pa Sie Disclosures on Risk Based Capital requirement under Pillar - Ill of Basel Il for the year ended 31 December 2010 The world’s local bank1 Disclosure Policy The following detailed qualitative and quantitative disclosures are provided in accordance with Bangladesh Bank rules and regulations on capital atequacy under Basel! issued through BRPD Circular 10 [10 March 2010) and BAPD Circular 24 (03, ‘August 2010). The purpose of these requirements is to complement the capital adequacy requtements and the Pilar Il ~ Supervisory review process. These disclosures are intended for markot participants to assess key information about the Bank's exposure to varous risks and to provide @ consistont and understanaebie disclosure framework for easy comparison ‘amang tanks operating in the market. The Bank has an apgroved cisalosure policy to observa the disclosure requirements set out by the Bengledesh Bank end Intemational Financial Reporting Standards (/FAS) end Intemational Agcounting Standards (IAS) as adopted by the Institute of Chartered Accountants of Bangladesh (ICAB) into Bengledesh Accounting ‘Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS) where relevant to the Bank. ‘The major highlights of the Bangladesh Bank regultions ar: > To maintain capital adequacy rato (CAR) t a minimum oF 9% of isk Weighted Assets; > To-adopt the standard sed approach for crecit risk for implementing Basel I, using notionl discretion for: + adopting the credit reting agencies as extemal cedt assessment institutions (ECA) for claims (on Sovereigns and banks; - adopting simplelcomprehensive approach for Credit Ris Mitigation (CRM), + all unrated corporate exposures are risk weighted by assigning 125% of risk weight. > To.adopt standarcized approach for market risk and basic indicator approach for operational risk. > Copitel adequacy retuins must be submitted to Bangladesh Bank on a quarterly bass 2 Scope of Application Bank has no subsidiaries or significant investments and Basel Ili applied atthe Bank level only 3 Disclosure framework ‘The disclosure requirements as per the Bangladesh Bank Basal Il Guideline are descrived below. 4 Assets In broader categories assets composition of HSBC Bangladesh mainly attrbutes the following > Banking book assets > Trading book assets Generally, investments in Hold for Trading! portfolios ae focal parts of the trading book. All others assets of the balance: sheet ere lying with banking book. The following are the components ofthe earring assets end non-earning assets of HSBC Bangladesh Earning assets > Loans and acvances to customer > Investment in securities > Money at cal & short notice > Balance with other banks and financial institutions > Income generating other assets - receivable from offshore on an atm length basis > Balence with Bangladesh Benk for maintsining cash reserve retio » Cash > Fixed assets > Other assets The balance sheet size of HSBC Bangladesh expanced by 18% compared to that at December 2008, The balance sheet expansion was mainly funded by a growth of 15% in customer deposits as the benk had initiated verious deposit campaigns to attract and retain customer deposits. The Bank has invested this surplus fund in Lozn & Advances to customer. Fund based Advances increased by epproximately 62% compared to that on 31 December 2008. ‘Assets ate monitored on a reqular basis to cope with unexpected risk. Assets Liabilty Committee (ALCO) monitors and reviews the benavior pattems of the assets. Assets are clessfied as per the directve of the Sengladesh Bank.Classified assets ere mainly a orton of loans and advances (.0. 1.14% of Total loans and advarces) which are celeulated on a ‘ormulsic aoproacn as per drective of Bangladesh Bank. Cssified assets has increased by 19% compared to that 07 31 December 2009. The ALCO regulary revews the Bank's overall asset and libilty poston, overall ecoro-c positon, he Benk's avidity position, capital adequacy, balance sheet risk , Interest rsk and makes necessary changes in its mx as and when requires. The Bank has a Risk Menagement Committee (RMC) comprising al the members of the Al CO and other risk related ‘unction heads to manage various risks within the Bank including the credit risk. As per the Banglacesh Bank guideline, implementation of core sk maragament guideline are in piace. Banking book assets 2a10 2009 BOT BOT Cash and cash equivalents Cash in hand 7,08%,569,760] { 1,000,880,182| Balance wth Benglecesh bank 81523,65%,265| |_6.977,560,107 9,615,260425 __7,978,220,281 Investment Government Securities 1,072,888 640) 372, BOE, | Prize Bond +965 200] 1,883,700 1,074,963,840 374,287,584 Claims on Banks Balance wth other bank and Fn Bangladesh 716,18 465] 176,967,262 Belance w th other bank and Fl-outside Bengladesh, 1,185,436,381 41,155,687,928 Money at call and short notce 3,036,000,000 |_1,636,020,200] 4,435,617845 __-3,017,638,192 Loans & advances Past due claims Comorste 509,353,804] 499,951,2¢4| Consunor 318,606,202 307,276,072 827,960,006 751,225,316 Unclassified Comorete ‘37,598,662,686] | 18,720,081,177 Consumer 16,360,849,692| | 11,820,834, 904! —46,949,502378. __30,540,986,061_ Other assats (including fixed assets) Fixed assets 348,198,728 246,178,522 Imtangpble assets 12,036,283} 4,819,083 O'fshore Banking Unit (OBU) 19,922,027,978} Irom in Course of cotoction from Bangiadosh Bank 619,685,988 Item in Course of cotection from other banks 13,102,143} Eneastmert of PS? awaitrg for teimoursament trom Bengledesh Bank 917,488,472 ‘Accrued couson interest on Bangadesn Government treasury oond 56,742,746] CDAL shares 6,000,000 Staff Loans secured by Residential Procerty 429,626,585 Other assets 612,119,182 Total assets Trading book assets HET securties 5,698,094.871 ia Total assets BIS3B347A19. — —69,350,325.290 5 Credit Risk Credit risks the ris« o Franca css if a customer of counterparty ‘lls to meet a payment obligation under a contact. It erses princinally from direct lending, trade finence anc leasing business, but also fom o‘t-balance sheet products such es guarantees and credit cerivaives, and from the holsings of debt secures. HSBC Bengledesn has standards, polcies anc procedures decicated to controling and monitoring rsk from al such actvites. Among the risks the HSC Bangladesh engages in, credit risk generates the lergest regulatory cap tal requirement ‘The aims of credit risk management, underpinning sustainably prof table business, are principally > tomsinie strong cukure of responsible loncing, supported oy arotx.t isk ploy anc contol framework, > coboth partner and chellenge business originators effectively in defining ard implementing rsk appetite, end its reevaluetion under actual end scenaro conditions; and? > ‘oensure incependent, expert scrutiry ard approval of credit rises, their costs ard ther mitigation