidelines on Risk-Weighted Capital Adequacy Framework - Internal Capital Adequacy Assessment Process (Pillar 2), the Issuer has put in place the ICAAP framework to assess the capital adequacy to ensure that the level of capital maintained by the Issuer is adequate at all times, taking into consideration the Issuer’s risk profile and business strategies.

The ICAAP framework ensures that all material risks are identified, measured and reported; and that adequate capital levels consistent with the risk profiles, including capital buffers, are maintained to support the current and projected demand for capital, under existing and stressed conditions. For non-measurable risks, relevant frameworks and control mechanisms are implemented to mitigate and manage the same.

The Issuer’s capital management approach is focused on maintaining an appropriate level of capital to meet its business needs and regulatory requirements as capital adequacy and risk management are closely aligned. The Issuer operates within an agreed risk appetite whilst optimising the use of shareholders’ funds to deliver sustainable returns.

Risk appetite is defined as the amount and types of risk that MBSB Group is able and willing to accept in pursuit of its strategic and business objectives. The development of the risk appetite is integrated into the annual strategic planning process and is adaptable to changing business and market conditions. As the risk appetite is dynamic, the risk appetite is set based on the business and financial targets, while incorporating macroeconomic and global outlook. The Bank Board considers the actual and targeted risk profile proposed by senior management and business units when setting the risk appetite. The risk appetite is also being reviewed annually or as and when required.

Capital Structure

The total capital and capital adequacy ratios of the Issuer are computed in accordance with CAFIB. The total risk weighted assets are computed based on Standardised Approach for Credit and Market Risk and Basic Indicator Approach for Operational Risk. The Bank’s CET1 Capital Ratio, Tier-1 Capital Ratio and Total Capital Ratio are above the minimum requirement and as follows:

Capital Adequacy Bank 30 September 2019 31 December 2018

CET1 Capital Ratio 11.617% 12.271% Tier-1 Capital Ratio 11.617% 12.271% Total Capital Ratio 12.835% 13.503%

Capital Adequacy

The Issuer have in place an internal limit for its Total Capital Ratio known as Internal Capital Target (ICT), which is guided by the need to maintain a prudent relationship between available capital and the risks of its underlying businesses. The capital management process is monitored by senior management through periodic reviews.

The Issuer places strong emphasis on the quality of its capital in order to support business growth and risks undertaken. The Issuer holds a significant amount of its capital in the form of common equity which is permanent and has the highest loss absorption capability on a going concern basis.

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9.3 Risk Management Objectives and Policies

The Issuer is principally engaged in the Islamic banking business and the provision of related services.

The Issuer’s business activities involve managing credit risk, operational risk, market risk, liquidity risk, Shariah risk, IT risk and other material risks. The Issuer has in place a risk management framework for identifying, measuring, monitoring, controlling and reporting the significant risks faced in the achievement of business objectives and strategies. The Risk Committee is responsible for periodically reviewing the risk management policies, risk exposure and limit whilst ensuring infrastructure and resources are in place. The Board is ultimately responsible for risk oversight through the RMC and BRMCC at the Issuer’s level. Risk management form an integral part of the MBSB Group’s and the Issuer’s activities and remain important feature in all their business operation, delivery channels and decision making process. The extents to which MBSB Group and the Issuer are able to identify, assess, monitors, manage and report each of the various types of risk is critical to their strength, soundness and profitability. MBSB group’s and the Issuer’s risk management function is independent of their operating units. All new businesses, introduction of new products, engagement in new activities or entrance into new strategical alliance are subject to endorsement by the Risk Management Division and submitted to the Board Audit Committee (“BAC”), Board Risk Management and Compliance Committee (“BRMCC”) and/or the Board for approvals.

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9.4 Credit Risk

Credit Risk Management Objectives and Policies Credit risk is the potential financial loss resulting from the failure of the customer to settle financial and contractual obligations through financing, hedging, trading and investing activities. It includes both pre-settlement and settlement risks of trading counterparties. Credit risk emanates mainly from financing, advances and other financing, financing commitments arising from such financing activities, as well as through financial transaction with counterparties including interbank money market activities as well as derivative instruments used for hedging and debt securities. Credit risk is managed throughout the whole credit process starting from credit origination, credit evaluation, credit administration and credit monitoring. The objective of credit risk management is to enable the Issuer to identify, monitor and manage credit risk in a manner that complies with Shariah principles, practices and prudence with the use of policies and procedures, limits and risk appetite levels, and monitoring and reporting the credit risk position to Management and the Board. Some of the risk management tools and mitigation used are as follows:

• Policies and procedures: Credit Policy, Policies from respective business divisions, Enterprise Risk Management Framework, ICAAP Framework (which includes the Bank’s Risk Appetite Statement (RAS)) and Stress Test Policy.

Over the past 5 years, the Bank’s policies have been continuously enhanced according to the BNM guidelines and market practice. Major enhancement of the risk policies over the past year are as follows:

No. Policy Material Changes Made

1 Risk Informed Pricing Policy

▪ The policy was developed in line with BNM requirements to ensure a more risk-informed approach to pricing retail financing products.

2 Credit Policy ▪ Enhancement on the policy to include the risk and mitigations involved in providing revolving credit for general working capital purposes.

▪ Tightening watchlist monitoring by conducting bi-

annual reviews on watchlist customers that hit judgmental triggers.

3 PFi policy ▪ Stricter income requirements for PFi customers (i.e higher income requirements).

• Imposition of limits

i.) For Financing portfolio: Single Counterparty Exposure Limit, Connected Party Transactions Limit, Large Exposure Limit, Board Property Sector Limit, Limit for credit grading.

ii.) For Securities portfolio: Issue and Issuer Concentration Limit, Credit Rating

Limit and Portfolio Concentration Limit.

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• Reporting and Monitoring

The Bank’s Early Care Unit monitors Early Care and Watchlist Corporate accounts and the status of the accounts are reported to the Initial Alert Report (IAR) Committee on a monthly basis. The Risk profile of the Bank’s financing portfolio is reported to the IAR Committee on a monthly basis and to Management and the Board on a quarterly basis.

Expected Credit Loss Market volatility could negatively impact the performance of financial instruments. This heightens the risks that the fair value derived may not be appropriate and may result in impairment loss. The Issuer constantly reviews the process and controls of identifying impairment indicators and related impairment loss calculations for financial assets carried at FVOCI and amortised cost, to ascertain consistency of methodology with MFRS 9, Financial Instruments. The Issuer did not make any ECL provisions for government guaranteed investment securities and the remaining investment securities with AA rating and above, of which probability of default is expected to be nil (0%) or insignificant based on the local rating agencies’ credit migration matrices. The Issuer will also perform significant increase in credit risk assessment at least bi-annually or as and when required in order to determine whether the credit risk of a financial instrument has increased significantly since initial recognition which potentially will shift from Stage 1 to Stage 2 or from Stage 2 to Stage 3.

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9.5 Market Risk

Market Risk Management Objectives and Policies Market risk is defined as the risk of losses to an institution resulting from movements in market prices, in particular, changes in profit rates, foreign exchange rates, equity prices and commodity prices. The Issuer’s exposure to market risk results largely from profit rate and foreign exchange rate risks. The market risk exposure is managed within MBSB Bank through the following policies and framework:

i.) Enterprise Risk Management (ERM) Framework ii.) Internal Capital Adequacy Assessment Process (ICAAP) Framework iii.) Stress Test Policy iv.) Asset Liability Management Policy

The key roles and main objectives of the Market Risk Framework are outlined as follows:

i.) To outline the risk appetite based on the current business’ activities and strategy ii.) Institute a strong risk management culture through assessment of market risk profile iii.) Develop a sound and well informed strategies to manage market risk iv.) Reviewing risk exposure v.) Ensuring and monitoring infrastructure, resources and systems are in place for risk

management activities

The market risks are measured by the following methodology and approach:

i.) Marked to Market Valuation

ii.) Repricing Gap Analysis

iii.) Stress Testing

iv.) Scenario and Sensitivity Analysis

Market risks are actively managed by the Global Markets Department (GMD) on the treasury portfolio and closely monitored by the Risk Management Division (RMD) on a daily basis to ensure that all transactions are conducted within the established limits. The market risk limit is a control to govern GMD’s activities which encompasses the portfolio concentration, position, dealer’s transaction and realised as well as unrealised marked-to-market losses. The market risk exposure is reported to the Asset Liability Committee (ALCO), Board Risk Management and Compliance Committee (BRMCC) as well as the Board on a monthly and quarterly basis.

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Foreign Exchange Risk Foreign Exchange (FX) risk is managed by the Global Markets Department (GMD) and monitored by the Risk Management Division (RMD) on a daily basis to ensure that all transactions are conducted within the established limits. The FX risk limit is a control to govern GMD’s FX portfolio which limits the Net Open Position, Intraday Trading, realised losses, dealer’s transaction, capital at risk and allowable currencies to trade.

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9.6 Liquidity Risk

Liquidity Risk Management Objectives and Policies Liquidity risk is the risk of inability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. Liquidity risk includes the inability to manage sudden decreases or changes in funding sources. Liquidity risk also arises from the failure to recognise changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. The liquidity risk exposure is managed within MBSB Bank through the following policies and framework:

i.) Enterprise Risk Management (ERM) Framework ii.) Internal Capital Adequacy Assessment Process (ICAAP) Framework iii.) Stress Test Policy iv.) Contingency Funding Plan

The key roles and main objectives of the Liquidity Risk Framework are outlined as follows:

i.) To outline the risk appetite based on the current business’ activities and strategy ii.) Institute a strong risk management culture through assessment of liquidity risk profile iii.) Develop a sound and well informed strategies to manage liquidity risk iv.) Reviewing risk exposure v.) Ensuring and monitoring infrastructure, resources and systems are in place for risk

management activities

Liquidity risks are measured by the following methodology and approach:

i.) BNM’s Liquidity Coverage Ratio and Net Stable Funding Ratio ii.) Deposits concentration iii.) Daily projected cash flow analysis

Liquidity risks are actively managed by the Global Markets Department (GMD) on the treasury portfolio and closely monitored by the Risk Management Division (RMD) on a daily basis to ensure that all transactions are conducted within the established limits. The liquidity risk limit is a control to govern GMD’s activities which encompass the deposits concentration, cashflows, maturity mismatched and funding activities. The liquidity risk exposure is reported to the Asset Liability Committee (ALCO), Board Risk Management and Compliance Committee (BRMCC) as well as the Board on a monthly and quarterly basis.

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9.7 Operational Risk

Operational Risk Management Objectives and Policies

MBSB Bank currently has in place the Enterprise Risk Management (ERM) framework and Operational Risk Management (ORM) procedures to provide a consistent operational risk management methodology and implementation across the bank. The objectives of the ORM procedures is to strengthen the governance, framework and processes for managing operational risk in the Bank and effective coordination in the management of operational risk with that of other risks, (e.g. credit and market risks). Further, the ORM procedures also provide a holistic and integrated approach to MBSB Bank’s overall risk management strategy, in addition to a clear, systematic and consistent approach towards the identification, assessment, reporting, mitigation and control of operational risk across MBSB Bank. MBSB Bank’s ORM procedures also establish clear lines of responsibility and accountability at all levels of the Bank for the management of operational risk, raise awareness of operational risk across the Bank and ensure readiness and compliance with BNM’s Operational Risk Policy and other regulatory requirements.

The customary tools employed in best practices for the management of operational risks to apply across the Bank are Risk Control Self-Assessment (RCSA), Key Risk Indicators (KRI), Loss Event Reporting (LER), Scenario Analysis and Operational Risk Integrated Online Network (ORION). All identified risks must be treated accordingly which involves identifying the options for treating each risk, evaluating those options, assigning accountability (for Extreme, High and Moderate residual risks) and taking relevant action. Risk Avoidance, Risk Mitigation, Risk Transfer and Risk Acceptance are the options for treating risks and may be applied individually or in combination, with due consideration of risk appetite.

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9.8 Shariah Non-Compliance Risk

Shariah non-compliance risk objectives and policies Shariah non-compliance (“SNC”) risk is the risk of legal or regulatory sanctions, financial loss or non-financial implications including reputational damage, which the Issuer may suffer arising from the failure to comply with the rulings of the Shariah Advisory Council of BNM, standards on Shariah matters issued by BNM pursuant to Section 29(1) of the IFSA or decisions or advice of the Issuer’s Shariah Committee. Shariah risk management is a function to systematically identify, measure, monitor, control of Shariah risks and to mitigate any possible of non-compliance events. The systematic approach of managing SNC risks will enable MBSB Bank to continue its operations and activities effectively without exposing the Bank to unacceptable level of risk. Any act performed by MBSB Bank which fails to comply with the Shariah rules may lead to the transactions performed being considered as null and void; and any income derived from the said transaction may result in MBSB Bank earning Shariah non-compliant income, thus requiring the income to be channeled to charity. The objective of the Shariah risk management is to ensure MBSB Bank conducts its activities in line with the best standards and practices in a manner that complies with internal and regulatory requirements. Based on operational risk loss event type classification, Shariah risk can be further defined as risk of potential loss due to MBSB Bank’s failure to comply with the Shariah rules and principles determined by the relevant Shariah regulatory councils. Shariah risk is classified under the following operational risk loss event type classification:

Event No. and Class Description Activity Examples

4 - Clients, Products & Business Practices

Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product.

• Failure to investigate client per guidelines (including permissible business income and tolerable financial benchmark).

• Mis-selling/Mis-informing of Shariah contract.

• Product defects (include Shariah non-compliance products).

5 - Damage to Physical Assets

Losses arising from loss or damage to physical assets from natural disaster or other events.

• Damage to inventory (Islamic finance-related).

7 - Execution, Delivery & Process Management

Losses from failed transaction processing or process management.

• Legal documents missing/ incomplete.

• Other task mis-performance.

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The process for Shariah risk identification, monitoring and control is similar to operational risk management which can be illustrated by the following processes:

a.) Identify Shariah risk within the organisation. b.) Measure and assess the likelihood and impact of those risks. c.) Implement proper and effective controls to manage those risks. d.) Monitor and report risk exceptions. e.) Improvements to processes and controls to manage Shariah risk.

The Shariah risk identification and mitigation is also indirectly being controlled via reviews performed by the respective business units/product owner, review by Shariah Compliance Review and certification by SSA during product development phase and for each Islamic financial activities transaction. Shariah risk will perform review on internal new or revised guidelines, standard operating procedures and product manuals that are issued by any divisions/departments of the Bank as to identify inherent Shariah risk. In addition, Shariah risk also will coordinate the monthly Shariah non-compliance reporting sent by the Designated Compliance & Risk Officer (DCORO). This initiative is to monitor and ensure the MBSB Bank is free and sound from any breaches and Shariah non-compliance event.

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9.9 Business Continuity Risk Business continuity risk management objectives and policies Business continuity risk is the risk of losses in assets, revenue, reputation and stakeholder/customer confidence due to the discontinuation or disruption of services in both business and technology operations. Business Continuity Management (BCM) is a whole-of-business approach that includes policies, standards, and procedures for ensuring that specified operations can be maintained or recovered in a timely fashion in the event of a disruption. The purpose is to minimise the operational, financial, legal, reputational and other material consequences arising from a disruption. Business Continuity Plan (BCP) and Disaster Recovery Plan (DRP) are the key components of BCM. BCM will not only address the restoration of Information Technology (IT) infrastructure and application systems but also focus on the rapid recovery and resumption of critical business functions for the fulfilment of business obligations. As changes in technology, business focus and staff can affect the level of preparedness, MBSB Bank recognises the need to incorporate BCM as an on-going discipline into its business-as-usual operations and thereby improve its readiness to respond to and recover from crisis. Each Business/Support Unit should have standard written manual approved by, at minimum, the respective Division/Department Heads, for continuing and carrying on with its business and service operations in the event of system failure; or when the normal course of carrying out business and support operations are disrupted by a crisis or disaster.

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9.10 Disclosure on Capital Adequacy The Capital Adequacy Framework for Islamic Banks (Risk-Weighted Assets) issued by BNM,

which is the equivalent of the Basel II issued by the Basel Committee of Banking Supervision and the Islamic Financial Services Board is structured around three fundamental pillars: • Pillar 1 defines the minimum capital requirement to ensure that financial institutions

hold sufficient capital to cover their exposure to credit, market and operational risks. • Pillar 2 requires financial institutions to have a process for assessing their overall

capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.

• Pillar 3 requires financial institutions to establish and implement an appropriate

disclosure policy that promotes transparency regarding their risk management practices and capital adequacy positions.

Pillar 3 disclosure is required under the CAFIB - Disclosure Requirements (Pillar 3). The Issuer adopts the following approaches under Pillar 1 requirements: • standardised approach for credit risk; • basic indicator approach for operational risk; and • standardised approach for market risk. The Issuer adopts the risk management policies, systems and processes established at the Issuer’s level and the risk management of the Issuer is managed at the Issuer’s level.

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10.0 MALAYSIAN BANKING INDUSTRY OVERVIEW

10.1 Economic Outlook 2019 - Monetary and Financial Developments

Overview In the near term, monetary and financial conditions will continue to be accommodative and supportive of economic growth. This will be backed by monetary operations which will ensure the orderly functioning of money and foreign exchange markets as well as intermediation activities. The domestic financial sector is expected to remain sound supported by financial institutions (FIs) operating with strong capital and liquidity buffers. Similarly, the domestic capital market will remain resilient driven by diversified instruments as well as healthy market capitalisation level. Nevertheless, downside risks associated with global uncertainties, particularly the pace of monetary policy normalisation in the US and other major economies, geopolitical developments as well as escalating global trade tensions will be of concern.

Monetary Developments Monetary Policy In 2018, monetary policy continues to be supportive in providing a conducive environment to promote growth while maintaining price stability. The Overnight Policy Rate (OPR) was increased 25 basis points (bps) to 3.25% in January and kept unchanged during the subsequent nine months of 2018. Meanwhile, the Statutory Reserve Requirement (SRR) was held steady at 3.50% of eligible liabilities since 2016 as the current monetary policy stance remains supportive of economic activities. This is also in line with the anticipation of steady economic growth with inflation remaining benign. Interest rates in the banking system rose in tandem with the OPR adjustment in January 2018. The OPR was adjusted upwards to normalise the degree of monetary accommodation amid steady growth of the economy. The weighted base rate (BR) of commercial banks was increased to 3.9% as at end-July 2018. The weighted average lending rate (ALR) was at 5.44%. Meanwhile, interest rate on savings deposit of commercial banks increased six bps to 1.05% as at end-July 2018. The interest rates on fixed deposits of 1-month to 12-month maturities ranged between 3.08% and 3.33%, respectively. Monetary aggregates continued to grow during the first seven months of 2018. M1 grew 4.7% to RM411.1 billion as at end-July 2018 following higher demand deposit which increased 4.8%. Similarly, M3 rose 6.6% to RM1,786.9 billion contributed by claims on private sector, particularly loans. Moving forward, money supply is expected to be supported by the extension of credit to private sector in the form of loans and securities. The ringgit, along with all regional currencies, faced significant depreciation pressure against the US dollar, despite its strong performance in the first quarter of 2018. The ringgit’s performance in the first quarter was mainly driven by non-resident portfolio inflows as the OPR increase signalled a sustained strong growth outlook for the economy. However, from April onwards, expectations of a faster pace of monetary policy normalisation in the US and strengthening of the US dollar, led to non-resident portfolio outflows from regional economies including Malaysia. The escalation of global trade tensions and spillover effect of the crisis in Turkey and Argentina to other

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emerging markets also contributed to the negative sentiments and depreciation pressure during the period. As at end-August 2018, the ringgit in line with other regional currencies depreciated within the range of 0.6% and 7.7% against the US dollar. However, the ringgit performed better against other regional currencies except for the Thai baht. Looking ahead, the ringgit will be more reflective of the underlying fundamentals of the domestic economy when external uncertainties recede. Financial Sector Developments Banking System Performance During the first seven months of 2018, activities in the banking system remain resilient with all financing indicators expanding. Loan applications, approvals and disbursements increased 5.7%, 5.1% and 7.3% to RM505 billion, RM223.1 billion and RM678.8 billion, respectively. Meanwhile, total loans outstanding expanded 5.3% to RM1,631 billion as at end-July 2018. The banking system is expected to remain sound, operating with strong capital and liquidity buffers. Lending to businesses recorded a stable growth during the same period. Loan applications rebounded 7.4% to RM221.8 billion. Total loan approvals increased 3.3% to RM100.5 billion. Meanwhile, total loan disbursements grew 5.2% to RM487 billion with the business sector accounting for about 72%. Most of the loans were channelled to manufacturing (27.4%) as well as wholesale and retail trade, restaurants and hotels (26.1%) sectors. Total loans outstanding to the business sector increased 3.7% to RM588.5 billion as at end-July 2018. Lending to households continued to record firm growth with loan disbursements increasing significantly by 13.2% to RM191.7 billion in the first seven months of 2018. Loans disbursed to the household sector were mainly for consumption credit which totalled RM90.4 billion (47.2%), followed by residential properties at RM49.9 billion (26%) and passenger cars at RM22.8 billion (11.9%). As at end-July 2018, total household loans outstanding expanded 6% amounting to RM936.7 billion, accounting for 57.4% of total loans outstanding in the banking system. The overall household debt1 valued at RM1,165.7 billion stood at 83.8% of GDP as at end-June 2018. The debt level has been moderating since 2015 following macro prudential measures implemented to rein in household debt levels. The bulk of debt comprises loans for purchase of residential properties (53%), followed by personal use (14.4%) and passenger cars (13.8%). Meanwhile, total household financial assets remain strong at RM2,458.4 billion. The debt servicing capacity of households remained intact, supported by stable income and employment growth. Given the stable employment and income, the household debt level is expected to remain manageable in 2018 and 2019. This is also supported by continuous measures taken by the Government to raise awareness and educate households on financial planning and management. The banking system maintained its capacity to absorb losses supported by strong capital position. As at end-July 2018, common equity tier 1 capital, tier 1 capital and total capital ratios stood at 13.3%, 14.2% and 17.7%, respectively, well above the Basel III minimum regulatory levels. Furthermore, the total capital buffer remained high at RM149.5 billion which exceeded the minimum regulatory requirement.

1 Comprising loans granted by the banking system, development financial institutions (DFIs) and non-bank financial institutions.

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In the first seven months of 2018, the banking system recorded a higher pre-tax profit of RM22.3 billion despite a challenging operating environment. This was supported by interest-/finance-related activities, contributing approximately 70% to gross income. Meanwhile, returns on assets and equity remained steady at 1.5% and 13.1%, respectively. Loan quality of the banking system continued to remain sound throughout the period with stable net impaired loans ratio2 of 0.98% as at end-July 2018. The banking system loan loss coverage ratio stood at 128%. The banking system’s liquidity remained sufficient with surplus ringgit placed with Bank Negara Malaysia (BNM) amounted to RM177.8 billion although there was a sizeable portfolio outflow in recent months. As at end-July 2018, the Liquidity Coverage Ratio (LCR) of the banking system stood at 141.5%. Although financial market is susceptible to external developments, including geopolitical and trade tensions, the outlook for domestic financial system remains stable and roadly intact. This is supported by deep and liquid financial market, sound FIs and sustained confidence in the system. Capital Market Performance Gross funds raised in the capital market decreased 2.4% to RM131.4 billion during the first seven months of 2018. This was due to lower fund raising activity by the private sector with gross funds raised declining 9.7% to RM60.7 billion. Gross funds raised by the private sector through domestic equity market recorded a double-digit decline of 91.1% to RM0.9 billion during the period following lower initial public offerings (IPOs) which declined 92.2% due to cautious market sentiment. Nevertheless, funds raised through new corporate bond issuances increased 4.7% to RM59.8 billion. The bulk of new issuances were medium term notes, accounting for 94.7% of total corporate bonds. The majority of funds were raised by the finance, insurance, real estate and business services sector, accounting for 68.7% of new corporate bond issuances. The funds were mainly used to finance infrastructure projects and working capital. On the back of higher investment activities, fund raising in the capital market is expected to improve in 2019. Meanwhile, gross funds raised by the public sector increased 4.8% to RM70.7 billion in the first seven months of 2018. The issuance of Malaysian Government Securities (MGS) increased to RM35.4 billion, while Malaysian Government Investment Issues (MGII) rose to RM35.2 billion. The Government bonds continued to receive strong support from local institutional and foreign investors. As at end-July 2018, share of resident and non-residents holdings of MGS stood at 59.5% and 40.5% of total MGS outstanding, respectively. During the same period, share of resident and non-residents holdings of MGII stood at 95.3% and 4.7% of total MGII outstanding, respectively. During the first seven months of 2018, MGS yields across all tenures trended upwards with yields on 1-year, 3-year, 5-year and 10-year ranging between 12 and 18 bps. The higher yields were due to investors rebalancing global portfolio investments towards safe-haven assets following external uncertainties. Similarly, in the corporate bond market, yields on the 5-year AAA-rated and AA-rated securities increased 12 and 11 bps, respectively.

2 Beginning January 2018, impaired loans are reported based on Malaysian Financial Reporting Standards (MFRS) 9. The adoption of

MFRS 9 requirement is based on the financial year of the banks. Classification of impaired loans/financing and provisioning for loan/financing impairment are in line with MFRS 9.

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The equity market remained resilient and continued to record gains despite heightened trade tensions and global monetary tightening during the first eight months of 2018. The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) started to pick up in the first week of January 2018 and continued its positive trend. The uptrend was supported by an increase in OPR by 25 bps leading to buying interest in finance-related stocks, resulting in the index surging to 1,870.52 points on 29 January 2018. Despite the US Federal Reserve (Fed) raised interest rates for the first time this year, the FBM KLCI continued to increase and closed at 1,876.87 points on 22 March 2018, the highest level since August 2014. Meanwhile, the local bourse rose to a new high of 1,895.18 points on 19 April 2018. The positive sentiment was largely driven by recovery in global crude oil prices. Nevertheless, the FBM KLCI declined in the final week of May and the market remained subdued tracking major and regional bourses throughout June and July 2018. Several factors caused the market to trend downwards, among others, the trade war between the US and China as well as interest rate hikes in major economies. The FBM KLCI advanced 1,819.66 points as at end-August 2018, supported by sound macroeconomic fundamentals, continued growth of the corporate sector and the inflow of foreign funds into the equity market. Investors’ confidence was also supported by positive external developments, including the statement by the Fed of its intention to maintain the benchmark rate. In addition, the reaffirmation by Fitch Ratings on Malaysia’s long-term foreign-currency issuer default rating at A- with stable outlook also contributed towards higher performance of the FBM KLCI. In terms of trading activity, total volume for the first eight months of 2018 rose 9.6% to 468.8 billion units. Meanwhile, total market transacted value increased 11.8% to RM454.2 billion. Average daily trading volume and value increased to 2.9 billion units and RM2.8 billion, respectively. As at end-August 2018, the market capitalisation increased 1% to RM1,865.8 billion. Market velocity was sustained at 34.3%, while market volatility was at 8.3%. At the same time, foreign holdings based on market capitalisation in the local bourse stood at 23.6% as at end-August 2018. In 2019, the domestic equity market is expected to continue to record gains despite external headwinds due to a confluence of factors including concerns over election outcomes in the euro area as well as heightened trade and geopolitical tensions. Islamic Banking and Capital Market Performance The Islamic banking industry continued to record strong growth in 2018. Total assets expanded 11.5% amounting to RM687 billion as at end-July 2018. The expansion was mainly driven by financing to household sector. The growth was also contributed from the completion of a merger involving an Islamic bank and a non-bank institution in early 2018. Total deposits of the Islamic banking system registered a strong growth of 12.6% to RM507.1 billion as at end-July 2018. The outlook of Islamic banking is expected to remain favourable given strong demand from both households and businesses for Shariah-based financial products and services. This is further supported by growing commitments from a number of major players in promoting Islamic banking as the preferred financing solution. Moving forward, focus will be given on supporting the effective implementation and operationalisation of Shariah standards, particularly in broadening the range of product offerings and applications of a variety of Shariah contracts to cater to the diverse needs of customers.

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The Islamic capital market (ICM) comprising Shariah-compliant equities and sukuk continues to maintain its leading position in the global ICM market by offering a wide range of products and services. The share of ICM accounts for 60.5% or RM1,963.3 billion of total domestic market capitalisation as at end-July 2018. Shariah-compliant equities contributed 58.2% or RM1,142.9 billion to total ICM, while the remaining was total sukuk outstanding. Bursa Malaysia-i, the world’s first end-to-end Shariah investment platform continues to make Malaysia a vibrant trading centre for Islamic-based financial offerings. The platform pioneered by nine Islamic Participating Organisations (POs) in 2016 has expanded to 14 Islamic POs as at end-July 2018. Out of these, one is a full-fledged3 PO while the remainder operate on a window4 basis. As at end-July 2018, ICM has engaged with more than 20,000 retail and institutional investors, domestically and internationally. Another Shariah-compliant platform, Bursa Suq Al-Sila’ (BSAS), which facilitates commodity trading for Murabahah5 and Tawarruq6 transactions have achieved daily average trading value of RM21.2 billion as at end-July 2018 with 151 participants, of which 39 were non-residents. This signifies the acceptance of BSAS as a global platform to facilitate liquidity management. Meanwhile, to further develop Shariah-compliant securities, the world’s first Shariah-compliant alternative, the Securities Borrowing and Lending Negotiated Transaction (iSSBNT) was launched in December 2017. The iSSBNT framework is expected to provide a facilitative trading environment, particularly for market players operating based on Shariah principles. As at May 2018, 77% of companies listed on Bursa Malaysia were Shariah-compliant. Malaysia continues to be the main driver for sukuk issuances and outstanding. In the first seven months of 2018, the sukuk issuances stood at 50.9% of total global sukuk issuances while as at end-July 2018, sukuk outstanding was 51.2% of total global sukuk outstanding. Malaysia also pioneered the world’s first issuance of Green Sustainable and Responsible Investment (SRI) sukuk in July 2017. As at end-July 2018, five green SRI sukuk with a total size of RM2.4 billion were issued. Several green SRI sukuk issuances are expected in 2019, especially for large-scale solar photovoltaic projects. In addition, the Securities Commission Malaysia has established Green SRI Sukuk Grant Scheme which aims at reducing the additional cost of certifying a debt instrument of meeting the green criteria. Moving forward, ICM will continue to play a crucial role in Malaysia’s capital market. This will be driven by growing demand for Shariah-compliant instruments. However, greater innovation in ICM is pertinent to ensure that Malaysia maintains its position as a leader in Islamic finance at the international level. In this regard, focus will be given to further develop ICM, especially to internationalise Shariah-compliant intermediation activities through new product development, fund management and cross-border collaboration.

3 Islamic stockbroking services provided by the PO on a fully Shariah-compliant basis. 4 Islamic stockbroking services provided by the PO other than on a full-fledged basis. 5 Sales contract with a disclosure of the asset cost price and profit margin to the buyer. 6 Purchasing an asset with deferred price, either on the basis of musawamah (sales contract without the disclosure of the asset cost

price and profit margin to the buyer) or murabahah, then selling it to a third party to obtain cash.

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Conclusion Monetary policy is expected to remain accommodative and supportive of economic growth while ensuring price stability. Meanwhile, the capital market is expected to remain resilient supported by favourable domestic economic conditions and steady global growth. However, external factors which include the pace of monetary policy normalisation in major economies; escalating trade threats and protectionism; rebalancing of global investment flows and geopolitical tensions may dampen financial and capital market performance. In this regard, focus will continue to be given towards fortifying these markets by providing an environment which supports innovation while ensuring that the regulatory framework is strengthened further and the principles of good governance, transparency and accountability are adhered.

(Source: Chapter 4: Monetary and Financial Developments, Economic Outlook 2019, Ministry of Finance Malaysia)

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10.2 BNM – Economic and Financial Developments in the Malaysian Economy in the Second Quarter of 2019

Global growth moderated The global economy grew at a more moderate pace in the second quarter of 2019. In the US, GDP growth moderated in the second quarter of 2019. The latest data release was accompanied by a revision to the back series to indicate stronger growth from 2017 to the third quarter of 2018, but slower growth in the fourth quarter of 2018 and first quarter of 2019. This suggests that growth peaked in the first half of 2018, and has slowed more than previously anticipated, due mainly to weaker investment activity. Meanwhile, growth in the euro area moderated to its weakest level since the fourth quarter of 2013. Besides softer consumption demand, industrial production remained in contraction, weighed by sluggish global trade activity and supply constraints in the automotive sector. Growth in the UK moderated due mainly to a drawdown of inventories amid sustained private consumption. In Asia, growth in PR China continued to moderate, as weaker private consumption was only partially off set by an improvement in policy driven investments. Growth in the rest of the Asian region also slowed, mainly affected by weaker external demand amid the ongoing trade dispute between the US and PR China. The Malaysian economy grew at a stronger pace of 4.9% in the second quarter of 2019 GDP registered a higher growth of 4.9% in the second quarter of 2019 (1Q 2019: 4.5%), supported by continued expansion in domestic demand. On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.0% (1Q 2019: 1.1%). Private sector activity remained the key driver of growth Domestic demand expanded by 4.6% in the second quarter (1Q 2019: 4.4%), supported by firm household spending and slightly higher private investment. Private consumption expanded by 7.8% (1Q 2019: 7.6%), supported by continued income growth and festive spending during the quarter. Selected Government measures, such as the special Aidilfitri assistance and Bantuan Sara Hidup, also provided some lift to overall household spending. After a strong growth in the first quarter of 2019 (6.3%), public consumption expanded marginally by 0.3%, due to lower spending on supplies and services. Growth in gross fixed capital formation (GFCF) registered a smaller contraction of 0.6% (1Q 2019: -3.5%), driven by a slightly higher private investment growth amid a continued decline in public investment. By type of assets, investments in structures turned around to register a positive growth of 1.2% (1Q 2019: -1.3%), reflecting some improvement in the residential property segment. Capital expenditure on machinery and equipment recorded a smaller decline of 4.2% (1Q 2019: -7.4%), following higher spending on information and communications technology (ICT).

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Private investment expanded at a faster pace of 1.8% (1Q 2019: 0.4%), supported by increased capital spending in the services and manufacturing sectors. Nonetheless, uncertainty surrounding global trade tensions and prevailing weaknesses in the broad property segment continued to weigh on the investment growth performance. Public investment registered a smaller contraction of 9.0% (1Q 2019: -13.2%), mainly reflecting higher fixed asset spending by the Federal Government which partially off set the continued weak investment by public corporations. Headline inflation increased mainly reflecting the lapse in the impact of the GST zerorisation Headline inflation, as measured by the annual percentage change in the Consumer Price Index (CPI), averaged higher at 0.6% in 2Q 2019 (1Q 2019: -0.3%). The increase mainly reflected the lapse in the impact of the GST zerorisation that was implemented in June 2018. This contributed to the rise in headline inflation in June 2019 to 1.5% (May 2019: 0.2%; April 2019: 0.2%). Fuel inflation recorded a smaller negative largely due to domestic fuel prices averaging higher during the quarter in addition to the base effect (Average RON95 petrol price per litre in 2Q 2019: RM2.08; 1Q 2019: RM2.02). Core inflation, excluding the impact of consumption tax policy changes, was unchanged at 1.6%. Demand-driven inflationary pressures remained broadly stable and contained, amid the absence of excessive wage pressure and some degree of spare capacity in the capital stock. Current account surplus remained sizeable The current account surplus of the balance of payment remained sizeable at RM14.3 billion or 3.9% of GNI in the second quarter of 2019 (1Q 2019: RM16.4 billion or 4.7% of GNI). This was due to higher investment income earned by Malaysian firms abroad which partly off set the lower goods surplus. As the improvement in import growth outpaced export growth, the goods surplus narrowed to RM28.1 billion (1Q 2019: RM33.8 billion). The primary income account registered a smaller deficit of RM5.5 billion (1Q 2019:-RM10.1 billion) due to the increase in investment income earned by Malaysian fi rms abroad, particularly from direct and portfolio investments. These investments were mainly in the finance and insurance, mining, information and technology sectors. This development more than off set the increase in investment income accrued to foreign direct investors and foreign portfolio investors in publicly-listed firms. In the services account, the deficit widened to RM3.4 billion (1Q 2019: -RM1.8 billion). This was attributable to higher net payments to foreign providers for transport and insurance services, in line with higher trade activity during the quarter. The travel account surplus narrowed to RM7.1 billion (1Q 2019: RM7.9 billion) on account of lower tourist per capita spending. The secondary income account deficit amounted to RM4.9 billion (1Q 2019: -RM5.5 billion), reflecting mainly outward remittances by foreign workers.

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Financial account registered a net outflow The financial account registered a net outflow of RM18.6 billion (1Q 2019: -RM13.8 billion), following outflows in the direct investment and portfolio investment accounts. These outflows have more than off set the marginal net inflow in the other investment account during the quarter. The direct investment account registered a net outflow of RM8.2 billion (1Q 2019: net inflow of RM16.3 billion). Foreign direct investments (FDI) registered a smaller net inflow of RM4.4 billion (1Q 2019: net inflow of RM21.7 billion). Inflows were channelled mainly into the services and manufacturing sectors. Direct investments abroad (DIA) by Malaysian companies registered a larger net outflow of RM12.6 billion (1Q 2019: net outflow of RM5.5 billion). DIA was channelled mainly into the services sector, particularly the financial services subsector and the accommodation and food services subsector, followed by the mining sector. The portfolio investment account registered a net outflow of RM10.2 billion (1Q 2019: net inflow of RM2.1 billion), following a reversal of non-resident portfolio investments. Non-resident portfolio investments recorded a net outflow of RM5.1 billion during the quarter (1Q 2019: +RM13.5 billion). Following increased risk aversion and more cautious sentiments, non-resident investors pared down holdings in both the domestic equity and debt markets. At the same time, residents’ portfolio investments abroad also recorded a smaller net outflow of RM5.0 billion (1Q 2019:-RM11.4 billion). The other investment account recorded a marginal net inflow of RM0.3 billion (1Q 2019: -RM31.9 billion). This reflected inter-bank borrowings by the domestic banking system, which were almost entirely off set by interbank placements abroad and a net repayment of loans and trade credits by the private sector. Net errors and omissions amounted to RM2.9 billion, or 0.6% of total trade. Manageable external debt Malaysia’s external debt amounted to RM931.1 billion, or 61.3% of GDP as at end-June 2019 (end-March 2019: RM903.7 billion or 59.5% of GDP). The increase reflects mainly the net drawdown of interbank borrowings and intercompany loans. There was also revaluation adjustment from the weaker ringgit against regional and major currencies during the period. These were partially off set by some liquidation of domestic debt securities and withdrawal of deposits by non-residents. The country’s external debt remains manageable, given its currency and maturity profiles, and the presence of large external assets. Close to one-third of external debt is denominated in ringgit (31.7%; end-March 2019: 32.7%), mainly in the form of non-resident holdings of domestic debt securities (61.7% share of ringgit-denominated external debt) and in ringgit deposits (18.0% share) in domestic banking institutions. As such, these liabilities are not subject to valuation changes from the fluctuations in the ringgit exchange rate. The remaining external debt of RM636.1 billion or 68.3% of total external debt is denominated in foreign currency (FC). As at end-June 2019, offshore borrowings increased to RM580.5 billion or 38.2% of GDP (end-March: RM546.9 billion or 36.0% of GDP). The corporate sector accounted for slightly more than half of FC-denominated external debt and are largely subject to prudential and hedging requirements.

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By instrument, 36.9% (or RM234.9 billion) of FC-denominated external debt are accounted by interbank borrowings and FC deposits in the domestic banking system. 78.3% of the interbank borrowings are in the form of largely stable intragroup borrowings from related offices abroad, including parent banks, regional offices and subsidiaries. This reflects banks’ centralised liquidity and funding management practices.

During the quarter, banks’ FC-denominated short-term external debt increased by RM20.6 billion driven by higher interbank borrowings. This was largely attributable to parent bank placements with foreign banks’ in Malaysia (including banks in Labuan International Banking and Financial Centre (LIBFC)) to facilitate lending and investment activities. Funds received by foreign LIBFC banks were largely invested abroad with non-resident clients, a reflection of LIBFC banks’ ‘out-out’ business activities. For locally-incorporated foreign banks, intragroup funds continue to be primarily used for short-term investments and lending in the domestic interbank market. Domestic banking groups accounted for the remaining increase in interbank borrowings reflecting their central role in managing liquidity and funding needs on a group-wide basis. In line with these developments, banks’ total external assets also increased during the quarter by RM22.8 billion.

Overall, banks’ funding and liquidity risks continue to be proactively managed via robust internal controls and policies, including internal limits on (i) interbank borrowings; (ii) foreign currency funding and liquidity positions; and (iii) foreign exchange market risk exposures. Foreign-currency risk, measured in terms of the net open position of FC-denominated exposures1 remained low at 4.9% of banks’ total capital.

Long-term bonds and notes issued offshore stood at RM161.7 billion as at end-June 2019, accounting for 25.4% of total FC-denominated external debt. These were mainly by non-financial corporations and channelled primarily to finance asset acquisitions abroad. Intercompany loans, which amount to RM110.5 billion and account for 17.4% of FC-denominated external debt, are typically on flexible and concessionary terms. About 80% of these intercompany loans were obtained by multinational corporations (MNCs) from parent or affiliate companies abroad.

From a maturity perspective, 58.3% of the total external debt is skewed towards medium- to long-term tenure (end-March: 59.2%), suggesting limited rollover risks. Short-term external debt accounted for the remaining 41.7% of external debt. While rollover risks may be inherent, this is well contained. Close to half of the short-term external debt are intragroup borrowings among banks and corporations which are generally stable, while another 11% are accounted by trade credits, largely backed by export earnings. As at 31 July 2019, international reserves stood at USD103.9 billion, sufficient to finance 7.6 months of retained imports, and is 1.1 time the short-term external debt.

1 Refers to the aggregated sum of the net short or long foreign currency positions for all currencies across banks.

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Of significance, reserves are not the only means for banks and corporations to meet their external obligations. The progressive liberalisation of foreign exchange administration rules has resulted in significant increase in non-reserves external assets. In particular, banks and corporations held roughly three-quarters of Malaysia’s RM1.8 trillion external assets, which can be drawn down to meet their RM728.3 billion external debt obligations. While the flexible exchange rate remains the first line of defence, adequate international reserves and availability of substantial foreign currency external assets by banks and corporations continue to serve as important buffers against potential external shocks.

The performance of domestic financial markets were mixed during the second quarter

During the first two months of the quarter, domestic financial markets were affected by cautious investor sentiments amid the moderating global growth outlook and escalations in global trade tensions. Domestically, potential reviews on Malaysia’s inclusion in the FTSE Russell World Government Bond Index (WGBI) also weighed down sentiments in the domestic bond market. As a result, non-resident portfolio outflows of RM5.1 billion led the ringgit to depreciate by 1.5% against the US dollar during the quarter. Despite the weak sentiments, domestic bond and equity markets remained supported by sustained demand from domestic institutional investors throughout the quarter.

Towards the end of the quarter, the performance of domestic bond and equity markets were lifted by a recovery in investor sentiments. In June, expectations of monetary policy easing by major central banks led to an improvement in global investor risk appetite, which spurred a recovery in non-resident portfolio inflows. As a result, the FBM KLCI increased by 1.7% in the second quarter to close at 1,672.1 points as at end-June (end-March 2019: 1,643.6 points) and the 3-year, 5-year and 10-year MGS yields declined by 8.5, 10.8 and 12.3 basis points, respectively.

Interest rates decreased during the quarter given the reduction in the Overnight Policy Rate (OPR)

Following the reduction in the OPR on 7 May 2019, interest rates in the wholesale and retail markets trended lower. In the interbank market, strong and immediate pass-through was observed, with the 3-month KLIBOR decreasing by 23 basis points to 3.46% (1Q 2019: 3.69%). Similarly, nominal fixed deposit (FD) rates also decreased following the OPR adjustment. The decline ranged from 24 to 25 basis points across tenures of 1 to 12 months. Correspondingly, real FD rates decreased given the decline in nominal rates and higher inflation during the quarter.

For the retail segment, the transmission of OPR to base rate (BR) was also strong, with all banks revising their BRs downwards by 25 basis points to the current weighted average of 3.68% (1Q 2019: 3.92%). By end-quarter, the weighted average lending rate (ALR) on outstanding loans was also lower by 20 basis points at 5.23% (1Q 2019: 5.43%).

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Other policy highlights in the second quarter of 2019

Policy highlights Salient requirements

Trade Credit Insurance/Trade Credit Takaful (TCIT) – Policy

Document (PD)

• The PD came into force on 3 May 2019, setting out regulatory expectations on the offering of TCIT, including requirements surrounding the approval process and information submission.

• The enhanced regulatory clarity is intended to increase the availability of trade facilitation products, including Shariah compliant products, that will facilitate the growth of Malaysian halal business.

• The offering of TCIT will also contribute towards portfolio diversification for licensed insurers and takaful operators.

Framework for Electronic Trading Platforms (ETP) –

Exposure Draft (ED)

• The ED was issued on 14 June 2019, setting out the Bank’s requirements and expectations on market participants that offer ETP services in the Malaysian money and foreign exchange markets.

• The ED aims to ensure that ETP services offered to Malaysian participants are secure, efficient and robust, to maintain orderly market conditions and to safeguard the integrity of the financial market.

• In particular, platform operators must− O obtain the Bank’s prior approval; and O have in place adequate operational and

governance capacities to ensure clear segregation of responsibilities and accountabilities across its Management and Board of Directors.

Insurance and Takaful Aggregation Business

Registration – ED

• The ED was issued for public consultation on 18 June 2019, setting out proposed expectations for the registration of insurance and takaful aggregators as a new category of business under the Financial Services Act 2013.

• The ED aims to provide clarity on the regulatory treatment of such nonadvisory services, including registration procedures and business conduct obligations to be observed by a registered insurance and takaful aggregator at all times.

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Takaful Operational Framework – PD

• The PD sets out strengthened parameters governing the management of takaful funds and shareholders fund by licensed takaful operators and retakaful operators.

• The revised policy aims to enhance the operational efficiency of takaful business and sustainability of takaful funds by− O allowing flexibility in the adoption of new

Shariah contracts subject to adherence to certain safeguards; and

O strengthening the Bank’s expectations on the robustness of internal policies to manage additional takaful funds, internal controls on inter-fund cross trading activities and requirements for the separate management of savings and investment funds.

• The policy will come into force on 1 July 2020.

Moderate global growth in 2019

The global economy is expected to grow at a moderate pace in 2019 compared to 2018. The IMF revised downward its 2019 global growth forecast, by 0.1 ppt to 3.2%.

Despite continued labour market strength, US GDP growth is expected to slow as investment activity moderates from waning fi scal support and uncertainties from the trade conflict with PR China. Euro area growth is projected to be adversely affected by moderating domestic and external demand. Economic activity in the Asian region is also expected to be slower, given weaker external demand. Active policy stimulus will help to support growth in PR China.

Risks to the outlook remain tilted to the downside, emanating from a potential escalation of trade disputes, continued uncertainties in Brexit negotiations, and excessive financial market volatility. Headline inflation is expected to average higher in the second half of 2019

Headline inflation in the second half of 2019 is expected to average higher compared to the first half of 2019 following the lapse in the impact of consumption tax policy changes.

For the rest of the year, the trajectory of headline inflation will be dependent on global oil prices and policy measures including the timing of the lifting of the price ceiling on domestic retail fuel prices. Price control policies such as the enhancement of the festive season price control scheme may result in a relatively subdued food inflation.

Underlying inflation is expected to remain stable, supported by the continued expansion in economic activity and in the absence of strong demand pressures.

(Source: Economic and Financial Developments in the Malaysian Economy in the Second Quarter of 2019, BNM)

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10.3 BNM – Financial Stability and Payment Systems Report 2018 - Risk Developments and Assessment of Financial Stability in 2018

Overview

Domestic financial stability continued to be preserved in 2018 supported by orderly financial markets and resilient financial institutions. Domestic financial markets experienced bouts of increased volatility due to external and domestic factors. The pace of monetary policy normalisation in the United States of America (US), escalating global trade tensions, rising geopolitical concerns and uncertainties in global oil prices were major themes that drove investor behaviour for most parts of the year, with emerging market economies (EMEs), including Malaysia, largely experiencing net portfolio outflows. Policy uncertainties immediately following the 14th General Election (GE14) also weighed heavily on investor sentiment. Domestic financial market conditions remained orderly, supported by strong domestic institutional investors, including financial institutions. In particular, financial institutions remained resilient with healthy profitability and strong capital and liquidity buffers. Improvements in asset quality continued to be observed. Liquidity and funding conditions also remained conducive for financial intermediation activities. These factors have contributed towards sustained public confidence in the Malaysian financial system. The Financial Stability Committee (FSC) of the Bank met four times in 2018. While noting that risks to domestic financial stability are contained (Diagram 1.1), the FSC remained vigilant over elevated levels of domestic debt and imbalances in the property market that continued to be a source of potential vulnerability. Risks to financial stability from household and non-financial corporate debt are judged tobe largely mitigated by the sustained overall debt servicing capacity of borrowers and prudent credit underwriting and risk management practices of financial institutions. Further, cross-cutting measures, including macroprudential policies, implemented since 2010 have also led to more sustainable aggregate household debt accumulation. Pockets of vulnerabilities continue to persist among low-income borrowers, who are more vulnerable to adverse shocks given their low financial buffers. However, their share of household borrowings has continued to decline in recent years. Although businesses were slightly more leveraged amid weaker earnings, their overall debt servicing capacity remains strong relative to prudent thresholds. Business conditions in the oil and gas (O&G), property and construction sectors are expected to remain challenging. However, direct exposures of financial institutions to firms in these sectors are low. For the property sector, expectations of continued orderly adjustments to the mismatch in housing demand and supply will also mitigate risks of broader spillovers to the financial system. Importantly, banks continue to maintain strong financial buffers to weather against potential losses stemming from households, businesses and the property market, including under severe stress scenarios. While market expectations of tighter global financial conditions appear to have eased somewhat going into 2019, close vigilance over the pace and level of debt accumulation and risk-taking behaviour is warranted to prevent a build-up of vulnerabilities that could expose the financial system to future risks. The FSC therefore continues to view current prudential measures to be appropriate to manage these risks and ensure that financial intermediation activities to support the economy will continue to be sustained. Strong and resilient financial institutions will remain a key strength underpinning domestic financial stability.

164

(Source: Chapter 1: Risk Developments and Assessment of Financial Stability in 2018, Financial Stability and Payment Systems Report 2018, BNM)

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11.0 OTHER INFORMATION

11.1 Material Contracts

As at the LPD, the Issuer has not (within the last two (2) years) entered into any material contracts outside the ordinary course of business.

11.2 Material Litigation

As at the LPD, the Issuer is not involved in any current or anticipated litigation or arbitration or any other proceedings involving any injunctive proceedings against the Issuer which may have a material adverse effect on the ability of the Issuer to carry on its business and the Board is not aware of any proceedings that are pending or threatened or of any fact likely to give rise to any proceedings which might materially and adversely affect the financial position or business of the Issuer and/or the ability of the Issuer to perform its obligations under the Sukuk Wakalah Programme.

11.3 Commitments and Contingencies

In the normal course of business, the MBSB Group makes various commitments and incurs certain contingent liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions, hence, they are not provided for in the financial statements.

11.4 Related Party Transaction

All related party transactions entered into by the Issuer (including financing arrangements made between the Issuer and its shareholders and other related entities) are based on commercial terms conducted at arm’s length.

11.5 Conflict of Interest and Appropriate Mitigating Measures

A. AmInvestment Bank

After making enquiries as were reasonable in the circumstances, AmInvestment Bank is not aware of any circumstances, which may give rise to a conflict-of-interest situation or a potential conflict-of-interest situation in its capacity as the Joint Principal Advisers, the Joint Lead Arrangers and the Joint Lead Managers in relation to the Sukuk Wakalah Programme. However, AmInvestment Bank wish to highlight that Datuk Azrulnizam Abdul Aziz, a director of MBSB Bank is also a director of AmMetLife Takaful Berhad. AmMetLife Takaful Berhad is a subsidiary of AMMB Holdings Berhad. AmInvestment Bank is also a subsidiary of AMMB Holdings Berhad. Notwithstanding this, AmInvestment Bank is of the view that this does not potentially give rise to any conflict of interest in this transaction.

166

B. RHB Investment Bank

After making enquiries as were reasonable in the circumstances, to the best of its knowledge, RHB Investment Bank is not aware of any circumstances, which may give rise to a conflict-of-interest situation or a potential conflict-of-interest situation in its capacity as the Joint Principal Advisers, the Joint Lead Arrangers, the Joint Lead Managers and the Facility Agent in relation to the Sukuk Wakalah Programme. However, RHB Investment Bank wish to highlight that the Employees Provident Fund is a holding body of MBSB and a substantial shareholder of RHB Bank Berhad, which in turn is the parent company of RHB Investment Bank. Notwithstanding this, RHB Investment Bank is of the view that this does not potentially give rise to any conflict of interest in this transaction.

C. Adnan Sundra & Low As at the date hereof and after making enquiries as were reasonable in the circumstances, Adnan Sundra & Low has confirmed that to the best of its knowledge, it is not aware of any circumstances that would give rise to a conflict-of-interest situation or potential conflict-of-interest situation in its capacity as solicitors for the Joint Principal Advisers and Joint Lead Arrangers in relation to the Sukuk Wakalah Programme.

D. Malaysian Trustees Berhad

After making enquiries as were reasonable in the circumstances, Malaysian Trustees Berhad has confirmed that to the best of its knowledge, it is not aware of any circumstances that would give rise to a conflict-of-interest situation or a potential conflict-of-interest situation in its capacity as the Sukuk Trustee in relation to the Sukuk Wakalah Programme. However, Malaysian Trustees Berhad wishes to highlight that the Employees Provident Fund is a holding body of MBSB and a substantial shareholder of RHB Bank Berhad, which in turn is the indirect shareholder of Malaysian Trustees Berhad. Notwithstanding this, Malaysian Trustees Berhad is of the view that this does not potentially give rise to any conflict of interest in this transaction.

E. AmBank Islamic Berhad

After making enquiries as were reasonable in the circumstances, to the best of its knowledge, AmBank Islamic Berhad is not aware of any circumstances, which may give rise to a conflict of interest situation or a potential conflict of interest situation in its capacity as the Joint Shariah Advisers for the Sukuk Wakalah Programme. However, AmBank Islamic Berhad wishes to highlight that Datuk Azrulnizam Abdul Aziz, a director of MBSB Bank is also a director of AmMetLife Takaful Berhad. AmMetLife Takaful Berhad is a subsidiary of AMMB Holdings Berhad. AmBank Islamic Berhad is also a subsidiary of AMMB Holdings Berhad. Notwithstanding this, AmBank Islamic Berhad is of the view that this does not potentially give rise to any conflict of interest in this transaction.

167

F. RHB Islamic Bank Berhad

After making enquiries as were reasonable in the circumstances, RHB Islamic Bank Berhad confirms that to the best of its knowledge, it is not aware of any circumstances, which may give rise to a conflict of interest situation or a potential conflict of interest situation in its capacity as the Joint Shariah Advisers in respect of the Sukuk Wakalah Programme. However, RHB Islamic Bank Berhad wishes to highlight that the Employees Provident Fund is a holding body of MBSB and a substantial shareholder of RHB Bank Berhad, which in turn is the parent company of RHB Islamic Bank Berhad. Notwithstanding this, RHB Islamic Bank Berhad is of the view that this does not potentially give rise to any conflict of interest in this transaction.

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168

APPENDIX 1

Audited Financial Statements for the Financial Year Ended

31 December 2018

(Incorporated in Malaysia)

FINANCIAL STATEMENTS

FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2018

MBSB BANK BERHAD (716122-P)

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

Contents Page

Directors' report 1 - 6

Statement by directors 7

Statutory declaration 7

Shariah Advisory Committee's report 8

Independent auditors' report 9 - 12

Statements of financial position 13

Statements of profit or loss and other comprehensive income 14

Statements of changes in equity 15 - 16

Statements of cash flows 17 - 18

Notes to the financial statements 19 - 135

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2018

2018 2017 2018 2017

Note RM'000 RM'000 RM'000 RM'000

Assets

Cash and short-term funds 5(a) 3,242,228 478,674 3,237,276 478,674

Deposits and placements with banks and other

financial institutions 5(b) 776,739 - 1,842 -

Derivative financial assets 6 67 3,091 67 3,091

Financial investments at fair value through other

comprehensive income ("FVOCI") 7 5,097,105 - 5,097,105 -

Financial investments available-for-sale 8 - 227,086 - 227,086

Financial investments at amortised cost 9 20,350 - 20,350 -

Financial investments held-to-maturity 10 - 600,600 - 600,600

Financing and advances 11 31,806,617 1,035,668 31,806,617 1,035,668

Sukuk Commodity Murabahah 12(a) - - 2,924,734 -

Other receivables 13 578,064 8,140 604,838 8,140

Investment in subsidiary 14 - - - -

Investment in joint venture 15 - - - -

Statutory deposits with Bank Negara Malaysia 16 1,053,000 26,774 1,053,000 26,774

Investment property 17 820 820 820 820

Property and equipment 18 20,923 965 20,923 965

Intangible assets 19 104,692 1,619 104,692 1,619

Deferred tax assets 20 - 626 - 626

Tax recoverable 74,587 5,750 74,587 5,750 Total assets 42,775,192 2,389,813 44,946,851 2,389,813

Liabilities

Deposits from customers 21 24,209,449 1,198,676 24,209,449 1,198,676

Deposits and placements of banks and other

financial institutions 22 8,578,851 681,268 8,578,851 681,268

Derivative financial liabilities 6 2 777 2 777

Other payables 23 515,834 14,623 3,099,060 14,623

Recourse obligation on financing sold 24 2,135,518 - 2,135,518 -

Sukuk-MBSB Structured Covered ("SC")

Murabahah 12(b) 1,968,075 - 1,968,075 -

Provision for zakat 13,000 - 13,000 -

Deferred tax liabilities 20 41,552 - 41,552 -

Total liabilities 37,462,281 1,895,344 40,045,507 1,895,344

Equity

Share capital 25 4,625,859 532,530 4,625,859 532,530

Reserves 26 687,052 (38,061) 275,485 (38,061)

Total equity 5,312,911 494,469 4,901,344 494,469

Total liabilities and equity 42,775,192 2,389,813 44,946,851 2,389,813

Commitments and contingencies 35 6,078,479 598,062 6,078,479 598,062

The accompanying notes form an integral part of the financial statements.

Bank

Group

Economic

Entity Bank

13

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 2018 2017

Note RM'000 RM'000 RM'000 RM'000

Income derived from investment of

depositors' funds 27 1,800,046 89,694 1,871,470 89,694

Income derived from investment of

shareholders' funds 28 252,918 29,839 243,195 29,839

Net allowance for impairment on financing and

advances and other financial assets 29 (135,694) (12,451) (135,694) (12,451)

Total distributable income 1,917,270 107,082 1,978,971 107,082

Income attributable to depositors and others 30 (1,126,948) (74,268) (1,260,384) (74,268)

Total net income 790,322 32,814 718,587 32,814

Personnel expenses 31 (180,456) (19,864) (180,456) (19,864)

Other overhead expenses 32 (91,872) (16,630) (89,568) (16,630)

Profit/(Loss) before taxation and zakat 517,994 (3,680) 448,563 (3,680)

Taxation 34 (121,116) 74 (116,368) 74

Zakat (13,000) - (13,000) -

Profit/(Loss) for the year 383,878 (3,606) 319,195 (3,606)

Other comprehensive income, net of tax:

Movement in fair value reserve, which may be

reclassified subsequently to profit or loss 26 10,667 818 10,667 818

Total comprehensive income/(loss) for the year 394,545 (2,788) 329,862 (2,788)

Earnings/(Loss) per share (sen) 36 10.65 (0.68) 8.85 (0.68)

The accompanying notes form an integral part of the financial statements.

Bank

Group

Economic

Entity Bank

14

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018Distributable

(Accumulated Fair losses)/

Share Statutory Regulatory value Retained capital reserve reserve reserve profit Total

Bank Group / Economic Entity RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

At 1 January 2018 532,530 - 5,234 41 (43,336) 494,469 Effects of adopting MFRS 9, net of tax (Note 3(a)) - - - - (16,316) (16,316) Restated at 1 January 2018 532,530 - 5,234 41 (59,652) 478,153 Profit for the year - - - - 383,878 383,878 Other comprehensive income for the year:- changes in fair value - - - 14,036 - 14,036 - income tax relating to component of

other comprehensive income - - - (3,369) - (3,369) - - - 10,667 - 10,667

Adjustment arising from merger exercise (Note 43(b)) - - - - 346,884 346,884 Issuance of ordinary shares (Note 43(a)) 4,093,329 - - - - 4,093,329 At 31 December 2018 4,625,859 - 5,234 10,708 671,110 5,312,911

At 1 January 2017 532,530 13,364 5,234 (777) (53,094) 497,257 Loss for the year - - - - (3,606) (3,606) Other comprehensive income for the year:- changes in fair value - - - 1,076 - 1,076 - income tax relating to component of

other comprehensive income - - - (258) - (258) - - - 818 - 818

Transfer from statutory reserves (Note 26) - (13,364) - - 13,364 - At 31 December 2017 532,530 - 5,234 41 (43,336) 494,469

The accompanying notes form an integral part of the financial statements.

Non-distributable

15

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018 (Cont'd.)

Distributable

(Accumulated

Fair losses)/

Share Statutory Regulatory value Retained

capital reserve reserve reserve profit Total

Bank RM'000 RM'000 RM'000 RM'000 RM'000 RM'000

At 1 January 2018 532,530 - 5,234 41 (43,336) 494,469 Effects of adopting MFRS 9, net of tax (Note 3(a)) - - - - (16,316) (16,316) Restated at 1 January 2018 532,530 - 5,234 41 (59,652) 478,153 Profit for the year - - - - 319,195 319,195 Other comprehensive income for the year:

- changes in fair value - - - 14,036 - 14,036 - income tax relating to component of

other comprehensive income - - - (3,369) - (3,369)

- - - 10,667 - 10,667 Issuance of ordinary shares (Note 43(a)) 4,093,329 - - - - 4,093,329 At 31 December 2018 4,625,859 - 5,234 10,708 259,543 4,901,344

At 1 January 2017 532,530 13,364 5,234 (777) (53,094) 497,257 Loss for the year - - - - (3,606) (3,606) Other comprehensive income for the year:

- changes in fair value - - - 1,076 - 1,076 - income tax relating to component of

other comprehensive income - - - (258) - (258)

- - - 818 - 818 Transfer from statutory reserves (Note 26) - (13,364) - - 13,364 - At 31 December 2017 532,530 - 5,234 41 (43,336) 494,469

The accompanying notes form an integral part of the financial statements.

Non-distributable

16

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 2018 2017

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

Cash flows from operating activities

Profit/(Loss) before taxation and zakat 517,994 (3,680) 448,563 (3,680)

Depreciation of property and equipment 4,085 400 4,085 400

Amortisation of intangible assets 9,680 799 9,680 799

Loss on disposal of property and equipment 2 8 2 8

Allowance for impairment 135,694 12,763 135,694 12,763

Profit adjustment on:

- financial investments (147,895) (30,509) (147,895) (30,509)

- Sukuk-MBSB SC Murabahah 79,951 - 79,951 -

- Sukuk Commodity Murabahah - - (79,943) -

- Recourse obligation on financing sold 72,822 - 72,822 -

Unrealised gain on derivatives (65) - (65) -

Net impairment loss on investment property - 54 - 54

Net gain on sale of financial investments (1,537) (22) (1,537) (22)

Net accretion of discount less amortisation of premium 1,911 50 1,911 50

Operating profit/(loss) before working capital changes 672,642 (20,137) 523,268 (20,137)

Working capital changes:

Decrease in deposits with financial institutions with

maturity of more than one month 105,929 - 52,971 -

(Increase )/decrease in statutory deposits with BNM (1,026,226) 3,600 (1,026,226) 3,600

Decrease/(increase) in other receivables 62,263 (4,536) 62,227 (4,536)

Decrease in investment property - (874) - (874)

Decrease/(increase) in derivative financial assets 3,089 (2,878) 3,089 (2,878)

(Increase)/decrease in financing and advances (822,442) 408,553 (822,442) 408,553

(1,677,387) 403,865 (1,730,381) 403,865

Decrease in deposits from customers and deposits and

placements of banks and other financial instituitions (1,056,011) (66,000) (1,056,011) (66,000)

(Decrease)/increase in derivative financial liabilities (775) 219 (775) 219

Increase in other payables 266,782 2,337 32,824 2,337

(790,004) (63,444) (1,023,962) (63,444)

Cash (used in)/generated from operations (1,794,749) 320,284 (2,231,075) 320,284

Tax paid (145,593) (794) (141,243) (794)

Zakat paid (4,844) - (4,844) -

Net cash (used in)/generated from operating activities (1,945,186) 319,490 (2,377,162) 319,490

The accompanying notes form an integral part of the financial statements.

Economic

Entity Bank

Bank

Group

17

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2018 (Cont'd.)

2018 2017 2018 2017

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

Cash flows from investing activities

Purchase of property and equipment (15,048) (352) (15,048) (352)

Purchase of intangible assets (88,387) (900) (88,387) (900)

Arising from vesting of assets and liabilities from

holding company 6,270,568 - 6,269,184 -

Proceeds from disposal of property and equipment 2 - 2 -

Profit income from financial investments 147,895 30,509 147,895 30,509

Net purchase of financial investments (1,066,082) (80,197) (1,066,082) (80,197)

Profit income from Sukuk Commodity Murabahah - - 79,943 -

Proceeds from maturity of Sukuk Commodity Murabahah - - 348,465 -

Net cash generated from/(used in) investing activities 5,248,948 (50,940) 5,675,972 (50,940)

Cash flows from financing activities

Repayment of recourse obligation on financing sold (43,404) - (43,404) -

Profit expense paid on recourse obligation on

financing sold (68,908) - (68,908) -

Profit expense paid on Sukuk-MBSB SC Murabahah (108,407) - (108,407) -

Repayment of Sukuk-MBSB SC Murabahah (319,489) - (319,489) -

Net cash used in financing activities (540,208) - (540,208) -

Net increase in cash and cash equivalents 2,763,554 268,550 2,758,602 268,550

Cash and cash equivalents at 1 January 478,674 210,124 478,674 210,124

Cash and cash equivalents at 31 December 3,242,228 478,674 3,237,276 478,674

as follows:

Recourse Sukuk-

obligation on MBSB

financing SC

sold Murabahah Total

Bank Group/Economic Entity and Bank RM'000 RM'000 RM'000

At 1 January 2017/31 December 2017/1 January 2018 - - -

Vested from holding company (Note 43(a)) 2,175,008 2,316,020 4,491,028

Profit expense during the year (Note 30) 72,822 79,951 152,773

Profit paid during the year (68,908) (108,407) (177,315)

Repayment and redemption (43,404) (319,489) (362,893)

At 31 December 2018 2,135,518 1,968,075 4,103,593

The accompanying notes form an integral part of the financial statements.

An analysis of changes in liabilities arising from financing activities for the financial year ended 31 December 2018 is

Bank

Group

Economic

Entity Bank

18

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

Notes to the financial statements

For the financial year ended 31 December 2018

Corporate information

11th floor, Wisma MBSB

48 Jalan Dungun

Damansara Heights

50490 Kuala Lumpur

1. Basis of preparation

The Bank is a licensed Islamic bank under Islamic Financial Services Act 2013, incorporated and

domiciled in Malaysia. The address of the registered office and principal place of business of the

Bank is as follows:

The Bank is principally engaged in Islamic Banking business and the provision of related financial

services. The details of the Bank's subsidiary are disclosed in Note 14 to the financial statements.

On 7 February 2018, the Bank became a wholly owned subsidiary of Malaysia Building Society

Berhad ("MBSB"), a public limited liability company incorporated in Malaysia and listed on the Main

Market of Bursa Malaysia Securities Berhad. The Bank subsequently changed the registered legal

entity name from Asian Finance Bank Berhad ("AFB") to MBSB Bank Berhad ("MBSB Bank" or "the

Bank") on 2 April 2018.

The ultimate holding body is Employees Provident Fund ("EPF"), a statutory body established under

the Employees Provident Fund Act 1991 (Act 452).

The consolidated financial statements of the Bank as at and for the financial year ended 31

December 2018 comprise the Bank and its subsidiary (together referred to as the "Bank Group" and

individually referred to as "Bank Group entities") and its interest in joint venture. In the previous

financial year, the Economic Entity included both the Bank and the equity accounted joint venture

(refer Note 15).

These financial statements were approved by the Board of Directors on 19 April 2019.

The consolidated and separate financial statements of the Bank Group and of the Bank have

been prepared in accordance with Malaysian Financial Reporting Standards ("MFRS"),

International Financial Reporting Standards ("IFRS"), the requirements of the Companies Act

2016 in Malaysia and Shariah requirements.

The financial statements of the Bank Group and of the Bank have been prepared on a historical

cost basis except as disclosed in the accounting policies below.

The financial statements are presented in Ringgit Malaysia ("RM") which is the Bank's functional

currency. All financial information is presented in RM and has been rounded to the nearest

thousand (RM'000) except when otherwise indicated.

19

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies

(a) Foreign currency transactions

(b) Basis of consolidation

(i) Subsidiaries

A subsidiary is an entity over which the Bank has all of the following:

(ii) Business combination

The accounting policies set out below have been applied consistently to the periods presented in

these financial statements and have been applied consistently by Bank Group entities, unless

otherwise stated.

The difference between these fair values and the fair value of the consideration

(including the fair value of any pre-existing investment in the acquiree) is goodwill or

discount on acquisition. Discount on acquisition which represents gain on bargain

purchase is recognised immediately in profit or loss.

In the Bank’s separate financial statements, investment in subsidiary is accounted for

at cost less any impairment losses. The policy for the recognition and measurement of

impairment losses is in accordance with Note 2(j) below. On disposal of such

investment, the difference between the net disposal proceeds and its carrying amount

is included in profit or loss. Dividend income received from subsidiary is recognised in

profit or loss on the date that the Bank's right to receive payment is established.

Foreign currency transactions are translated to the respective functional currencies of Bank

Group entities using the exchange rates prevailing at the dates of the transactions or

valuation where items are remeasured. Foreign exchange gains and losses resulting from

the settlement of such transactions and from the translation at year-end exchange rates of

monetary assets and liabilities denominated in foreign currencies are recognised in profit or

loss.

- exposure or rights to variable returns from its involvement with the investee; and

- power over the investee;

- the ability to use its power to affect those returns.

Subsidiaries are consolidated from the date of acquisition, being the date on which the

Bank Group obtains control, and continue to be consolidated until the date that such

control ceases. The assessment of control is performed continuously to determine if

control exists or continues to exist over an entity. Acquisitions of subsidiaries are

accounted for using the acquisition method of accounting. The identifiable assets

acquired and the liabilities assumed are measured at their fair values at the acquisition

date. Acquisition costs incurred are expensed and included in administrative

expenses.

 

20

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(b) Basis of consolidation (cont'd.)

(ii) Business combination (cont'd.)

-

- derecognises the carrying amount of any non-controlling interest;

- derecognises the cumulative translation differences recorded in equity;

- recognises the fair value of the consideration or distribution received;

- recognises the fair value of any investment retained;

- recognises any surplus or deficit in profit or loss; and

-

(c) Joint venture

derecognises the assets (including goodwill) and liabilities of the subsidiary at

their respective carrying amounts;

The Bank’s interest in joint venture is accounted for in the financial statements by the equity

method of accounting. Equity accounting involves recognising the Bank’s share of the post-

acquisition results of jointly controlled entities in profit or loss and its share of post-

acquisition changes of the investee’s reserves in other comprehensive income. The

cumulative post-acquisition changes are adjusted against the cost of the investment and

include goodwill on acquisition (net of any accumulated impairment losses).

Joint ventures are corporations, partnerships or other entities over which there is

contractually agreed sharing of control by the Bank with one or more parties where the

strategic financial and operating decisions relating to the entities require unanimous

consent of the parties sharing control.

In business combinations achieved in stages, previously held equity interest in the

acquiree is remeasured to fair value at the acquisition date and any corresponding

gain or loss is recognised in profit or loss.

 

For each business combination, the Bank Group elects whether to measure the non-

controlling interest in the acquiree at the acquisition date either at fair value or at the

proportionate share of the acquiree’s identifiable net assets.

 

Changes in the Bank Group’s equity interest in a subsidiary that do not result in a loss

of control are accounted for as equity transactions. In such circumstances, the

carrying amounts of the controlling and non-controlling interests are adjusted to reflect

the changes in their respective interests in the subsidiary. Any difference between the

amount by which the non-controlling interest is adjusted and the fair value of the

consideration paid or received is recognised directly in shareholders’ equity.

If the Bank Group loses control over a subsidiary, at the date the Bank Group losses

control, it:

reclassifies the parent’s share of components previously recognised in other

comprehensive income to profit or loss or retained earnings, as appropriate.

21

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(c) Joint venture (cont'd.)

(d) Intangible assets

Software licences

Where necessary, adjustments have been made to the financial statements of joint venture

to ensure consistency of accounting policies with those of the Bank.

After application of the equity method, the Bank determines whether it is necessary to

recognise an impairment loss on investment in its joint venture. At the end of each reporting

period, the Bank determines whether there is objective evidence of impairment. If there is

such evidence, the Bank calculates the impairment amount and recognises the loss as

"share of loss of joint venture" in the statement of profit or loss.

The Bank recognises the portion of gains or losses on the sale of assets by the Bank to the

joint venture that is attributable to the other venturers. The Bank does not recognise its

share of profits or losses from the joint venture that result from the purchase of assets by

the Bank from the joint venture until it resells the assets to an independent party. However,

a loss on the transaction is recognised immediately if the loss provides evidence of a

reduction in the net realisable value of current assets or an impairment loss.

Intangible assets acquired separately are measured initially at cost. The cost of intangible

assets acquired in a business combination is their fair value as at the date of acquisition.

Following initial acquisition, intangible assets are measured at cost less any accumulated

amortisation and any accumulated impairment losses.

Intangible assets with finite useful lives are amortised over the estimated useful lives and

assessed for impairment whenever there is an indication that the intangible asset may be

impaired. The amortisation period and the amortisation method are reviewed at least at

each financial year-end. Changes in the expected useful life or the expected pattern of

consumption of future economic benefits embodied in the asset is accounted for by

changing the amortisation period or method, as appropriate, and are treated as changes in

accounting estimates. The amortisation expense on intangible assets with finite lives is

recognised in profit or loss.

Intangible assets with indefinite useful lives, or which are not yet available for use, are

tested for impairment annually, or more frequently if the events and circumstances indicate

that the carrying value may be impaired either individually or at the cash-generating unit

level. Such intangible assets are not amortised. The useful life of an intangible asset with

an indefinite useful life is reviewed annually to determine whether the useful life

assessment continues to be supportable. If not, the change in useful life from indefinite to

finite is made on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the

difference between the net disposal proceeds and the carrying amount of the asset and are

recognised in profit or loss when the asset is derecognised.

The useful life of software licences is assessed to be finite and is amortised on a straight-

line basis over 5 years.

22

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(e) Property and equipment and depreciation

Building renovation 20%

Furniture and equipment 20%

Motor vehicles 20%

Data processing equipment 20%

(f) Investment property

All items of property and equipment are initially recorded at cost. The cost of an item of

property and equipment is recognised as an asset if, and only if, it is probable that future

economic benefits associated with the item will flow to the Bank Group and the cost of the

item can be measured reliably.

Subsequent to recognition, property and equipment are measured at cost less accumulated

depreciation and any accumulated impairment losses. When significant parts of property

and equipment are required to be replaced, the Bank Group recognises such parts as

individual assets with specific useful lives and depreciation. Likewise, when a major

inspection is performed, its cost is recognised in the carrying amount of the property and

equipment as a replacement if the recognition criteria are satisfied. All other repair and

maintenance costs are recognised in profit or loss as incurred.

Depreciation of property and equipment is provided for on a straight-line basis to write down

the cost of each asset to its residual value over the estimated useful life from the date they

are available for use, at the following annual rates:

The investment property is initially recognised at cost and subsequently at cost less

accumulated impairment losses, if any. The carrying amount of the investment property is

reviewed at the end of each reporting period to determine whether there is any indication of

impairment based on market value determined by independent qualified valuers.

An investment property is derecognised on its disposal, or when it is permanently

withdrawn from use and no future economic benefits are expected from its disposal. The

difference between net disposal proceeds and the carrying amount is recognised in profit or

loss in the period in which the item is derecognised.

The carrying amounts of property and equipment are reviewed for impairment when events

or changes in circumstances indicate that the carrying amounts may not be recoverable.

The residual values, useful lives and depreciation methods are reviewed at end of the

reporting period, and adjusted prospectively, if appropriate.

An item of property and equipment is derecognised upon disposal or when no future

economic benefits are expected from its use or disposal. Any gain or loss on derecognition

of the asset is included in profit or loss in the year the asset is derecognised.

Investment property, comprising only freehold land is held for capital appreciation, and is

not occupied by the Bank.

23

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(g) Employee benefits

(i) Short-term benefits

(ii) Defined contribution plans

(h) Provisions

(i) Cash and cash equivalents

(j) Impairment of non-financial assets

The Bank Group assesses at the end of each reporting period whether there is an

indication that an asset may be impaired. If any such indication exists, or when an annual

impairment assessment for an asset is required, the Bank Group makes an estimate of the

asset's recoverable amount.

As required by law, companies in Malaysia make contributions to the Employees

Provident Fund (“EPF”), a defined contribution pension scheme. Such contributions

are recognised as an expense in profit or loss when incurred.

Cash and short-term funds in the statements of financial position consist of cash and

balances with banks and other financial instituitions, money at call and deposit placements

with banks and other financial institutions which have an insignificant risk of changes in fair

value with original maturities of one month or less.

An asset's recoverable amount is the higher of an asset's fair value less costs of disposal

and its value in use. For the purpose of assessing impairment, assets are grouped at the

lowest levels for which there are separately identifiable cash flows, cash-generating unit

("CGU").

Wages, salaries, bonuses and social security contributions are recognised as an

expense in the year in which the associated services are rendered by employees of

the Bank Group. Short-term accumulating compensated absences such as paid

annual leave are recognised when services are rendered by employees that increase

their entitlement to future compensated absences. Short-term non-accumulating

compensated absences such as sick leave are recognised when the absences occur.

Provisions are recognised when the Bank Group has a present obligation (legal or

constructive) as a result of a past event, it is probable that an outflow of economic

resources will be required to settle the obligation and the amount of the obligation can be

estimated reliably.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the

current best estimate. If it is no longer probable that an outflow of economic resources will

be required to settle the obligation, the provision is reversed. If the effect of the time value

of money is material, provisions are discounted using a current pre-tax rate that reflects,

where appropriate, the risks specific to the liability. When discounting is used, the increase

in the provision due to the passage of time is recognised as a finance cost.

For the purposes of the statements of cash flows, cash and cash equivalents consist of

cash and short-term funds as defined above.

24

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(j) Impairment of non-financial assets (cont'd.)

(k) Financial instruments

(i) Recognition and initial measurement

Current financial year

A financial asset or a financial liability is initially measured at fair value plus or minus,

for an item not at fair value through profit or loss, transaction costs that are directly

attributable to its acquisition or issuance.

In assessing value in use, the estimated future cash flows expected to be generated by the

asset are discounted to their present value using a pre-tax discount rate that reflects current

market assessments of the time value of money and the risks specific to the asset. Where

the carrying amount of an asset exceeds its recoverable amount, the asset is written down

to its recoverable amount. Impairment losses recognised in respect of a CGU or groups of

CGUs are allocated first to reduce the carrying amount of any goodwill allocated to those

units or groups of units and then, to reduce the carrying amount of the other assets in the

unit or groups of units on a pro-rata basis.

Unless specifically disclosed, the Bank Group and the Bank generally applied the following

accounting policies retrospectively. Nevertheless, as permitted by MFRS 9, Financial

Instruments , the Bank Group and the Bank have elected not to restate the comparatives.

A financial asset or a financial liability is recognised in the statement of financial

position when, and only when, the Bank Group or the Bank becomes a party to the

contractual provisions of the instrument.

Impairment losses are recognised in profit or loss.

An assessment is made at the end of each reporting period as to whether there is any

indication that a previously recognised impairment loss may no longer exist or may have

decreased. A previously recognised impairment loss is reversed only if there has been a

change in the estimates used to determine the asset's recoverable amount since the last

impairment loss was recognised. If that is the case, the carrying amount of the asset is

increased to its recoverable amount. That increase cannot exceed the carrying amount that

would have been determined, net of depreciation and/or amortisation, had no impairment

loss been recognised previously. Such reversal is recognised in profit or loss. Impairment

loss on goodwill is not reversed in a subsequent period.

25

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(i) Recognition and initial measurement (cont'd.)

Previous financial year

(ii) Financial instrument categories and subsequent measurement

Financial assets

Current financial year

a)    Business model assessment

i)

ii)

Financial assets are not reclassified subsequent to their recognition unless the Bank

Group or the Bank changes its business model for managing assets.

On initial recognition, a financial asset is classified as measured at: amortised cost,

fair value through other comprehensive income ("FVOCI") or fair value through profit

or loss ("FVTPL").

Financial instrument was recognised initially, at its fair value plus or minus, in the case

of a financial instrument not at fair value through profit or loss, transaction costs that

were directly attributable to the acquisition or issue of the financial instrument.

The Bank Group and the Bank make an assessment of the objective of the

business model ("BM") in which an asset is held at a portfolio level because this

best reflects the way the business is managed and information is provided to

management.

The Bank Group and the Bank consider all relevant evidence that is available at

the date of the assessment. Such relevant evidence includes, but is not limited to:

the stated policies and objectives for the portfolio and the operation of those

policies in practice. In particular, whether management’s strategy focuses on

earning contractual profit revenue, maintaining a particular profit rate profile,

matching the duration of the financial assets to the duration of the liabilities that

are funding those assets or realising cash flows through the sale of the assets;

how the performance of the portfolio (and the financial assets held within) is

evaluated and reported to the management;

26

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(ii) Financial instrument categories and subsequent measurement (cont'd.)

Financial assets (cont'd.)

Current financial year (cont'd.)

a)    Business model assessment (cont'd.)

iii)

iv)

v)

- contingent events that would change the amount and timing of cash flows;

- leverage features;

- prepayment and extension terms;

For the purposes of this assessment, ‘principal’ is defined as the fair value of the

financial asset on initial recognition. ‘Profit’ is defined as consideration for the time

value of money and for the credit risk associated with the principal amount

outstanding during a particular period of time and for other basic lending risks and

costs (e.g. liquidity risk and administrative costs), as well as profit margin.

Financial assets that are held for trading or managed and whose performance is

evaluated on a fair value basis are measured at FVTPL because they are neither

held to collect contractual cash flows nor held both to collect contractual cash

flows and to sell financial assets.

the frequency, volume and timing of sales in prior periods, the reasons for such

sales and its expectations about future sales activity. However, information about

sales activity is not considered in isolation, but as part of an overall assessment

of how the Bank Group's and the Bank's stated objective for managing the

financial assets is achieved and how cash flows are realised.

b)    Assessment of whether contractual cash flows are solely payments of

principal and profit ("SPPI")

In assessing whether the contractual cash flows are SPPI, the Bank Group and

the Bank consider the contractual terms of the instrument. This includes

assessing whether the financial asset contains a contractual term that could

change the timing or amount of contractual cash flows such that it would not meet

this condition. In making the assessment, the Bank Group and the Bank consider:

how managers of the business are compensated (for example, whether the

compensation is based on the fair value of the assets managed or the contractual

cash flows collected); and

the risks that affect the performance of the portfolio (and the financial assets held

within) and, in particular, the way that those risks are managed;

- terms that limit the Bank Group's and the Bank's claim to cash flows from

specified assets (e.g. non-recourse financing); and

- features that modify consideration of the time value of money (e.g. periodical

reset of profit rates).

27

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(ii) Financial instrument categories and subsequent measurement (cont'd.)

Financial assets (cont'd.)

Current financial year (cont'd.)

c)    Financial assets measured at amortised cost

d)  

(i) Debt investments

(ii) Equity investments

A financial asset is measured at amortised cost if it meets both of the following

conditions and is not designated as at FVTPL:

- the asset is held within a business model whose objective is to hold assets to

collect contractual cash flows; and

This category comprises debt investment where it is held within a business model

whose objective is achieved by both collecting contractual cash flows and selling

the debt investment, and its contractual terms give rise on specified dates to cash

flows that are solely payments of principal and profit on the principal amount

outstanding. The debt investment is not designated as at fair value through profit

or loss. Profit income calculated using the effective profit method, foreign

exchange gains and losses and impairment are recognised in profit or loss. Other

net gains and losses are recognised in other comprehensive income. On

derecognition, gains and losses accumulated in other comprehensive income are

reclassified to profit or loss.

- the contractual terms of the financial asset give rise on specified dates to cash

flows that are SPPI on the principal amount outstanding.

Financial assets measured at fair value through other comprehensive

income ("FVOCI")

Profit income is recognised by applying effective profit rate to the gross carrying

amount except for credit impaired financial assets where the effective profit rate is

applied to the amortised cost.

This category comprises investment in equity that is not held for trading, and the

Bank Group and the Bank may irrevocably elect to present subsequent changes

in the investment’s fair value in other comprehensive income. This election is

made on an investment by investment basis. Dividends are recognised as income

in profit or loss unless the dividend clearly represents a recovery of part of the

cost of investment. Other net gains and losses are recognised in other

comprehensive income. On derecognition, gains and losses accumulated in other

comprehensive income are not reclassified to profit or loss.

Subsequent to initial recognition, these financial assets are measured at

amortised cost using the effective profit method. The amortised cost is reduced

by impairment losses. Profit income, foreign exchange gains and losses and

impairment are recognised in profit or loss. Any gain or loss on derecognition is

recognised in profit or loss.

28

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(ii) Financial instrument categories and subsequent measurement (cont'd.)

Financial assets (cont'd.)

Current financial year (cont'd.)

e)    Financial assets measured at fair value through profit or loss ("FVTPL")

Previous financial year

Classification

a) Fair value through profit or loss

b) Financial investments held-to-maturity

All financial assets, except for those measured at fair value through profit or loss

and equity investments measured at fair value through other comprehensive

income, are subject to impairment assessment (Note 2(l)).

In the previous financial year, financial assets of the Economic Entity and the Bank

were classified and measured under MFRS 139, Financial Instruments: Recognition

and Measurement as follows:

All financial assets not measured at amortised cost or fair value through other

comprehensive income as described above are measured at fair value through

profit or loss. This includes derivative financial assets (except for a derivative that

is a designated and effective hedging instrument). On initial recognition, the Bank

Group or the Bank may irrevocably designate a financial asset that otherwise

meets the requirements to be measured at amortised cost or at fair value through

other comprehensive income as at fair value through profit or loss if doing so

eliminates or significantly reduces an accounting mismatch that would otherwise

arise.

Financial assets categorised as fair value through profit or loss are subsequently

measured at their fair value. Net gains or losses, including any profit or dividend

income, are recognised in the profit or loss.

Financial assets at fair value through profit or loss were financial assets held for

trading. A financial asset was classified in this category if it was acquired or

incurred principally for the purpose of selling or repurchasing it in the near term. It

also included derivative instruments where currently applicable only to the

Economic Entity's and the Bank's forward foreign exchange contracts.

Financial investments held-to-maturity were non-derivative financial assets with

fixed or determinable payments and fixed maturities that the Economic Entity's

and the Bank’s management had the positive intention and ability to hold to

maturity. If the Economic Entity and the Bank were to sell other than an

insignificant amount of held-to-maturity financial assets, the whole category would

be tainted and reclassified as available-for-sale.

29

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(ii) Financial instrument categories and subsequent measurement (cont'd.)

Financial assets (cont'd.)

Previous financial year (cont'd.)

Classification (cont'd.)

c) Financing and advances

d) Financial investments available-for-sale

Subsequent measurement – gain and losses

These contracts were initially recognised at fair value, including direct and

incremental transaction costs, and subsequently measured at amortised cost

using the effective profit method. The contracts were stated at net of unearned

income and any amounts written off less any impairment loss.

Financial investments available-for-sale were non-derivatives that were either

designated in this category or not classified in any of the other categories.

Financial investments available-for-sale and financial assets at fair value through profit

or loss were subsequently carried at fair value. Financing and advances and financial

investments held-to-maturity were subsequently carried at amortised cost using the

effective profit method.

Changes in the fair values of financial assets at fair value through profit or loss,

including the effects of currency translation, profit and dividend income were

recognised in profit or loss in the period in which the changes arise. Changes in the

fair value of financial investments available-for-sale were recognised in other

comprehensive income, except for impairment losses (refer to accounting policy Note

2(l)) and foreign exchange gains and losses on monetary assets. The exchange

differences on monetary assets were recognised in profit or loss, whereas exchange

differences on non-monetary assets were recognised in other comprehensive income

as part of fair value change.

Profit and dividend income on financial investments available-for-sale were

recognised separately in profit or loss. Profit on financial investments available-for-

sale calculated using the effective profit method was recognised in profit or loss.

Dividend income on available-for-sale equity instruments were recognised in profit or

loss when the Bank’s right to receive payments was established.

Financing and advances were non-derivative financial assets with fixed or

determinable payments that were not quoted in an active market. These financial

assets were in the form of Ijarah, Qard and Bai'.

All financial assets, except for those measured at fair value through profit or loss were

subject to impairment assessment.

30

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(ii) Financial instrument categories and subsequent measurement (cont'd.)

Financial assets (cont'd.)

Previous financial year (cont'd.)

Subsequent measurement – gain and losses (cont'd.)

Financial liabilities

Current financial year

The categories of financial liabilities at initial recognition are as follows:

a) Financial liabilities measured at amortised cost

b) Financial liabilities measured at fair value through profit or loss ("FVTPL")

i)

Other financial liabilities not categorised as fair value through profit or loss are

subsequently measured at amortised cost using the effective profit method.

Profit expense and foreign exchange gains and losses are recognised in the profit

or loss. Any gains or losses on derecognition are also recognised in the profit or

loss.

Fair value through profit or loss category comprises financial liabilities that are

derivatives (except for a derivative that is a financial guarantee contract or a

designated and effective hedging instrument) and financial liabilities that are

specifically designated into this category upon initial recognition.

On initial recognition, the Bank Group or the Bank may irrevocably designate a

financial liability that otherwise meets the requirements to be measured at

amortised cost as at fair value through profit or loss:

Derivatives were subsequently measured at fair value. Fair value was obtained from

comparing with contracted rate. All derivatives were carried as assets when fair value

was positive and liabilities when fair value was negative. Changes in fair value were

recognised immediately in profit or loss.

if doing so eliminates or significantly reduces an accounting mismatch that would

otherwise arise;

31

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(ii) Financial instrument categories and subsequent measurement (cont'd.)

Financial liabilities (cont'd.)

Current financial year (cont'd.)

b)

ii)

iii)

Previous financial year

Financial liabilities measured at amortised cost

Financial liabilities measured at fair value through profit or loss ("FVTPL")

(cont'd.)

a group of financial liabilities or assets and financial liabilities is managed and its

performance is evaluated on a fair value basis, in accordance with a documented

risk management or investment strategy, and information about the group is

provided internally on that basis to the Bank Group’s key management personnel;

or

Financial liabilities that were not classified as at fair value through profit or loss fell into

this category and were measured at amortised cost. Financial liabilities measured at

amortised cost were deposits from customers, deposits and placements of banks and

other financial institutions, and other payables.

Economic Entity's and the Bank’s holding in financial liabilities are recognised at

amortised cost. Financial liabilites are derecognised when extinguished.

For financial liabilities where it is designated as fair value through profit or loss upon

initial recognition, the Bank Group and the Bank recognise the amount of change in

fair value of the financial liability that is attributable to change in credit risk in the other

comprehensive income and remaining amount of the change in fair value in the profit

or loss, unless the treatment of the effects of changes in the liability’s credit risk would

create or enlarge an accounting mismatch.

if a contract contains one or more embedded derivatives and the host is not a

financial asset in the scope of MFRS 9, where the embedded derivative

significantly modifies the cash flows and separation is not prohibited.

Financial liabilities categorised as fair value through profit or loss are subsequently

measured at their fair value with gains or losses, including any profit expense are

recognised in the profit or loss.

32

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(iii) Financial guarantee contracts

(a) the amount of the loss allowance; and

(b)

(iv) Derecognition

(v) Modifications of financial assets and financial liabilities

Financial assets

Liabilities arising from financial guarantees are included within "expected credit losses

for commitment and contingencies" under other payables.

A financial asset or part of it is derecognised when, and only when the contractual

rights to the cash flows from the financial asset expire or the financial asset is

transferred to another party without retaining control or substantially all risks and

rewards of the asset. On derecognition of a financial asset, the difference between the

carrying amount and the sum of the consideration received (including any new asset

obtained less any new liability assumed) is recognised in profit or loss.

A financial liability or a part of it is derecognised when, and only when, the obligation

specified in the contract is discharged, cancelled or expires. On derecognition of a

financial liability, the difference between the carrying amount of the financial liability

extinguished or transferred to another party and the consideration paid, including any

non-cash assets transferred or liabilities assumed, is recognised in profit or loss.

Modification of financial assets involves any modification made to the original payment

terms and conditions of the financing facility following an increase in the credit risk of

the customer. This includes but is not limited to an extension of tenure and flexible

payment schedule including payment vacation, profit only payments, or capitalisation

of principal or profit or both.

the amount initially recognised less, when appropriate, the cumulative amount of

income recognised in accordance to the principles of MFRS 15, Revenue from

Contracts with Customers.

A financial guarantee contract is a contract that requires the issuer to make specified

payments to reimburse the holder for a loss it incurs because a specified debtor fails

to make payment when due in accordance with the original or modified terms of a debt

instrument.

Financial guarantees issued are initially measured at fair value. Subsequently, they

are measured at higher of:

33

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(k) Financial instruments (cont'd.)

(v) Modifications of financial assets and financial liabilities (cont'd.)

Financial assets (cont'd.)

Financial liabilities

(vi) Offsetting

The Bank Group and the Bank derecognises a financial liability when its terms are

modified and the cash flows of the modified liability are substantially different. In this

case, a new financial liability based on the modified terms is recognised at fair value.

The difference between the carrying amount of the financial liability extinguished and

the new financial liability with modified terms is recognised in profit or loss.

Financial assets and financial liabilities are offset and the net amount presented in the

statements of financial position when, and only when, the Bank Group and the Bank

currently have a legally enforceable right to set off the amounts and they intend either

to settle them on a net basis or to realise the asset and settle the liability

simultaneously.

The Bank Group and the Bank evaluates whether the cash flows of the modified asset

are substantially different if the terms of a financial asset are modified.

If the modification of a financial iability is not accounted for as derecognition, then the

amortised cost of the liability is recalculated by discounting the modified cash flows at

the original effective profit rate and the resulting gain or loss is recognised in profit or

loss.

Once the financing assets have been modified, its satisfactory performance is

monitored for a period of six months before it can be reclassified as non-credit

impaired.

However, the financial assets will not be considered as modified if moratorium on

financing repayments is granted or the financing is rescheduled/restructured by Agensi

Kaunseling & Pengurusan Kredit ("AKPK").

If the cash flows are substantially different, then the contractual rights to cash flows

from the original financial asset are deemed to have expired. In this case, the original

financial asset is derecognised and a new financial asset is recognised at fair value.

If such a modification is carried out because of financial difficulties of the borrower,

then the gain or loss is presented together with impairment losses. In other cases, it is

presented as profit income, calculated using the effective profit rate method.

If the cash flows of the modified asset carried at amortised cost or FVOCI are not

substantially different, the modification does not result in derecognition of the financial

asset. In this case, the Bank Group and the Bank recalculates the gross carrying

amount of the financial asset using the original effective profit rate of the asset and

recognises the amount arising from adjusting the gross carrying amount as a

modification gain or loss in profit or loss.

34

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets

Current financial year

Measurement

- probability of default ("PD");

- loss given default ("LGD"); and

- exposure at default ("EAD").

The key inputs into the measurement of ECL are the term structure of the following

variables:

ECL for exposures in Stage 1 is calculated by multiplying the 12-month PD by LGD and

EAD. Lifetime ECL is calculated by multiplying the lifetime PD by LGD and EAD.

PD provides an estimate of the likelihood that a borrower will be unable to meet its debt

obligation or default over a particular time horizon, usually in the course of 1 year.

An impairment loss in respect of debt investments measured at fair value through other

comprehensive income ("FVOCI") is recognised in profit or loss and the allowance account

is recognised in other comprehensive income.

The Bank Group and the Bank measure loss allowances at an amount equal to lifetime ECL

except for debt securities that are determined to have low credit risk at the reporting date

and other financial instruments of which credit risk has not increased significantly since

initial recognition, which are measured at 12-month ECL.

When determining whether the credit risk of a financial asset has increased significantly

since initial recognition and when estimating ECL, the Bank Group and the Bank consider

reasonable and supportable information that is relevant and available without undue cost or

effort. This includes both quantitative and qualitative information and analysis, based on the

Bank Group’s and the Bank's historical experience and informed credit assessment and

including forward-looking information, where available.

Unless specifically disclosed below, the Bank Group and the Bank generally applied the

following accounting policies retrospectively. Nevertheless, as permitted by MFRS 9,

Financial Instruments , the Bank Group and the Bank elected not to restate the

comparatives.

The Bank Group and the Bank recognise loss allowances for expected credit losses

("ECL") on financial assets measured at amortised cost and financial investments

measured at FVOCI (debt securities), but not on investments in equity instruments. ECL are

a probability-weighted estimate of credit losses.

An impairment loss in respect of financial assets measured at amortised cost is recognised

in profit or loss and the carrying amount of the asset is reduced through the use of an

allowance account.

35

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Current financial year (cont'd.)

Measurement (cont'd.)

LGD is the magnitude of the likely loss if there is a default. The Bank Group and the Bank

estimate LGD parameters based on the history of recovery rates of claims against

defaulted counterparties. The LGD models consider the structure, collateral, seniority of the

claim, counterparty industry and recovery costs of any collateral that is integral to the

financial asset.

EAD represents the expected exposure in the event of a default. The Bank Group and the

Bank derive the EAD from the current exposure to the counterparty and potential changes

to the current amount allowed under the contract and arising from amortisation. The EAD of

a financial asset is its gross carrying amount at the time of default. For lending

commitments, the EADs are potential future amounts that may be drawn under the contract,

which are estimated based on historical observations and forward-looking forecasts. For

financial guarantees, the EAD represents the amount of the guaranteed exposure when the

financial guarantee becomes payable. For some financial assets, EAD is determined by

modelling the range of possible exposure outcomes at various points in time using scenario

and statistical techniques.

As described above, and subject to using a maximum of a 12-month PD for Stage 1

financial assets, the Bank Group and the Bank measure ECL considering the risk of default

over the maximum contractual period (including any borrower’s extension options) over

which they are exposed to credit risk, even if, for credit risk management purposes, the

Bank Group and the Bank consider a longer period. The maximum contractual period

extends to the date at which the Bank Group and the Bank have the right to require

repayment of an advance or terminate a financing commitment or guarantee.

36

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Current financial year (cont'd.)

Measurement (cont'd.)

- instrument type;

- credit risk gradings;

- collateral type;

- financing-to-value ("FTV") ratio for retail property financing;

- date of initial recognition;

- remaining term to maturity;

- industry; and

- geographic location of the borrower.

Where modelling of a parameter is carried out on a collective basis, the financial

instruments are grouped on the basis of shared risk characteristics that include but not

limited to:

However, for facilities that include both a financing and an undrawn commitment

component, the Bank Group and the Bank measure ECL over a period longer than the

maximum contractual period if the Bank Group’s and the Bank's contractual ability to

demand repayment and cancel the undrawn commitment does not limit the Bank Group’s

and the Bank's exposure to credit losses to the contractual notice period. These facilities do

not have a fixed term or repayment structure. The Bank Group and the Bank can cancel

them with immediate effect but this contractual right is not enforced in the normal day-to-

day management, but only when the Bank Group and the Bank become aware of an

increase in credit risk at the facility level. This longer period is estimated taking into account

the credit risk management actions that the Bank Group and the Bank expect to take, and

that serve to mitigate ECL. These include a reduction in limits, cancellation of the facility

and/or turning the outstanding balance into a financing with fixed repayment terms.

The groupings are subject to regular review to ensure that exposures within a particular

group remain appropriately homogeneous. For portfolios in respect of which the Bank

Group has limited historical data, external benchmark information is used to supplement the

internally available data.

37

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Current financial year (cont'd.)

Recognition

Significant increase in credit risk ("SICR")

The Bank Group and the Bank determine days past due by counting the number of days

since the earliest elapsed due date in respect of which full payment has not been received.

Financial assets are segregate into 3 stages depending on the changes in credit quality

since initial recognition.

Lifetime ECL are the ECL that result from all possible default events over the expected life

of the asset, while 12-month ECL are the portion of ECL that result from default events that

are possible within the 12 months after the reporting date. The maximum period considered

when estimating ECL is the maximum contractual period over which the Bank Group and

the Bank are exposed to credit risk.

Stage 3 includes financial assets that have objective evidence of impairment at reporting

date. For these assets, lifetime ECL is recognised and profit income is calculated on the net

carrying amount.

The credit risk may also be deemed to have increased significantly since initial recognition

based on qualitative factors linked to the Bank Group’s and the Bank's credit risk

management processes. This will be the case for exposures that meet certain heightened

risk criteria, such as placement on a watchlist. Such qualitative factors are based on the

management's expert judgement and relevant historical experiences.

Stage 2 includes financial assets that have a significant increase in credit risk since initial

recognition but do not have objective evidence of impairment. For those assets, lifetime

ECL is recognised and profit income is still calculated on the gross carrying amount of the

asset.

Obligatory triggers applied by the Bank Group and the Bank in determining whether there

has been a significant increase in credit risk is where the principal or profit or both of the

financing assets are overdue for more than 1 month, after grace period, but less than 3

months or hit any of the qualitative indicators but not limited to increase in internal credit

spread of an existing facility, breach of covenants and decrease in securities prices.

Stage 1 includes financial assets that do not have a significant increase in credit risk since

initial recognition or those have low credit risk at reporting date. For these assets, 12-month

ECL are recognised and profit income is calculated on the gross carrying amount of the

assets.

38

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Current financial year (cont'd.)

Significant increase in credit risk ("SICR") (cont'd.)

Credit impaired (Default)

The Bank Group and the Bank consider a financial asset to be in default when:

(a) Payment conduct

●

●

●

(b) Restructured and rescheduled (“R&R”) financing; or

(c) Customer/Issuer is declared bankrupt/wound up

At each reporting date, the Bank Group and the Bank assess whether financial assets

carried at amortised cost and debt securities at fair value through other comprehensive

income are credit impaired. A financial asset is credit impaired when one or more events

that have a detrimental impact on the estimated future cash flows of the financial asset

have occurred.

Where the principal or profit or both of the financing is past due for more than

ninety (90) days or three (3) months;

Where payments are scheduled on intervals of three (3) months or longer, the

account shall be classified as impaired as soon as a default occurs (i.e. when the

customer is unable to meet the contractual payment terms), unless it does not

exhibit any weakness that would render it classified as impaired according to the

Bank Group’s and the Bank's credit risk grading framework.

In the case of revolving facilities (e.g. revolving working capital or overdraft

facilities), notwithstanding the first trigger above, where the outstanding amount

has remained in excess of the approved limit for a period of more than ninety (90)

days or three (3) months;

If there is evidence that there is no longer a significant increase in credit risk relative to

initial recognition, then the loss allowance on a financial asset returns to being measured as

12-month ECL. Some qualitative indicators of an increase in credit risk, such as

delinquency or forbearance, may be indicative of an increased risk of default that persists

after the indicator itself has ceased to exist. In these cases, the Bank Group and the Bank

determine a probation period during which the financial asset is required to demonstrate

good behaviour to provide evidence that its credit risk has declined sufficiently. When

contractual terms of a financing have been modified, evidence that the criteria for

recognising lifetime ECL are no longer met includes a history of up-to-date payment

performance against the modified contractual terms.

39

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Current financial year (cont'd.)

Credit impaired (Default) (cont'd.)

● qualitative: e.g. breaches of covenant;

●

● based on data developed internally and obtained from external sources.

Restructured financial assets

-

-

Incorporation of forward-looking information

If the expected restructuring will not result in derecognition of the existing asset, then

the expected cash flows arising from the modified financial asset are included in

calculating the cash shortfalls from the existing asset.

Inputs into the assessment of whether a financial asset is in default and their significance

may vary over time to reflect changes in circumstances. The definition of default largely

aligns with that applied by the Bank Group and the Bank for regulatory capital purposes.

MFRS 9 specifically requires measurement of ECL using not only past and current

information, but also including forecast information. Hence, the ECL calculations include

forward looking adjustment according to the expected future macroeconomic conditions.

Forward looking adjustment incorporated within the ECL model is a combination of

statistical analysis and expert judgements based on the availability of detailed information.

External information considered includes economic data and forecasts published by

external rating agencies.

quantitative: e.g. overdue status and non-payment on another obligation of the

same issuer to the Bank Group or the Bank; and

If the terms of a financial asset are renegotiated or modified or an existing financial asset is

replaced with a new one due to financial difficulties of the borrower, then an assessment is

made of whether the financial asset should be derecognised and ECL are measured as

follows:

ECL for restructured financial assets that are not considered to be credit-impaired will be

recognised on 12-month basis. However, if there is a significant increase in credit risk, the

ECL will be recognised on a lifetime basis.

If the expected restructuring will result in derecognition of the existing asset, then the

expected fair value of the new asset is treated as the final cash flow from the existing

financial asset at the time of its derecognition. This amount is included in calculating

the cash shortfalls from the existing financial asset that are discounted from the

expected date of derecognition to the reporting date using the original effective profit

rate of the existing financial asset.

In assessing whether a borrower is in default, the Bank Group and the Bank consider

indicators that are:

40

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Current financial year (cont'd.)

Incorporation of forward-looking information (cont'd.)

Write-down/write-off

Previous financial year

a) Assets carried at amortised cost

- when an asset was non-performing;

- significant financial difficulty of the issuer or obligor;

- a breach of contract, such as a default or delinquency in profit or principal payments;

All financial assets (except for financial assets categorised as fair value through profit

or loss) were assessed at the end of the reporting period whether there was objective

evidence that a financial asset or group of financial assets was impaired. A financial

asset or a group of financial assets was impaired and impairment losses were incurred

only if there was objective evidence of impairment as a result of one or more events

that occurred after the initial recognition of the asset (a ‘loss event’) and that loss

event (or events) had an impact on the estimated future cash flows of the financial

asset or group of financial assets that could be reliably estimated.

The criteria that the Economic Entity and the Bank used to determine that there was

objective evidence of an impairment loss included:

Methodology and assumptions including forecasts of future economic conditions are

reviewed regularly.

Financial assets that are written down/written off could still be subject to enforcement

activities in order to comply with the Bank Group's and the Bank's procedures for recovery

of amounts due.

Key macroeconomic variables (“MEV”) that are incorporated into the ECL calculations

include, but not limited to House Price Index ("HPI") and Consumer Price Index ("CPI").

Forward-looking MEVs are supported with 3 economic scenarios i.e baseline, best and

worst case scenarios for 10 years of forecast based on the available forecasts.

Financial assets and related impairment allowances are normally written down/written off,

either partially or in full, when there is no realistic prospect of recovery of the financial

assets. This is generally the case when the Bank Group and the Bank determine that the

borrower does not have assets or sources of income that could generate sufficient cash

flows to repay the amounts subject to the write-down/write-off. This assessment is carried

out at the individual asset level. Where financial assets are secured, the write-down/write-

off is normally done after receipt of any proceeds from the realisation of security.

41

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Previous financial year (cont'd.)

a) Assets carried at amortised cost (cont'd.)

i)

ii) national or local economic conditions that correlated with defaults on the assets in

the portfolio.

- it became probable that the borrower would enter bankruptcy or other financial

reorganisation;

- disappearance of an active market for that financial asset because of financial

difficulties; or

adverse changes in the payment status of borrowers in the portfolio; and

The amount of the impairment loss was measured as the difference between the

asset’s carrying amount and the present value of estimated future cash flows

(excluding future credit losses that had not been incurred) discounted at the financial

asset’s original effective profit rate. The asset’s carrying amount of the asset was

reduced and the amount of the loss was recognised in profit or loss. If ‘financing and

advances’ or ‘financial investments held-to-maturity’ had a variable profit rate, the

discount rate for measuring any impairment loss was the current effective profit rate

determined under the contract.

When an asset was uncollectible, it was written off against the related allowance

account. Such assets were written off after all the necessary procedures had been

completed and the amount of the loss had been determined.

For financing and advances, the Economic Entity and the Bank first assessed whether

objective evidence of impairment existed individually for financing and advances that

were individually significant, and individually or collectively for financing and advances

that were not individually significant. If the Economic Entity and the Bank determined

that no objective evidence of impairment existed for an individually assessed financing

and advances, whether significant or not, they included the asset in a group of

financing and advances with similar credit risk characteristics and collectively

assessed them for impairment.

If, in a subsequent period, the amount of the impairment loss decreased and the

decrease could be related objectively to an event occurring after the impairment was

recognised (such as an improvement in the debtor’s credit rating), the reversal of the

previously recognised impairment loss was recognised in profit or loss.

- the Economic Entity and the Bank, for economic or legal reasons relating to the

borrower's financial difficulty, granting to the borrower a concession that the lender

would not otherwise consider;

- observable data indicating that there was a measurable decrease in the estimated

future cash flows from a portfolio of financial assets since the initial recognition of

those assets, although the decrease could not yet be identified with the individual

financial assets in the portfolio, including:

42

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Previous financial year (cont'd.)

a) Assets carried at amortised cost (cont'd.)

i) Individual impairment allowance

ii) Collective impairment allowance

b) Assets classified as available-for-sale

Financing and advances which were not individually significant or those that had

been individually assessed with no evidence of impairment loss were grouped

together for portfolio impairment assessment. These financing and advances

were grouped within similar credit risk characteristics for collective assessment,

whereby data from the financing portfolio were taken into consideration. When

there were insufficient historical data available, past information from the industry

had been used instead.

The Economic Entity and the Bank assessed at the end of the reporting period

whether there was objective evidence that a financial asset or a group of financial

assets was impaired.

For debt securities, the Economic Entity and the Bank used criteria and measurement

of impairment loss applicable for ‘assets carried at amortised cost’ above. If, in a

subsequent period, the fair value of a debt instrument classified as available-for-sale

increased and the increase could be objectively related to an event occurring after the

impairment loss was recognised in profit or loss, the impairment loss was reversed

through profit or loss.

The Economic Entity and the Bank addressed impairment of financing and advances

via either individually assessed allowance or collectively assessed allowance.

The Economic Entity and the Bank determined the allowance appropriate for each

individual significant impaired financing and advances on an individual basis. The

allowances were established based primarily on estimates of the realisable value

of the collateral to secure the financing and advances and were measured as the

difference between the carrying amount of the financing and advances and the

present value of the expected future cash flows discounted at original effective

profit rate of the financing and advances. All other financing and advances that

had been individually evaluated, but not considered to be individually impaired

were assessed collectively for impairment.

43

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(l) Impairment of financial assets (cont'd.)

Previous financial year (cont'd.)

b) Assets classified as available-for-sale (cont'd.)

(m) Equity instruments

(n) Recognition of income

(i) Profit income

Profit income is recognised in profit or loss for all profit-bearing assets using the

effective profit method.

The effective profit method is a method of calculating the amortised cost of a financial

asset or a financial liability and of allocating the profit income or profit expense over

the relevant period. The effective profit rate is the rate that exactly discounts estimated

future cash payments or receipts through the expected life of the financial instruments

or, when appropriate, a shorter period to the net carrying amount of the financial asset

or financial liability. When calculating the effective profit rate, the Bank takes into

account all contractual terms of the financial instrument and includes any fees or

incremental costs that are directly attributable to the instrument and are an integral

part of the effective profit rate, but not future credit losses.

In the case of equity securities classified as available-for-sale, in addition to the criteria

for ‘assets carried at amortised cost’ above, a significant or prolonged decline in the

fair value of the security below its cost was also considered as an indicator that the

assets were impaired. If any such evidence existed for available-for-sale financial

assets, the cumulative loss that had been recognised directly in equity was removed

from equity and recognised in profit or loss. The amount of cumulative loss that was

reclassified to profit or loss was the difference between the acquisition cost and the

current fair value, less any impairment loss on that financial asset previously

recognised in profit or loss. Impairment losses recognised in profit or loss on equity

instruments classified as available-for-sale were not reversed through profit or loss.

Ordinary shares are classified as equity. Dividends on ordinary shares are recognised as a

liability and deducted from equity in the period in which all relevant approvals have been

obtained.

Revenue is recognised to the extent that it is probable that the economic benefit will flow to

the Bank Group and/or the Bank and the revenue can be reliably measured. The following

specific recognition criteria must also be met before revenue is recognised:

The transaction costs of an equity transaction are accounted for as a deduction from equity,

net of tax. Equity transaction costs comprise only those incremental external costs directly

attributable to the equity transaction which would otherwise have been avoided.

44

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(n) Recognition of income (cont'd.)

(i) Profit income (cont'd.)

(ii) Fee income

(iii) Dividend income

(iv) Other income

(o) Income tax

(i) Current tax

Profit on impaired financial assets is recognised using the rate of profit used to

discount the future cash flows for the purpose of measuring the impairment loss.

Current tax assets and liabilities are measured at the amount expected to be

recovered from or paid to the taxation authorities. The tax rates and tax laws used to

compute the amount are those that are enacted or substantively enacted by the end of

reporting period.

Current tax is recognised in profit or loss except to the extent that the tax relates to

items recognised outside profit or loss, either in other comprehensive income or

directly in equity.

Other income is recognised upon invoices being issued and services rendered.

Murabahah income is recognised on effective profit rate basis over the period of the

contract based on the financing amounts disbursed. Ijarah income is recognised on

effective profit rate basis over the lease term of the financing amount. Tawarruq

income is essentially Murabahah contract based income and therefore recognised on

the same basis as Murabahah income. Istisna' income is also recognised on effective

profit rate basis over the contractual period based on financing amount disbursed.

Financing arrangement fees, commissions and insurance fees are recognised as

income at the time the underlying transactions are completed and there are no other

contingencies associated with the fees.

Commitment and processing fees are recognised as income based on the amortised

cost method.

Dividend income is recognised when the Bank Group's and/or the Bank's right to

receive payment is established.

45

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(o) Income tax (cont'd.)

(ii) Deferred tax

Deferred tax liabilities are recognised for all taxable temporary differences, except:

-

-

-

-

where the deferred tax asset relating to the deductible temporary difference arises

from the initial recognition of an asset or liability in a transaction that is not a

business combination and, at the time of the transaction, affects neither the

accounting profit nor taxable profit or loss; and

Deferred tax is provided using the liability method on temporary differences at the end

of each reporting period between the tax bases of assets and liabilities and their

carrying amounts for financial reporting purposes.

where the deferred tax liability arises from the initial recognition of goodwill or of

an asset or liability in a transaction that is not a business combination and, at the

time of the transaction, affects neither the accounting profit nor taxable profit or

loss; and

in respect of taxable temporary differences associated with investments in

subsidiaries, associates and interests in joint ventures, where the timing of the

reversal of the temporary differences can be controlled and it is probable that the

temporary differences will not reverse in the foreseeable future.

in respect of deductible temporary differences associated with investments in

subsidiaries, associates and interests in joint ventures, deferred tax assets are

recognised only to the extent that it is probable that the temporary differences will

reverse in the foreseeable future and taxable profits will be available against

which the temporary differences can be utilised.

Deferred tax assets are recognised for all deductible temporary differences, unused

tax credits and unused tax losses, to the extent that it is probable that taxable profits

will be available against which the deductible temporary differences, and the unused

tax credits and unused tax losses can be utilised except:

46

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(o) Income tax (cont'd.)

(ii) Deferred tax (cont'd.)

(p) Zakat

(q) Earnings per ordinary share

The obligation and responsibility of specific payment of zakat on deposit fund lies with the

muslim depositors of the Bank. As such, no accrual of zakat expenses is recognised in the

financial statements of the Bank.

Deferred tax assets and liabilities are measured at the tax rates that are expected to

apply to the year when the asset is realised or the liability is settled, based on tax rates

and tax laws that have been enacted or substantively enacted at the end of each

reporting period.

Deferred tax relating to items recognised outside profit or loss is recognised outside

profit or loss. Deferred tax items are recognised in correlation to the underlying

transaction either in other comprehensive income or directly in equity and deferred tax

arising from a business combination is adjusted against goodwill on acquisition.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right

exists to set off current tax assets against current tax liabilities and the deferred taxes

relate to the same taxable entity and the same taxation authority.

This represents business zakat that is paid on the Bank's portion. It is an obligatory amount

payable by the Bank Group and the Bank to comply with the rules and principles of Shariah.

The zakat is computed based on working capital method at a rate of 2.5%. The

beneficiaries of zakat fund include schools, mosques, universities and non-government

organisations.

The carrying amount of deferred tax assets is reviewed at the end of each reporting

period and reduced to the extent that it is no longer probable that sufficient taxable

profit will be available to allow all or part of the deferred tax assets to be utilised.

Unrecognised deferred tax assets are reassessed at the end of each reporting period

and are recognised to the extent that it has become probable that future taxable profits

will allow the deferred tax assets to be utilised.

The Bank Group and the Bank present the basic earnings per share ("EPS") data for their

ordinary shares.

Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of

the Bank Group and the Bank by the weighted average number of ordinary shares

outstanding during the year.

47

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

2. Summary of significant accounting policies (cont'd.)

(r) Fair value measurement

- in the principal market for the asset or liability; or

-

Level 1:

Level 2:

Level 3:

For assets and liabilities that are recognised in the financial statements on a recurring

basis, the Bank Group and the Bank determine whether transfers have occurred between

levels in the hierarchy by re-assessing categorisation (based on the lowest level input that

is significant to the fair value measurement as a whole) at the end of each reporting period.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in

an orderly transaction between market participants at the measurement date. The fair value

measurement is based on the presumption that the transaction to sell the asset or transfer

the liability takes place either:

The fair value of an asset or a liability is measured using the assumptions that market

participants would use when pricing the asset or liability, assuming that market participants

act in their economic best interest.

in the absence of a principal market, in the most advantageous market for the asset or

liability.

The fair value measurement of a non-financial asset takes into account a market

participant's ability to generate economic benefits by using the asset in its highest and best

use or by selling it to another market participant that would use the asset in its highest and

best use.

The Bank Group and the Bank use valuation techniques that are appropriate in the

circumstances and for which sufficient data are available to measure fair value, maximising

the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial

statements are categorised within the fair value hierarchy, described as follows, based on

the lowest level input that is significant to the fair value measurement as a whole:

Valuation techniques for which the lowest level input that is significant to the fair

value measurement is directly or indirectly observable; and

Quoted (unadjusted) market prices in active markets for identical assets or

liabilities that the Bank Group can access at the measurement date;

Valuation techniques for which the lowest level input that is significant to the fair

value measurement is unobservable.

48

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

3. Changes in accounting policies

(a)

●

●

●

●

●

●

Impact of application of MFRS 9, Financial Instruments

The adoption of the new and revised MFRSs and interpretation did not result in any

significant impact on the financial statements of the Bank Group and of the Bank except for

effects of adopting MFRS 9, Financial Instruments which is further discussed below.

On 1 January 2018, the Bank Group and the Bank adopted the following standards,

interpretation and amendments to MFRSs mandatory for annual financial periods beginning

on or after 1 January 2018:

The Bank Group and the Bank adopted MFRS 9 on 1 January 2018 which resulted in

changes in accounting policies and adjustments to the amounts previously recognised in

the financial statements. As permitted by MFRS 9, the Bank Group and the Bank elected

not to restate comparative figures. Any adjustments to the carrying amounts of the financial

assets and liabilities resulting from the adoption of MFRS 9 were recognised in

accumulated losses brought forward as at 1 January 2018.

The adoption of MFRS 9 has resulted in changes in the accounting policies for

classification and measurement of financial assets and liabilities and impairment of financial

assets. The new accounting policies for financial instruments and impairment of financial

assets are disclosed in Note 2(k) and Note 2(l) respectively.

MFRS 9, Financial Instruments

MFRS 15, Revenue from Contracts with Customers

Clarifications to MFRS 15, Revenue from Contracts with Customers

IC Interpretation 22, Foreign Currency Transactions and Advance Consideration

Transfer of Investment Property (Amendments to MFRS 140)

Classification and Measurement of Share-based Payment Transactions (Amendments

to MFRS 2)

MFRSs, interpretation and amendments effective for annual periods on or after 1

January 2018

49

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

3. Changes in accounting policies (cont'd.)

(a)

Impact of application of MFRS 9, Financial Instruments (cont'd.)

Classification and measurement of financial instruments

1. Changes to classification of financial assets

i)

ii)

2. Changes to measurement of financial assets

MFRSs, interpretation and amendments effective for annual periods on or after 1

January 2018 (cont'd.)

Those previously classified as financing and receivables are now classified as

measured at amortised cost.

Those previously classified as available-for-sale are now classified as measured at

FVOCI; and

Set out below are disclosures relating to the impact of adoption of MFRS 9.

The financial assets are reclassified to new categories under MFRS 9 from their

previous categories under MFRS 139 which had been “retired” with no changes to

measurement basis:

The business model for financial assets classified as FVOCI and as amortised cost

are 'held to collect and sell' and 'held to collect' respectively. The instruments are held

solely for collection of principal and profit and thus do not need to be classified as

FVTPL.

The new impairment requirements apply to financial assets measured at amortised

cost and fair value through other comprehensive income ("FVOCI"). Impairment is

computed based on the exposure at default (“EAD”), which is based on the amounts

the Bank Group and the Bank expect to be outstanding at the time of default, over the

next 12 months, or the remaining lifetime (“Lifetime EAD”).

At initial recognition, an impairment allowance is required for expected credit losses

(“ECL”) resulting from default events that are possible within the next 12 months. In

the event of a significant increase in credit risk, an allowance is required for ECL

resulting from all possible default events over the expected life of the financial

instrument (“Lifetime ECL”). Financial assets where 12-month ECL is recognised are

in “Stage 1”; financial assets which are considered to have a significant increase in

credit risk are in “Stage 2”; and financial assets for which there is objective evidence of

impairment and are considered as credit impaired are in “Stage 3”.

The estimation of ECL incorporates all available information relevant to the

assessment, including information about past events, current conditions, and

reasonable and supportable economic forecasts at the end of the reporting period. As

a result, the recognition and measurement of impairment is intended to be more

forward looking than under MFRS 139, and the resulting impairment change will tend

to be more volatile.

For financing commitments and financial guarantee contracts, the allowance for

expected credit losses is recognised as a provision under other payables in the

financial statements of the Bank Group and the Bank.

50

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

3. Changes in accounting policies (cont'd.)

(a)

Impact of application of MFRS 9, Financial Instruments (cont'd.)

Classification and measurement of financial instruments (cont'd.)

Economic Entity and Bank

MFRSs, interpretation and amendments effective for annual periods on or after 1

January 2018 (cont'd.)

The measurement category and the carrying amounts of financial assets in accordance with

MFRS 139 and MFRS 9 as at 1 January 2018 are as follows:

There were no changes to the classification and measurement of financial liabilities and

derivatives.

Original

carrying amount

New

carrying amount

MFRS 139 MFRS 9 MFRS 139 MFRS 9RM'000 RM'000

Financing and

receivables

Amortised cost 478,674 478,674

Available-for-sale

investments

FVOCI 227,086 227,086

Held-to-maturity

investments

Amortised cost 600,600 600,600

Financing and

receivables

Amortised cost 1,035,668 1,019,721

FVTPL FVTPL 3,091 3,091

Financing and

receivables

Amortised cost 26,774 26,774

Financing and

receivables

Amortised cost 8,140 8,140

Amortised cost Amortised cost (1,198,676) (1,198,676)

Amortised cost Amortised cost (681,268) (681,268)

FVTPL FVTPL (777) (777)

Amortised cost Amortised cost (14,623) (20,145)

Measurement category

Cash and short-term funds

Financing and advances

Other payables

Investment securities

- Debt securities

Investment securities

- Debt securities

Other receivables

Deposit from customers

Deposit and placements of

banks and other financial

institutions

Derivatives financial

liabilities

Derivative financial assets

Statutory deposits with

Bank Negara Malaysia

51

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

3. Changes in accounting policies (cont'd.)

(a)

Impact of application of MFRS 9, Financial Instruments (cont'd.)

Classification and measurement of financial instruments (cont'd.)

Reconciliation of new carrying amounts under MFRS 9 as at 1 January 2018

*

MFRSs, interpretation and amendments effective for annual periods on or after 1

January 2018 (cont'd.)

Net effect of adopting MFRS 9 (after tax) amounting to RM16,316,000 was recognised in

accumulated losses brought forward as at 1 January 2018.

The following table reconciles the carrying amounts of the assets and liabilities in the

statement of financial position under MFRS 139 as at 31 December 2017 with the carrying

amounts under MFRS 9 as at 1 January 2018 as well as the impact of adoption of MFRS 9

on income tax assets and liabilities and accumulated losses as at 1 January 2018.

Economic Entity and Bank

Statement of Financial Position

MFRS 139 carrying

amounts as at

31 December 2017 Reclassification Remeasurement Tax impact

MFRS 9 carrying

amounts as at

1 January 2018

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

Assets

Cash and short-term funds 478,674 - - - 478,674

Derivative financial assets 3,091 - - - 3,091

Financial investments at fair value through

other comprehensive income ("FVOCI") - 227,086 - - 227,086

Financial investments available-for-sale 227,086 (227,086) - - -

Financial investments at amortised cost - 600,600 - - 600,600

Financial investments held-to-maturity 600,600 (600,600) - - -

Financing and advances 1,035,668 - (15,947) - 1,019,721

Other receivables 8,140 - - - 8,140

Statutory deposits with Bank Negara

Malaysia 26,774 - - - 26,774

Investment property 820 - - - 820

Property and equipment 965 - - - 965

Intangible assets 1,619 - - - 1,619

Deferred tax assets 626 - - 5,153 5,779

Tax recoverable 5,750 - - - 5,750

Total assets 2,389,813 - (15,947) 5,153 2,379,019

Liabilities

Deposits from customers 1,198,676 - - - 1,198,676

Deposits and placements of banks

and other financial institutions 681,268 - - - 681,268

Derivative financial liabilities 777 - - - 777

Other payables 14,623 - 5,522 - 20,145

Total liabilities 1,895,344 - 5,522 - 1,900,866

Equity

Share capital 532,530 - - - 532,530

Reserves * (38,061) - (21,469) 5,153 (54,377)

Total equity 494,469 - (21,469) 5,153 478,153

Total liabilities and equity 2,389,813 - (15,947) 5,153 2,379,019

Effects of adopting MFRS 9

52

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

3. Changes in accounting policies (cont'd.)

(b) MFRSs, interpretations and amendments issued but not yet effective

MFRSs, interpretations and amendments effective for annual periods beginning on or

after 1 January 2019

●

●

●

●

●

●

●

●

●

MFRSs, interpretations and amendments effective for annual periods beginning on or

after 1 January 2020

●

●

MFRSs, intepretations and amendments effective for annual periods beginning on or

after 1 January 2021

●

The following are accounting standards, interpretations and amendments of the MFRSs

that have been issued by the Malaysian Accounting Standards Board ("MASB") but have

not been adopted by the Bank Group and the Bank:

MFRS 16, Leases

IC Interpretation 23, Uncertainty over Income Tax Treatments

Amendments to MFRS 101, Presentation of Financial Statements and MFRS 108,

Accounting Policies, Changes in Accounting Estimates and Errors - Definition of

Material

MFRS 17, Insurance Contracts

Amendments to MFRS 3, Business Combinations (Annual Improvements to MFRS

Standards 2015-2017 Cycle)

Amendments to MFRS 9, Financial Instruments - Prepayment Features with Negative

Compensation

Amendments to MFRS 11, Joint Arrangements (Annual Improvements to MFRS

Standards 2015-2017 Cycle)

Amendments to MFRS 112, Income Taxes (Annual Improvements to MFRS

Standards 2015-2017 Cycle)

Amendments to MFRS 119, Employee Benefits - Plan Amendment, Curtailment or

Settlement

Amendments to MFRS 123, Borrowing Costs (Annual Improvements to MFRS

Standards 2015-2017 Cycle)

Amendments to MFRS 128, Investments in Associates and Joint Ventures - Long-

term Interests in Associates and Joint Ventures

Amendments to MFRS 3, Business Combinations - Definition of a Business

53

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

3. Changes in accounting policies (cont'd.)

(b) MFRSs, interpretations and amendments issued but not yet effective (cont'd.)

MFRSs, interpretations and amendments effective for annual periods beginning on or

after a date yet to be confirmed

●

4. Significant accounting estimates and judgements

(a) Critical judgements made in applying accounting policies

The Directors of the Bank do not anticipate that the application of the above will have a

material impact on the financial statements of the Bank Group and the Bank.

In determining if the sale meets the derecognition criteria, management has evaluated the

extent to which the Bank retains the risks and rewards of ownership of the PFi. As the

Principal Terms and Conditions require the replacement of defaulted PFi with performing

PFi by the Bank, management had concluded that the risks and rewards of ownership of

the PFi continue to be retained by the Bank. Accordingly, the sale of the PFi to JKSB does

not meet the criteria for derecognition and has not been derecognised in the financial

statements of the Bank. Instead, an amount equivalent to the carrying value of the pledged

PFi has been recognised in the financial statements of the Bank as an amount due to JKSB

included in other payables, and, conversely, in JKSB's books, an equivalent amount has

been recognised as an amount due from the Bank. Management is of the opinion that the

described accounting treatment provides a more comprehensive and accurate

representation of the arrangement between the Bank and JKSB.

The portfolio of identified PFi is purchased by JKSB from the Bank on an arm's length

basis. Management has considered the derecognition criteria prescribed in MFRS 9,

Financial Instruments , and concluded, as described above, that the sale of PFi by the Bank

to JKSB has not met the derecognition criteria as stipulated in the standard.

In line with the Principal Terms and Condition of the Sukuk-MBSB SC Murabahah

programme of the Bank Group (as detailed in Note 12(a) and Note 12(b)), Sukuk-MBSB SC

Murabahah and Sukuk Commodity Murabahah will be issued in tranches from time to time,

as decided by management and each tranche is required to be backed by a portfolio of

identified PFi held by JKSB.

The following are the judgements made by management in the process of applying the

Bank Group's and the Bank's accounting policies that have the most significant effect on

the amount recognised in the financial statements.

Assessment of derecognition of Islamic personal financing ("PFi") sold to Jana

Kapital Sdn. Bhd. ("JKSB")

Amendments to MFRS 10, Consolidated Financial Statements and MFRS 128,

Investments in Associates and Joint Ventures - Sale or Contribution of assets

between an investor and its Associate or Joint Venture

54

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

4. Significant accounting estimates and judgements (cont'd.)

(b) Key source of estimation uncertainty

Expected credit losses/Allowance for impairment of financing and advances and

other receivables

macroeconomic variables.

The calculation of credit impairment provisions also involves expert credit judgements to be

applied by the credit risk management team based upon counterparty information from

various sources including relationship managers and external market information.

● criteria that determine if there has been a significant increase in credit risk; and

● development of ECL models which includes the choice of inputs relating to the

The Bank Group’s and the Bank's ECL calculations involve a number of underlying

assumptions and estimates such as:

The key assumption concerning the future and other key sources of estimation uncertainty

at the end of the reporting period, that has a significant risk of causing a material

adjustment to the carrying amount of assets and liabilities within the next financial year, is

discussed below:

The Bank Group's and the Bank's significant accounting policies on the impairment of

financial assets are diclosed in Note 2(l) and the amount of impairment losses provided by

the Bank Group and the Bank is disclosed in Notes 9, 11, 13 and 23.

55

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

5. Cash and short-term funds and deposits and placements with banks and other financial institutions

2018 2017 2018 2017

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

(a) Cash and balances with banks and

other financial institutions 179,508 47,674 174,556 47,674

Money at call and deposit placements

maturing within one month 3,062,720 431,000 3,062,720 431,000

Total cash and short-term funds 3,242,228 478,674 3,237,276 478,674

(b) Deposits and placements with banks and

other financial institutions with original

maturity of more than one month

Licensed Islamic banks 776,739 - 1,842 -

Total cash and short-term funds

and deposits and placements with

banks and other financial institutions 4,018,967 478,674 3,239,118 478,674

6. Derivative financial assets/(liabilities)

Bank

Group

Economic

Entity Bank

The following table summarises the contractual or underlying principal amounts of derivative financial instruments

held at fair value through profit or loss. The principal or contractual amount of these instruments reflects the volume

of transactions outstanding at financial position date, and do not represent amounts at risk.

Trading derivative financial instruments are revalued on a gross position and the unrealised gains or losses are

reflected as derivative financial assets and liabilities respectively.

Bank Group / Economic Entity and Bank

Notional Notional

amount Assets Liabilities amount Assets Liabilities

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

Trading derivatives

Foreign exchange contracts:

Currency forward

- Less than one year 5,842 67 (2) 130,503 3,091 (777)

2018 2017

Fair value Fair value

56

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

7. Financial investments at FVOCI

2018 2017

RM'000 RM'000

At fair value

Money Market Instruments

Malaysian Government Investment Issues 2,154,192 -

Debt securities:

In Malaysia

Corporate sukuk 1,060,628 -

Government Guaranteed corporate sukuk 1,882,285 -

5,097,105 -

8. Financial investments available-for-sale

2018 2017

RM'000 RM'000

Quoted securities:

In Malaysia

Islamic Medium Term Notes - 211,885

Corporate sukuk - 15,201

- 227,086

9. Financial investments at amortised cost

2018 2017

RM'000 RM'000

At amortised cost

Quoted securities:

In Malaysia

Islamic Medium Term Notes 20,356 -

Less: Impairment allowance

- Stage 1 (6) -

20,350 -

10. Financial investments held-to-maturity

2018 2017

RM'000 RM'000

At amortised cost

Islamic Medium Term Notes - 600,600

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

57

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

11. Financing and advances

2018 2017

RM'000 RM'000

(i) By type

At amortised cost

Term financing

- Property financing 4,340,081 20,391

- Bridging financing 716,015 -

- Hire purchase receivables 781,118 -

- Auto financing 213,898 -

- Personal financing 20,562,117 12

- Other term financing 5,456,952 269,831

Trust receipts 51,525 -

Staff financing 41,277 307

Revolving credit 743,218 712,223

Others 138,473 86,029

Gross financing and advances 33,044,674 1,088,793

Less: Impairment allowance

- Individual assessment allowance - (45,716)

- Collective assessment allowance - (7,409)

- Stage 1 (346,537) -

- Stage 2 (455,639) -

- Stage 3 (435,881) -

Net financing and advances 31,806,617 1,035,668

2018 2017

RM'000 RM'000

Islamic financing facility granted by:

Cagamas Berhad - Recourse obligation on

financing sold (Note 24) 2,042,743 -

Sukuk-MBSB SC Murabahah* (Note 12(b)) 2,584,123 -

(ii) By residual contractual maturity

2018 2017

RM'000 RM'000

Maturity within one year 1,480,942 748,567

More than one year to three years 1,770,112 112,152

More than three years to five years 1,939,750 92,550

More than five years 27,853,870 135,524

33,044,674 1,088,793

Bank Group / Economic

Entity and Bank

* Islamic personal financing ("PFi") charged to Sukuk-MBSB SC Murabahah relate to PFi sold to the Bank's

subsidiary, Jana Kapital Sdn Bhd. However, the sale of the PFi does not meet the derecognition criteria as the risks

and rewards of ownership of the PFi are retained by the Bank as mentioned under Note 4(a).

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Included in Islamic personal financing and property financing are financing that have been charged for credit facilities

granted to the Bank Group and the Bank as shown below:

58

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

11. Financing and advances (cont'd.)

(iii) By economic purpose

2018 2017

RM'000 RM'000

Personal use 20,579,030 43

Working capital 3,517,473 884,527

Property development 4,115,803 -

Purchase of landed property:

- Residential 4,121,981 19,556

- Non-residential 277,935 73,142

Purchase of transport vehicles 216,564 101

Others 215,888 111,424

33,044,674 1,088,793

(iv) By type of customers

2018 2017

RM'000 RM'000

Domestic business enterprises

- Small medium enterprise 2,421,177 341

- Government 240,301 242,261

- Non-bank financial institutions 536,644 -

- Others 4,770,904 824,853

Individuals 25,069,610 13,061

Foreign entities 6,038 8,277

33,044,674 1,088,793

(v) By sector

2018 2017

RM'000 RM'000

Household sectors 25,075,711 21,340

Agriculture 236,677 160,378

Mining and quarrying 60,008 70,390

Manufacturing 262,010 129,759

Electricity, gas and water 233,110 60,130

Construction 5,395,247 153,895

Wholesale & retail trade and restaurants & hotels 164,657 104,963

Transport, storage and communication 122,120 62,950

Finance, insurance and business services 1,075,960 324,988

Education, health and others 419,174 -

33,044,674 1,088,793

(vi) By profit rate sensitivity

2018 2017

RM'000 RM'000

Fixed rate:

Property financing 564,967 -

Others 20,115,974 39,155

Variable rate:

Property financing 3,796,380 20,567

Others 8,567,353 1,029,071

33,044,674 1,088,793

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

59

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

11. Financing and advances (cont'd.)

(vii) By geographical distribution

2018 2017

RM'000 RM'000

Malaysia 33,044,540 1,088,352

United Kingdom 134 441

33,044,674 1,088,793

(viii) Financing by types and Shariah contracts

Movement of Qard financing:

2018 2017

RM'000 RM'000

At 1 January 32 321

New disbursement - 182

Repayment (32) (471)

At 31 December - 32

Source of Qard fund:

Shareholder's fund - 182

Use of Qard fund:

Personal use (32) (471)

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group and Bank

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

Term financing 28,074,836 2,265,091 1,652,362 78,417 - 32,070,706

Property financing 2,149,257 2,187,949 3,316 - - 4,340,522

Bridging financing 716,015 - - - - 716,015

Hire purchase receivables - - 781,118 - - 781,118

Auto financing - 84 213,898 - - 213,982

Personal financing 20,561,843 285 - - - 20,562,128

Other term financing 4,647,721 76,773 654,030 78,417 - 5,456,941

Trust receipts - 51,525 - - - 51,525

Staff financing 37,982 190 2,580 - - 40,752

Revolving credit 743,218 - - - - 743,218

Others 138,473 - - - - 138,473

28,994,509 2,316,806 1,654,942 78,417 - 33,044,674

(721,859) 670,239 - - -

Economic Entity and Bank

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

Term financing - 285,345 4,889 - - 290,234

Property financing - 18,031 2,360 - - 20,391

Personal financing - 12 - - - 12

Other term financing - 267,302 2,529 - - 269,831

Staff financing - 99 176 - 32 307

Revolving credit - 712,223 - - - 712,223

Others - 86,029 - - - 86,029

- 1,083,696 5,065 - 32 1,088,793

Qard

Total

financing

and

advances

Type

2018

Tawarruq Bai' Ijarah Istisna'

Total

financing

and

advances

2017

Tawarruq Bai' Ijarah Istisna' Qard

Type

60

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

11. Financing and advances (cont'd.)

(ix) Movement in gross financing and advances

(x) Movement in impairment allowance for financing and advances

2018 2017

RM'000 RM'000

Individual Assessment Allowance

At 1 January 45,716 37,823

- Effects of adopting MFRS 9 (45,716) -

Restated at 1 January - 37,823

Impairment made during the year - 17,867

Amount written back - (115)

Amount written off - (9,859)

At 31 December - 45,716

Collective Assessment Allowance

At 1 January 7,409 12,399

- Effects of adopting MFRS 9 (7,409) -

Restated at 1 January - 12,399

Amount written back - (4,990)

At 31 December - 7,409

#

* The holding company has had a revision of ECL on the financing and advances vested to the Bank post

the vesting of assets and liabilities. The adjustment of the ECL amounting to RM50,757,000 was borne

by the holding company and subsequently recognised by the Bank.

The incremental collective allowance (aggregate of Stage 1 and 2 allowance) as at 1 January 2018 is

RM15,947,000 upon adoption of MFRS 9.

Bank Group / Economic

Entity and Bank

Stage 1 Stage 2 Stage 3 Total

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

Gross carrying amount upon adoption of MFRS 9

as at 1 January 2018 729,499 247,871 111,424 1,088,794

Vested from holding company on 2 April 2018 (Note 43(a)) 27,853,305 3,060,833 735,137 31,649,275

Transfer to stage 1 686,430 (671,870) (14,560) -

Transfer to stage 2 (1,411,984) 1,491,251 (79,267) -

Transfer to stage 3 (204,425) (229,280) 433,705 -

New financing/disbursement during the year 3,686,809 534,453 32,166 4,253,428

Repayment during the year (3,134,981) (427,040) (117,630) (3,679,651)

Other movements 109,548 (69,114) 141,080 181,514

Write-offs - - (566,315) (566,315)

Transfer from financial assets held-for-sale (Note 44) 676 400 116,553 117,629

Gross carrying amount as at 31 December 2018 28,314,877 3,937,504 792,293 33,044,674

Bank Group and Bank

2018

2018 Stage 1 Stage 2 Stage 3 Total

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

Loss allowance upon adoption of MFRS 9

as at 1 January 2018 # 16,691 6,665 45,716 69,072

Vested from holding company 492,316 444,705 538,420 1,475,441

- ECL as at 2 April 2018 (Note 43(a)) 454,139 432,125 538,420 1,424,684

- Subsequent adjustment of ECL* 38,177 12,580 - 50,757

Charged to profit or loss (163,136) 3,584 310,952 151,400

Changes in the loss allowance:

- Transfer to stage 1 12,696 (12,468) (228) -

- Transfer to stage 2 (164,406) 176,183 (11,777) -

- Transfer to stage 3 (81,168) (137,706) 218,874 -

New financing/disbursement during the year 72,027 43,512 26,587 142,126

Repayment during the year (180,772) (179,663) (98,714) (459,149)

Change in credit risk parameters 178,487 113,726 176,210 468,423

Write-offs - - (566,315) (566,315)

Transfer from financial assets held-for-sale (Note 44) 666 685 107,108 108,459

Loss allowance as at 31 December 2018 346,537 455,639 435,881 1,238,057

Bank Group and Bank

61

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

11. Financing and advances (cont'd.)

(xi) Movement for impaired financing and advances

2018 2017

RM'000 RM'000

Balance as at 1 January 111,424 124,935

Impaired financing vested from holding company 735,137 -

Classified as impaired during the year 465,871 2,963

Reclassified as non-impaired (93,827) (686)

Amount recovered (117,630) (5,930)

Amount written off (566,315) (9,858)

Other movements 141,080 -

Transfer from financial assets held-for-sale (Note 44) 116,553 -

Balance as at 31 December 792,293 111,424

2.40% 10.23%

(xii) Impaired financing by sector

2018 2017

RM'000 RM'000

Household sector 417,768 3,540

Agriculture 154 -

Mining and quarrying 38,891 70,391

Manufacturing 317 -

Finance, insurance and business services 11,603 37,493

Construction 213,827 -

Wholesale & retail trade and restaurants & hotels 21,115 -

Transport, storage and communication 287 -

Education, health and others 88,331 -

792,293 111,424

(xiii) Impaired financing by geographical distribution

Malaysia 792,293 111,424

12.

(a) Sukuk Commodity Murabahah

2018 2017

RM'000 RM'000

Sukuk Commodity Murabahah 2,924,734 -

(i) By tranche

2018 2017

RM'000 RM'000

Tranche 1 233,369 -

Tranche 2 564,411 -

Tranche 3 1,026,568 -

Tranche 4 1,100,386 -

2,924,734 -

Bank

Bank

Sukuk Commodity Murabahah was vested to the Bank from the holding company, MBSB as part of the First

Tranche Transfer of Shariah-compliant assets and liabilities on 2 April 2018 (refer Note 43(a)).

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Gross impaired financing and advances as a % of gross financing and

advances

Sukuk Commodity Murabahah and Sukuk-MBSB Structured Covered ("SC") Murabahah

62

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

12.

(a) Sukuk Commodity Murabahah (cont'd.)

(i)

(ii)

(iii)

JKSB issued a Sukuk Commodity Murabahah to the Bank to raise funds necessary for the purchase of

Tranche Cover Assets from the Bank. The salient terms of the Sukuk Commodity Murabahah are as follows:

On 24 December 2013, the first drawdown of the Programme amounting to approximately RM495 million was

made by the holding company, MBSB with an equivalent issuance by JKSB amounting to approximately

RM624 million to the holding company, MBSB. The first Tranche is secured against Tranche Cover Assets

amounting to RM570,637,000 sold to JKSB on 1 December 2013. The first Tranches of the Sukuk-MBSB SC

Murabahah and the Sukuk Commodity Murabahah have a tenure of 8 and 9 years from their drawdown dates

respectively and both instruments carry profit rates ranging from 3.84% to 4.68% per annum, payable semi-

annually in arrears.

The tenure of the Sukuk Commodity Murabahah will be equivalent to the tenure of each Tranche of the

Sukuk-MBSB SC Murabahah plus an additional year;

The Sukuk Commodity Murabahah will be issued in Tranches corresponding to each Tranche of Sukuk-

MBSB SC Murabahah;

The profit rates of each Tranche of the Sukuk Commodity Murabahah will be equivalent to the profit

rates of the corresponding Sukuk-MBSB SC Murabahah, payable semi-annually in arrears.

As part of the Bank's Sukuk-MBSB SC Murabahah programme ("the Programme"), Jana Kapital Sdn. Bhd.

("JKSB"), which is the Bank's subsidiary, issued an unconditional and irrevocable Covered Sukuk Guarantee

to the holders of Sukuk-MBSB SC Murabahah. JKSB pledged an identified pool of PFi ("Tranche Cover

Assets") sold by the Bank (refer Note 4(a)) as security for the Covered Sukuk Guarantee.

Sukuk Commodity Murabahah and Sukuk-MBSB Structured Covered ("SC") Murabahah (cont'd.)

Included in Sukuk Commodity Murabahah are amount owing from JKSB of RM27,634,000 and amount

granted to JKSB of RM350,877,000 which is repayable upon maturity of the Tranche 4 of Sukuk Commodity

Murabahah. These amounts are granted to JKSB as part of the Programme to raise the necessary funds for

the purchase of the Tranche Cover Assets and are unsecured.

On 29 May 2015, the third drawdown of the Programme amounting to approximately RM900 million was made

by the holding company, MBSB with an equivalent issuance by JKSB amounting to approximately RM1,510

million to the holding company, MBSB. The third Tranche is secured against Tranche Cover Assets amounting

to RM1,232,642,000 sold to JKSB on 1 May 2015. The third Tranches of the Sukuk-MBSB SC Murabahah

and the Sukuk Commodity Murabahah have a tenure of 10 and 11 years from their drawdown dates

respectively and both instruments carry profit rates ranging from 4.30% to 5.20% per annum, payable semi-

annually in arrears.

On 21 October 2015, the fourth drawdown of the Programme amounting to approximately RM900 million was

made by the holding company, MBSB with an equivalent issuance by JKSB amounting to approximately

RM900 million to the holding company, MBSB. The fourth Tranche is secured against Tranche Cover Assets

amounting to RM1,239,677,000 sold to JKSB on 1 October 2015. The fourth Tranches of the Sukuk-MBSB

SC Murabahah and the Sukuk Commodity Murabahah have a tenure of 12 and 13 years from their drawdown

dates respectively and both instruments carry profit rates ranging from 4.30% to 5.50% per annum, payable

semi-annually in arrears.

On 10 December 2014, the second drawdown of the Programme amounting to approximately RM700 million

was made by the holding company, MBSB with an equivalent issuance by JKSB amounting to approximately

RM931 million to the holding company, MBSB. The second Tranche is secured against Tranche Cover Assets

amounting to RM833,045,000 sold to JKSB on 1 November 2014. The second Tranches of the Sukuk-MBSB

SC Murabahah and the Sukuk Commodity Murabahah have a tenure of 10 and 11 years from their drawdown

dates respectively and both instruments carry profit rates ranging from 4.00% to 5.00% per annum, payable

semi-annually in arrears.

63

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

12.

(b) Sukuk-MBSB SC Murabahah

2018 2017

RM'000 RM'000

Sukuk-MBSB SC Murabahah 1,968,075 -

Maturity of Sukuk-MBSB

SC Murabahah:

Within one year 308,864 -

More than one year 1,659,211 -

1,968,075 -

(i)

(ii)

(iii)

(iv)

(v)

(vi)

On 25 October 2013, MBSB's Sukuk-MBSB SC Murabahah programme ("the Programme") was approved by

the Securities Commission of Malaysia. The salient terms of the Programme as prescribed in its Principal

Terms and Conditions are as follows:

Sukuk-MBSB SC Murabahah was vested to the Bank from the holding company, MBSB as part of the transfer

of Shariah-compliant assets and liabilities on 2 April 2018 (refer Note 43(a)).

Sukuk Commodity Murabahah and Sukuk-MBSB Structured Covered ("SC") Murabahah (cont'd.)

As at 31 December 2018, the carrying amount of Financing Receivables identified to back the outstanding

Sukuk MBSB SC-Murabahah was RM2,584,123,000 as disclosed in Note 11(i).

The Programme is available for issue within a period of 5 years from the first issuance date and is issued

in tranches ("Tranche") from time to time, at the discretion of the issuer;

Each Tranche consists of multiple series of Sukuk with different maturities;

Each Tranche is backed by an identified pool of Financing Receivables ("Tranche Cover Assets") held by

JKSB; JKSB issued an unconditional and irrevocable Covered Sukuk Guarantee to the holders of the

Sukuk-MBSB SC Murabahah;

In the event of default as defined in the Principal Terms and Conditions, the Tranche Cover Assets will

be liquidated by the Sukuk Trustee in favour of the holders of the Sukuk-MBSB SC Murabahah; and

From time to time, additional Tranche Cover Assets will be purchased by JKSB in line with additional

Tranches drawndown by the Bank.

Tranche Cover Assets is pledged by JKSB as security for the Covered Sukuk Guarantee. These

Tranche Cover Assets are assigned to the Sukuk Trustee for this purpose;

Bank Group / Economic

Entity and Bank

64

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

13. Other receivables

2018 2017 2018 2017

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

Amount due from subsidiary (i) - - 30,069 -

Financing to related companies (ii) 385,031 - 385,031 -

Amount due from holding company (iii) 98,666 - 98,666 -

Prepayments and deposits 6,235 3,877 6,107 3,877

Sundry receivables 88,132 4,263 84,965 4,263

578,064 8,140 604,838 8,140

(i) Amount due from subsidiary

(ii) Financing to related companies

Bank Group

and Bank

2018

RM'000

At gross 635,993

Less: Allowance for impairment - Stage 3 (250,962)

385,031

Movements in the Stage 3 allowance for impairment are as follows:

Balance as at 1 January -

Vested from holding company (Note 43(a)) 203,375

Subsequent adjustment borne by holding company * 32,484

Charge for the year 15,103

Balance as at 31 December 250,962

*

(iii) Amount due from holding company

The amount due from holding company is unsecured, profit-free and repayable on demand.

The amount due from subsidiary was vested from the holding company on 2 April 2018. The

amount is unsecured, subject to effective profit rate of 7.00% (2017: 6.75%) per annum and

repayable on demand.

The holding company has had a revision of allowance for impairment on the financing to related

companies vested to the Bank post the vesting of assets and liabilities. The adjustment of the

allowance for impairment amounting to RM32,484,000 was borne by the holding company and

subsequently recognised by the Bank.

The financing to related companies were vested from holding company on 2 April 2018. The

financing are repayable on demand and certain financing are secured against landed properties.

The effective profit rate of financing to related companies at the reporting date is 7.00% (2017:

6.75%) per annum.

Included in financing to related companies is secured financing amounting to RM583,480,000 at

gross.

Bank

Group

Economic

Entity Bank

65

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

14. Investment in subsidiary

2018 2017

RM'000 RM'000

Unquoted shares at cost * -

* Represents RM2.

Details of the subsidiary is as follows:

Name of subsidiary 2018 2017 Principal activity

Jana Kapital Sdn. Bhd. 100 - Investment holding

The subsidiary was incorporated in Malaysia.

15. Investment in joint venture

2018 2017 2018 2017

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

Unquoted shares at cost 16,222 16,222 16,222 16,222

Less:

Share of loss (16,222) (16,222) - -

Impairment - - (16,222) (16,222)

- - - -

Bank

Jana Kapital Sdn. Bhd. ("JKSB") is the only subsidiary of the Bank. The subsidiary has been

transferred to the Bank from the holding company as part of the merger exercise (refer Note 43(a)).

Effective interest

held (%)

The Bank invested RM16,222,000 in participating shares of Safeena (L) Ltd, representing a 50%

equity interest in a joint controlled entity with AmanahRaya Investment Bank Ltd. This joint venture

was incorporated in the Federal Territory of Labuan, Malaysia under the Labuan Companies Act,

1990. The principal activity of Safeena (L) Ltd is provision of funding for marine vessels.

Bank

Group

Economic

Entity Bank

66

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

15. Investment in joint venture (cont'd.)

(i) Management shares

(ii) Participating shares

The principal features of the participating shares are as follows:

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

The management shares carry the right to vote on any matter which is required under the

Labuan Companies Act, 1990, and the right to return of capital paid-up on the management

shares (after the return of capital paid-up on the participating shares) and rights to dividend

or to share in surplus investments remaining after the return of capital paid up on the shares

of Safeena (L) Ltd.

The participating shares do not confer any rights of entitlements to vote at meetings of

Safeena (L) Ltd.

Safeena (L) Ltd may in a management shareholders’ meeting declare dividends but no

dividend shall exceed the amount recommended by the Board of Directors (“the

Board”) to be justified by the profits of Safeena (L) Ltd.

The participating shareholders do not have the right to require the redemption of any of

their participating shares.

The investments available for distribution amongst the shareholders shall be applied

pari passu on the return of paid-up capital on management shares and participating

shares.

Any surplus investments of Safeena (L) Ltd shall be distributed pari passu amongst the

participating shareholders and the Investment Advisors as performance fees in

accordance with the provisions of the Investment Advisory Services Agreement.

The Board may, with the affirmative votes of the management shareholders, distribute

in kind among shareholders by way of dividend or otherwise any of the assets of

Safeena (L) Ltd provided that no distribution shall be made with would amount to a

reduction of capital except in a manner allowed by the Labuan Companies Act, 1990.

The rights attached to the participating shareholders may be varied or abrogated with

the consent in writing of the management shareholders provided always that the

management shareholders act at all times in the interest of Safeena (L) Ltd.

The Board may from time to time if they think fit pay such interim dividends on the

participating shares as appear to the Board to be justified by the profits of Safeena (L)

Ltd.

67

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

16. Statutory deposits with BNM

17. Investment property

2018 2017

RM'000 RM'000

At cost

Freehold land

At 1 January 820 -

Addition - 874

Impairment loss - (54)

At 31 December 820 820

The value of investment property of RM820,000 which is categorised under Level 3 fair value has

been derived using the sales comparison approach. Sales price of comparable properties in close

proximity are adjusted for differences in key attributes such as property size. The most significant

input into this valuation approach is price per square foot of comparable properties.

The non-profit bearing statutory deposits are maintained with Bank Negara Malaysia in compliance

with Section 26(2)(c) of the Central Bank of Malaysia Act, 2009, the amount of which are

determined as set percentages of total eligible liabilities.

Bank Group / Economic

Entity and Bank

68

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

18. Property and equipment

Bank Group and Bank

Furniture Data

Building and Motor processing Work in

renovation equipment vehicles equipment progress Total

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

Cost

At 1 January 2018 5,315 1,799 88 5,741 - 12,943

Vested from holding company (Note 43(a)) 24,357 17,591 578 36,969 - 79,495

Additions 1,154 960 - 7,801 5,133 15,048

Reclassification - - - 2,546 (2,546) -

Disposals - (24) (6) - - (30)

At 31 December 2018 30,826 20,326 660 53,057 2,587 107,456

Accumulated depreciation

At 1 January 2018 5,315 1,728 86 4,849 - 11,978

Vested from holding company (Note 43(a)) 21,831 16,060 502 32,103 - 70,496

Depreciation charge for the

year (Note 32) 1,492 907 29 1,657 - 4,085

Disposals - (21) (5) - - (26)

At 31 December 2018 28,638 18,674 612 38,609 - 86,533

Net book value

At 31 December 2018 2,188 1,652 48 14,448 2,587 20,923

69

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

18. Property and equipment (cont'd.)

Economic Entity and Bank

Furniture Data

Building and Motor processing Work in

renovation equipment vehicles equipment progress Total

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

Cost

At 1 January 2017 5,315 1,765 764 5,470 - 13,314

Additions - 62 - 289 - 351

Disposals - (28) (676) (18) - (722)

At 31 December 2017 5,315 1,799 88 5,741 - 12,943

Accumulated depreciation

At 1 January 2017 5,279 1,701 754 4,558 - 12,292

Depreciation charge for the

year (Note 32) 36 47 8 309 - 400

Disposals - (20) (676) (18) - (714)

At 31 December 2017 5,315 1,728 86 4,849 - 11,978

Net book value

At 31 December 2017 - 71 2 892 - 965

70

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

19. Intangible assets

Bank Group/Economic Entity and Bank

Software Work in

licences progress Total

RM'000 RM'000 RM'000

Cost

At 1 January 2017 22,377 - 22,377

Additions 899 - 899

At 31 December 2017/1 January 2018 23,276 - 23,276

Vested from holding company (Note 43(c)) 99,150 - 99,150

Additions 60,256 28,131 88,387

At 31 December 2018 182,682 28,131 210,813

Accumulated amortisation

At 1 January 2017 20,858 - 20,858

Amortisation for the year (Note 32) 799 - 799

At 31 December 2017/1 January 2018 21,657 - 21,657

Vested from holding company (Note 43(c)) 74,784 - 74,784

Amortisation for the year (Note 32) 9,680 - 9,680

At 31 December 2018 106,121 - 106,121

Net book value

At 1 January 2017 1,519 - 1,519

At 31 December 2017/1 January 2018 1,619 - 1,619

At 31 December 2018 76,561 28,131 104,692

71

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

20. Deferred tax assets/(liabilities)

2018 2017

RM'000 RM'000

At 1 January 626 349

Effect of adopting MFRS 9 (Note 3(a)) 5,153 -

Restated at 1 January 5,779 349

Recognised in profit or loss (Note 34) (43,962) 535

Recognised in other comprehensive income (Notes 26 and 34) (3,369) (258) At 31 December (41,552) 626

The movement in deferred tax assets and liabilities during the financial year comprises the following:

Fair value Capital Impairment

Bank Group / reserve allowances allowances Others Total

Economic Entity and Bank RM'000 RM'000 RM'000 RM'000 RM'000

Deferred tax

assets/(liabilities)

At 1 January 2017 245 (391) - 495 349

Recognised in

profit or loss (Note 34) - 125 - 410 535

Recognised in other

comprehensive income

(Notes 26 and 34) (258) - - - (258)

At 31 December 2017 (13) (266) - 905 626

Effects of adopting MFRS 9

(Note 3(a)) - - 5,153 - 5,153

Restated at 1 January (13) (266) 5,153 905 5,779

Recognised in

profit or loss (Note 34) - (11,411) (46,387) 13,836 (43,962)

Recognised in other

comprehensive income

(Notes 26 and 34) (3,369) - - - (3,369)

At 31 December 2018 (3,382) (11,677) (41,234) 14,741 (41,552)

Bank Group / Economic

Entity and Bank

72

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

21. Deposits from customers

2018 2017

RM'000 RM'000

(i) By type of deposit:

Non-Mudharabah Funds:

Demand deposits:

Tawarruq 225,520 -

Wadiah - 70,796

Saving deposits:

Tawarruq 76,558 -

Wadiah - 1,821

Commodity Murabahah Term Deposits:

Tawarruq 23,907,371 1,118,029

24,209,449 1,190,646

Mudharabah Funds:

Savings deposits - 514

General investment deposits - 7,516

- 8,030

24,209,449 1,198,676

(ii)

2018 2017

RM'000 RM'000

Due within six months 17,172,705 915,397

More than six months to one year 4,818,107 67,624

More than one year to three years 723,813 142,524

More than three years 1,192,746 -

23,907,371 1,125,545

(iii) By type of customers:

2018 2017

RM'000 RM'000

Government and statutory bodies 14,746,960 336,488

Business enterprises 6,371,297 846,838

Individuals 3,091,192 15,350

24,209,449 1,198,676

Maturity structure of term deposits are as follows:

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

73

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

22. Deposits and placements of banks and other financial institutions

2018 2017

RM'000 RM'000

(i) By type of deposit:

Non-Mudharabah Funds:

Licensed Islamic banks - 180,708

Other financial institutions 8,578,851 500,560

8,578,851 681,268

(ii) By type of contract:

Tawarruq 8,578,851 680,808

Wadiah - 460

8,578,851 681,268

23. Other payables

2018 2017 2018 2017

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

Amount due to subsidiary (i) - - 2,584,124 -

Amount due to related companies (ii) 35,437 - 35,437 -

Al-Mudharabah security funds 123,401 - 123,401 -

Sundry creditors 168,112 8,633 168,112 8,633

Other provisions and accruals 82,292 5,990 81,394 5,990

Expected credit losses for

commitments and contingencies (iii) 93,943 - 93,943 -

Deferred income 12,649 - 12,649 - 515,834 14,623 3,099,060 14,623

(i) Amount due to subsidiary

(ii) Amount due to related companies

Bank

Group

Economic

Entity Bank

The amount due to subsidiary, JKSB was vested from the holding company on 2 April 2018. This amount

relates to the sale of a portfolio of PFi that does not meet the derecognition criteria prescribed under MFRS

9 as detailed in Note 4(a).

The amount due to related companies are unsecured, profit-free and repayable on demand.

Bank Group / Economic

Entity and Bank

74

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

23. Other payables (cont'd)

(iii) Expected credit losses for commitments and contigencies

Movement of expected credit losses for commitments and contingencies are as follows:

2018

Stage 1 Stage 2 Stage 3 Total

Loss allowance upon adoption of

MFRS 9 as at 1 January 2018 (Note 3(a)) 4,659 863 - 5,522

Vested from holding company on 2 April 2018

(Note 43(a)) 69,751 35,157 1,515 106,423

Total charged to profit or loss (21,693) 610 3,081 (18,002)

Changes in the impairment allowance

- Transfer to stage 1 217 (217) - -

- Transfer to stage 2 (28,677) 28,677 - -

- Transfer to stage 3 (3,008) (501) 3,509 -

New financing/disbursement during the year 21,197 5,774 203 27,174

Repayment/drawdown to financing

during the year (22,531) (20,795) (619) (43,945)

Changes in credit risk parameters 11,109 (12,328) (12) (1,231)

Loss allowance as at 31 December 2018 52,717 36,630 4,596 93,943

24. Recourse obligation on financing sold

2018 2017

RM'000 RM'000

Repayments due within 12 months 593,853 -

Repayments due after 12 months 1,541,665 -

2,135,518 -

The recourse obligation on credit facilities granted by Cagamas Berhad are secured on a portfolio of

financing amounting to RM2,042,743,000 as disclosed in Note 11(i).

Bank Group and Bank

Bank Group / Economic

Entity and Bank

Recourse obligation on financing sold was vested to the Bank from the holding company, MBSB as part of

the transfer of Shariah-compliant assets and liabilities on 2 April 2018 (refer Note 43(a)).

These amounts relate to proceeds received from the sale of Islamic property financing to Cagamas Berhad

with recourse to the Bank. Under the agreement, the Bank undertakes to administer the financing on behalf

of Cagamas Berhad and to buy back any financing which are regarded as defective based on a set of pre-

determined criteria.

75

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

25. Share Capital

2018 2017 2018 2017

'000 '000 RM'000 RM'000

Ordinary shares

Issued and fully paid :

At 1 January 532,530 532,530 532,530 532,530

Issued during the year:

Issue of ordinary shares pursuant to vesting

of assets and liabilities (Note 43(a)) 4,093,329 - 4,093,329 -

At 31 December 4,625,859 532,530 4,625,859 532,530

The holders of ordinary shares are entitled to receive dividends from time to time, and are entitiled to one

vote per share at meetings of the Bank.

Bank Group / Economic Entity and Bank

Number of Shares Amount

76

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

26. Reserves

Distributable

(Accumulated

Fair losses)/

Statutory Regulatory value Retained

reserve (i) reserve (ii) reserve (iii) profit Total

Bank Group / Economic Entity RM'000 RM'000 RM'000 RM'000 RM'000

Balance as at 1 January 2018 - 5,234 41 (43,336) (38,061)

Effects of adopting MFRS 9, net of tax (Note 3(a)) - - - (16,316) (16,316)

- 5,234 41 (59,652) (54,377)

Profit for the year - - - 383,878 383,878

Other comprehensive income for the year

- changes in fair value - - 14,036 - 14,036

- income tax relating to component of

other comprehensive income - - (3,369) - (3,369)

- - 10,667 - 10,667

Adjustment arising from merger exercise (Note 43(b)) - - - 346,884 346,884

Balance as at 31 December 2018 - 5,234 10,708 671,110 687,052

Balance as at 1 January 2017 13,364 5,234 (777) (53,094) (35,273)

Loss for the year - - - (3,606) (3,606)

Other comprehensive income for the year

- changes in fair value - - 1,076 - 1,076

- income tax relating to component of

other comprehensive income - - (258) - (258)

- - 818 - 818

Transfer from statutory reserves (13,364) - - 13,364 -

Balance as at 31 December 2017 - 5,234 41 (43,336) (38,061)

Non-distributable

77

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

26. Reserves (cont'd.)

Distributable

(Accumulated

Fair losses)/

Statutory Regulatory value Retained

reserve (i) reserve (ii) reserve (iii) profit Total

Economic Entity and Bank RM'000 RM'000 RM'000 RM'000 RM'000

Balance as at 1 January 2018 - 5,234 41 (43,336) (38,061)

Effects of adopting MFRS 9, net of tax (Note 3(a)) - - - (16,316) (16,316)

- 5,234 41 (59,652) (54,377)

Profit for the year - - - 319,195 319,195

Other comprehensive income for the year

- changes in fair value - - 14,036 - 14,036

- income tax relating to component of

other comprehensive income - - (3,369) - (3,369)

- - 10,667 - 10,667

Balance as at 31 December 2018 - 5,234 10,708 259,543 275,485

Balance as at 1 January 2017 13,364 5,234 (777) (53,094) (35,273)

Loss for the year - - - (3,606) (3,606)

Other comprehensive income for the year

- changes in fair value - - 1,076 - 1,076

- income tax relating to component of

other comprehensive income - - (258) - (258)

- - 818 - 818

Transfer from statutory reserves (13,364) - - 13,364 -

Balance as at 31 December 2017 - 5,234 41 (43,336) (38,061)

Non-distributable

78

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

26. Reserves (cont'd.)

(i)

(ii)

(iii)

27. Income derived from investment of depositors' funds

2018 2017 2018 2017

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

Income derived from investment of:

i) General investment deposit 9,732 417 10,129 417

ii) Other deposits 1,790,314 89,277 1,861,341 89,277

1,800,046 89,694 1,871,470 89,694

i) Income derived from investment of general investment deposits

Finance income and hibah:

Financing and advances 8,718 260 8,718 260

Financial investments held-for-trading - 1 - 1

Financial investments at FVOCI 591 - 591 -

Financial investments available-for-sale - 36 - 36

Financial investments at amortised cost 67 - 67 -

Financial investments held-to-maturity - 77 - 77

Money at call and deposits with bank

and other financial institutions 205 43 205 43

Profit on Sukuk Commodity Murabahah - - 397 -

Others 151 - 151 -

9,732 417 10,129 417

of which:

Financing income earned on

impaired financing 125 - 125 -

Bank

Group

Economic

Entity Bank

The statutory reserves were maintained in compliance with Section 12 of the Islamic Financial

Services Act 2013 and were not distributable as cash dividends. The requirement to maintain a

reserve fund has been removed pursuant to BNM's Guideline on Capital Funds for Islamic Banks

issued 3 May 2017, following which the outstanding balance was transferred to accumulated

losses.

The regulatory reserve is maintained in accordance with BNM's policy on Financial Reporting for

Islamic Banking Institutions to maintain, in aggregate, loss allowance for non-credit impaired

exposures and regulatory reserve of no less than 1% of total credit exposures, net of loss allowance

for credit impaired exposures.

The fair value reserve includes the cumulative net changes in the fair value of financial investments

at FVOCI and the expected credit losses arising from financial investments at FVOCI, until the

financial investments are derecognised. In prior year, the fair value reserve was in relation to

financial investments available-for-sale.

79

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

27. Income derived from investment of depositors' funds (cont'd.)

ii) Income derived from investment of other deposits

2018 2017 2018 2017

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

Finance income and hibah:

Financing and advances 1,575,722 55,517 1,575,722 55,517

Financial investments held-for-trading - 185 - 185

Financial investments at FVOCI 109,233 - 109,233 -

Financial investments available-for-sale - 7,671 - 7,671

Financial investments at amortised cost 18,636 - 18,636 -

Financial investments held-to-maturity - 16,488 - 16,488

Money at call and deposits with bank

and other financial institutions 59,676 9,416 59,676 9,416

Profit on Sukuk Commodity Murabahah - - 71,027 -

Others 27,047 - 27,047 -

1,790,314 89,277 1,861,341 89,277

of which:

Financing Income earned on

impaired financing 22,113 - 22,113 -

28. Income derived from investment of shareholders' funds

2018 2017 2018 2017

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

Finance income and hibah:

Financing and advances 195,411 13,714 195,411 13,714

Financial investments held-for-trading - 48 - 48

Financial investments at FVOCI 14,333 - 14,333 -

Financial investments available-for-sale - 1,900 - 1,900

Financial investments at amortised cost 5,035 - 5,035 -

Financial investments held-to-maturity - 4,063 - 4,063

Money at call and deposits with bank

and other financial institutions 35,636 2,314 16,105 2,314

Profit on Sukuk Commodity Murabahah - - 8,519 -

Others 1,955 - 3,244 -

252,370 22,039 242,647 22,039

of which:

Financing income earned on

impaired financing 2,733 - 2,733 -

Other operating income:

Financing related fees (2,301) 4,909 (2,301) 4,909

Commission 8,117 577 8,117 577

Sundry expenses (5,333) - (5,333) -

Net gain on derivative

foreign exchange contracts 65 2,314 65 2,314

548 7,800 548 7,800

Grand total 252,918 29,839 243,195 29,839

Bank

Group

Economic

Entity Bank

Bank

Group

Economic

Entity Bank

80

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

29. Net allowance for impairment on financing and advances and other financial assets

Bank Group / Economic Entity and Bank

Stage 1 Stage 2 Stage 3 Total

2018 RM'000RM'000 RM'000RM'000 RM'000RM'000 RM'000

Financial investments at amortised cost (Note 9) 6 - - 6

Financing and advances (Note 11(x)) (163,136) 3,584 310,952 151,400

Financial assest held-for-sale (Note 44) 665 (411) (16,325) (16,071)

Other receivables (Note 13(ii)) - - 15,103 15,103

Financing commitments and financial

guarantees (Note 23(iii)) (21,693) 610 3,081 (18,002)

(184,158) 3,783 312,811 132,436

Impaired financing and advances:

- Written off - - 6,452 6,452

- Recovered - - (3,194) (3,194)

Total (184,158) 3,783 316,069 135,694

Economic Entity and Bank

Individual Collective

assessment assessment Total

2017 RM'000RM'000 RM'000 RM'000

Financing and advances, net 17,752 (4,990) 12,762

Impaired financing and advances:

- Written off - - -

- Recovered (311) - (311)

Total 17,441 (4,990) 12,451

30. Income attributable to depositors and others

2018 2017 2018 2017

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

(a) Income attributable to depositors

Deposits from customers:

- Mudharabah funds 82 175 82 175

- Non-mudharabah funds 926,848 35,330 926,848 35,330

Deposits and placements of banks and

other financial institutions:

- Non-mudharabah funds 47,245 38,763 47,245 38,763

974,175 74,268 974,175 74,268

Economic

Entity Bank

Bank

Group

81

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

30. Income attributable to depositors and others (cont'd.)

2018 2017 2018 2017

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

(b) Income attributable to securitisation 72,822 - 72,822 -

(c) Income attributable to sukuk 79,951 - 79,951 -

(d) Others - - 133,436 -

1,126,948 74,268 1,260,384 74,268

31. Personnel expenses

2018 2017

RM'000RM'000 RM'000

Salaries, allowances and bonuses 137,461 15,681

Contributions to Employees

Provident Fund and SOCSO 23,603 1,752

Directors' remuneration (Note 33) 1,897 732

Shariah Advisory Committee members'

remuneration (Note 33) 287 194

Other staff related expenses 17,208 1,505

180,456 19,864

32. Other overhead expenses

2018 2017 2018 2017

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

Establishment related expenses

Depreciation of property and equipment 4,085 400 4,085 400

Amortisation of intangible assets 9,680 799 9,680 799

Rental of premises 7,097 1,946 7,097 1,946

Software and hardware maintenance 14,838 5,984 14,838 5,984

Rental of equipment and network line 55 275 55 275

Security expenses 1,006 434 1,006 434

Others 3,424 2,759 3,424 2,759

40,185 12,597 40,185 12,597

Promotion and marketing related expenses

Advertising and promotional activities 5,898 73 5,898 73

Others 8 86 8 86

5,906 159 5,906 159

General administrative expenses

License and association fees and levies 740 403 740 403

Travelling, transport and accomodation

expenses 2,330 225 2,330 225

clearing charges 3,473 339 3,473 339

Electricity and water 2,453 311 2,453 311

Bank

Group

Economic

Entity Bank

Bank

Group

Economic

Entity Bank

Printing, stationery, postage and

Bank Group / Economic

Entity and Bank

82

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

32. Other overhead expenses (cont'd.)

2018 2017 2018 2017

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

General administrative expenses (cont'd.)

Other professional fees 28,586 1,101 28,586 1,101

Auditors' remuneration:

- Audit fee 1,312 316 1,300 316

- Non-audit fee 150 111 150 111

Repair and maintenance of office equipment 700 - 700 -

Others 7,294 1,068 6,846 1,068

47,038 3,874 46,578 3,874

Commission fees

Commission fees 2,404 - 2,404 -

Angkasa charges 22,949 - 22,949 -

25,353 - 25,353 -

Inter-company recharges (26,610) - (28,454) - 91,872 16,630 89,568 16,630

33. CEO, Directors' and Shariah Advisory Committee Members' remuneration

2018 2017

RM'000 RM'000

Chief Executive Officer

Khalid Mahmood Bhaimia (Resigned on 16 March 2018)

Salaries and bonus 308 808

Benefits-in-kind 34 -

342 808

Datuk Seri Ahmad Zaini bin Othman (Appointed on 7 February 2018)

Salaries and bonus 1,211 -

Other emoluments 188 -

1,399 -

1,741 808

Directors of the Bank

Non-Executive:

Fees and allowances 1,897 732

Shariah Advisory Committee members

Fees and allowances 287 194

3,925 1,734

Bank

Group

Economic

Entity Bank

Bank Group / Economic

Entity and Bank

83

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

33. CEO, Directors' and Shariah Advisory Committee Members' remuneration (cont'd.)

2018

Fees Allowance Total

Non-Executive Directors RM'000 RM'000 RM'000

1. Tan Sri Abdul Halim bin Ali 128 57 185

2. Datuk Azrulnizam bin Abdul Aziz 122 111 233

3. Encik Aw Hong Boo 151 138 289

4. Datuk Johar bin Che Mat 148 120 268

5. Puan Lynette Yeow Su Yin 124 114 238

6. Encik Sazaliza Zainuddin 110 * 87 197

7. Tunku Alina binti Raja Muhd Alias 134 116 250

8. Dr. Loh Leong Hua 92 79 171

9. Dato' Dr. Md Khir bin Abdul Rahman 10 15 25

10. Dato' Dr. Vaseehar Hassan bin Abdul Razack 6 10 16

11. Encik Abdul Rahim Abdul Hamid 6 9 15

12. Dr. Saleh Jameel Malaikah 2 6 8

13. Encik Zakir Hussain Rizvi 2 - 2

1,035 862 1,897

Fees Allowance Total

Shariah Advisory Committee members RM'000 RM'000 RM'000

1. Asst. Prof. Dr. Akhtarzaite binti Abdul Aziz - 61 61

2. Prof. Dr. Abdul Rahim bin Abdul Rahman - 53 53

3. Prof. Dato' Dr. Noor Inayah binti Ya'akub - 57 57

4. Encik Mohd Nasiruddin bin Mohd Kamaruddin - 56 56

5. Encik Mohd Bahroddin bin Badri - 31 31

6. Encik Nushi bin Mahfodz 2 12 14

7. Prof. Dr. Ali Muhyealdin A Al-Quradaghi 4 - 4

8. Dr. Waleed Mohammed H Sh Al-Mulla 4 - 4

9. Dr. Abdul Sattar Abdul Karim 5 - 5

10. Dr. Mohammad Zaini bin Yahaya 2 - 2

17 270 287

Details of the remuneration of each Director during the financial year ended 31 December 2018 are as

follows:

Bank Group and Bank

* 50% of the Director's fees are paid to the organisation to whom the Director represents.

84

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

33. CEO, Directors' and Shariah Advisory Committee Members' remuneration (cont'd.)

2017

Fees Allowance Total

Non-Executive Directors RM'000 RM'000 RM'000

1. Dato' Dr Md Khir Abdul Rahman 96 81 177

2. Dr. Saleh Jameel Malaikah 24 21 45

3. Dato' Dr. Vaseehar Hassan bin Abdul Razack 60 65 125

4. Encik Abdul Rahim Abdul Hamid 65 59 124

5. Encik Gourang Hemani 4 6 10

6. Encik Rakesh Sanghvi 4 5 9

7. Dr. Fouad Hayel Saeed Anam 4 7 11

8. Encik Zakir Hussain Rizvi 24 19 43

9. Encik Tarek Youssef Fawzi 4 2 6

10. Dr. Loh Leong Hua 50 44 94

11. Datuk Azrulnizam bin Abdul Aziz 50 34 84

12. Datuk Johar bin Che Mat - 4 4

385 347 732

Fees Allowance Total

Shariah Advisory Committee members RM'000 RM'000 RM'000

1. Dr. Mohammad Zaini bin Yahaya 24 - 24

2. Encik Nushi bin Mahfodz 24 - 24

3. Dr. Abdul Sattar Abdul Karim 49 - 49

4. Dr. Waleed Mohammed H Sh Al-Mulla 48 - 48

5. Prof. Dr. Ali Muhyealdin A Al-Quradaghi 49 - 49

194 - 194

Economic Entity and Bank

85

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

34. Taxation

2018 2017 2018 2017

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

Malaysian income tax:

Current income tax 77,057 339 72,370 339

Under provision in prior year 97 122 36 122

77,154 461 72,406 461

Deferred tax (Note 20):

Origination and reversal of

temporary differences 43,484 (614) 43,484 (614)

Under provision in prior year 478 79 478 79

43,962 (535) 43,962 (535)

Total income tax expense/(credit)

for the year 121,116 (74) 116,368 (74)

2018 2017 2018 2017

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

Profit/(Loss) before taxation and zakat 517,994 (3,680) 448,563 (3,680)

Taxation at Malaysian statutory tax rate of 24%

(2017: 24%) 124,319 (883) 107,655 (883)

Effect of income not subject to tax (32,026) - - -

Effect of expenses not deductible

for tax purposes 28,248 608 8,199 608

Under provision in prior years 575 201 514 201

121,116 (74) 116,368 (74)

Tax recognised directly in equity:

Fair value reserve (Note 20) 3,369 258 3,369 258

Bank

Group

Economic

Entity Bank

Bank

Group

Economic

Entity Bank

A reconciliation of income tax expense applicable to profit / (loss) before taxation at the statutory income

tax rate to income tax expense at the effective income tax rate of the Bank Group and of the Bank is as

follows:

86

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

35. Commitments and contingencies

Gross

positive

fair value - Credit Risk

Principal derivative equivalent weighted

amount contract amount amount

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

Bank Group and Bank

2018

Direct credit substitutes 187,785 - 187,785 187,659

Trade-related contingencies 254,488 - 90,927 90,927

Irrevocable commitments

to extend credit:

- one year or less 1,248,705 - 350,206 350,206

- over one year to five years 4,160,842 - 2,078,256 2,053,871

- over five years 220,817 - 110,408 110,408

Foreign exchange related

contracts

- one year or less 5,842 67 151 151

Total 6,078,479 67 2,817,733 2,793,222

Gross

positive

fair value - Credit Risk

Principal derivative equivalent weighted

amount contract amount amount

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

Economic Entity and Bank

2017

Direct credit substitutes 24,451 - 24,451 24,325

Trade-related contingencies 28,158 - 5,631 5,631

Irrevocable commitments

to extend credit:

- one year or less 349,819 - 174,909 172,233

- over one year to five years 14,314 - 7,157 7,151

- over five years 50,817 - 25,408 25,408

Foreign exchange related

contracts

- one year or less 130,503 3,091 4,271 1,247

Total 598,062 3,091 241,827 235,995

In the normal course of business, the Bank Group and the Bank make various commitments and incur

certain contingent liabilities with legal recourse to their customers. No material losses are anticipated as a

result of these transactions.

87

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

35. Commitments and contingencies (cont'd.)

35.1 Capital Commitments

2018 2017

RM'000 RM'000

Contracted but not provided for 48,287 471

35.2 Lease Commitments

2018 2017

RM'000 RM'000

Within one year 7,968 2,100

Between one to five years 4,680 3,189

12,648 5,289

36. Earnings/(Loss) per share

2018 2017 2018 2017

Basic:

Net profit/(loss) for the year (RM'000) 383,878 (3,606) 319,195 (3,606)

Weighted average number

of ordinary shares in issue ('000) 3,605,331 532,530 3,605,331 532,530

Basic earnings/(loss) per share (sen) 10.65 (0.68) 8.85 (0.68)

The Bank Group and the Bank have no dilution in their earnings per share during the year.

Bank

Group

Economic

Entity Bank

Bank Group / Economic

Entity and Bank

Property and equipment

Basic earnings/(loss) per share is calculated by dividing the net profit/(loss) for the year by the weighted

average number of ordinary shares in issue during the year.

Capital expenditure approved by Directors but not provided for in the financial statements are as

follows:

Bank Group / Economic

Entity and Bank

The Bank Group and the Bank have lease commitments in respect of rented premises which are

classified as operating leases. A summary of the non-cancellable long-term commitments, net of

sub-leases, is as follows:

88

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

37. Capital adequacy

2018 2017 2018 2017

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

Common Equity Tier I (''CET I'') Capital/Tier I Capital

Ordinary share capital 4,625,859 532,530 4,625,859 532,530

Retained earnings/(Accumulated losses) 324,226 (43,336) 259,543 (43,336)

Other reserves 15,942 5,275 15,942 5,275

4,966,027 494,469 4,901,344 494,469

Less : Regulatory adjustments

Deferred tax assets - (626) - (626)

Cumulative gains of financial investments at

FVOCI/available-for-sale (8,152) (30) (8,152) (30)

Regulatory reserve (5,234) (5,234) (5,234) (5,234)

Intangible assets (104,692) (1,620) (104,692) (1,620)

Total CET I Capital/Tier I Capital 4,847,949 486,959 4,783,266 486,959

Tier II Capital

Collective impairment allowance and

regulatory reserve ^ 445,089 11,443 480,046 11,443

Total Tier II capital 445,089 11,443 480,046 11,443

Total capital base 5,293,038 498,402 5,263,312 498,402

^

Breakdown of risk-weighted assets in various categories of risk weights are as follows:

2018 2017 2018 2017

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

Total risk-weighted assets ("RWA")

- Credit risk 35,607,133 1,511,252 38,403,661 1,511,252

- Market risk 2,136 9,836 2,136 9,836

- Operational risk 619,526 89,397 573,889 89,397

Total RWA 36,228,795 1,610,485 38,979,686 1,610,485

Capital adequacy ratios

CET I capital ratio 13.381% 30.236% 12.271% 30.236%

Tier I capital ratio 13.381% 30.236% 12.271% 30.236%

Total capital ratio 14.610% 30.947% 13.503% 30.947%

The capital adequacy ratios have been computed in accordance with BNM’s Capital Adequacy Framework for Islamic

Banks (Capital Components and Risk-Weighted Assets). The total risk-weighted assets are computed based on

Standardised Approach for Credit and Market Risk and Basic Indicator Approach for Operational Risk.

Collective impairment allowance on non-credit impaired exposure and regulatory reserves is subject to a

maximum of 1.25% of total credit RWA.

Bank

Group

Economic

Entity Bank

Bank

Group

Economic

Entity Bank

89

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

38. Significant related party transactions/balances

(a) Transactions and balances with government-related entities are as follows:

(i) Individually significant transactions and balances with EPF are as follows:

2018 2017 2018 2017

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

Expenses

Profit expense paid on Sukuk to EPF 42,620 - 42,620 -

Profit expense paid on fixed deposit

to EPF 3,847 - 3,847 -

Rental expense 216 - 216 -

Balances

Sukuk MBSB-SC Murabahah 1,121,242 - 1,121,242 -

Accrued profit on sukuk due to EPF 7,824 7,824

Fixed deposit from EPF 900,000 - 900,000 -

Accrued profit on fixed deposit due

to EPF 1,025 - 1,025 -

EPF, the ultimate holding body, is a shareholder with control over the holding Company, MBSB, with direct

shareholdings of 63.77% as at 31 December 2018 (2017: 65.40%). EPF is also a government-linked

entity. EPF and entities directly controlled by and under the significant influence of EPF are collectively

referred to as government-related entities to the Bank Group and the Bank.

Bank

Group

Economic

Entity Bank

All the transactions entered into by the Bank Group and the Bank with government-related entities are

conducted in the ordinary course of the Bank Group's and the Bank's business on terms comparable to

those with other entities that are not government-related.

90

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

38. Significant related party transactions/balances (cont'd.)

(a) Transactions and balances with government-related entities are as follows: (cont'd.)

(ii)

2018 2017 2018 2017

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

Income/(Expenses)

Profit income from deposit placements 23,177 - - -

Profit expense to depositors (2,478) - (2,478) -

Balances

Cash and short-term funds 19,215 - 14,262 -

Deposits and placements with banks

and other financial institutions 32 - - -

(iii) Collectively, but not individually, significant transactions and balances:

2018 2017 2018 2017

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

Income/(Expenses)

Profit income from financing 24,656 - 24,656 -

Profit expense to depositors (6,724) - (6,724) -

Balances

Financing to customers 303,695 - 303,695 -

Deposits from customers 154,019 - 154,019 -

Bank

Group

Economic

Entity Bank

Bank

Group

Economic

Entity Bank

Individually significant transactions and balances with the RHB Banking Group of companies,

comprising RHB Bank Berhad and RHB Islamic Bank Berhad, being companies in which EPF has

significant influence over, are as follows:

The Bank Group and the Bank have balances with other government-related entities including but

not limited to provision of financing and advances, deposit placements and borrowings.

For the financial year ended 31 December 2018, the aggregate amount of the Bank Group's and the

Bank's significant transactions and balances with other government-related entities other than the

RHB Banking Group of companies are as disclosed below:

91

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

38. Significant related party transactions/balances (cont'd.)

(b)

2018 2017 2018 2017

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

Immediate holding company

Income

Inter-company recharges 25,119 - 25,119 -

Balances

Amount due from holding company 98,666 - 98,666 -

Subsidiary

Income/(Expenses)

Profit income from Sukuk Commodity

Murabahah - - 79,943 -

Profit income from amount

due from subsidiary - - 1,314 -

Inter-company recharges - - 1,822 -

Profit expenses to subsidiary - - (133,436) -

Balances

Sukuk Commodity Murabahah - - 2,924,734 -

Amount due from subsidiary - - 30,069 -

Amount due to subsidiary - - 2,584,124 -

Related companies

Income/(Expenses)

Profit income from financing 29,128 - 29,128 -

Inter-company recharges 3,643 - 3,643 -

Rental paid (674) - (674) -

Balances

Gross financing to related companies 635,993 - 635,993 -

Amount due to related companies 35,437 - 35,437 -

(c)

2018 2017

RM'000 RM'000

Short-term

employee benefits 4,213 1,734

Pension costs: EPF 316 - 4,529 1,734

Bank

Group

The Directors are of the opinion that all the transactions and balances above have been entered into in the

normal course of business and have been established on terms and conditions that are not materially

different from those obtainable in transactions with unrelated parties.

Bank Group / Economic

Entity and Bank

The remuneration of Directors and other members of key management during the year is as follows:

Transactions and balances with immediate holding company, a subsidiary and related companies of the

Bank are as follows:

Economic

Entity Bank

92

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

38. Significant related party transactions/balances (cont'd.)

(c)

Included in the total key management personnel remuneration are:

2018 2017

RM'000 RM'000

Chief Executive Officer's remuneration comprising salary, bonus, allowances and other emoluments,

including benefits-in-kind (Note 33) 1,741 808

(d) Transactions and balances with Directors, shareholders and key management:

2018 2017

RM'000 RM'000

Income/(Expenses)

Profit income on financing - 187

Other income - 63 Profit expense incurred on savings and deposits (77) -

BalanceAmount due to in respect of savings and deposits 2,851 330

39. Credit exposures arising from transactions with connected parties

2018 2017

RM'000 RM'000

Outstanding credit exposures with connected parties 823,376 -

Percentage of outstanding credit exposures to connected

parties as proportion of total credit exposures 2.07% 0.00%

Percentage of outstanding credit exposures to connected parties which is non-performing or in default 0.68% 0.00%

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

Bank Group / Economic

Entity and Bank

The credit exposures above are derived based on BNM's revised Guidelines on Credit Transactions and

Exposures with Connected Parties for Islamic Banks, which are effective on 1 January 2008.

The remuneration of Directors and other members of key management during the year is as follows

(cont'd.):

93

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management

The Bank Group and the Bank have exposure to one or more of the following risks:

(i) Market risk

(ii) Credit risk

(iii) Liquidity risk

(iv) Operational risk

(v) Profit rate/rate of return risk in the banking book

(vi) Capital risk

Arising from the failure to meet the minimum regulatory and internal requirements; and

(vii) Shariah non-compliance risk

(a) Financial risk management objectives and policies

Risk management forms an integral part of the Bank Group’s and the Bank's activities and remains an

important feature in all their business, operations, delivery channels and decision-making processes. The

extent to which the Bank Group and the Bank are able to identify, assess, monitor, manage and report

each of the various types of risk is critical to their strength, soundness and profitability. The Bank Group’s

and the Bank's risk management function is independent of their operating units. All new businesses,

introduction of new products, engagement in new activities or entrance into new strategic alliances are

subject to endorsement by the Risk Management Division and submitted to the Board Audit Committee

(“BAC”), Board Risk Management and Compliance Committee ("BRMCC") and/or Board of Directors ("the

Board") for approvals.

Arising from fluctuations in the market value of the trading or investment exposure arising from changes to

market risk factors such as profit rates, currency exchange rates, credit spreads, commodities prices and

their associated volatility;

Arising from the possibility of losses due to an obligor or, market counterparty or issuer of securities or

other instruments held, having failed to perform its contractual obligations to the Bank Group and the

Bank;

Arising from the Bank Group’s and the Bank's ability to efficiently meet their present and future funding

needs or regulatory obligations, when they come due, which may adversely affect their daily operations

and incur unacceptable losses;

Arising from risk of loss resulting from inadequate or failed internal processes, people and systems, or

from external events;

Current and potential risk to the Bank Group’s and the Bank's earning and economic value arising from

movement in the profit rates/rate of return;

Arising from possible failure to comply with the Shariah requirements as determined by Shariah Advisory

Council ("SAC") of Bank Negara Malaysia ("BNM") and Securities Commission ("SC"), the Shariah

Advisory Committee and other Shariah regulatory authorities.

94

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

(a) Financial risk management objectives and policies (cont'd.)

In essence, the objectives of the Bank Group’s and the Bank's risk management activities are to:

(i) Identify and monitor the various risk exposures and risk requirements;

(ii)

(iii)

(b) Risk management framework

Key features of the Risk Management Framework include:

(i) Governance and organisation

(ii) Internal Capital Adequacy Assessment Process ("ICAAP")

(iii) Risk appetite

The Bank Group and the Bank employ an Enterprise-wide Risk Management Framework to manage their

risks effectively. The framework involves an on-going process of identifying, evaluating, monitoring,

managing and reporting significant risks affecting the Bank Group and the Bank which is implemented

through a number of committees established by the Board. This framework provides the Board and the

management with a tool to anticipate and manage both existing and potential risks, taking into

consideration dynamic risk profiles as dictated by changes in business strategies, regulatory environment

and functional activities throughout the year.

A strong governance structure is important to ensure an effective and consistent implementation of

the Risk Management Framework. The Board is ultimately responsible for the Bank Group’s strategic

directions, which is supported by the risk appetite and Risk Management Frameworks, policies and

procedures. The Board is assisted by various risk committees and control functions in ensuring that

the Bank Group’s Risk Management Framework is effectively maintained.

The Bank Group’s ICAAP Framework ensures that all material risks are identified, measured and

reported; and that adequate capital levels consistent with the risk profiles, including capital buffers,

are maintained to support the current and projected demand for capital under existing and stressed

conditions. For non-measurable risks, relevant framework and control mechanisms are implemented

to mitigate and manage the same.

Ensure risk taking activities are consistent with the approved policies and the aggregated risk

positions are within the risk appetite as approved by the Board; and

Help create shareholder value through proper allocation of risk and the facilitation of independent

risk assessments of new business and products.

It is defined as the amount and types of risk that the Bank Group is able and willing to accept in

pursuit of its strategic and business objectives. The development of the risk appetite is integrated

into the annual strategic planning process and is adaptable to changing business and market

conditions. As the risk appetite is dynamic, the Board sets the risk appetite based on the business

and financial targets, while incorporating macroeconomic and global outlook. The Board also

considers the actual and targeted risk profile of the Bank Group proposed by senior management

and business units when setting the risk appetite. The risk appetite is also being reviewed annually

or as and when required.

95

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

(b) Risk management framework (cont'd.)

(iv) Risk Management Process

•

•

•

•

•

(v) Risk Management Infrastructure

•

•

•

(vi) Risk Culture

Business planning: Risk Management Division ("RMD") is an element of the business planning

process, which encompasses setting frameworks for risk appetite, risk structure and new

product or new business activities.

Risk identification: Risks are systematically identified through the robust application of the

Bank Group’s Risk Management Framework, policies and procedures.

Measure and assess: Risks are measured and aggregated using the group wide

methodologies across each of the risk types, including stress testing.

Manage and control: Controls and limits are used to manage risk exposures within the risk

appetite set by the Board. Controls and limits are regularly monitored and reviewed in the face

of evolving business needs, market conditions and regulatory changes. Corrective actions are

taken to mitigate risks.

Monitor and report: Risks on an individual as well as a portfolio basis are regularly monitored

and reported to ensure they remain within the Bank Group’s risk appetite.

Risk policies, procedures and methodologies: Well-defined risk policies by risk type provide

the principles by which the Bank Group manages its risks. Procedures provide guidance for

day-to-day risk-taking activities. Methodologies provide specific requirements, rules or criteria

that must be met to comply with the policies.

People: Attracting the right talent and skills are the key to ensuring a well-functioning Risk

Management Framework. The organisation continuously evolves and proactively responds to

the increasing complexity of the Bank Group as well as the economic and regulatory

environment.

Technology and data: Appropriate technology and sound data management are enablers to

support risk management activities.

The Bank Group embraces risk management as an integral part of its culture and decision-making

processes. The Bank Group’s risk management philosophy is embodied in the Three Lines of

Defense approach, whereby risks are managed at the point of a risk-taking activity. There is clear

accountability of risk ownership across the Bank Group. Guided by the said principle, the Bank

Group has launched a Risk Awareness Culture which comprises training, awareness campaigns and

roadshows within the Bank Group to promote a healthy risk culture. A strong risk culture minimises

the Bank Group’s exposure to financial and non-financial risks including reputational impact, over

time.

In addition, the Bank Group has implemented the Regional Compliance and Risk Officers (“RCRO”)

and Designated Compliance and Risk Officers (“DCORO”) to cultivate proactive risk and compliance

management and to establish a robust risk culture. The DCOROs are appointed at the respective

branches, business and functional units across the Bank Group to provide real time advisory on risk

and compliance matters.

96

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

(c) Risk organisation

(i)

(ii)

(iii)

(iv)

The Bank Group’s risk management approach is based on the ‘Three Lines of Defence’ concept.

1st line of defence - the risk owner or risk taking unit i.e. business or support unit is accountable for putting

in place a robust control environment within their respective units. They are responsible for the day to day

management of operational risk.

2nd line of defence - RMD is responsible for establishing and maintaining the Risk Management

Framework, developing various risk management tools to facilitate the management of operational risk,

monitoring the effectiveness of risk management, assessing operational risk issues from the risk owner

and escalating the issues to the relevant governance level with recommendations on appropriate risk

mitigation strategies. In creating a strong risk culture, RMD is also responsible to promote risk awareness

across the Bank Group.

Management Investment and Credit Committee ("MICC"): The MICC deliberates and recommends

to the Board or relevant Board Committees for Corporate Financing, Retail Financing and Investment

accounts, and decides whether to proceed with the preparation of the Board/BICC paper based on

completed credit assessment reports. The MICC also deliberates and recommends any appeal on

variations to the terms and conditions as earlier approved by the Board or Board Committees and

also deliberates and approves the submission of the relevant corporate rehabilitation papers for the

Board or Board Committees.

Management Committee ("MANCO"): The MANCO deliberates the implementation of the Enterprise-

wide Risk Management Framework which addresses credit, market and operational and strategic

risks and also resolves operational issues within the policies established by the Board and

recommends policy changes to the Board.

At the apex of the Bank Group and the Bank's risk management structure is the Board of Directors ("the

Board"), which comprises Non-Executive Directors. In line with best practices, the Board determines the

risk policy objectives for the Bank Group and the Bank, and assumes responsibility for the supervision of

risk management.

The day-to-day responsibility for risk management and control is delegated to the BRMCC which

undertakes the oversight function for overall risk limits and ensures that the Bank Group and the Bank are

within risk appetites as established by the Board. Other than the BRMCC, the Board is also supported by

specialised and supervisory committees, the details of which are as follows:

Board Investment and Credit Committee ("BICC"): The BICC assists the Board to consider and if

deem fit to affirm or veto, all financing and investment applications, additional financing or

investment, and/or request for changes to existing financing/investment accounts within the

Committee’s discretionary authority. The BICC also considers and if deem fit to affirm or veto on

waivers of penalty, profit or principal amount, rescheduling/restructuring of accounts and/or request

for changes to existing non-performing financing/investment accounts within the Committee’s

discretionary authority.

Asset and Liability Committee ("ALCO"): The ALCO is responsible for the Bank Group’s and the

Bank's liquidity management by focusing on the maturity gap, liquidity position, financing portfolio

concentration, deposits composition and depositors’ concentration. The ALCO also manages the

profit rate exposures and profit margin of the Bank Group and the Bank by reviewing the lending

rates, cost of funds, profit margin and the repricing gaps.

97

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

(c) Risk organisation (cont'd.)

(d) Risk reporting and monitoring

(e) Credit risk mitigation

(f) Concentration risk

Compliance Division is responsible for ensuring effective oversight on compliance-related risks such as

regulatory compliance risk, compliance risk as well as money laundering and terrorism financing risks

through proper classification of risks and developing, reviewing and enhancing compliance-related training

programme as well as conducting training that promotes awareness creation.

3rd line of defence - Internal Audit Division provides independent assurance to the Board and senior

management on the effectiveness of the risk management process.

The Bank Group’s and the Bank's credit portfolios are monitored through early alert reporting to ensure

credit deterioration is promptly detected and mitigated through the implementation of risk remediation

strategies. All business units undertake regular and comprehensive analyses of their credit portfolios and

report to the relevant committees and are overseen by RMD. RMD provides independent reporting to the

business units and the Board to ensure independence in relation to the prompt identification and

communication of emerging credit issues of the Bank Group and the Bank to the Board.

All credit facilities are granted on the credit standing of respective borrowers, source of repayment, debt

servicing ability and the collateral provided. The valuation of the collateral is conducted periodically. The

main types of collateral taken by the Bank Group and the Bank are marketable securities, real estate,

inventory and receivables. Personal guarantees are also taken as a part of the collateral to secure the

moral commitment from the principal shareholders and directors of the borrowers. Corporate guarantees

are often obtained when the borrower’s credit worthiness is insufficient to justify the granting of credit

facilities.

Concentration of credit risk arises when a number of customers are engaged in similar business activities

or activities within the same geographic region, or when they have similar risk characteristics that would

cause their ability to meet contractual obligations to be similarly affected by changes in economic or other

conditions. The Bank Group and the Bank monitor their portfolios to identify and assess risk

concentrations. The credit portfolios are monitored and periodically reviewed to identify, assess and

safeguard against unacceptable risk concentrations. RMD also applies single customer counterparty limits

to protect against unacceptably large exposures to single risk. RMD conducts analyses and reports

concentration risk to the Board on a quarterly basis.

98

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk

(i) Maximum exposure to credit risk

2018 2017 2018 2017

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

Credit exposure for

on-balance sheet financial assets

Cash and short-term funds 3,242,228 478,674 3,237,276 478,674

Deposits and placements with banks

and other financial institutions 776,739 - 1,842 -

Derivative financial assets 67 3,091 67 3,091

Financial investments at FVOCI 5,097,105 - 5,097,105 -

Financial investments

available-for-sale - 227,086 - 227,086

Financial investments

at amortised cost 20,350 - 20,350 -

Financial investments

held-to-maturity - 600,600 - 600,600

Financing and advances 31,806,617 1,035,668 31,806,617 1,035,668

Sukuk Commodity Murabahah - - 2,924,734 -

Statutory deposits with Bank Negara

Malaysia 1,053,000 26,774 1,053,000 26,774

Other receivables * 571,829 4,263 598,731 4,263

42,567,935 2,376,156 44,739,722 2,376,156

*

Bank

Group

Economic

Entity Bank

The following analysis represents the Bank Group's and the Bank's maximum exposure to credit risk

from on-balance sheet financial assets and off-balance sheet commitments and contingencies,

excluding any collateral held or other credit enhancements. For on-balance sheet financial assets,

the exposure to credit risk equals their carrying amount. For contingent liabilities, the maximum

exposure to credit risk is the maximum amount that the Bank Group and the Bank would have to pay

if the obligations of the instruments issued are being called upon. For credit commitments, the

maximum exposures to credit risk is the full amount of the undrawn credit facilities granted to

customers.

The primary objective of the Bank Group's and the Bank's credit platform is to enhance the efficiency and

effectiveness of the credit oversight and credit approval processes for all retail and corporate financing.

Credit proposals are submitted to the relevant credit committees for approval or concurrence, and are

subsequently submitted to RMD for independent assessment. Credit exposures are evaluated by RMD

and are monitored against approved limits on a periodic basis on a portfolio and individual basis.

Credit risk is the risk of loss to the Bank Group and the Bank due to the deterioration in credit worthiness

of their borrowers and, consequently, their ability to discharge their contractual obligations to the Bank

Group and the Bank. Credit risk remains the most significant risk to which the Bank Group and the Bank

are exposed. The purpose of credit risk management is to keep credit risk exposure to an acceptable level

in line with the Bank Group’s and the Bank's risk appetite and to ensure that the returns are

commensurate to the risk underwritten.

Other receivables exclude prepayments and deposits as these items are classified as non-

financial assets.

99

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(i) Maximum exposure to credit risk (cont'd.)

2018 2017

RM'000 RM'000

Credit exposure for

off-balance sheet items

Direct credit substitutes 187,785 24,451

Trade-related contingencies 254,488 28,158

Irrevocable commitments 5,630,364 414,950

6,072,637 467,559

(ii) Credit quality

(a) Financing and advances

Financing and advances are summarised as follows:

Bank Group / Economic

Entity and Bank

2018

Stage 1 Stage 2 Stage 3 Total

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

Neither past due nor impaired

Corporate financing

Excellent 1,380 - - 1,380

Good 3,484,483 273,974 - 3,758,457

Average 2,555,278 473,353 - 3,028,631

Below Average 225,842 7,862 - 233,704

Poor 31,389 3,864 - 35,253

Retail financing 22,016,505 1,393,970 - 23,410,475

Total neither past due nor impaired 28,314,877 2,153,023 - 30,467,900

Past due but not impaired

Corporate financing

Excellent - - - -

Good - 90,649 - 90,649

Average - 199,213 - 199,213

Below Average - 58,833 - 58,833

Poor - 113,287 - 113,287

Retail financing - 1,322,499 - 1,322,499

Total past due but not impaired - 1,784,481 - 1,784,481

Impaired - - 792,293 792,293

Gross financing and advances 28,314,877 3,937,504 792,293 33,044,674

Loss allowance (346,537) (455,639) (435,881) (1,238,057)

Net financing and advances 27,968,340 3,481,865 356,412 31,806,617

Bank Group and Bank

100

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(ii) Credit quality (cont'd.)

(a) Financing and advances (cont'd.)

2018

Stage 1 Stage 2 Stage 3 Total

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

Financing commitments

Corporate financing

Excellent 506 - - 506

Good 1,937,849 202,108 - 2,139,957

Average 2,469,641 414,399 - 2,884,040

Below Average 241,195 363 - 241,558

Poor - 12,630 152,248 164,878

Retail financing 182,677 10,849 5,899 199,425

Gross financing commitments 4,831,868 640,349 158,147 5,630,364

Loss allowance (48,113) (31,033) (3,852) (82,998)

Net financing commitments 4,783,755 609,316 154,295 5,547,366

Financial guarantees

Corporate financing

Excellent - - - -

Good 83,254 - - 83,254

Average 255,955 76,170 - 332,125

Below Average - 4,000 - 4,000

Poor - - 22,894 22,894

Gross financing guarantees 339,209 80,170 22,894 442,273

Loss allowance (4,604) (5,597) (744) (10,945)

Net financing guarantees 334,605 74,573 22,150 431,328

Bank Group and Bank

101

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(ii) Credit quality (cont'd.)

(a) Financing and advances (cont'd.)

Internal rating definition for year 2018:

Poor credit quality and high risk of default.

Superior capability for payment of financial commitments with

little susceptibility to adverse effects to changes in

circumstances and economic conditions.

Description

Strong capacity to meet financial commitments and are less

susceptible to adverse effects to changes in circumstances

and economic conditions.

Moderate capacity to meet financial commitments and may be

susceptible to adverse changes in circumstances and

economic conditions.

Weak in terms of overall credit risk, with some apparent risk of

default. May face problems in meeting commitments in the

long term.

Risk Level

Excellent

Good

Average

Below Average

Poor

2017

Economic Entity and Bank

RM'000

Neither past due nor impaired

Corporate financing

CRR 1 - CRR 3 122,040

CRR 4 - CRR 6 822,801

CRR 7 - CRR 10 14,732

Retail financing 7,185

Total neither past due nor impaired 966,758

Past due but not impaired

Corporate financing -

Retail financing 10,611

Total past due but not impaired 10,611

Impaired 111,424

Gross financing and advances 1,088,793

Individual assessment allowance (45,716)

Collective assessment allowance (7,409)

Net financing and advances 1,035,668

102

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(ii) Credit quality (cont'd.)

(a) Financing and advances (cont'd.)

Internal rating definition for year 2017:

Brief explanation

Good

CRR 9 Doubtful

Grade Description

CRR 1 Prime Quality

Strong ability to pay debt obligations. Very

good management team of professional

background and experienced with

excellent reputation and track record.

Customer with dynamic market presence,

professional management and very strong

financial position is evident. Undoubted for

all its obligations.

Sound financial position evident with no

difficulty foreseen in meeting its

obligations. Good reputation and track

record is unquestionable.

CRR 2 Strong

CRR 3

CRR 7 Watch-List

Very high risk of default or already in

default. The continuation of the business is

in question and cash generated from

business is low – provision for doubtful

financing is justified.

Positive ability to pay debt obligations.

Generally known to be of stable financial

position and track record.

Business is trading towards an acceptable

level on a stable or upward trend. No

difficulty in servicing its current debts.

Adequate safety of meeting its obligations

but more time is required to meet its

obligation in full.

Inadequate safety of timely payment of

profit and principal. Financial trends and /

or market position has changed

significantly requiring closer monitoring.

High risks on profit and principal

payments. Financial performance has

continued to deteriorate possibly allied to

significant adverse change in business

environment giving increasing cause for

concern.

CRR 4 Favourable

CRR 8 Sub-standard

CRR 6 Marginal

CRR 5 Satisfactory

103

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(ii) Credit quality (cont'd.)

(a) Financing and advances (cont'd.)

Internal rating definition for year 2017 (cont'd.):

Brief explanation

Past due but not impaired

RM'000 % to Gross RM'000 % to Gross

Financing Financing

By aging

Months-in-arrears 1 1,237,110 3.74% 9,685 0.89%

Months-in-arrears 2 547,371 1.66% 926 0.09%

1,784,481 5.40% 10,611 0.98%

Impaired

2018 2017

Impaired financing RM'000 RM'000

Individually assessed of which:

Months-in-arrears 0 12,900 -

Months-in-arrears 1 - -

Months-in-arrears 2 3,567 -

Months-in-arrears 3 and above 144,294 70,391

Collectively assessed 631,532 41,033

792,293 111,424

Bank Group / Economic Entity and Bank

Unlikely that the business will survive – full

provision for doubtful financing made for

the unsecured portion of the exposure.

CRR 10 Bad

20172018

Bank Group / Economic

Entity and Bank

This refers to financing and advances for which exposures are considered impaired based on the

Bank Group's and Bank's policies.

Grade Description

104

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(ii) Credit quality (cont'd.)

(a) Financing and advances (cont'd.)

Impaired (cont'd.)

2018 2017

RM'000 RM'000

Retail 79,393 37,493

Corporate 45,170 805

124,563 38,298

(b) Other financial assets

Credit quality of other financial assets by external rating is as follows:

Bank Group

Neither past due nor impaired

2018 Stage 1

L

i

f Stage 2 Stage 3 Total

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

Cash and short-term funds

AAA 3,119,394 - - 3,119,394

AA and below 71,831 - - 71,831

Unrated 51,003 - - 51,003

3,242,228 - - 3,242,228

Debt investments

AAA 969,308 - - 969,308

AA and below 91,320 - - 91,320

Unrated* 4,056,827 - - 4,056,827 5,117,455 - - 5,117,455

*The unrated financial investments are all government guaranteed securities.

Other financial assets

Unrated 186,798 - 385,031 571,829

186,798 - 385,031 571,829

Rescheduled or restructured financing are financing where the original contractual terms have been

modified due to deterioration in the customers’ financial positions and the Bank has made

concessions that it would not otherwise consider. Once the financing is rescheduled or restructured,

its satisfactory performance is monitored for a period of six months before it can be reclassified to

non-credit impaired.

Bank Group / Economic

Entity and Bank

Impaired financing of which are rescheduled and restructured financing:

105

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(ii) Credit quality (cont'd.)

(b) Other financial assets (cont'd.)

Bank

Neither past due nor impaired

2018 Stage 1

L

i Stage 2 Stage 3 Total

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

Cash and short-term funds

AAA 3,119,394 - - 3,119,394

AA and below 66,879 - - 66,879

Unrated 51,003 - - 51,003

3,237,276 - - 3,237,276

Debt investments

AAA 969,308 - - 969,308

AA and below 91,320 - - 91,320

Unrated* 4,056,827 - - 4,056,827 5,117,455 - - 5,117,455

*The unrated financial investments are all government guaranteed securities.

Other financial assets

Unrated 213,700 - 385,031 598,731

213,700 - 385,031 598,731

Economic Entity and Bank

2017 Stage 1

L

i

f Stage 2 Stage 3 Total

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

Cash and short-term funds

AAA 431,442 - - 431,442

AA and below 45,890 - - 45,890

Unrated 1,342 - - 1,342

478,674 - - 478,674

Debt investments

AAA 222,882 - - 222,882

AA and below 181,064 - - 181,064

Unrated* 423,740 - - 423,740

827,686 - - 827,686

*The unrated financial investments are all government guaranteed securities.

Other financial assets

Unrated 4,263 - - 4,263

4,263 - - 4,263

106

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial Risk Management (cont'd.)

40.1 Credit risk (cont'd.)

(iii) Concentration of credit risk

Cash and

short-term

funds and

deposits and Statutory

placements Financial deposits

with Derivative Financial investments Financing with Bank Commitment

financial financial investments at amortised and Other Negara On balance Financial and

Bank Group institutions assets at FVOCI cost advances receivables* Malaysia sheet total guarantees contingencies^

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

Government and central banks 3,067,814 - 2,154,192 - - - 1,053,000 6,275,006 - -

Household sectors - - - - 24,219,170 - - 24,219,170 - 360,172

Agriculture - - - - 207,514 - - 207,514 24,680 145,137

Mining and quarrying - - - - 20,742 - - 20,742 8,794 8,045

Manufacturing - - 10,119 - 255,752 - - 265,871 5,528 127,135

Electricity, gas and water - - 502,630 20,350 228,155 - - 751,135 95,000 357,138

Construction - - 585,001 - 5,190,184 337,781 - 6,112,966 299,546 3,498,069

Wholesale & retail trade and

restaurants & hotels - - - - 158,783 47,250 - 206,033 4,791 69,123

Transport, storage and

communication - - 206,977 - 119,964 - - 326,941 2,000 836,007

Finance, insurance and

business services 940,721 - 1,071,735 - 1,024,419 98,666 - 3,135,541 1,934 99,538

Education, health and others - - 439,709 - 381,934 - - 821,643 - 130,000

Others - 67 126,742 - - 88,132 - 214,941 - -

4,008,535 67 5,097,105 20,350 31,806,617 571,829 1,053,000 42,557,503 442,273 5,630,364

Assets not subject to credit risk 10,432 - - - - - - 10,432 - -

4,018,967 67 5,097,105 20,350 31,806,617 571,829 1,053,000 42,567,935 442,273 5,630,364

* Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

^ Commitments and contingencies excluding foreign exchange related contracts.

2018

107

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial Risk Management (cont'd.)

40.1 Credit risk (cont'd.)

(iii) Concentration of credit risk (cont'd.)

Cash and

short-term

funds and

deposits and Statutory

placements Financial deposits

with Derivative Financial investments Financing Sukuk with Bank Commitment

financial financial investments at amortised and Commodity Other Negara On balance Financial and

Bank institutions assets at FVOCI cost advances Murabahah receivables* Malaysia sheet total guarantees contingencies^

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

Government and central banks 3,067,814 - 2,154,192 - - - - 1,053,000 6,275,006 - -

Household sectors - - - - 24,219,170 - - - 24,219,170 - 360,172

Agriculture - - - - 207,514 - - - 207,514 24,680 145,137

Mining and quarrying - - - - 20,742 - - - 20,742 8,794 8,045

Manufacturing - - 10,119 - 255,752 - - - 265,871 5,528 127,135

Electricity, gas and water - - 502,630 20,350 228,155 - - - 751,135 95,000 357,138

Construction - - 585,001 - 5,190,184 - 337,781 - 6,112,966 299,546 3,498,069

Wholesale & retail trade and

restaurants & hotels - - - - 158,783 - 47,250 - 206,033 4,791 69,123

Transport, storage and

communication - - 206,977 - 119,964 - - - 326,941 2,000 836,007

Finance, insurance and

business services 160,872 - 1,071,735 - 1,024,419 2,924,734 128,735 - 5,310,495 1,934 99,538

Education, health and others - - 439,709 - 381,934 - - - 821,643 - 130,000

Others - 67 126,742 - - - 84,965 - 211,774 - -

3,228,686 67 5,097,105 20,350 31,806,617 2,924,734 598,731 1,053,000 44,729,290 442,273 5,630,364

Assets not subject to credit risk 10,432 - - - - - - - 10,432 - -

3,239,118 67 5,097,105 20,350 31,806,617 2,924,734 598,731 1,053,000 44,739,722 442,273 5,630,364

* Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

^ Commitments and contingencies excluding foreign exchange related contracts.

2018

108

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial Risk Management (cont'd.)

40.1 Credit risk (cont'd.)

(iii) Concentration of credit risk (cont'd.)

Cash and

short-term

funds and

deposits and Statutory

placements Financial Financial deposits

with Derivative investments investments Financing with Bank Commitment

financial financial available- held to and Other Negara On balance Financial and

Economic Entity and Bank institutions assets for-sale maturity advances receivables* Malaysia sheet total guarantees contingencies^

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

Government and central banks 431,103 - - - - - 26,774 457,877 - -

Household sectors - - - - 20,707 - - 20,707 - 50

Agriculture - - - - 158,944 - - 158,944 20,238 170,712

Mining and quarrying - - - - 25,224 - - 25,224 - 10,704

Manufacturing - - - - 127,937 - - 127,937 2,444 77,269

Electricity, gas and water - - 35,200 137,238 59,773 - - 232,211 - -

Construction - - 20,194 291,889 153,362 - - 465,445 25,100 69,812

Wholesale & retail trade and

restaurants & hotels - - - - 104,295 - - 104,295 2,577 35,538

Transport, storage and

communication - - 50,419 15,138 62,676 - - 128,233 2,000 12,441

Finance, insurance and

business services 46,271 - 121,273 70,382 322,750 - - 560,676 250 38,424

Education, health and others - - - - - - - - - -

Others - 3,091 - 85,953 - 4,263 - 93,307 - -

477,374 3,091 227,086 600,600 1,035,668 4,263 26,774 2,374,856 52,609 414,950

Assets not subject to credit risk 1,300 - - - - - - 1,300 - -

478,674 3,091 227,086 600,600 1,035,668 4,263 26,774 2,376,156 52,609 414,950

* Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

^ Commitments and contingencies excluding foreign exchange related contracts.

2017

109

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.1 Credit risk (cont'd.)

(iv) Collateral and other credit enhancements obtained

• For property financing - changes over the properties being financed;

• For auto financing - ownership claims over the vehicles being financed

•

(v) Key macroeconomic variables

Sensitivity analysis for macroeconomic variables

10% 10% non-

favourable favourable

Tax rate RM'000 RM'000

2018

Sensitivity to MEV - HPI

Impact to profit before tax 6,162 (5,997)

Impact to profit after tax and equity 24% 4,683 (4,558)

Sensitivity to MEV - CPI

Impact to profit before tax 2,342 (2,297)

Impact to profit after tax and equity 24% 1,780 (1,746)

The main types of collateral obtained by the Bank Group and the Bank to mitigate credit risk are

as follows:

For other financing and advances - changes over business assets such as premises,

inventories, trade receivables and/or cash deposits.

The financial effect of collateral (quantification to the extent to which collateral and other credit

enhancements mitigate credit risk) held for gross financing and advances for the Bank Group and

the Bank is 22.38% (2017: 32.13%) . The financial effect of collateral held for the remaining

financial investments are not significant.

At the reporting date, if the forward-looking MEVs had changed by 10% favourable/non-

favourable, with all other variables held constant, the Bank Group's and the Bank's net profit and

shareholders' equity would have been increased/(decreased) as per the following table, arising as

a result of changes in the probability of default.

Bank Group and Bank

In computing the Excepted Credit Losses ("ECL") of financing and advances, the Bank Group and

the Bank incorporate the impact of forward-looking key macroeconomic variables ("MEV")

acording to the respective portfolio. The MEVs incorporated into the ECL calculations include, but

not limited to House Price Index ("HPI") and Consumer Price Index ("CPI"). The forward-looking

MEVs are supported with 3 economic scenarios i.e baseline, best and worst case scenarios.

Macroeconomic

Variables (MEV)

Next 12

months

Remaining

forecast

period

Next 12

months

Remaining

forecast

period

Next 12

months

Remaining

forecast

period

House Price Index

("HPI") 196.28 211.79 197.19 216.54 194.61 203.77

Consumer Price

Index ("CPI")

- Year-on-Year

Change 1.38 2.11 2.04 2.57 1.11 1.8

Base scenario Best scenario Worst scenario

110

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk

(i) Profit rate risk

Rate of Return in the Banking Book

The table below shows the Bank's profit rate sensitivity to a 100 basis points parallel shift as at

reporting date.

+100 basis -100 basis +100 basis -100 basis

points points points points

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

Bank Group/Economic Entity

and Bank

Impact on Earnings-at-Risk ("EaR") 71,356 (71,356) 1,605 (1,605)

Impact on Economic Value

Loss ("EVE") (1,119,951) 1,119,951 (23,543) 23,543

Rate of Return risk in the Banking Book ("RORBB") refers to the risk of the Bank Group and the

Bank suffering deterioration in financial position (economic value loss) or financial losses due to

the impact of changes in market profit rates over time on banking book exposure arising from

activities such as deposits taking, financing and investment.

The Bank Group and the Bank use various tools including repricing gap reports and stress tests

to measure their RORBB exposure. The impact on earnings and economic value are considered

at all times in measuring the RORBB.

20172018

Market risk is the risk of potential loss as a result of changes in the intrinsic value of financial

instruments caused by movements in market variables such as profit rates and foreign exchange rates

that will eventually affect the Bank Group’s and the Bank's profitability and capital preservation.

The Bank Group’s and the Bank's market risk management includes the monitoring of fluctuations in

net profit income or investment value due to changes in relevant market risk factors. The ALCO

monitors the exposure on a monthly basis through reports produced by the Treasury Division. The

RMD, via its presence in the ALCO, provides advisory services and input on the Bank Group’s and the

Bank's market risk management.

111

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk (cont'd.)

(i) Profit rate risk (cont'd.)

Effective

Up to 1 > 1-3 > 3-12 > 1-5 Over 5 Non-profit profit

Bank Group months months months years years sensitive Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

2018

Financial Assets

Cash and short-term funds 3,062,720 - - - - 179,508 3,242,228 3.27

Deposits and placements

with financial institutions 1,874 - 774,865 - - - 776,739 3.65

Derivative financial assets - 67 - - - - 67

Financial investments at FVOCI 5,097 192,538 373,038 2,548,826 1,977,606 - 5,097,105 4.09

Financial investments at amortised cost - - - 20,350 - - 20,350 4.22

Financing and advances

- non-impaired 462,803 510,837 400,419 3,599,151 27,279,171 (802,176) 31,450,205 6.73

- impaired, net of loss allowances* - - - - - 356,412 356,412

Other receivables^ 385,031 - - - - 186,798 571,829 7.00

Statutory deposits with Bank Negara Malaysia - - - - - 1,053,000 1,053,000

Total financial assets 3,917,525 703,442 1,548,322 6,168,327 29,256,777 973,542 42,567,935

* This is arrived after deducting impairment allowances from gross impaired financing.

^ Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

The tables below summarise the Bank Group's and the Bank's exposure to profit rate risk. The tables indicate average profit rates at the reporting date and periods in which

the financial instruments mature.

<------------------------------------------ Non-trading book ---------------------------------------->

112

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk (cont'd.)

(i) Profit rate risk (cont'd.)

Effective

Up to 1 > 1-3 > 3-12 > 1-5 Over 5 Non-profit profit

Bank Group months months months years years sensitive Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

2018

Financial Liabilities

Deposits from customers 6,789,658 7,171,717 8,154,246 1,863,692 52,867 177,269 24,209,449 4.08

Deposits and placements of

banks and other financial institutions 2,102,970 2,783,187 2,812,625 871,613 - 8,456 8,578,851 4.05

Derivative financial liabilities 2 - - - - - 2

Other payables # - - - - - 420,893 420,893

Recourse obligation on financing sold 7,597 20,511 565,745 1,541,665 - - 2,135,518 4.51

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah - - 308,864 1,064,590 594,621 - 1,968,075 4.88

Total financial liabilities 8,900,227 9,975,415 11,841,480 5,341,560 647,488 606,618 37,312,788

Total profit-sensitivity gap (4,982,702) (9,271,973) (10,293,158) 826,767 28,609,289 366,924 5,255,147

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

113

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk (cont'd.)

(i) Profit rate risk (cont'd.)

Effective

Up to 1 > 1-3 > 3-12 > 1-5 Over 5 Non-profit profit

Bank months months months years years sensitive Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

2018

Financial Assets

Cash and short-term funds 3,062,720 - - - - 174,556 3,237,276 3.27

Deposits and placements

with financial institutions 1,842 - - - - - 1,842 3.30

Derivative financial assets - 67 - - - - 67

Financial investments at FVOCI 5,097 192,538 373,038 2,548,826 1,977,606 - 5,097,105 4.09

Financial investments at amortised cost - - - 20,350 - - 20,350 4.22

Financing and advances

- non-impaired 462,803 510,837 400,419 3,599,151 27,279,171 (802,176) 31,450,205 6.73

- impaired, net of loss allowances* - - - - - 356,412 356,412

Sukuk Commodity Murabahah 27,634 - 316,619 1,153,137 1,427,344 - 2,924,734 3.31

Other receivables^ 415,100 - - - - 183,631 598,731 7.00 Statutory deposits with Bank Negara Malaysia - - - - - 1,053,000 1,053,000

Total financial assets 3,975,196 703,442 1,090,076 7,321,464 30,684,121 965,423 44,739,722

* This is arrived after deducting impairment allowances from gross impaired financing.

^ Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

<------------------------------------------ Non-trading book ---------------------------------------->

114

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk (cont'd.)

(i) Profit rate risk (cont'd.)

Effective

Up to 1 > 1-3 > 3-12 > 1-5 Over 5 Non-profit profit

Bank months months months years years sensitive Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

2018

Financial Liabilities

Deposits from customers 6,789,658 7,171,717 8,154,246 1,863,692 52,867 177,269 24,209,449 4.08

Deposits and placements of

banks and other financial institutions 2,102,970 2,783,187 2,812,625 871,613 - 8,456 8,578,851 4.05

Derivative financial liabilities 2 - - - - - 2

Other payables # 2,584,124 - - - - 420,893 3,005,017 6.29

Recourse obligation on financing sold 7,597 20,511 565,745 1,541,665 - - 2,135,518 4.51

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah - - 308,864 1,064,590 594,621 - 1,968,075 4.88

Total financial liabilities 11,484,351 9,975,415 11,841,480 5,341,560 647,488 606,618 39,896,912

Total profit-sensitivity gap (7,509,155) (9,271,973) (10,751,404) 1,979,904 30,036,633 358,805 4,842,810

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

115

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk (cont'd.)

(i) Profit rate risk (cont'd.)

Effective

Up to 1 > 1-3 > 3-12 > 1-5 Over 5 Non-profit profit

Economic Entity and Bank months months months years years sensitive Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

2017

Financial Assets

Cash and short-term funds 431,000 - - - - 47,674 478,674 3.01

Deposits and placements

with financial institutions

Derivative financial assets 2,845 246 - - - - 3,091

Financial investments

available-for-sale - - 70,380 146,610 10,092 4 227,086 4.31

Financial investments

held-to-maturity - - 50,120 450,103 100,377 - 600,600 4.25

Financing and advances

- non-impaired 637,015 94,807 16,744 204,703 24,100 (7,409) 969,960 4.95

- impaired, net of loss allowances* - - - - - 65,708 65,708

Other receivables^ - - - - - 4,263 4,263

Statutory deposits with Bank Negara Malaysia - - - - - 26,774 26,774

Total financial assets 1,070,860 95,053 137,244 801,416 134,569 137,014 2,376,156

* This is arrived after deducting impairment allowances from gross impaired financing.

^ Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

<------------------------------------------ Non-trading book ---------------------------------------->

116

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2 Market risk (cont'd.)

(i) Profit rate risk (cont'd.)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit profit

Economic Entity and Bank months months months years years sensitive Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

2017

Financial Liabilities

Deposits from customers 219,927 508,817 254,277 142,524 - 73,131 1,198,676 3.54

Deposits and placements of banks

and other financial institutions 297,152 269,747 110,745 - - 3,624 681,268 3.80

Derivative financial liabilities 777 - - - - - 777

Other payables # - - - - - 8,633 8,633

Total financial liabilities 517,856 778,564 365,022 142,524 - 85,388 1,889,354

Total profit-sensitivity gap 553,004 (683,511) (227,778) 658,892 134,569 51,626 486,802

# Other payables exclude other provisions and accruals as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

117

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.2Market risk (cont'd.)

(ii) Foreign Exchange Risk

40.3Liquidity risk

The Bank Group and the Bank take minimal exposure to the effects of fluctuations in the

prevailing foreign currency exchange rates on their financial position and cash flows. The Bank

Group manages its exposure to foreign exchange currencies at each entity level.

The Bank Group's and the Bank's liquidity risk management policy is to maintain high quality and well

diversified portfolios of liquid assets and sources of funds under both normal business and stress

conditions. Liquidity risk management of the Bank Group and the Bank is governed by established risk

tolerance levels as defined in the Bank Group's and the Bank's Market Risk Framework. The ALCO

would be informed by management action triggers to alert management to potential and emerging

liquidity pressures. The Bank Group's and the Bank's early warning system and contingency funding

plans are in place to alert and enable management to act effectively and efficiently during a liquidity

crisis.

The Bank Group and the Bank are exposed to transactional foreign exchange exposures which

are exposures on assets and liabilities denominated in currencies other than the functional

currency of the transacting entity.

The ALCO meets at least once a month to discuss the liquidity risk and funding profile and is chaired

by the Chief Executive Officer. The ALCO and Funding Unit, which is responsible for the independent

monitoring of the Bank Group’s and the Bank's liquidity risk profile, works closely with the Treasury

Division in the surveillance on market conditions and performs stress testing on liquidity positions.

As at the end of the reporting period, the financial assets and financial liabilities of the Bank

Group and the Bank in the currency other than Ringgit Malaysia ("MYR") are not material,

therefore the foreign exchange risk sensitivity analysis is not presented.

118

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(a) Maturity analysisNo

Less than Over Over specific

Bank Group 1 year 1 - 5 years 5 years maturity Total

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

2018

Financial Assets

Cash and short-term funds 3,062,720 - - 179,508 3,242,228

Deposits and placements with banks and

other financial institutions 776,739 - - - 776,739

Derivative financial assets 67 - - - 67

Financial investments at FVOCI 570,673 2,548,826 1,977,606 - 5,097,105

Financial investments at amortised cost - 20,350 - - 20,350

Financing and advances * 1,369,303 3,574,952 26,862,362 - 31,806,617

Other receivables^ 571,829 - - - 571,829

Statutory deposits with Bank Negara Malaysia - - - 1,053,000 1,053,000

Total financial assets 6,351,331 6,144,128 28,839,968 1,232,508 42,567,935

* This is arrived after deducting impairment allowances from gross financing and advances.

^ Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

The tables below summarise the Bank Group's and the Bank's financial assets and financial liabilities based on remaining

contractual maturities.

119

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(a) Maturity analysis (cont'd.)

No

Less than Over Over specific

Bank Group 1 year 1 - 5 years 5 years maturity Total

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

2018

Financial Liabilities

Deposits from customers 22,292,890 1,863,692 52,867 - 24,209,449

Deposits and placements of

banks and other financial institutions 7,707,238 871,613 - - 8,578,851

Derivative financial liabilities 2 - - - 2

Other payables # 420,893 - - - 420,893

Recourse obligation on financing sold 593,853 1,541,665 - - 2,135,518

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah 308,864 1,064,590 594,621 - 1,968,075

Total financial liabilities 31,323,740 5,341,560 647,488 - 37,312,788

Net liquidity gap on Statement of

Financial Position (24,972,409) 802,568 28,192,480 1,232,508 5,255,147

Commitment and contingencies^ (1,481,955) (4,369,865) (220,817) - (6,072,637)

Net liquidity gap (26,454,364) (3,567,297) 27,971,663 1,232,508 (817,490)

^ Commitments and contingencies exclude foreign exchange related contracts.

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial

liabilities.

120

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(a) Maturity analysis (cont'd.)No

Less than Over Over specific

Bank 1 year 1 - 5 years 5 years maturity Total

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

2018

Financial Assets

Cash and short-term funds 3,062,720 - - 174,556 3,237,276

Deposits and placements with banks and

other financial institutions 1,842 - - - 1,842

Derivative financial assets 67 - - - 67

Financial investments at FVOCI 570,673 2,548,826 1,977,606 - 5,097,105

Financial investments at amortised cost - 20,350 - - 20,350

Financing and advances * 1,369,303 3,574,952 26,862,362 - 31,806,617

Sukuk Commodity Murabahah 344,253 1,153,137 1,427,344 2,924,734

Other receivables^ 598,731 - - - 598,731

` Statutory deposits with Bank Negara Malaysia - - - 1,053,000 1,053,000

Total financial assets 5,947,589 7,297,265 30,267,312 1,227,556 44,739,722

* This is arrived after deducting impairment allowances from gross financing and advances.

^ Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

121

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(a) Maturity analysis (cont'd.)

No

Less than Over Over specific

Bank 1 year 1 - 5 years 5 years maturity Total

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

2018

Financial Liabilities

Deposits from customers 22,292,890 1,863,692 52,867 - 24,209,449

Deposits and placements of

banks and other financial institutions 7,707,238 871,613 - - 8,578,851

Derivative financial liabilities 2 - - - 2

Other payables # 3,005,017 - - - 3,005,017

Recourse obligation on financing sold 593,853 1,541,665 - - 2,135,518

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah 308,864 1,064,590 594,621 - 1,968,075

Total financial liabilities 33,907,864 5,341,560 647,488 - 39,896,912

Net liquidity gap on Statement of

Financial Position (27,960,275) 1,955,705 29,619,824 1,227,556 4,842,810

Commitment and contingencies^ (1,481,955) (4,369,865) (220,817) - (6,072,637)

Net liquidity gap (29,442,230) (2,414,160) 29,399,007 1,227,556 (1,229,827)

^ Commitments and contingencies exclude foreign exchange related contracts.

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial

liabilities.

122

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(a) Maturity analysis (cont'd.)

No

Less than Over Over specific

Economic Entity and Bank 1 year 1 - 5 years 5 years maturity Total

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

2017

Financial Assets

Cash and short-term funds 431,000 - - 47,674 478,674

Derivative financial assets 3,091 - - - 3,091

Financial investments

available-for-sale 70,384 146,610 10,092 - 227,086

Financial investments

held-to-maturity 50,120 450,103 100,377 - 600,600

Financing and advances* 742,250 203,953 89,465 - 1,035,668

Other receivables^ 4,263 - - - 4,263

Statutory deposits with Bank Negara Malaysia - - - 26,774 26,774

Total financial assets 1,301,108 800,666 199,934 74,448 2,376,156

* This is arrived after deducting impairment allowances from gross financing and advances.

^ Other receivables exclude prepayments and deposits as these items are classified as non-financial assets.

123

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(a) Maturity analysis (cont'd.)No

Less than Over Over specific

Economic Entity and Bank 1 year 1 - 5 years 5 years maturity Total

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

2017

Financial Liabilities

Deposits from customers 1,056,152 142,524 - - 1,198,676

Deposits and placements of

banks and other financial institutions 681,268 - - - 681,268

Derivative financial liabilities 777 - - - 777

Other payables # 8,633 - - - 8,633

Total financial liabilities 1,746,830 142,524 - - 1,889,354

Net liquidity gap on Statement of

Financial Position (445,722) 658,142 199,934 74,448 486,802

Commitment and contingencies^ (393,960) (22,782) (50,817) - (467,559)

Net liquidity gap (839,682) 635,360 149,117 74,448 19,243

^ Commitments and contingencies exclude foreign exchange related contracts.

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial

liabilities.

124

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(b) Contractual maturity of financial liabilities on an undiscounted basis

Less than Over Over

Bank Group 1 year 1 - 5 years 5 years Total

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

2018

Financial Liabilities

Deposits from customers 22,555,954 2,138,159 69,698 24,763,811

Deposits and placements of

banks and other financial institutions 7,788,977 1,031,993 - 8,820,970

Derivative financial liabilities 2 - - 2

Other payables # 420,893 - - 420,893

Recourse obligation on financing sold 675,578 1,717,725 - 2,393,303

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah 399,459 1,309,715 670,125 2,379,299

Total financial liabilities 31,840,863 6,197,592 739,823 38,778,278

Commitment and contingencies^

Direct credit substitutes 83,156 104,629 - 187,785

Trade-related contingencies 150,094 104,394 - 254,488

Irrevocable commitments 1,248,705 4,160,842 220,817 5,630,364

1,481,955 4,369,865 220,817 6,072,637

^ Commitments and contingencies exclude foreign exchange related contracts.

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial

liabilities.

The tables below present the cash flows payable of the Bank Group and the Bank under financial liabilities by remaining

contractual maturities at the end of the reporting period. The amounts disclosed in the table are the contractual undiscounted

cash flows.

125

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(b) Contractual maturity of financial liabilities on an undiscounted basis (cont'd.)

Less than Over Over

Bank 1 year 1 - 5 years 5 years Total

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

2018

Financial Liabilities

Deposits from customers 22,555,954 2,138,159 69,698 24,763,811

Deposits and placements of

banks and other financial institutions 7,788,977 1,031,993 - 8,820,970

Derivative financial liabilities 2 - - 2

Other payables # 3,005,017 - - 3,005,017

Recourse obligation on financing sold 675,578 1,717,725 - 2,393,303

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah 399,459 1,309,715 670,125 2,379,299

Total financial liabilities 34,424,987 6,197,592 739,823 41,362,402

Commitment and contingencies^

Direct credit substitutes 83,156 104,629 - 187,785

Trade-related contingencies 150,094 104,394 - 254,488

Irrevocable commitments 1,248,705 4,160,842 220,817 5,630,364

1,481,955 4,369,865 220,817 6,072,637

^ Commitments and contingencies exclude foreign exchange related contracts.

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial

liabilities.

126

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.3 Liquidity risk (cont'd.)

(b) Contractual maturity of financial liabilities on an undiscounted basis (cont'd.)

Less than Over Over

Economic Entity and Bank 1 year 1 - 5 years 5 years Total

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

2017

Financial Liabilities

Deposits from customers 1,063,981 155,258 - 1,219,239

Deposits and placements of

banks and other financial institutions 684,696 - - 684,696

Derivative financial liabilities 777 - - 777

Other payables # 8,633 - - 8,633

Total financial liabilities 1,758,087 155,258 - 1,913,345

Commitment and contingencies^

Direct credit substitutes 15,983 8,468 - 24,451

Trade-related contingencies 28,158 - - 28,158

Irrevocable commitments 349,819 14,314 50,817 414,950

393,960 22,782 50,817 467,559

^ Commitments and contingencies exclude foreign exchange related contracts.

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial

liabilities.

127

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

40. Financial risk management (cont'd.)

40.4 Operational risk

Operational risk is defined as the risk of loss arising from inadequate or failed internal processes,

people and systems and external events, which includes legal risk and Shariah non-compliance risk but

excludes strategic and reputational risk. The Bank Group recognises and emphasises the importance

of operational risk management and manages this risk through a control-based environment where

processes are documented, authorisation is independent, transactions are reconciled and monitored

and business activities are carried out within the established guidelines, procedures and limits. The

Bank Group's and the Bank’s governance approach in managing operational risk is premised on the

Three Lines of Defense Approach as discussed under Note 40(c).

128

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

41. Fair value

The tables below analyse other financial instruments at fair value.

Total Carrying

Bank Group Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total fair value amount

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000% RM'000

2018

Financial assets

Derivative financial assets - 67 - 67 - - - - 67 67

Financial investments at FVOCI - 5,097,105 - 5,097,105 - - - - 5,097,105 5,097,105

Financial investments at

amortised cost - - - - - 20,145 - 20,145 20,145 20,350

Financing and advances - - - - - - 33,763,429 33,763,429 33,763,429 31,806,617

- 5,097,172 - 5,097,172 - 20,145 33,763,429 33,783,574 38,880,746 36,924,139

Financial liabilities

Deposits from customers - - - - - 24,219,537 - 24,219,537 24,219,537 24,209,449

Deposits and placements of banks

and other financial institutions - - - - - 8,582,337 - 8,582,337 8,582,337 8,578,851

Derivative financial liabilities - 2 - 2 - - - - 2 2

Recourse obligation on

financing sold - - - - - - 2,149,454 2,149,454 2,149,454 2,135,518

Sukuk-MBSB SC Murabahah - - - - - 1,993,863 - 1,993,863 1,993,863 1,968,075

- 2 - 2 - 34,795,737 2,149,454 36,945,191 36,945,193 36,891,895

The carrying amounts of cash and short-term funds, deposits and placements with financial institutions, other receivables (excluding prepayments and deposits) and other payables

reasonably approximate their fair values due to the relatively short-term nature of these financial instruments.

Fair value of financial instruments carried at

fair value

Fair value of financial instruments not carried at

fair value

129

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

41. Fair value (cont'd.)

The tables below analyse other financial instruments at fair value (cont'd.)

Total Carrying

Bank Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total fair value amount

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000% RM'000

2018

Financial assets

Derivative financial assets - 67 - 67 - - - - 67 67

Financial investments at FVOCI - 5,097,105 - 5,097,105 - - - - 5,097,105 5,097,105

Financial investments at

amortised cost - - - - - 20,145 - 20,145 20,145 20,350

Financing and advances - - - - - - 33,763,429 33,763,429 33,763,429 31,806,617

Sukuk Commodity Murabahah - - - - - - 2,965,716 2,965,716 2,965,716 2,924,734

- 5,097,172 - 5,097,172 - 20,145 36,729,145 36,749,290 41,846,462 39,848,873

Financial liabilities

Deposits from customers - - - - - 24,219,537 - 24,219,537 24,219,537 24,209,449

Deposits and placements of banks

and other financial institutions - - - - - 8,582,337 - 8,582,337 8,582,337 8,578,851

Derivative financial liabilities - 2 - 2 - - - - 2 2

Recourse obligation on

financing sold - - - - - - 2,149,454 2,149,454 2,149,454 2,135,518

Sukuk-MBSB SC Murabahah - - - - - 1,993,863 - 1,993,863 1,993,863 1,968,075

- 2 - 2 - 34,795,737 2,149,454 36,945,191 36,945,193 36,891,895

Fair value of financial instruments carried at Fair value of financial instruments not carried at

fair value fair value

130

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

41. Fair value (cont'd.)

The tables below analyse other financial instruments at fair value (cont'd.)

Total Carrying

Economic Entity and Bank Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total fair value amount

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000% RM'000

2017

Financial assets

Derivative financial assets 3,091 - 3,091 - - - - 3,091 3,091

Financial investments

available-for-sale - 227,086 - 227,086 - - - - 227,086 227,086

Financial investments

held-to-maturity - - - - - 599,666 - 599,666 599,666 600,600

Financing and advances - - - - - - 1,052,798 1,052,798 1,052,798 1,035,668

- 230,177 - 230,177 - 599,666 1,052,798 1,652,464 1,882,641 1,866,445

Financial liabilities

Deposits from customers - - - - - 1,198,779 - 1,198,779 1,198,779 1,198,676

Deposits and placements of banks

and other financial institutions - - - - - 681,268 - 681,268 681,268 681,268

Derivative financial liabilities - 777 - 777 - - - - 777 777

- 777 - 777 - 1,880,047 - 1,880,047 1,880,824 1,880,721

Fair value of financial instruments carried at Fair value of financial instruments not carried at fair value fair value

131

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

41. Fair value (cont'd.)

Financial investments at amortised cost

Financing and advances

Sukuk Commodity Murabahah

Deposits from customers

Deposits and placements of banks and other financial institutions

Recourse obligation on financing sold

Sukuk-MBSB SC Murabahah

The fair value of Sukuk-MBSB SC Murabahah is based on market prices.

42. Sources and uses of charity funds

2018 2017

RM'000 RM'000

Sources

Gharamah from late payment charges

Balance as at 1 January 1,867 1,700

Collection during the year 315 1,080

2,182 2,780

Application

Fund contribution for schools, mosques, universities and

non-government organisations during the year (803) (913)

Balance as at 31 December 1,379 1,867

Bank Group / Economic

Entity and Bank

The fair values of the financial instruments not measured at fair value are based on the following methodologies

and assumptions:

The estimated fair value is generally based on the quoted and observable market prices. Where there is no

ready market in certain securities, the Bank Group and the Bank establish fair value by using valuation

techniques. These include the use of recent arm's length transactions, discounted cash flow analysis and other

valuation techniques commonly used by market participants.

The fair value of fixed rate financing with remaining maturities of less than one year and variable rate financing

are estimated to approximate the carrying amount. For fixed rate financing with maturities of more than one

year, the fair values are estimated based on expected future cash flows of contractual instalment payments,

discounted at prevailing rates offered for similar financing to new borrowers with similar credit profiles as at the

reporting date.

The fair value of impaired fixed and variable rate financing is represented by their carrying amount, which are

net of impairment allowances.

The fair value is estimated by discounting expected future cash flows at the effective profit rate of similar

instruments.

Deposits, placements and obligations which mature or reprice after one year are grouped by residual maturity.

Fair value is estimated using discounted cash flows, applying either market rates, where applicable, or current

rates offered for deposits of similar remaining maturities. The fair values of deposits repayable on demand and

deposits and placements with remaining maturities of less than one year are approximated by their carrying

values due to the relatively short maturity of these instruments.

The fair values for recourse obligations on financing sold to Cagamas Berhad are determined based on

discounted cash flows of future instalment payments at prevailing rates quoted by Cagamas Berhad as at

reporting date.

As a deterrent mechanism against cases of default by customers in discharging their financial obligation arising

from Islamic contracts, the imposition of late payment charges by Islamic banking institutions under the concept

of gharamah (fine or penalty) is allowable. Gharamah is not allowed to be recognised as income, and it must be

channeled to specified charitable bodies.

132

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

43. Significant event

(a)

Bank

Identified assets RM'000

Cash and short-term funds 6,269,184

Financing and advances 30,224,591

Gross stage 1 27,853,305

Gross stage 2 3,060,833

Gross stage 3 735,137

ECL stage 1 (454,139)

ECL stage 2 (432,125)

ECL stage 3 (538,420)

Financial investments at FVOCI 3,210,031

Sukuk Commodity Murabahah 3,273,199

Other receivables/other assets 538,017

Financing to related companies 311,386

Gross stage 3 514,761

ECL stage 3 (203,375)

Deposits and placements with banks and other financial institutions 54,813

Amount due from Jana Kapital Sdn Bhd ("JKSB") 21,915

Financial asset held-for-sale ("AHS") 18,363

Gross 1,155,396

ECL (1,137,033)

Property and equipment 8,999

At cost 79,495

Accumulated depreciation (70,496)

Investment in JKSB *

43,930,498

Identified liabilities RM'000

Deposits from customers 31,964,367

Sukuk - MBSB SC Murabahah 2,316,020

Recourse obligation on financing sold 2,175,008

Amount due to JKSB 2,811,064

ECL on commitments and contingencies 106,423

Others payables 464,287

39,837,169

Net assets transferred 4,093,329

* Represents RM2

The acquisition was approved by the shareholders of MBSB on 23 January 2018. The shareholders also

approved the transfer of Shariah-compliant assets and liabilities of MBSB to the Bank via a Members' Scheme

of Arrangement.

Pursuant to the abovesaid approval and upon completion of the transfer of shares and the payment of the

balance of the purchase consideration to the Vendors, the Bank became a wholly owned subsidiary of MBSB on

7 February 2018.

On 6 November 2017, Malaysia Building Society Berhad ("MBSB") entered into the Sale and Purchase

Agreement with the shareholders of the Bank ("the Vendors") for the proposed acquisition by MBSB of the

entire equity interest in the Bank for an aggregate purchase consideration of RM644,952,808 to be satisfied by

way of cash amounting to RM396,894,036 and the issuance of 225,507,974 Consideration Shares at an issue

price of RM1.10 per Consideration Share ("the Acquisition").

On 2 April 2018, MBSB completed the transfer of its Shariah-compliant assets and liabilities ("Identified

A&L") to the Bank ("the First Tranche Transfer"). The transfer of the Identified A&L was implemented

through a Members' Scheme of Arrangement pursuant to Section 366 of the Companies Act 2016 by

way of a Vesting Order dated 28 February 2018 from the High Court of Malaya of which can be

completed within 3 years from 2 April 2018. The Identified A&L comprised the following:

The consideration for the above transfer was satisfied by the issuance of 4,093,329,268 new ordinary

shares by the Bank to MBSB at RM1 per ordinary share.

133

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

43. Significant events (cont'd.)

(b)

(c)

Bank

RM'000

i) Intangible assets transferred in April 2018

Cost 99,150

Accumulated amortisation (74,784)

Net Book Value 24,366

ii) Mortgage converted to Islamic property financing

Converted on 29 May 2018 248,015

Converted on 24 October 2018 602

Converted on 24 November 2018 84,607

iii) Conventional deposit converted to Islamic deposit on 14 July 2018 20,222

In conjunction with the First Tranche Transfer, the Sukuk Exchange was also completed following the

successful issuance of the Bank's Structured Covered Sukuk (debt nature) in exchange for MBSB

Structured Covered Sukuk held by MBSB Sukukholders. Accordingly, the entire equity interest in Jana

Kapital Sdn Bhd ("JKSB"), the special purpose vehicle for the Sukuk programme, an investment being

part of the Identified A&L was transferred by MBSB to the Bank for RM2. As a result, upon consolidation

at the Bank Group level, an adjustment arising from merger exercise of RM346,883,863 representing the

difference between the net assets of JKSB acquired of RM346,883,865 and cost of investment of RM2

was recognised into the Bank Group's retained earnings.

Subsequent to the First Tranche Transfer and up to the end of the reporting period, MBSB has

progressively transferred the following assets and liabilities to the Bank:

134

MBSB BANK BERHAD (716122-P)

(Incorporated in Malaysia)

44. Financial assets held-for-sale

45. Change of name

On 2 April 2018, the Bank changed its name from Asian Finance Bank Berhad to MBSB Bank Berhad.

Financial asset held-for-sale has been vested down from the holding company to the Bank on 2 April 2018 and

the sale was concluded on 28 December 2018. Gains/losses in relation to completion of debt sale exercise

belongs to the holding company.

2018 Stage 1 Stage 2 Stage 3 Total

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

Gross carrying amount as at 1 January 2018 - - - -

Vested from holding company on 2 April 2018 438 9,752 1,145,206 1,155,396

Disposal during the year (460) (251) (1,017,796) (1,018,507)

Transfer to financing and advances (Note 11(ix)) (676) (400) (116,553) (117,629)

Other movement 698 (9,101) (10,857) (19,260)

Gross carrying amount as at 31 December 2018 - - - -

Less: Loss allowance

Loss allowance as at 1 January 2018 - - - -

Vested from holding company on 2 April 2018 21 1,157 1,135,855 1,137,033

Charged to profit or loss (Note 29) 665 (411) (16,325) (16,071)

Change in credit risk parameters 665 (411) (16,325) (16,071)

Disposal during the year (20) (60) (1,012,422) (1,012,503)

Transfer to financing and advances (Note 11(x)) (666) (685) (107,108) (108,459)

Loss allowance as at 31 December 2018 - - - -

0 (0) 0 0

Net financial assets held-for-sale - - - -

Bank Group and Bank

135

169

APPENDIX 2

Unaudited Interim Financial Statements for the Financial Period Ended

30 September 2019

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

FOR THE FINANCIAL PERIOD ENDED 30 SEPTEMBER 2019

MBSB BANK BERHAD 200501033981 (716122-P)

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

UNAUDITED STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2019

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

Assets

Cash and short-term funds 7(a) 1,309,323 3,242,228 1,273,359 3,237,276

Deposits and placements with banks and other

financial institutions 7(b) 1,320,050 776,739 351,354 1,842

Derivative financial assets 8 108 67 108 67

Financial investments at fair value through profit

or loss ("FVTPL") 9 10,158 - 10,158 -

Financial investments at fair value through other

comprehensive income ("FVOCI") 10 10,211,747 5,097,105 10,211,747 5,097,105

Financial investments at amortised cost 11 20,101 20,350 20,101 20,350

Financing and advances 12 33,036,852 31,806,617 33,036,852 31,806,617

Sukuk Commodity Murabahah - - 2,852,422 2,924,734

Other receivables 13 515,166 578,064 547,657 604,838

Investment in subsidiary 14 - - - -

Investment in joint venture 15 - - - -

Statutory deposits with Bank Negara Malaysia 1,235,000 1,053,000 1,235,000 1,053,000

Investment property 820 820 820 820

Property and equipment 23,090 20,923 23,090 20,923

Right use of assets 23,068 - 23,068 -

Intangible assets 116,005 104,692 116,005 104,692

Tax recoverable 86,136 74,587 86,127 74,587 Total assets 47,907,624 42,775,192 49,787,868 44,946,851

Liabilities

Deposits from customers 16 27,196,602 24,209,449 27,196,602 24,209,449

Deposits and placements of

banks and other financial institutions 17 10,430,137 8,578,851 10,430,137 8,578,851

Derivative financial liabilities 8 410 2 410 2

Other payables 18 566,457 515,834 2,919,328 3,099,060

Lease liabilities 23,393 - 23,393 -

Recourse obligation on financing sold 2,005,783 2,135,518 2,005,783 2,135,518

Sukuk-MBSB Structured Covered ("SC") Murabahah 1,898,113 1,968,075 1,898,113 1,968,075

Provision for zakat 15,344 13,000 15,344 13,000

Deferred tax liabilities 73,658 41,552 73,658 41,552

Total liabilities 42,209,897 37,462,281 44,562,768 40,045,507

Equity

Share capital 4,625,859 4,625,859 4,625,859 4,625,859

Reserves 1,071,868 687,052 599,241 275,485

Total equity 5,697,727 5,312,911 5,225,100 4,901,344

Total Liabilities and Equity 47,907,624 42,775,192 49,787,868 44,946,851

Commitments and contingencies 27 5,758,645 6,078,479 5,758,645 6,078,479

Capital Adequacy

CET1 capital 12.560% 13.381% 11.617% 12.271%

Tier 1 capital 12.560% 13.381% 11.617% 12.271%

Total capital ratio 13.773% 14.610% 12.835% 13.503%

Bank

Bank Group Bank

Bank Group

The interim financial statements should be read in conjunction with the audited financial statements of the Bank Group and the Bank for the financial year ended 31 December 2018.

1

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

UNAUDITED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2019

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Income derived from investment of

depositors' funds 19 439,935 606,257 1,694,432 1,200,568

Income derived from investment of

shareholders' funds 20 277,380 60,531 423,738 173,212

Net allowance for impairment on financing and

advances and other financial assets 21 (95,980) (56,778) (324,827) (87,519)

Total distributable income 621,335 610,010 1,793,343 1,286,261

Income attributable to depositors and others 22 (408,452) (377,646) (1,212,993) (761,275)

Total net income 212,883 232,364 580,350 524,986

Personnel expenses 23 (41,695) (59,644) (166,540) (120,079)

Other overhead expenses 24 (30,683) (31,927) (86,792) (67,276)

Profit before taxation and zakat 140,505 140,793 327,018 337,631

Taxation (61,335) (28,611) (99,602) (75,670)

Zakat (1,000) - (4,172) (3,976)

Profit for the financial period 78,170 112,182 223,244 257,985

Profit attributable to:

Owners of the Bank 78,170 112,182 223,244 257,985

78,170 112,182 223,244 257,985

Profit for the financial period 78,170 112,182 223,244 257,985

Other comprehensive income,net of tax 25 71,225 25,469 161,572 9,938

71,225 25,469 161,572 9,938

Total comprehensive income

for the financial period 149,395 137,651 384,816 267,923

Total comprehensive income attributable to:

Owners of the Bank Group 149,395 137,651 384,816 267,923

149,395 137,651 384,816 267,923

Earnings per share (sen) 6.76 9.70 6.43 7.44

Bank Group

3rd Quarter Ended Nine Months Ended

Group and the Bank for the financial year ended 31 December 2018.

The interim financial statements should be read in conjunction with the audited financial statements of the Bank Group and the Bank for the financial year ended 31 December 2018.

2

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

UNAUDITED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2019

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Income derived from investment of

depositors' funds 19 452,767 625,472 1,750,867 1,238,143

Income derived from investment of

shareholders' funds 20 280,636 61,963 416,861 177,413

Net allowance for impairment on financing and

advances and other financial assets 21 (95,980) (56,778) (324,827) (87,519)

Total distributable income 637,423 630,657 1,842,901 1,328,037

Income attributable to depositors and others 22 (447,482) (421,576) (1,329,959) (850,612)

Total net income 189,941 209,081 512,942 477,425

Personnel expenses 23 (41,695) (59,644) (166,540) (120,079)

Other overhead expenses 24 (30,059) (31,811) (85,015) (66,585)

Profit before taxation and zakat 118,187 117,626 261,387 290,761

Taxation (59,759) (26,976) (95,031) (72,585)

Zakat (1,000) - (4,172) (3,976)

Profit for the financial period 57,428 90,650 162,184 214,200

Profit attributable to:

Owners of the Bank 57,428 90,650 162,184 214,200

57,428 90,650 162,184 214,200

Profit for the financial period 57,428 90,650 162,184 214,200

Other comprehensive income, net of tax: 25 71,225 25,469 161,572 9,938

71,225 25,469 161,572 9,938

Total comprehensive income

for the financial period 128,653 116,119 323,756 224,138

Total comprehensive income attributable to:

Owners of the Bank 128,653 116,119 323,756 224,138

128,653 116,119 323,756 224,138

Bank

3rd Quarter Ended Nine Months Ended

The interim financial statements should be read in conjunction with the audited financial statements of the Bank Group and the Bank for the financial year ended 31 December 2018.

3

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

UNAUDITED STATEMENTS OF CHANGES IN EQUITY

FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2019

Retained

Fair value profit/

Share Regulatory reserve- (Accumulated

Capital Reserve FVOCI losses) Total

Bank Group RM'000 RM'000 RM'000 RM'000 RM'000

Balance as at 1 January 2019 4,625,859 5,234 10,708 671,110 5,312,911

Profit for the financial period - - - 223,244 223,244

Other comprehensive income for the financial period - - 161,572 - 161,572

Total comprehensive income for the financial period - - 161,572 223,244 384,816

Balance as at 30 September 2019 4,625,859 5,234 172,280 894,354 5,697,727

Balance as at 1 January 2018 532,530 5,234 41 (43,336) 494,469

Effects of adopting MFRS 9 - - - (16,316) (16,316)

Restated at 1 January 2018 532,530 5,234 41 (59,652) 478,153

Profit for the financial period - - - 257,985 257,985

Other comprehensive income for the financial period - - 9,938 - 9,938

Total comprehensive income for the financial period - - 9,938 257,985 267,923

Adjustment arising from merger exercise - - - 346,884 346,884

Issuance of ordinary shares 4,093,329 - - - 4,093,329

Balance as at 30 September 2018 4,625,859 5,234 9,979 545,217 5,186,289

The interim financial statements should be read in conjunction with the Audited Financial Statements of the Bank Group and the Bank for the

financial year ended 31 December 2018.

4

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

UNAUDITED STATEMENTS OF CHANGES IN EQUITY

FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2019 (CONTINUED)

Retained

Fair value profit/

Share Regulatory reserve- (Accumulated

Capital Reserve FVOCI losses) Total

Bank RM'000 RM'000 RM'000 RM'000 RM'000

Balance as at 1 January 2019 4,625,859 5,234 10,708 259,543 4,901,344

Profit for the financial period - - - 162,184 162,184

Other comprehensive income for the financial period - - 161,572 - 161,572

Total comprehensive income for the financial period - - 161,572 162,184 323,756

Balance as at 30 September 2019 4,625,859 5,234 172,280 421,727 5,225,100

Balance as at 1 January 2018 532,530 5,234 41 (43,336) 494,469

Effects of adopting MFRS 9 - - - (16,316) (16,316)

Restated at 1 January 2018 532,530 5,234 41 (59,652) 478,153

Profit for the financial period - - - 214,200 214,200

Other comprehensive income for the financial period - - 9,938 - 9,938

Total comprehensive income for the financial period - - 9,938 214,200 224,138

Issuance of ordinary shares 4,093,329 - - - 4,093,329

Balance as at 30 September 2018 4,625,859 5,234 9,979 154,548 4,795,620

The interim financial statements should be read in conjunction with the Audited Financial Statements of the Bank Group and the Bank for the

financial year ended 31 December 2018.

5

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

INTERIM FINANCIAL STATEMENTS

UNAUDITED STATEMENTS OF CASH FLOWS

FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2019

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Cash flows from operating activities

Profit before taxation 327,018 337,631 261,387 290,761

Adjustments for non-cash items 94,873 12,936 24,085 (41,232)

Operating profit before working capital changes 421,891 350,567 285,472 249,529

Working capital changes:

Net changes in operating assets (2,177,793) 599,635 (1,970,007) (2,262,571)

Net changes in operating liabilities 4,912,863 (3,238,813) 4,663,614 (555,916)

Income taxes and zakat paid (131,106) (3,348) (127,336) (448)

Net cash generated from/(used in) operating activities 3,025,855 (2,291,959) 2,851,743 (2,569,406)

Cash flows from investing activities

Purchase of property and equipment (6,781) (6,319) (6,781) (6,319)

Purchase of intangible assets (27,398) (85,957) (27,398) (85,957)

Arising from vesting of assets and liabilities from

holding company - 6,270,568 - 6,269,184

Proceeds from disposal of property and equipment - 24 - 24

Net purchase of financial investments (4,865,875) (418,110) (4,865,875) (418,110)

Proceeds from purchase of FVTPL (9,004) - (9,004) -

Profit income from financial investments 220,783 103,207 220,783 103,207

Profit income from Sukuk Commodity Murabahah - - 70,788 54,168

Proceeds from maturity of Sukuk Commodity Murabahah - - 72,312 101,207

Net cash (used in)/generated from investing activities (4,688,275) 5,863,413 (4,545,175) 6,017,404

Cash flows from financing activities

(Proceeds)/repayment on

recourse obligation on financing sold (72,248) 19,857 (72,248) 19,857

Profit expense paid - recourse obligation on

financing sold (57,487) (44,728) (57,487) (44,728)

Profit expense paid - Sukuk MBSB-SC Murabahah (36,582) (55,277) (36,582) (55,277)

Proceeds of Sukuk - MBSB-SC Murabahah (104,168) (100,352) (104,168) (100,352)

Net cash used in financing activities (270,485) (180,500) (270,485) (180,500)

Net (decrease)/increase in cash and cash equivalents (1,932,905) 3,390,954 (1,963,917) 3,267,498

Cash and cash equivalents at the beginning of

financial period 3,242,228 478,674 3,237,276 478,674

Cash and cash equivalents at the end of

financial period 1,309,323 3,869,628 1,273,359 3,746,172

Bank

9 months ended 9 months ended

Bank Group

The interim financial statements should be read in conjunction with the audited financial statements of the Bank Group and the Bank for the financial year ended 31 December 2018.

6

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

NOTES TO THE FINANCIAL STATEMENTS

FOR THE FINANCIAL QUARTER ENDED 30 SEPTEMBER 2019

1. Basis of preparation

● MFRS 16, Leases

● IC Interpretation 23, Uncertainty over Income Tax Treatments

●

● Amendments to MFRS 9, Financial Instruments - Prepayment Features with Negative Compensation

●

● Amendments to MFRS 112, Income Taxes (Annual Improvements to MFRS Standards 2015-2017 Cycle)

● Amendments to MFRS 119, Employee Benefits - Plan Amendment, Curtailment or Settlement

● Amendments to MFRS 123, Borrowing Costs (Annual Improvements to MFRS Standards 2015-2017 Cycle)

●

The unaudited condensed interim financial statements for the financial quarter ended 30 September 2019 have

been prepared under the historical cost convention except for financial assets which are recognised at fair value

and the following financial assets and financial liabilities which are recognised initially at fair value plus directly

attributable transaction costs and subsequently measured at amortised cost using the effective profit method:

financing, trade and other payables, bank borrowings and recourse obligations on financing sold.

The unaudited condensed interim financial statements have been prepared in accordance with MFRS 134:

Interim Financial Reporting issued by the Malaysian Accounting Standards Board (“MASB”) and Financial

Reporting for Islamic Banking Institutions policy issued by Bank Negara Malaysia ("BNM"), provisions of

Companies Act 2016 and Shariah requirements. The unaudited interim financial statements should be read in

conjunction with the audited annual financial statements of the Bank Group and the Bank for the financial year

ended 31 December 2018. The explanatory notes attached to the condensed interim financial statements provide

an explanation of events and transactions that are significant to an understanding of the changes in the financial

position and performance of the Bank Group and the Bank since the financial year ended 31 December 2018.

The significant accounting policies and methods of computation applied in the unaudited interim financial

statements are consistent with those adopted in the most recent annual financial statements for the financial year

ended 31 December 2018.

On 1 January 2019, where applicable, the Bank Group and the Bank adopted the following MFRSs and

Amendments to MFRSs mandatory for annual financial periods beginning on or after 1 January 2019:

Effective for annual periods commencing on or after 1 January 2019

Amendments to MFRS 3, Business Combinations (Annual Improvements to MFRS Standards 2015-2017

Cycle)

Amendments to MFRS 11, Joint Arrangements (Annual Improvements to MFRS Standards 2015-2017 Cycle)

Amendments to MFRS 128, Investments in Associates and Joint Ventures - Long-term Interests in

Associates and Joint Ventures

7

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

1. Basis of preparation (continued)

Effective for annual periods beginning on or after 1 January 2020

● MFRS 3, Business Combinations - Definition of a Business

●

Effective for annual periods beginning on or after 1 January 2021

● MFRS 17, Insurance Contracts

2. Audit Report of Preceding Financial Year Ended 31 December 2018

The audit report on the financial statements of the preceding year was not qualified.

3. Seasonality and Cyclicality of Operation

4. Exceptional or Unusual Items

There are no exceptional or unusual items in the current quarter.

5. Changes in Estimates of Amounts Reported Previously

6. Dividend

No dividend were paid during the current financial quarter.

There were no changes in estimates of amounts reported in prior financial years that may have a material effect

in the current quarter.

The business operations of the Bank Group and the Bank have not been affected by any seasonal or cyclical

factors.

MFRS 101, Presentation of Financial Statements and MFRS 108, Accounting Policies, Changes in

Accounting Estimates and Errors- Definition of Material

8

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

7. Cash and short-term funds and deposits and placements with banks and other financial institutions

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

(a) Cash and balances with banks and

other financial institutions 141,227 179,508 105,263 174,556

Money at call and deposit placements

maturing within one month 1,168,096 3,062,720 1,168,096 3,062,720

Total cash and short-term funds 1,309,323 3,242,228 1,273,359 3,237,276

(b) Deposits and placements with

financial institutions with original

maturity of more than one month

- Licensed Islamic banks 1,320,050 776,739 351,354 1,842

Total cash and short-term funds

and deposits and placements

with financial institutions 2,629,373 4,018,967 1,624,713 3,239,118

8. Derivative financial assets/(liabilities)

Bank Group Bank

Bank Group and Bank

The following table summarises the contractual or underlying principal amounts of derivative financial instruments

held at fair value through profit or loss. The principal or contractual amount of these instruments reflects the volume

of transactions outstanding at financial position date, and do not represent amounts at risk.

Trading derivative financial instruments are revalued on a gross position and the unrealised gains or losses are

reflected as derivative financial assets and liabilities respectively.

Contract/ Contract/

Notional Notional

amount Assets Liabilities amount Assets Liabilities

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

Trading derivatives

Foreign exchange contracts:

Currency forward

- Less than one year 234,158 108 (410) 5,842 67 (2)

30-Sep-19 31-Dec-18

Fair value Fair value

9

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

9. Financial investments at FVTPL

30-Sep-19 31-Dec-18

RM'000 RM'000

At fair value

Quoted securities:

In Malaysia

Malaysian Government Investment Issues 10,158 -

10,158 -

10. Financial investments at FVOCI

30-Sep-19 31-Dec-18

RM'000 RM'000

At fair value

Money Market Instruments

Malaysian Government Investment Issues 7,117,758 2,154,192

Debt securities:

In Malaysia

Corporate sukuk 1,047,177 1,060,628

Government Guaranteed corporate sukuk 2,046,812 1,882,285

10,211,747 5,097,105

Expected credit losses ("ECL") movement for debt instruments at fair value through other comprehensive income:

Stage 1 Stage 2 Stage 3 Total

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

At 1 January 2019 - - - -

Total charge to Income Statement: 13 - - 13

Change in credit risk 13 - - 13

At 30 Sep 2019 13 - - 13

There was no ECL for financial investments at FVOCI during the year 2018.

11. Financial investments at amortised cost

30-Sep-19 31-Dec-18

RM'000 RM'000

At amortised cost

Quoted securities:

In Malaysia

Private and Islamic debt securities 20,109 20,356

Less: ECL at Stage 1 (8) (6)

20,101 20,350

Bank Group and Bank

Bank Group and Bank

Bank Group and Bank

The following ECL is not recognised in the statement of financial position as the carrying amount of debt

instruments at fair value through other comprehensive income is equivalent to their fair value.

Bank Group and Bank

10

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

12. Financing and advances

30-Sep-19 31-Dec-18

RM'000 RM'000

(i) By type

At amortised cost

Term financing

- Personal financing 20,324,771 20,562,117

- Other term financing 6,139,989 5,456,952

- Property financing 4,977,247 4,340,081

- Industrial hire purchase 805,994 781,118

- Bridging financing 702,986 716,015

- Auto Financing 174,628 213,898

Revolving Credit 874,186 743,218

Trade finance 533,650 138,473

Trusts receipts - 51,525

Cash line 1,849 -

Staff financing 43,699 41,277

Gross financing and advances 34,578,999 33,044,674

Less: Expected credit losses ("ECL")

- Stage 1 (445,023) (346,537)

- Stage 2 (463,699) (455,639)

- Stage 3 (633,425) (435,881)

Net financing and advances 33,036,852 31,806,617

(ii) By residual contractual maturity

30-Sep-19 31-Dec-18

RM'000 RM'000

Within one year 2,416,426 1,480,942

More than one year to three years 1,433,434 1,770,112

More than three years to five years 2,094,250 1,939,750

More than five years 28,634,889 27,853,870

34,578,999 33,044,674

Bank Group and Bank

Bank Group and Bank

11

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

12. Financing and advances (continued)

(iii) By economic purpose

30-Sep-19 31-Dec-18

RM'000 RM'000

Personal Use 20,423,139 20,674,102

Construction 4,842,986 4,122,973

Purchase of landed property:

- Residential 4,613,963 4,031,169

- Non-Residential 266,034 207,864

Working Capital 4,112,957 3,519,031

Purchase of transport vehicles 175,181 213,635

Purchase of other fixed assets 39,294 56,097

Purchase of other securities 504 498

Purchase of consumer durables 136 142

Others 104,805 219,164

34,578,999 33,044,674

(iv) By type of customers

30-Sep-19 31-Dec-18

RM'000 RM'000

Individuals 25,430,957 25,069,610

Domestic business enterprises

- Small medium enterprise 2,592,373 2,421,177

- Non-bank financial institutions 592,201 536,644

- Government 228,826 240,301

- Others 5,734,642 4,770,904

Foreign entities - 6,038

34,578,999 33,044,674

(v) By sector

30-Sep-19 31-Dec-18

RM'000 RM'000

Household 25,430,956 25,075,711

Construction 5,897,035 5,395,247

Finance, insurance and business services 1,351,381 1,075,960

Education, health and others 343,099 419,174

Manufacturing 572,997 262,010

Agriculture 221,769 236,677

Electricity, gas and water 240,548 233,110

Wholesale & retail trade and restaurants & hotels 266,166 164,657

Transport, storage and communication 140,630 122,120

Mining and quarrying 114,418 60,008

34,578,999 33,044,674

Bank Group and Bank

Bank Group and Bank

Bank Group and Bank

12

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

12. Financing and advances (continued)

(vi) By profit rate sensitivity

30-Sep-19 31-Dec-18

RM'000 RM'000

Fixed rate:

Personal financing 18,025,881 18,976,550

Property financing 462,769 564,967

Others 1,386,368 1,139,424

Variable rate:

Personal financing 2,315,143 1,602,482

Property financing 4,538,867 3,796,380

Others 7,849,971 6,964,871

34,578,999 33,044,674

(vii) By geographical distribution

30-Sep-19 31-Dec-18

RM'000 RM'000

Malaysia 34,578,999 33,044,540

United Kingdom - 134

34,578,999 33,044,674

(viii) Financing by types and Shariah contracts

Bank Group and Bank

Bank Group and Bank

Bank Group and Bank

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

Term Financing 29,151,848 2,181,532 1,705,952 86,283 - 33,125,615

Property financing 2,867,907 2,106,183 3,157 - - 4,977,247

Bridging financing 702,986 - - - - 702,986

Hire purchase receivables - - 805,994 - - 805,994

Auto financing - - 174,628 - - 174,628

Personal financing 20,324,516 255 - - - 20,324,771

Other term financing 5,256,439 75,094 722,173 86,283 - 6,139,989

Cash line 1,849 - - - - 1,849

Trust receipts - - - - - -

Staff financing 40,539 111 3,049 - - 43,699

Revolving credit 874,186 - - - - 874,186

Others 533,650 - - - - 533,650

30,602,072 2,181,643 1,709,001 86,283 - 34,578,999

Bank Group and Bank

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

Term Financing 28,074,836 2,265,091 1,652,362 78,417 - 32,070,706

Property financing 2,149,257 2,187,949 3,316 - - 4,340,522

Bridging financing 716,015 - - - - 716,015

Hire purchase receivables - - 781,118 - - 781,118

Auto financing - 84 213,898 - - 213,982

Personal financing 20,561,843 285 - - - 20,562,128

Other term financing 4,647,721 76,773 654,030 78,417 - 5,456,941

Cash line - - - - - -

Trust receipts - 51,525 - - - 51,525

Staff financing 37,982 190 2,580 - - 40,752

Revolving credit 743,218 - - - - 743,218

Others 138,473 - - - - 138,473

28,994,509 2,316,806 1,654,942 78,417 - 33,044,674

Istisna' Murabahah Type

Murabahah Total Type

30-Sep-19

Tawarruq Bai' Ijarah Istisna'

Total

31-Dec-18

Tawarruq Bai' Ijarah

13

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

12. Financing and advances (continued)

(ix) Movement in gross financing and advances

(x) Movement of ECL for financing and advances

30-Sep-19

Stage 1 Stage 2 Stage 3 Total

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

Gross carrying amount as at 1 January 2019 28,314,877 3,937,504 792,293 33,044,674

Transfer to stage 1 598,110 (523,064) (75,046) -

Transfer to stage 2 (1,344,077) 1,523,523 (179,446) -

Transfer to stage 3 (143,986) (377,195) 521,181 -

New financing / disbursement during the year 4,298,460 449,439 30,777 4,778,676

Repayment during the year (2,781,647) (586,402) (53,015) (3,421,064)

Other changes to the carrying amount 125,874 52,374 (1,535) 176,713

Gross carrying amount as at 30 September 2019 29,067,611 4,476,179 1,035,209 34,578,999

31-Dec-18

Stage 1 Stage 2 Stage 3 Total

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

Gross carrying amount as at 1 January 2018 729,499 247,871 111,424 1,088,794

Vested from holding company on 2 April 2018 27,853,305 3,060,833 735,137 31,649,275

Transfer to stage 1 686,430 (671,870) (14,560) -

Transfer to stage 2 (1,411,984) 1,491,251 (79,267) -

Transfer to stage 3 (204,425) (229,280) 433,705 -

New financing / disbursement during the year 3,686,809 534,453 32,166 4,253,428

Repayment during the year (3,134,981) (427,040) (117,630) (3,679,651)

Other changes to the carrying amount 109,548 (69,114) 141,075 181,509

Write-offs - - (566,310) (566,310)

Transfer from asset held-for-sale 676 400 116,553 117,629

Gross carrying amount as at 31 December 2018 28,314,877 3,937,504 792,293 33,044,674

Bank Group and Bank

Bank Group and Bank

30-Sep-19 Stage 1 Stage 2 Stage 3 Total

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

ECL as at 1 January 2019 346,537 455,639 435,881 1,238,057

Charges to profit or loss, of which: 98,486 8,060 197,544 304,090

Changes in the loss allowance:

- Transfer to stage 1 66,337 (34,670) (31,667) -

- Transfer to stage 2 (21,251) 116,985 (95,734) -

- Transfer to stage 3 (1,496) (97,975) 99,471 -

New financing / disbursement during the year 94,248 26,229 21,304 141,781

Repayment during the year (83,263) (180,697) (48,021) (311,981)

Change in credit risk parameters 43,911 178,188 252,191 474,290

ECL as at 30 September 2019 445,023 463,699 633,425 1,542,147

Bank Group and Bank

14

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

12. Financing and advances (continued)

(x) Movement of ECL for financing and advances (continued)

*

(xi) Movement of impaired financing and advances

30-Sep-19 31-Dec-18

RM'000 RM'000

Balance as at 1 January 792,293 111,424

Impaired financing vested from holding company - 735,137

Classified as impaired during the period 551,958 465,871

Reclassified as non-impaired (254,492) (93,827)

Amount recovered (53,015) (117,630)

Amount written off - (566,310)

Transfer from assets held-for-sale - 116,553

Other changes to the carrying amount (1,535) 141,075

Balance as at end of financial period 1,035,209 792,293

Gross impaired financing and advances as a % of gross financing

and advances 2.99% 2.40%

Bank Group and Bank

The holding company has had a revision of ECL on the financing and advances vested to the Bank

post the vesting of assets and liabilities. The adjustment of the ECL amounting to RM50,757,000 was

borne by the holding company and subsequently recognised by the Bank.

31-Dec-18 Stage 1 Stage 2 Stage 3 Total

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

ECL as at 1 January 2018 16,691 6,665 45,716 69,072

Vested from holding company 492,316 444,705 538,420 1,475,441

- ECL as at 2 April 2018 454,139 432,125 538,420 1,424,684

- Subsequent transfer of ECL* 38,177 12,580 - 50,757

Charged to profit or loss, of which: (163,136) 3,584 310,952 151,400

Changes in the loss allowance:

- Transfer to stage 1 12,696 (12,468) (228) -

- Transfer to stage 2 (164,406) 176,183 (11,777) -

- Transfer to stage 3 (81,168) (137,706) 218,874 -

New financing / disbursement during the year 72,027 43,512 26,587 142,126

Repayment during the year (180,772) (179,663) (98,714) (459,149)

Change in credit risk parameters 178,487 113,726 176,210 468,423

Write-offs - - (566,315) (566,315)

Transfer from asset held-for-sale 666 685 107,108 108,459

ECL as at 31 December 2018 346,537 455,639 435,881 1,238,057

Bank Group and Bank

15

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

12. Financing and advances (continued)

(xii) Impaired financing by sector

30-Sep-19 31-Dec-18

RM'000 RM'000

Household sector 589,455 417,768

Construction 190,248 213,827

Education, health and others 72,514 88,331

Manufacturing 59,698 317

Finance, insurance and business services 58,684 11,603

Mining and quarrying 38,891 38,891

Wholesale & retail trade and restaurants & hotels 21,918 21,115

Transport, storage and communication 3,632 287

Agriculture 169 154

1,035,209 792,293

(xiii) Impaired financing by geographical distribution

Malaysia 1,035,209 792,293

13. Other receivables

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

Financing to subsidiary - - 37,538 30,069

Financing to related companies 700,404 635,993 700,404 635,993

Amount due from holding company 4,231 98,666 4,231 98,666

Prepayments and deposits 12,083 6,235 11,966 6,107

Sundry receivables 64,526 88,132 59,596 84,965

781,244 829,026 813,735 855,800

Less: ECL at Stage 3 (266,078) (250,962) (266,078) (250,962)

515,166 578,064 547,657 604,838

14. Investment in subsidiary

The subsidiary was incorporated in Malaysia.

15. Investment in joint venture

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

Unquoted shares at cost 16,222 16,222 16,222 16,222

Less:

Share of loss (16,222) (16,222) - -

Impairment - - (16,222) (16,222)

- - - -

Bank Group Bank

The Bank has a wholly owned subsidiary, Jana Kapital Sdn.Bhd. ("JKSB"), an investment holding company that

was transferred from the holding company on 2 April 2018. The unquoted shares at cost in JKSB as at 30

September 2019 is RM 2 ( 31 December 2018: RM 2).

Bank Group and Bank

BankBank Group

16

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

16. Deposits from customers

30-Sep-19 31-Dec-18

RM'000 RM'000

(i) By type of deposit:

Non-Mudharabah Funds:

Commodity Murabahah Term Deposit 26,878,914 23,907,371

Demand deposits 203,590 225,520

Savings deposits 114,098 76,558

27,196,602 24,209,449

The deposit above are under the Islamic contract of Tawarruq.

(ii)

30-Sep-19 31-Dec-18

RM'000 RM'000

Within six months 18,855,130 17,172,705

More than six months to one year 5,181,158 4,818,107

More than one year to three years 1,682,598 723,813

More than three years 1,160,028 1,192,746

26,878,914 23,907,371

(iii) By type of customers:

30-Sep-19 31-Dec-18

RM'000 RM'000

Government and statutory bodies 17,456,524 14,746,960

Business enterprises 5,425,145 6,371,297

Individuals 4,314,933 3,091,192

27,196,602 24,209,449

17. Deposits and placements of banks and other financial institutions

30-Sep-19 31-Dec-18

RM'000 RM'000

(i) By type of deposit:

Non-Mudharabah Funds:

Other financial institutions:

-Licensed Investment Banks 1,339 -

-Licensed Islamic Banks 157 -

-Other Financial Institutions 10,428,641 8,578,851

10,430,137 8,578,851

(ii) By type of contract:

Tawarruq 10,430,137 8,578,851

10,430,137 8,578,851

Bank Group and Bank

Bank Group and Bank

Bank Group and Bank

Bank Group and Bank

Maturity structure of term deposits are as follows:

17

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

18. Other payables

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

Amount due to subsidiary - - 2,353,174 2,584,124

Amount due to related companies 33,975 35,437 33,975 35,437

Al-Mudharabah security fund 133,164 123,401 133,164 123,401

Sundry creditors 230,377 168,112 230,377 168,112

Other provisions and accruals 48,515 82,292 48,212 81,394

ECL for commitment and contingencies 103,367 93,943 103,367 93,943

Deferred income 17,059 12,649 17,059 12,649

566,457 515,834 2,919,328 3,099,060

Movement of ECL for commitment and contingencies are as follows:

30-Sep-19

Stage 1 Stage 2 Stage 3 Total

ECL as at 1 January 2019 52,717 36,630 4,596 93,943

Total charged to profit or loss, of which: 3,110 (8,513) 14,827 9,424

Changes in the impairment allowance

- Transfer to stage 1 4,987 (2,556) (2,431) -

- Transfer to stage 2 (3,370) 3,753 (383) -

- Transfer to stage 3 (640) (432) 1,072 -

New financing/ disbursement during the year 19,054 3,624 118 22,796

Repayment/drawdown to financing

during the year (10,889) (5,343) (547) (16,779)

Changes in credit risk parameters (6,032) (7,559) 16,998 3,407

ECL as at 30 September 2019 55,827 28,117 19,423 103,367

31-Dec-18

Stage 1 Stage 2 Stage 3 Total

ECL as at 1 January 2018 4,659 863 - 5,522

Vested from holding company on 2 April 2018 69,751 35,157 1,515 106,423

- commitment from financing 69,751 35,157 1,498 106,406

- commitment from asset held-for-sale - - 17 17

Total charged to profit or loss, of which: (21,693) 610 3,081 (18,002)

Changes in the impairment allowance

- Transfer to stage 1 217 (217) - -

- Transfer to stage 2 (28,677) 28,677 - -

- Transfer to stage 3 (3,008) (501) 3,509 -

New financing/ disbursement during the year 21,197 5,774 203 27,174

Repayment/drawdown to financing

during the year (22,531) (20,795) (619) (43,945)

Changes in credit risk parameters 11,109 (12,328) (12) (1,231)

ECL as at 31 December 2018 52,717 36,630 4,596 93,943

Bank

Bank Group and Bank

Bank Group

Bank Group and Bank

18

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

19. Income derived from investment of depositors' funds

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Income derived from investment of:

i) General investment deposits - 1,881 - 9,613

ii) Other deposits 439,935 604,376 1,694,432 1,190,955

439,935 606,257 1,694,432 1,200,568

i) Income derived from investment of general investment deposits

Finance income and hibah:

Financing and advances - 1,655 - 8,567

Financial investments at FVOCI - 97 - 579

Financial investments at amortised cost - 18 - 59

Money at call and deposits with

financial institutions - 75 - 267

Profit on Sukuk commodity murabahah - - - -

Others - 35 - 140

- 1,881 - 9,613

of which financing income earned on

impaired financing - 191 - 414

ii) Income derived from investment of other deposits

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Finance income and hibah:

Financing and advances 328,854 531,153 1,370,744 1,036,176

Financial investments at FVTPL 93 - 186 -

Financial investments at FVOCI 90,168 34,916 215,348 71,718

Financial investments at amortised cost (172) 4,869 (426) 14,641

Money at call and deposits with

financial institutions 14,119 24,113 80,625 51,725

Profit on Sukuk commodity murabahah - - - -

Others 6,873 9,325 27,955 16,695

439,935 604,376 1,694,432 1,190,955

of which financing income earned on

impaired financing 3,711 32,965 14,487 48,767

Bank Group

3rd Quarter Ended Nine Months Ended

Bank Group

3rd Quarter Ended Nine Months Ended

19

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

19. Income derived from investment of depositors' funds (continued)

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Income derived from investment of:

i) General investment deposits - 1,940 - 9,926

ii) Other deposits 452,767 623,532 1,750,867 1,228,217

452,767 625,472 1,750,867 1,238,143

i) Income derived from investment of general investment deposits

Finance income and hibah:

Financing and advances - 1,655 - 8,567

Financial investments at FVOCI - 97 - 579

Financial investments at amortised cost - 18 - 59

Money at call and deposits with

financial institutions - 56 - 168

Profit on Sukuk Commodity Murabahah - 76 - 406

Others - 38 - 147

- 1,940 - 9,926

of which financing income earned on

impaired financing - 191 - 414

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

ii) Income derived from investment of other deposits

Finance income and hibah:

Financing and advances 328,854 531,153 1,370,744 1,036,176

Financial investments at FVTPL 93 - 186 -

Financial investments at FVOCI 90,168 34,916 215,348 71,718

Financial investments at amortised cost (172) 4,869 (426) 14,641

Money at call and deposits with

financial institutions 14,119 17,957 80,625 39,927

Profit on Sukuk Commodity Murabahah 12,831 24,902 56,434 48,314

Others 6,874 9,736 27,956 17,442

452,767 623,532 1,750,867 1,228,217

of which financing income earned on

impaired financing 3,711 33,951 14,487 49,753

3rd Quarter Ended Nine Months Ended

Bank

Nine Months Ended

Bank

3rd Quarter Ended

20

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

20. Income derived from investment of shareholders' funds

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Finance income and hibah:

Financing and advances 250,142 42,541 342,840 122,310

Financial investments at FVTPL 3 - 5 -

Financial investments at FVOCI 1,367 2,922 5,870 8,994

Financial investments at amortised cost (3) 1,447 (9) 4,097

Money at call and deposits with

financial institutions 8,078 5,752 24,788 12,790

Profit on Sukuk commodity murabahah - - - -

Others 4,604 757 5,412 1,883

264,191 53,420 378,906 150,075

of which financing income earned on

impaired financing 2,715 2,337 3,685 5,794

Other operating (expenses) / income :

Financing related fees (1,789) 2,669 (5,143) 8,125

Commission 2,940 2,533 9,082 6,442

Gain from sale of FVOCI 7,998 1,775 37,066 3,558

Sundry income 4,040 176 3,827 5,054

Net gain on derivatives

foreign exchange contracts - (42) - (42)

13,189 7,111 44,832 23,137

277,380 60,531 423,738 173,212

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Finance income and hibah:

Financing and advances 250,142 42,541 342,840 122,310

Financial investments at FVTPL 2 - 4 -

Financial investments at FVOCI 1,367 2,922 5,870 8,994

Financial investments at amortised cost (3) 1,447 (9) 4,097

Money at call and deposits with

financial institutions 302 5,285 1,861 11,460

Profit on Sukuk commodity murabahah 10,426 1,868 14,353 5,448

Others 5,211 789 7,110 1,967

267,447 54,852 372,029 154,276

of which financing income earned on

impaired financing 2,715 2,337 3,685 5,794

Other operating (expenses) / income :

Loan related fees (1,789) 2,669 (5,143) 8,125

Insurance commission 2,940 2,533 9,082 6,442

Gain from sale of FVOCI 7,998 1,775 37,066 3,558

Sundry income 4,040 176 3,827 5,054

Net gain on derivatives

foreign exchange contracts - (42) - (42)

13,189 7,111 44,832 23,137

280,636 61,963 416,861 177,413

Bank

3rd Quarter Ended Nine Months Ended

Bank Group

3rd Quarter Ended Nine Months Ended

21

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

21. Net allowance for impairment on financing and advances and other financial assets

30-Sep-19

Stage 1 Stage 2 Stage 3 Total

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

Financial investments at FVOCI 13 - - 13

Financial assets at amortised cost 2 - - 2

Financing and advances 98,486 8,060 197,544 304,090

Other receivables - - 15,118 15,118

Financing commitments

and financial guarantee 3,110 (8,513) 14,827 9,424

101,611 (453) 227,489 328,647

Impaired financing and advances:

- Written off - - 4,470 4,470

- Recovered - - (8,290) (8,290)

101,611 (453) 223,669 324,827

Stage 1 Stage 2 Stage 3 Total

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

Financial investments at FVOCI (5) - - (5)

Financial investments at amortised cost 2 - - 2

Financing and advances 28,667 (20,458) 85,906 94,115

Other receivables - - 5,108 5,108

Financing commitments

and financial guarantee 2,133 (12,069) 8,199 (1,737)

30,797 (32,527) 99,213 97,483

Impaired financing and advances:

- Written off - - 594 594

- Recovered - - (2,097) (2,097)

30,797 (32,527) 97,710 95,980

30-Sep-18

Stage 1 Stage 2 Stage 3 Total

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

Financial investments at amortised cost 8 - - 8

Financing and advances (188,100) 55,443 236,612 103,955

Other receivables - - 9,479 9,479

Financial asset held-for-sale (5) 427 (16,447) (16,025)

(188,097) 55,870 229,644 97,417

Impaired financing and advances:

- Written off - - 6,108 6,108

- Recovered - - (16,006) (16,006)

(188,097) 55,870 219,746 87,519

Stage 1 Stage 2 Stage 3 Total

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

Financial investments at amortised cost 8 - - 8

Financing and advances (69,888) 58,475 96,650 85,237

Other receivables - - 4,676 4,676

Financial asset held-for-sale 1 1,573 (37,294) (35,720)

(69,879) 60,048 64,032 54,201

Impaired financing and advances:

- Written off - - 4,586 4,586

- Recovered - - (2,009) (2,009)

(69,879) 60,048 66,609 56,778

3rd Quarter Ended

3rd Quarter Ended

Bank Group and Bank

Nine Months Ended

Bank Group and Bank

Bank Group and Bank

Nine Months Ended

Bank Group and Bank

22

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

22. Income attributable to depositors and others

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

(a) Income attributable to depositors

Deposits from customers:

- Mudharabah funds - 309,617 - 612,381

- Non-mudharabah funds 277,320 2,325 838,172 20,697

Deposits and placements of banks and

other financial institutions:

- Non-mudharabah funds 85,109 14,581 234,159 25,114

362,429 326,523 1,072,331 658,192

(b) Income attributable to securitisation 22,765 24,266 69,874 48,688

(c) Income attributable to sukuk 23,258 26,857 70,788 54,395

408,452 377,646 1,212,993 761,275

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

(a) Income attributable to depositors

Deposits from customers:

- Mudharabah funds - 309,617 - 612,381

- Non-mudharabah funds 277,320 2,325 838,172 20,697

Deposits and placements of banks and

other financial institutions:

- Non-mudharabah funds 85,109 14,581 234,159 25,114

362,429 326,523 1,072,331 658,192

(b) Income attributable to securitisation 22,765 24,266 69,874 48,688

(c) Income attributable to sukuk 23,258 26,845 70,788 54,168

d) Others 39,030 43,942 116,966 89,564

447,482 421,576 1,329,959 850,612

23. Personnel expenses

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Salaries, allowances and bonuses 28,061 45,049 124,950 93,033

Contributions to Employee

Provident Fund and SOCSO 5,079 7,824 22,657 15,832

Directors' remuneration 759 546 1,956 1,721

Shariah Advisory Committee members'

remuneration 123 151 357 168

Other staff related expenses 7,673 6,074 16,620 9,325

41,695 59,644 166,540 120,079

Bank Group

3rd Quarter Ended Nine Months Ended

Bank

3rd Quarter Ended Nine Months Ended

Bank Group/Bank

3rd Quarter Ended Nine Months Ended

23

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

24. Other overhead expenses

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Establishment related expenses

Depreciation of property and equipment 1,546 78 4,614 2,868

Depreciation of right use of assets 3,685 - 9,756 -

Amortisation of intangible assets 5,813 2,729 16,086 7,469

Rental of premises (279) 2,410 2,812 4,416

Software and hardware maintenance 6,773 212 11,642 2,615

Rental of equipment and network line - - - 55

Security expenses 516 414 1,269 505

Lease profit expense 834 - 834 -

Others 154 576 1,882 2,205

19,042 6,419 48,895 20,133

Promotion and marketing related expenses

Advertising and promotional activities 2,829 1,767 7,290 4,332

Others - - - 9

2,829 1,767 7,290 4,341

General administrative expenses

License and association fees and levies 39 198 115 543

Travelling, transport and accomodation expenses 1,000 839 2,573 1,351

Printing, stationery, postage and clearing charges 1,155 7,184 3,909 9,391

Electricity and water 969 1,384 2,687 1,454

Other professional fees 1,517 5,174 9,315 9,786

Auditors remuneration (141) 245 584 591

Others 2,776 154 6,753 3,550

7,315 15,178 25,936 26,666

Commission fees

Commission fees 1,240 1,360 3,311 1,360

Angkasa charges 7,103 7,203 21,904 14,776

8,343 8,563 25,215 16,136

Inter-company recharges (6,846) - (20,544) -

30,683 31,927 86,792 67,276

Bank Group

3rd Quarter Ended Nine Months Ended

24

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

24. Other overhead expenses (continued)

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Establishment related expenses

Depreciation of property, plant and equipment 1,546 78 4,614 2,868

Depreciation of right use of assets 3,685 - 9,756 -

Amortisation of intangible assets 5,813 2,729 16,086 7,469

Rental of premises (279) 2,410 2,812 4,416

Software and hardware maintenance 6,773 212 11,642 2,615

Rental of equipment and network line - - - 55

Security expenses 516 414 1,269 505

Lease profit expense 834 - 834 -

Others 154 576 1,882 2,205

19,042 6,419 48,895 20,133

Promotion and marketing related expenses

Advertising and promotional activities 2,829 1,767 7,290 4,332

Others - - - 9

2,829 1,767 7,290 4,341

General administrative expenses

License and association fees and levies 39 198 115 543

Travelling, transport and accomodation expenses 1,000 839 2,573 1,351

Printing, stationery, postage and clearing charges 1,155 7,184 3,909 9,391

Electricity and water 969 1,384 2,687 1,454

Other professional fees 1,435 5,174 9,233 9,786

Auditors remuneration (150) 245 575 591

Others 2,678 38 6,369 2,859

7,126 15,062 25,461 25,975

Collection fees

Commission fees 1,240 1,360 3,311 1,360

Angkasa charges 7,103 7,203 21,904 14,776

8,343 8,563 25,215 16,136

Inter-company recharges (7,281) - (21,846) -

30,059 31,811 85,015 66,585

25. Other comprehensive income, net of tax

30-Sep-19 30-Sep-18 30-Sep-19 30-Sep-18

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

Net gain/(loss) from change in fair value of FVOCI 71,230 25,469 161,559 9,938

Changes in expected credit losses -FVOCI (5) - 13 -

71,225 25,469 161,572 9,938

Bank Group and Bank

3rd Quarter Ended Nine Months Ended

Bank

3rd Quarter Ended Nine Months Ended

25

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

26. Commitments and contingencies

Gross Positive

Fair Value - Credit Risk

Principal Derivative equivalent weighted

amount Contract amount amount

Bank Group and Bank RM'000 RM'000 RM'000 RM'000

30-Sep-19

Direct credit substitutes 171,963 - 165,401 165,401

Trade-related contingencies 93,805 - 46,903 46,903

Short Term Self Liquidating

trade related contingencies 31,925 - 6,385 6,385

Irrevocable commitments to extend credit:

- one year or less 1,230,671 - 251,575 251,574

- over one year to five years 3,851,123 - 1,923,502 1,876,628

- over five years 145,000 - 72,500 72,500

Foreign exchange related contracts

- one year or less 234,158 108 3,618 842

5,758,645 108 2,469,884 2,420,233

Gross Positive

Fair Value - Credit Risk

Principal Derivative equivalent weighted

amount Contract amount amount

Bank Group and Bank RM'000RM'000 RM'000RM'000 RM'000RM'000 RM'000

31-Dec-18

Direct credit substitutes 187,785 - 187,785 187,659

Trade-related contingencies 254,488 - 90,927 90,927

Irrevocable commitments to extend credit:

- one year or less 1,248,705 - 350,206 350,206

- over one year to five years 4,160,842 - 2,078,256 2,053,871

- over five years 220,817 - 110,408 110,408

Foreign exchange related contracts

- one year or less 5,842 67 151 151

6,078,479 67 2,817,733 2,793,222

In the normal course of business, the Bank Group makes various commitments and incurs certain contingent liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions, hence, they are not provided for in the financial statements.

26

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management

27.1 Credit quality

(i) Financing and advances

Financing and advances are summarised as follows:

30-Sep-19

Stage 1 Stage 2 Stage 3 Total

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

Neither past due nor impaired

Corporate financing

Excellent 1,083 - - 1,083

Good 3,417,389 224,059 - 3,641,448

Average 3,366,573 1,008,582 - 4,375,155

Below Average 242,695 26,829 - 269,524

Poor 1,441 112,180 - 113,621

Retail financing 22,038,430 1,689,901 - 23,728,331

29,067,611 3,061,551 - 32,129,162

Past due up to 3 months

Corporate financing

Good - 83,076 - 83,076

Average - 135,274 - 135,274

Below Average - - - -

Poor - - - -

Retail financing - 1,196,278 - 1,196,278

- 1,414,628 - 1,414,628

Impaired - - 1,035,209 1,035,209

Gross financing and advances 29,067,611 4,476,179 1,035,209 34,578,999

Less ECL (445,023) (463,699) (633,425) (1,542,147)

Net financing and advances 28,622,588 4,012,480 401,784 33,036,852

Bank Group and Bank

27

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.1 Credit quality (continued)

(i) Financing and advances (continued)

Financing and advances are summarised as follows (continued):

31-Dec-18

Stage 1 Stage 2 Stage 3 Total

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

Neither past due nor impaired

Corporate financing

Excellent 1,380 - - 1,380

Good 3,484,483 273,974 - 3,758,457

Average 2,555,278 473,353 - 3,028,631

Below Average 225,842 7,862 - 233,704

Poor 31,389 3,864 - 35,253

Retail financing 22,016,505 1,393,970 - 23,410,475

28,314,877 2,153,023 - 30,467,900

Past due up to 3 months

Corporate financing

Good - 90,649 - 90,649

Average - 199,213 - 199,213

Below Average - 58,833 - 58,833

Poor - 113,287 - 113,287

Retail financing - 1,322,499 - 1,322,499

Total Past due up to 3 months - 1,784,481 - 1,784,481

Impaired - - 792,293 792,293

Gross financing and advances 28,314,877 3,937,504 792,293 33,044,674

Less ECL (346,537) (455,639) (435,881) (1,238,057)

Net financing and advances 27,968,340 3,481,865 356,412 31,806,617

Bank Group and Bank

28

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.1 Credit risk management (continued)

(ii) Other financial assets

Credit quality of other financial assets by external rating is as follows:

Bank Group

Stage 1 Lifetime ECL not credit impairedStage 2 Stage 3 Total

Neither past due nor impaired RM'000 RM'000 RM'000 RM'000

30-Sep-19

Cash and short-term funds

AAA 1,202,033 - - 1,202,033

AA and below 44,378 - - 44,378

Unrated 62,912 - - 62,912

1,309,323 - - 1,309,323

Financial investments

AAA 8,131,484 - - 8,131,484

AA and below 135,962 - - 135,962

Unrated 1,974,560 - - 1,974,560

10,242,006 - - 10,242,006

Other financial assets

Unrated 68,757 - 700,404 769,161

68,757 - 700,404 769,161

Bank Group

Stage 1 Lifetime ECL not credit impairedStage 2 Stage 3 Total

Neither past due nor impaired RM'000 RM'000 RM'000 RM'000

31-Dec-18

Cash and short-term funds

AAA 3,119,394 - - 3,119,394

AA and below 71,831 - - 71,831

Unrated 51,003 - - 51,003

3,242,228 - - 3,242,228

Financial investments

AAA 969,308 - - 969,308

AA and below 91,320 - - 91,320

Unrated 4,056,827 - - 4,056,827

5,117,455 - - 5,117,455

Other financial assets

Unrated 186,798 - 385,031 571,829

186,798 - 385,031 571,829

29

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.1 Credit risk management (continued)

(ii) Other financial assets (continued)

Bank

Stage 1 Lifetime ECL not credit impairedStage 2 Stage 3 Total

Neither past due nor impaired RM'000 RM'000 RM'000 RM'000

30-Sep-19

Cash and short-term funds

AAA 1,202,033 - - 1,202,033

AA and below 8,414 - - 8,414

Unrated 62,912 - - 62,912

1,273,359 - - 1,273,359

Financial investments

AAA 8,131,484 - - 8,131,484

AA and below 135,962 - - 135,962

Unrated 1,974,560 - - 1,974,560

10,242,006 - - 10,242,006

Other financial assets

Unrated 101,365 - 700,404 801,769

101,365 - 700,404 801,769

Bank

Stage 1 Lifetime ECL not credit impairedStage 2 Stage 3 Total

Neither past due nor impaired RM'000 RM'000 RM'000 RM'000

31-Dec-18

Cash and short-term funds

AAA 3,119,394 - - 3,119,394

AA and below 66,879 - - 66,879

Unrated 51,003 - - 51,003

3,237,276 - - 3,237,276

Financial investments

AAA 969,308 - - 969,308

AA and below 91,320 - - 91,320

Unrated 4,056,827 - - 4,056,827

5,117,455 - - 5,117,455

Other financial assets

Unrated 213,700 - 385,031 598,731

213,700 - 385,031 598,731

30

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk

(i) Profit Rate Risk

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank Group months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

30-Sep-19

Assets

Cash and short-term funds 1,168,096 - - - - 141,227 - 1,309,323 3.18

Deposits and placements

with financial institutions 204,984 1,014,618 100,448 - - - - 1,320,050 3.34

Derivative financial assets 108 - - - - - - 108

Financial investments at FVTPL - - - - - - 10,158 10,158 3.64

Financial investments at FVOCI - 10,221 350,630 4,294,376 5,556,520 - - 10,211,747 3.90

Financial investments at amortised cost - - - 20,101 - - - 20,101 4.54

Financing and advances

- non-impaired 576,494 504,808 1,196,921 3,291,964 27,973,603 (908,722) - 32,635,068 6.47

- impaired, net of allowances* - - - - - 401,784 - 401,784

Other receivables^ 700,404 - - - - (199,710) - 500,694 6.75

Statutory deposits with Bank Negara Malaysia - - - - - 1,235,000 - 1,235,000

Total financial assets 2,650,086 1,529,647 1,647,999 7,606,441 33,530,123 669,579 10,158 47,644,033

* This is arrived after deducting impairments from gross impaired financing.

^ Other receivables exclude prepayments and deposits and deferred expenses as these items are classified as non-financial assets.

<------------------------------------------ Non-trading book ---------------------------------------->

31

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank Group months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

30-Sep-19

Liabilities

Deposits from customers 5,222,227 8,443,651 10,370,409 2,737,723 104,903 317,689 - 27,196,602 3.94

Deposits and placements of

banks and other financial institutions 1,851,534 2,285,468 5,354,256 882,978 - 55,901 - 10,430,137 3.92

Derivative financial liabilities 410 - - - - - - 410

Other payables # - - - - - 500,883 - 500,883

Recourse obligation on financing sold 501,463 - - 1,504,320 - - - 2,005,783 4.51

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah (411) 212,663 95,972 1,080,643 509,246 - - 1,898,113 5.01

Total financial liabilities 7,575,223 10,941,782 15,820,637 6,205,664 614,149 874,473 - 42,031,928

Total profit-sensitivity gap (4,925,137) (9,412,135) (14,172,638) 1,400,777 32,915,974 (204,894) 10,158 5,612,105

# Other payables exclude other provisions, accruals and deferred income as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

32

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

30-Sep-19

Assets

Cash and short-term funds 1,168,096 - - - - 105,263 - 1,273,359 3.18

Deposits and placements

with financial institutions - 250,907 100,447 - - - - 351,354 3.17

Derivative financial assets 108 - - - - - - 108

Financial investments at FVTPL - - - - - - 10,158 10,158 3.64

Financial investments at FVOCI - 10,221 350,630 4,294,376 5,556,520 - - 10,211,747 3.90

Financial investments at amortised cost - - - 20,101 - - - 20,101 4.54

Financing and advances

- non-impaired 576,494 504,808 1,196,921 3,291,964 27,973,603 (908,722) - 32,635,068 6.47

- impaired, net of allowances* - - - - - 401,784 - 401,784

Sukuk Commodity Murabahah 111,925 137,544 98,110 1,283,330 1,221,513 - - 2,852,422 3.24

Other receivables^ 737,942 - - - - (204,524) - 533,418 6.75

Statutory deposits with Bank Negara Malaysia - - - - - 1,235,000 - 1,235,000

Total financial assets 2,594,565 903,480 1,746,108 8,889,771 34,751,636 628,801 10,158 49,524,519

* This is arrived after deducting impairments from gross impaired financing.

^ Other receivables exclude prepayments and deposits and deferred expenses as these items are classified as non-financial assets.

<------------------------------------------ Non-trading book ---------------------------------------->

33

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

30-Sep-19

Liabilities

Deposits from customers 5,222,227 8,443,651 10,370,409 2,737,723 104,903 317,689 - 27,196,602 3.94

Deposits and placements of

banks and other financial institutions 1,851,534 2,285,468 5,354,256 882,978 - 55,901 - 10,430,137 3.92

Derivative financial liabilities 410 - - - - - - 410

Other payables # 2,353,174 - - - - 500,883 - 2,854,057

Recourse obligation on financing sold 501,463 - - 1,504,320 - - - 2,005,783 4.51

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah (411) 212,663 95,972 1,080,643 509,246 - - 1,898,113 5.01

Total financial liabilities 9,928,397 10,941,782 15,820,637 6,205,664 614,149 874,473 - 44,385,102

Total profit-sensitivity gap (7,333,832) (10,038,302) (14,074,529) 2,684,107 34,137,487 (245,672) 10,158 5,139,417

# Other payables exclude other provisions, accruals and deferred income as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

34

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank Group months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

31-Dec-18

Assets

Cash and short-term funds 3,062,720 - - - - 179,508 - 3,242,228 3.27

Deposits and placements

with financial institutions 1,874 - 774,865 - - - - 776,739 3.65

Derivative financial assets - 67 - - - - - 67 -

Financial investments at FVOCI 5,097 192,538 373,038 2,548,826 1,977,606 - - 5,097,105 4.09

Financial investments at amortised cost - - - 20,350 - - - 20,350 4.22

Financing and advances

- non-impaired 462,803 510,837 400,419 3,599,151 27,279,171 (802,176) - 31,450,205 6.73

- impaired, net of allowances* - - - - - 356,412 - 356,412 -

Other receivables^ 385,031 - - - - 186,798 - 571,829 7.00

Statutory deposits with Bank Negara Malaysia - - - - - 1,053,000 - 1,053,000

Total financial assets 3,917,525 703,442 1,548,322 6,168,327 29,256,777 973,542 - 42,567,935

* This is arrived after deducting impairments from gross impaired financing.

^ Other receivables exclude prepayments and deposits and deferred expenses as these items are classified as non-financial assets.

<------------------------------------------ Non-trading book ---------------------------------------->

35

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank Group months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

31-Dec-18

Liabilities

Deposits from customers 6,789,658 7,171,717 8,154,246 1,863,692 52,867 177,269 - 24,209,449 4.08

Deposits and placements of

banks and other financial institutions 2,102,970 2,783,187 2,812,625 871,613 - 8,456 - 8,578,851 4.05

Derivative financial liabilities 2 - - - - - - 2

Other payables # - - - - - 420,893 - 420,893

Recourse obligation on financing sold 7,597 20,511 565,745 1,541,665 - - - 2,135,518 4.51

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah - - 308,864 1,064,590 594,621 - - 1,968,075 4.88

Total financial liabilities 8,900,227 9,975,415 11,841,480 5,341,560 647,488 606,618 - 37,312,788

Total profit-sensitivity gap (4,982,702) (9,271,973) (10,293,158) 826,767 28,609,289 366,924 - 5,255,147

# Other payables exclude other provisions, accruals and deferred income as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

36

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

31-Dec-18

Assets

Cash and short-term funds 3,062,720 - - - - 174,556 - 3,237,276 3.27

Deposits and placements

with financial institutions 1,842 - - - - - - 1,842 3.30

Derivative financial assets - 67 - - - - - 67

Financial investments at FVOCI 5,097 192,538 373,038 2,548,826 1,977,606 - - 5,097,105 4.09

Financial investments at amortised cost - - - 20,350 - - - 20,350 4.22

Financing and advances

- non-impaired 462,803 510,837 400,419 3,599,151 27,279,171 (802,176) - 31,450,205 6.73

- impaired, net of allowances* - - - - - 356,412 - 356,412

Sukuk Commodity Murabahah 27,634 - 316,619 1,153,137 1,427,344 - - 2,924,734 3.31

Other receivables^ 415,100 - - - - 183,631 - 598,731 7.00

Statutory deposits with Bank Negara Malaysia - - - - - 1,053,000 - 1,053,000

Total financial assets 3,975,196 703,442 1,090,076 7,321,464 30,684,121 965,423 - 44,739,722

* This is arrived after deducting impairments from gross impaired financing.

^ Other receivables exclude prepayments and deposits and deferred expenses as these items are classified as non-financial assets.

<------------------------------------------ Non-trading book ---------------------------------------->

37

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

27. Financial risk management (continued)

27.2 Market risk (continued)

(i) Profit Rate Risk (continued)

Effective

Up to 1 1-3 3-12 1-5 Over 5 Non-profit Trading profit

Bank months months months years years sensitive book Total rate

RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 %

31-Dec-18

Liabilities

Deposits from customers 6,789,658 7,171,717 8,154,246 1,863,692 52,867 177,269 - 24,209,449 4.08

Deposits and placements of

banks and other financial institutions 2,102,970 2,783,187 2,812,625 871,613 - 8,456 - 8,578,851 4.05

Derivative financial liabilities 2 - - - - - - 2

Other payables # 2,584,124 - - - - 420,893 - 3,005,017

Recourse obligation on financing sold 7,597 20,511 565,745 1,541,665 - - - 2,135,518 4.51

Sukuk-MBSB Stuctured Covered ("SC")

Murabahah - - 308,864 1,064,590 594,621 - 1,968,075 4.88

Total financial liabilities 11,484,351 9,975,415 11,841,480 5,341,560 647,488 606,618 - 39,896,912

Total profit-sensitivity gap (7,509,155) (9,271,973) (10,751,404) 1,979,904 30,036,633 358,805 - 4,842,810

# Other payables exclude other provisions and accruals and deferred income as these items are classified as non-financial liabilities.

<------------------------------------------ Non-trading book ---------------------------------------->

38

MBSB BANK BERHAD 200501033981 (716122-P)

(Incorporated in Malaysia)

28. Capital adequacy

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

Common Equity Tier I (''CET I'') Capital/Tier I Capital

Ordinary share capital 4,625,859 4,625,859 4,625,859 4,625,859

Retained earnings 324,226 324,226 259,543 259,543

Other reserve 177,514 15,942 177,514 15,942

5,127,599 4,966,027 5,062,916 4,901,344

Less : Regulatory adjustments

Deferred tax assets - - - -

Cumulative gains of financial investments at

FVOCI (119,025) (8,152) (119,025) (8,152)

Regulatory reserve (5,234) (5,234) (5,234) (5,234)

Intangible assets (116,005) (104,692) (116,005) (104,692)

Total CET I Capital/Tier I Capital 4,887,335 4,847,949 4,822,652 4,783,266

Tier II Capital

Collective impairment allowance and

regulatory reserve ^ 472,069 445,089 505,708 480,046

472,069 445,089 505,708 480,046

Total capital base 5,359,404 5,293,038 5,328,360 5,263,312

^

Breakdown of risk weighted assets in various categories of risk weights are as follows:

30-Sep-19 31-Dec-18 30-Sep-19 31-Dec-18

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

Total risk weighted assets ("RWA")

- Credit risk 37,765,488 35,607,133 40,456,651 38,403,661

- Market risk 11,725 2,136 11,725 2,136

- Operational risk 1,135,212 619,526 1,046,384 573,889

Total RWA 38,912,425 36,228,795 41,514,760 38,979,686

Capital adequacy ratios

CET I capital ratio 12.560% 13.381% 11.617% 12.271%

Tier I capital ratio 12.560% 13.381% 11.617% 12.271%

Total capital ratio 13.773% 14.610% 12.835% 13.503%

BankBank Group

Bank Group Bank

Collective impairment allowance on non-credit impaired exposure and regulatory reserves is subject to a

maximum of 1.25% of total credit RWA.

The capital adequacy ratios have been computed in accordance with BNM’s Capital Adequacy Framework (Capital Components and Basel II – Risk Weighted Assets). The total risk weighted assets are computed based on Standardised Approach for Credit and Market Risk and Basic Indicator Approach for Operational Risk.

39

MBSB BANK BERHAD 200501033981 (716122-P)

PERFORMANCE REVIEW FOR THE 3RD QUARTER ENDED 30 SEPTEMBER 2019

1. Performance Review

(a) Financing

Variation of Results against Preceding Year Corresponding Quarter

Variation of Results against Immediate Preceding Quarter

Financing

(Incorporated in Malaysia)

The Bank Group registered a profit before taxation and zakat of RM140.5 million for the third quarter

ended 30 September 2019. Gross financing and advances for the Bank Group stood at RM34.58 billion

whilst total deposits at RM37.63 billion.

Bank Group gross financing and advances increased by 2.9% and 1.2% for 3Q19 compared to 3Q18

and 2Q19 respectively. The increase was mainly contributed by growth in Corporate financing and

property financing. Corporate financing grew in line with the Bank Group's strategy to grow Corporate

base customer, while property financing's growth was contributed by the exercise of loan conversion

from conventional mortgage to property financing.

PrecedingCurrent Year

Year Corresponding

Quarter Quarter 30-Sep-19 30-Sep-18

(3Q19) (3Q18)

RM'000 RM'000 RM'000 %

Personal financing 20,341,034 21,129,781 (788,747) -3.7%

Corporate financing 9,060,094 8,081,728 978,366 12.1%

Property financing 5,000,621 4,149,286 851,335 20.5%

Auto financing 177,250 230,315 (53,065) -23.0%

Total gross financing and advances 34,578,999 33,591,110 987,889 2.9%

Changes

Current Immediate

Year Preceding

Quarter Quarter

30-Sep-19 30-June-19

(3Q19) (2Q19)

RM'000 RM'000 RM'000 %

Personal financing 20,341,034 20,372,495 (31,461) -0.2%

Corporate financing 9,060,094 8,906,271 153,823 1.7%

Property financing 5,000,621 4,710,550 290,071 6.2%

Auto financing 177,250 190,796 (13,546) -7.1%

Total gross financing and advances 34,578,999 34,180,112 398,887 1.2%

Changes

40

MBSB BANK BERHAD 200501033981 (716122-P)

PERFORMANCE REVIEW FOR THE 3RD QUARTER ENDED 30 SEPTEMBER 2019

(Incorporated in Malaysia)

1. Performance Review (continued)

(b) Income statement

Current Year Quarter vs Preceding Year Corresponding Quarter

Current Year Quarter vs Immediate Preceding Quarter

The total income derived from investment of depositors' and shareholders' funds from 3Q19 increased by 7.6% and 2.7% as compared to 3Q18 and 2Q19 respectively. Contribution from financing and advances towards the income derived from investment of depositors' funds for 3Q19 reduced at 75% (3Q18: 88% 2Q19: 84%).

Current Immediate

Year Preceding

Quarter Quarter

30-Sep-19 30-June-19

(3Q19) (2Q19)

RM'000 RM'000 RM'000 %

Income derived from investment of

depositors' funds 439,935 618,807 (178,872) -28.9%

Income derived from investment of

shareholders' funds 277,380 79,685 197,695 >100%

Total income derived from investment of

depositors' and shareholders' funds 717,315 698,493 18,822 2.7%

ECL (95,980) (94,570) (1,410) 1.5%

Total net income 212,883 188,345 24,538 13.0%

Total overhead expenses (72,378) (92,825) 20,447 -22.0%

Profit before tax 140,505 95,520 44,985 47.1%

Profit after tax 78,170 75,431 2,739 3.6%

Profit attributable to owners of

the Bank 78,170 75,431 2,739 3.6%

Changes

Preceding

Current Year

Year Corresponding

Quarter Quarter

30-Sep-19 30-Sep-18

(3Q19) (3Q18)

RM'000 RM'000 RM'000 %

Income derived from investment of

depositors' funds 439,935 606,257 (166,322) -27.4%

Income derived from investment of

shareholders' funds 277,380 60,531 216,849 >100%

Total income derived from investment of

depositors' and shareholders' funds 717,315 666,788 50,527 7.6%

ECL (95,980) (56,778) (39,202) 69.0%

Total net income 212,883 232,364 (19,481) -8.4%

Total overhead expenses (72,378) (91,571) 19,193 -21.0%

Profit before tax 140,505 140,793 (288) -0.2%

Profit after tax 78,170 112,182 (34,012) -30.3%

Profit attributable to owners of

the Bank 78,170 112,182 (34,012) -30.3%

Changes

41

MBSB BANK BERHAD 200501033981 (716122-P)

PERFORMANCE REVIEW FOR THE 3RD QUARTER ENDED 30 SEPTEMBER 2019

(Incorporated in Malaysia)

1. Performance Review (continued)

2. Authorisation for issue

The unaudited interim financial report was authorised for issuance to Bank Negara Malaysia by the

Board of Directors in accordance with a resolution of the Directors on 24 October 2019.

ECL increased compared to 3Q18 due to unfavourable macroeconomic forecast that impacted stage 1

retail segment.

ECL slightly increased compared to 2Q19 as the financing base has grown, contributed by increase of

property financing as a result of conversion of conventional mortgage from the holding company.

The total overhead expenses for 3Q19 recorded lower than 3Q18 and 2Q19 due to lower personnel

related expenses.

Bank Group profit before tax for 3Q19 decreased by 0.2%, and increased by 47.1% as compared to

3Q18 and 2Q19 respectively. The decrease and increase were mainly contributed by the result of ECL

and overhead expenses.

42

Issuer

MBSB BANK BERHAD (Registration No. 200501033981)

(Company No. 716122-P)

Registered Office Address 11th Floor, Wisma MBSB

48 Jalan Dungun Damansara Heights 50490 Kuala Lumpur

Joint Principal Advisers / Joint Lead Arrangers / Joint Lead Managers

AmINVESTMENT BANK BERHAD (Registration No. 197501002220)

(Company No. 23742-V) Level 22

Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur

AND

RHB INVESTMENT BANK BERHAD

(Registration No. 197401002639) (Company No. 19663-P)

Level 10, Tower One RHB Centre

Jalan Tun Razak 50400 Kuala Lumpur

Facility Agent

RHB INVESTMENT BANK BERHAD (Registration No. 197401002639)

(Company No. 19663-P) Level 10, Tower One

RHB Centre Jalan Tun Razak

50400 Kuala Lumpur

Sukuk Trustee

MALAYSIAN TRUSTEES BERHAD (Registration No. 197501000080)

(Company No. 21666-V) Level 10, Tower One

RHB Centre Jalan Tun Razak

50400 Kuala Lumpur

Central Depository and Paying Agent

BANK NEGARA MALAYSIA

Jalan Dato’ Onn 50480 Kuala Lumpur

Rating Agency

RAM RATING SERVICES BERHAD (Registration No. 200701005589)

(Company No. 763588-T) Suite 20.01, Level 20

The Gardens South Tower Mid Valley City, Lingkaran Syed Putra

59200 Kuala Lumpur

Solicitors to the Joint Principal Advisers / Joint Lead Arrangers

ADNAN SUNDRA & LOW Level 11, Menara Olympia No.8, Jalan Raja Chulan

50200 Kuala Lumpur

Joint Shariah Advisers

AmBANK ISLAMIC BERHAD (Registration No. 199401009897)

(Company No. 295576-U) 22nd Floor

Bangunan AmBank Group No. 55, Jalan Raja Chulan

50200 Kuala Lumpur

AND

RHB ISLAMIC BANK BERHAD (Registration No. 200501003283)

(Company No. 680329-V) Level 10, Tower One

RHB Centre Jalan Tun Razak

50400 Kuala Lumpur