Risk Management ReportFor the Year Ended March 20, 2017

RISK MANAGEMENT REPORT 3

1. Risk Management

Middle East Bank (MEB) continued building and enhancing its information technology infrastructures for risk management according to Basel-III requirements. Central Bank of Iran (CBI) has taken major steps to bring Iran’s banking regulations in line with the latest Basel accords and International Financial Reporting Standards (IFRS). The CBI has emphasized implementation of IFRS particularly for matters related to

disclosure and market discipline matters for the current reporting period. Although CBI has not yet issued guidelines on capital adequacy or liquidity ratios. MEB (conforming to Basel-II or Basel-III accords) voluntarily reports its capital adequacy and liquidity ratios according to the latest guidelines released by the Basel Committee on Banking Supervision (BCBS) in addition to current CBI rules.

1.1 - Risk Review1.1.1 - Risk HighlightsMEB manages risk from two perspective: “Regulatory” perspective and “Internal Economic” perspective. The regulatory perspective is designed to ensure compliance with CBI regulations, Basel-III requirements and the Bank’s internal rating methodologies. The internal economic perspective is intended to establish policies and processes according to Basel-

III requirements for identifying risks through risk inventory process, risk appetite framework, risk bearing capacity, Internal Capital Adequacy Assessment Process (ICAAP), Internal Liquidity Adequacy Assessment Process (ILAAP) and stress testing. MEB implements the principle of three lines of defense in order to achieve its goals of risk management. Table 1 illustrates some highlights of MEB’s risk profile.

Table 1- Risk HighlightsSelect Risk Ratios as of March 20, 2017 PercentageDoubtful Loans /Total Loans 0.5Capital Adequacy Ratio Basel-III Foundation-IRB 12.6Capital Adequacy Ratio Basel-III Standardized Approach 11.7Liquidity Coverage Ratio (LCR) 77.2Net Stable Funding Ratio (NSFR) 97.3Basel-III Leverage Ratio 8.4High Liquid Assets1 / Total Deposits 6.9*(High Liquid Assets1 + Regulatory Deposits) / Total Deposits 13.9*High Liquid Assets/Total Deposits except NDF2 9.3*(High Liquid Assets + Regulatory Deposits)/Total Deposits except NDF2 18.7*Loans / Total Assets 71.9Loans / Deposits 85.4

1. Cash and Cash Equivalents + unencumbered due from other banks+ bonds + short-term liquid investment2. National Iranian Oil Company has guaranteed loans financed by National Development Fund. Therefor, MEB is not exposed to liquidity risk due to National Development Fund. * Overnight Interbank Loans are considered as encumbered due from banks and financial intuitions, in the calculations and are not added to High Liquid Assets Assuming otherwise these liquidity ratios are 13.3, 20.2, 17.9, and 27.3 percent, respectively, top down in the table.

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Graph 1 shows the share of economic capital for credit risks, market risks and operational risks. The measurement of economic capital for clients’ credit risks is based on historical measurement of probability of default (PD) and loss given default (LGD) except for that portion of credit risk that is due to financing of projects through National Development Fund (NDF) and guaranteed by government entities. The PD-LGD economic capital is estimated based on a 99.5% confidence level with a capital multiplier of 6 times the standard deviation based on a beta distribution with significantly fatter tail than normal distribution. The measurement of economic capital for NDF projects, interbank loans, interest rate risk and operational risks are based on standardized models and risk weights for a capital adequacy ratio of 13%. The measurement for economic capital of market risk due to short term equity investments is based on

value at risk model with a capital multiplier of 6 times standard deviation (beta distribution and 99.5% confidence level). Graph 1 and its associated table show the estimated economic capital for different risk groups. Graph 2 and its associated table show the estimated economic capital compared with net exposures. It should be noted that one is effectively taking into consideration the fat tail that may result from loss of diversification effect in stressed conditions by having capital multiplier 6 times standard deviation. Table 2 describes respectively from the left the exposure types, the economic capital assessment methodology, amount of net exposure, corresponding risk weights, estimated economic capital, economic capital to exposure ratio, and the share of economic capital compared to the total capital (Tier 1 plus Tier 2) for each exposure.Please see section 1.3 (Risk Bearing Capacity) for more detail.

Graph 1- Share of Economic Capital for Risk Groups

Graph 2 - Economic Capital vs. Exposure

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Table 2 - Data for Graphs 1 and 2

Risks Measurment Method

Net Exposure

Risk Weights (driven from simulation

based on PD & LGD)

Capital based on Net

Exposure

Capital to Net Exposure

Share of Economic

Capital

Credit risk - rated incorporated clients

Historical PD-LGD methodology

28,873,753 107% 4,026,778 13.95% 52.8%Credit risk - unrated incorporated clients 3,676,075 131% 625,839 17.02% 8.2%Credit risk - unrated natural persons 3,108,498 69% 279,511 8.99% 3.7%Credit risk - financial institutions 1,104,577 57% 81,356 7.37% 1.1%Credit risk - off-balance sheet items 7,168,661 70% 652,348 9.10% 8.6%Credit risk - Interbank Loans

Standardized risk weight

6,310,934 20% 164,084 2.60% 2.2%Credit risk - projects financed by NDF & CBI 17,803,579 20% 462,893 2.60% 6.1%Market risk - interest rate risk 3,286,489 24% 102,538 3.12% 1.3%

Operational risks

Basel-III standardized measurement approach

- 241,000 3.2%

Market risk - equity VaR methodology 407,446 159% 84,368 20.71% 1.1%

Long Term Investment in Financial Institution

Standardized risk weight

258,404 250% 83,981 32.50% 1.1%Due from Subsidiaries 165,504 100% 21,516 13.00% 0.3%Other Receivables 665,828 100% 86,558 13.00% 1.1%Tangible Fixed Assets 2,006,126 100% 260,796 13.00% 3.4%Intangible Assets Excluding Goodwill 119,868 100% 15,583 13.00% 0.2%Other Assets 1,861,632 100% 242,012 13.00% 3.2%Total of measured risks 7,431,161 97.5%Available capital for other risks (Model, reputation, etc.) 193,430 2.5%

Equity 7,624,591 100%

1.1.2 - Risk Strategy SummaryMEB’s risk strategy follows its basic rules and goals of steering, principles of risk management, risk management structure and processes, risk bearing capacity, risk limits, and capital and liquidity management .MEB defines itself as a corporate bank, providing financing services to ongoing businesses for their working capital needs. Our loans mostly cover short term needs of our customers, usually payable in three months and reusable up to one year. Longer-dated financing or project finance is only provided when the viability of the project passes credit committee’s stringent requirement and funding is provided by the National Development Fund (NDF) an associated guarantee. Larger projects may also be funded trough, a syndication of banks. MEB’s strategy is to minimize market risks related to its equity share holdings and so therefore commits no more than 0.5% of its assets in a diversified marketable equity securities portfolio. The Bank’s risk strategy is formulated based on the business strategy, risk bearing capacity and risk appetite. The Board oversees implementation of ICAAP and ILAAP. The Risk Management Department regularly reports and update (if necessary educates) the Board with concepts of economic capital and capital adequacy measurement as well as assisting the Board developing its supervisory processes on capital adequacy and liquidity adequacy, ICAAP and ILAAP. It is expected that the elaboration and implementation of ICAAP and ILAAP will be completed by mid-2018.

1.1.3 - New Basel-III RequirementsAccording to the latest BCBS rules, banks should be able to estimate their economic capital and the adequacy of their liquidity position based on risk exposures and should have processes in place in order to reliably estimate their capital and liquidity adequacy. Processes are called Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP). MEB has strengthened its corporate governance in order to comply with these rules.Corporate Governance in MEB follows the international standard of “Three Lines of Defense”. All of MEB’s risk bearing units are referred to as the first line of defense. These units are owners of risks and are responsible for the proper management of the risks their activities generate. Risk Management function and Compliance Management function are referred to as “Second Line of Defense”. Risk Management function consists of Risk Committee (a Board sub-committee), and the Risk Management Department headed by Senior Risk Manager. Risk Management function oversees the risk taking activities, imposes limits on risk exposures and interfaces with the first line of defense when the risk limits are breached or risk exposures are not acceptable. The Senior Risk Manager regularly reports the status of risk exposures, the risk limit breaches, changes to the risk bearing capacity of the Bank to the Risk Committee and to the Board. MEB’s Board has approved ICAAP, and Internal Liquidity Adequacy Processes ILAAP to manage and control risk

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exposures affecting capital adequacy and liquidity.The Internal Audit Department (referred to as the “Third Line of Defense”) audits all the units including Risk Management and Compliance Management. Internal Audit function independently reports to the Board as compliance matters.The Risk Management Department’s activities include 1- preparing risk inventory, 2- preparing risk appetite, 3- developing risk strategy, 4- developing processes required to implement MEB’s risk strategy, 5- internal evaluation of capital adequacy and liquidity, 6- evaluating the capital and liquidity plans of the Bank, 7- developing stress test models for capital adequacy and liquidity, 8- reporting risk status to the Board and 9- publishing transparent public reports on risk management practices of the Bank.

1.1.4 - Risk InventoryRisk inventory is a risk identification and assessment process whereby risks are identified and assessed at all levels of the Bank. MEB’s Risk Inventory includes credit risks, market risks, operational risks, liquidity risks, concentration risks, legal and compliance risks, and reputational risks.Risk Inventory provides a general overview of the Bank’s risks (Risks Profile). Risk Inventory process specifies the sub-processes for risk identification, risk assessment, risk materiality, and measuring risk controls. The risk assessment processes follow RCSA methodology.Processes, sub-processes, activities and sub activities of each department and the Bank’s branches are documented according to a model called American Productivity and Quality Center (APQC). Managers and experts from the risk taking departments

cooperate with risk analysts and “Organization and Methods Department” to create APQC. Properly documented and Board approved processes are finally submitted to Risk Management Department to conduct risk inventory process. The team for identifying and assessing all risks and controls is referred to as RCSA Team and consists of an expert or experts from each department being analyzed and risk analysts from Risk Management Department including an operational risk analyst and credit, market and liquidity risk analysts. The RCSA Team meets to identify and assess risks and relevant controls for each section, or department. The identified risk and controls must be confirmed by the head of the corresponding department and the Senior Risk Manager. The RCSA Team determines the frequencies and severities of the identified risks. Risks are divided into two classes: material and non-material risks. The materiality is determined based on frequency of occurrence and severity of loss for each identified risk. The residual risks those that the Bank is willing to accept after the mitigating controls are applied to material risks.

1.1.5 - Risk AppetiteDetermining the Bank’s risk appetite follows the risk inventory process. Risk appetite determines the limits and tolerance levels of risks with respect to capital adequacy, liquidity adequacy and profitability conditions. The Board and the Bank’s Senior Management ultimately define and approve Banks’ risk appetite. The board is responsible for setting the acceptable limits and is responsible for monitoring the implementation and compliance of units with the limits set by risk appetite.MEB’s risk limits are set forth in Table 3 as bellow:

Table 3 - MEB Risk Limits

IndicatorRisk Limit (%)

Safe Caution Red Zone

Capital AdequacyCapital Adequacy Ratio – Basel-III standard model > 13/0 > 10/5 < 10/5CET1 % - Basel-III > 10/0 > 8/0 < 8/0Capital Adequacy/ Economic Capital > 120/0 > 100/0 < 100/0Credit RisksLargest single customer / Core Tier 1 < 10/0 < 20/0 > 20/0Groups’ Accumulative Loans / Core Tier 1 < 10/0 < 20/0 > 20/0Total of first 20 significant customers Loans/ Total Loans < 20/0 < 35/0 > 35/0Each Industry Total Loan / Total Loan < 10/0 < 15/0 > 15/0Non-Current Loan / Total Loan < 2/0 < 5/0 > 5/0Expected losses / Total Loan < 2/0 < 3/0 > 3/0Liquidity RisksTotal Loan / Total Deposit < 80/0 < 85/0 > 85/0Highly liquid assets and Regulatory Deposit/ Deposits > 25/0 > 20/0 < 20/0LCR – Basel-III > 110/0 > 100/0 < 100/0NSFR – Basel-III > 110/0 > 100/0 < 100/0Market RisksShort-Term Equity Investment / Total Asset < 1/0 < 1/5 > 1/5Required Capital for short-term Equity Investment / Core Tier 1 – Basel-III

< 2/0 < 3/0 > 3/0

Risk Weight of short-term Investment according to Basel-II based on VaR

< 150/0 < 300/0 > 300/0

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1.1.6 - Developing Risk StrategyThe Bank’s risk strategy is formulated based on the business strategy, risk bearing capacity and risk appetite. The Board reviews and approves the risk strategy in the last quarter of each year for the following year. All risk bearing departments are required to report regularly the status of compliance with the limits set for identified risks. Risk strategy employs two important tools for ensuring its effectiveness: Economic Capital and Risk Adjusted Return on Capital (RAROC). Economic capital is the amount of capital assigned to cover unexpected losses due to risk-bearing. RAROC measures the economic value of a risk bearing activities. Activities that have RAROC higher than cost of capital add economic value and these that do not lose value. Hence, measuring economic capital and risk adjusted return are important tools for controlling compliance with the risk strategy and measuring performance in order to encourage activities that add economic value. The Bank has now built the required infrastructure to measure RAROC for different risk bearing units and is in the process of its implementing it as a management tool.

1.1.7 - Developing Processes Required to Implement the Risk StrategyThe Bank’s processes and procedures for implementation of its risk strategy are prepared and communicated to all departments through “Organization and Methods Department” . These processes determine application of the risk management to the first line of defense and monitoring of risks by the risk function as second line of defense. Also, the risk strategy determines the various responsibilities of senior management and the Board for control of the capital and liquidity adequacy,Both of which are key control elements of risk management in the MEB.

1.1.8 - Internal Evaluation of Capital and Liquidity Adequacy (ICAAP and ILAAP)The Board oversees and ensures the effective implementation of ICAAP and ILAAP. The Board and Risk Committee are aware and knowledgeable about the measurement and management of capital and liquidity adequacy with respect to the amount of risk exposures.

The Board is kept informed by the Risk Management Department which regularly familiarizes the Board with concepts of economic capital and capital adequacy measurement as well as assisting the Board developing its supervisory processes on capital adequacy and liquidity adequacy (ICAAP and ILAAP). It is expected that the implementation of ICAAP and ILAAP will be completed by mid-2018.

1.1.9 - Planning for the Capital and Liquidity of the BankGiven its business strategy and risk strategy, the Bank targets a capital adequacy ratio of at least 13% according to the Basel-III standardized model. Therefore, the Bank raised its capital raising from IRR4,000 to IRR7,783 billion funded by retained earnings and capital market. In addition, Bank plans to add to its capital at least IRR1,000 billion to its capital from retained earnings or 50% of retained earnings for the foreseeable future. In the event of the expansion of the debt market in Iran, the Bank may use new instruments such as convertible bonds to raise its Tier 2 capital. It is our judgment that 13% Basel-III standardized model of Capital Adequacy Ratio (CAR) is highly sufficient.

1.1.10 - Developing Stress Test ModelsAccording to new international banking requirements the Bank must estimate its capital and liquidity in economic distressed situations. Therefore, the Bank must define a variety of stress scenarios and assure that it can maintain an optimal capital adequacy in the event of significant economic distressed situations. The risk management department develops models for examining capital and liquidity adequacy in in the event of economic crises. The stress models are summarized in the Stress Testing section of this document.

1.1.11 - Reporting and TransparencyMEB complies with the reporting requirements of the CBI. Additionally, MEB voluntarily implements latest Basel-III requirements. Accordingly MEB’s reports are in accordance with IFRS and in accordance with Basel-III transparency and market discipline requirements.

1.2 - Balance Sheet Highlights

1.2.1 - Assets HighlightsDuring the year under review we carried on with our strategy of lending short-term loans to select corporate clients with whom we have developed and maintained strong long-term banking relationships. Our loan portfolio constitutes about 72% of total assets and consists mostly of working capital financing (receivables and inventory purchases) of our corporate clients and individuals who operate their businesses as proprietorship. Borrowers’ credit ratings and credit extensions are based

on our assessment of the borrowers’ ability to generate the required cash flows, in order to pay back interest and principal at maturity; generally within three months. This strategy has allowed the bank to maintain a ratio of doubtful loans to total loans of less than 1%, well below the 11% stated national average of doubtful loans as reported by CBI. The ratio of non-performing loans (more than 60 days late) to total loans is about 4.3%. The national average for loans “60 days past due” is not available but it is likely to be much higher figure than the nationwide doubtful loans of 11%.

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Table 4 - Loans’ Classification

Loans’ ClassificationEach Item as a Percentage of Total Loans

March 20, 2017 March 19, 2016Standard 95.8 95.6Overdue (late between 60 days and 6 months) 1.6 3.7Suspended (late between 6 months and 18 months) 2.1 0.1Doubtful (late more than 18 months) 0.5 0.6Total 100.0 100.0

Also, on the asset side, MEB’s short-term investments in equities constitute 0.5% of total assets. MEB plans to reduce even further the short-term equity investments considering the low Sharpe Ratio and the very high risk weight associated with these assets. Our estimate of IRB-Foundation risk weight for our short-term equity investments is about 202%. For these short-term investments, the standardized Basel-III risk weight is 300%. These risk weights are to be contrasted with the Basel-I risk weight of 100% for short-term stock market investments. These high risk weights impose a policy of minimal and prudent short-term stock market investments. The overall asset side strategy of MEB is reflected in its strong capital ratios as depicted in the section “Capital Conservation Strategy”.As of March 20, 2017, MEB’s Long-term and strategic

investments were about 0.3% of total assets and were used for facilitating the financial needs of our customers. These investments include a brokerage house, an FX trade company and an investment bank, and an information technology company used for development of MEB’s core banking and related IT products. Considering the current economic situation, MEB has adopted a conservative liquidity strategy and maintains about 12% of its total assets in very liquid assets plus regulatory reserves. Customer loans portfolio constitutes about 72% of total assets; while about 8% of total assets are tangibles, intangibles and other assets supporting the core activities of the Bank.

The average risk weight of our on-balance sheet assets is about 68%. The average risk weight of loans including loans related to projects from NDF is 83%, Therefore, MEB has a relatively high CAR of 12.6% using the IRB-Foundation model and an acceptable CAR of 11.7% using Basel-III standardized model. Despite a relatively high CAR in comparison with other Iranian banks, MEB is one of the most profitable banks in Iran. MEB’s profitability can be attributed to an efficient workforce, lower cost of capital and high regulatory interest rate for loans. MEB has a lower cost of capital because a relatively large section of its deposits consists of customers’ current account deposits. The reputation of the Bank as a solid and trustworthy bank also helped the lower cost of capital. We operate in an environment where our depositors feel more comfortable with us having lower deposit interest rates rather than having the opportunity to gain higher interest rates available with many other banks.Another contributing factor to high profitability of the Bank was because the interbank overnight rates were higher than regulatory deposits interest rates for much of reporting year. MEB was generally a provider of funds in the interbank market which provided a window of opportunity to profit from the high interbank rates and low deposits rates. The reason for unusual high interbank rates was that CBI imposed a high interest rate penalty on banks with deficiencies in their statutory reserves.

This high penalty interest rate pushed interbank loans to levels higher than regulatory fixed interest rates imposed on term deposits. This situation also forced some banks with deficient reserves to offer deposit interest rates higher than CBI regulatory deposit rates to avoid the much higher penalty for deficiency in statutory reserves.

1.2.2 - Liabilities HighlightsWe do not rely on large number of branches for expanding our financial resources. Instead, we rely on our business borrowers to bring their banking activities and financial resources to the Bank. Essentially with this strategy we work as an intermediary to help our clients with occasional excess resources to finance our other clients with occasional short-term working capital needs. We also rely on the high quality of our services to attract the employees, managers and the customers of our borrowers to do their banking with us. We also attract high net worth individuals (HNWI) and business owners/managers and high income earners (HIE) because of the quality of our services and the reputation established among the business leaders. Majority of the deposits and funds provided by the HNWI and HIEs are related to our corporate clients. MEB’s depositors have stayed loyal despite the fact that higher deposit rates were available at other banks.

Table 5 - Assets CompositionEach Item as a Percentage of Total Assets

Asset Type March 20, 2017 March 19, 2016High Liquid Assets1 5.8 10.7Regulatory Deposits with CBI 5.9 7.5Long term and strategic investments 0.3 1.4Loans 71.9 67.5Tangibles, Intangibles, Receivables, and others 7.6 10.4Encumbered Assets with CBI and other banks 8.5 2.5Total 100.0 100.0

1. Cash & Cash Equivalent + Unencumbered due from other banks+ Bonds + Short - Term Liquid Investment

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1.2.3 - Capital HighlightsConsidering the current economic situation, MEB continues to maintain more capital than regulatory requirements. Despite higher than required liquidity and capital ratios, MEB has been able to stay one of the most profitable banks in the country for the reasons explained in the “Asset side strategy” of this report.

The result of capital conservation strategy is shown in Table 7 where several Capital Adequacy Ratios are estimated based on different models.MEB reports its capital adequacy ratio (CAR) based on several models: Basel-I, Basel-III Foundational Internal Rating and Basel-III Standardized Approach.

Table 6 - Composition of LiabilitiesEach Item as a Percentage of Total Liabilities

Items March 20, 2017 March 19, 2016Current account deposits 11.9 14.8Short term deposits 33.1 44.2Long term deposits 49.0 37.7Due to other banks 0.1 0.2Due to CBI 1.6 1.1Other liabilities 4.3 2.0Total 100.0 100.0

Table 7 - Capital Adequacy RatiosCapital Adequacy Ratio Percentage

CAR Approaches and Stress Scenarios March 20, 2017 March 19, 2016Tier1 only Tier 1 + Tier 2 Tier1 only Tier 1 + Tier 2

CAR according to Basel-I - 13.54 - 18.01CAR according to IRB-Foundation 11.3 12.6 11.9 12.8CAR according to Basel-III Standardized Approach 10.5 11.7 11.6 12.5Stress Test scenario 2 (less severe) 7.7 9.0 9.0 9.9Stress Test scenario 3 (more severe) 5.2 6.4 7.3 8.1Stress Test scenario 4 (most severe) 3.6 4.8 5.9 6.7

1 (Tier 1% +Tier 2%) / (RWA + Operational & FX Risk)

Table 8 - Capital Adequacy AnalysisAmount %

March 20, 2017 March 19, 2016

CAR according to IRB-Foundation 12.6 12.8Liquid Assets1/ Total Assets 11.7 18.2Loans/ Total Assets 71.9 67.5Short term and Long term and strategic investments / Total Assets 0. 9 2.6Average risk weight of loans according to IRB-Foundation (without NDF) 109.9 -Average risk weight of loans according to IRB-Foundation (with NDF) 82.6 107Average risk weight of on balance sheet assets 68.5 91.9Equity Ratio: (capital+ Retained earnings)/ Total Assets 10.4 12.8Average risk weight of on and off balance sheet assets with market risk and operational risk 2 60.3 82.0

1. Cash & Cash Equivalent + Unencumbered due from other Banks+ Bonds + Short - Term Liquid Investment + Regulatory Deposits

2. (12.5* required capital of operational risk + 12.5* required capital of FX risk + Total of On-balance and Off-balance sheet risk weighted assets) / (Total of On-balance and off-balance sheet assets)

1.3 - Risk Bearing CapacityThe purpose of the determination of the risk-bearing capacity is to ensure that the bank takes only the amount of risks that its capitalization can sufficiently cover at any time. The process for the definition and implementation of the risk-bearing capacity is conducted in three steps: • Calculation of the risk-bearing capacity;• Allocation and planning of the capital; and • Monitoring of and reporting on the risk-bearing capacity of

the Bank. These processes are designed to ensure the long-term viability of the Bank and are thus of great importance in the risk management system of the Bank. The continuous monitoring

of risks serves the purpose of preventing developments, which could potentially endanger the viability of the Bank. Additionally the monitoring of risks provides information, on which the Board and the Risk Committee can act in a timely manner.In line with the capital requirements of Basel-III and the European Banking Authority’s (EBA) guideline on the Supervisory Review and Evaluation Process (SREP), the Bank voluntarily uses an integrated internal capital and liquidity adequacy process (ICAAP and ILAAP), which is commensurate with the bank’s business model, size, complexity, and riskiness.The ICAAP is aimed at maintaining the viability of the bank

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Table 9 - Share of Economic Capital for Credit Risk Groups

Group Exposure(million IRR)

Economic Capital (million IRR)

Economic Capital / Exposure

Economic Capital / Total equity

AA- to AAA 0 0 0BB+ to A+ 10,924,298 991,829 9.1% 13.0%BB- to BB 5,053,954 788,328 15.6% 10.3%B- to B+ 5,615,666 573,416 10.2% 7.5%CCC- to CCC+ 6,101,167 975,306 16.0% 12.7%D to CC 1,345,453 177,825 13.2% 2.3%Unrated (Individuals) 3,126,454 247,476 7.9% 3.2%Unrated (Corporates) 3,697,309 545,171 14.7% 7.1%Financial Institutions 1,110,957 74,740 6.7% 1.0%Converted Off-Balance Sheet 7,408,760 853,372 11.5% 11.2%NDF’s and CBI’s Loans 17,930,769 404,040 2.3% 5.3%Interbank Loans to Other Banks 3,975,000 89,570 2.3% 1.2%Total 66,289,787 5,721,073 74.8%

1.3.1.1 - Probabilities of Default (PD)The probabilities of default estimate the likelihood that a client will not serve the pledged payment obligations within the next year. Credit default probabilities are estimated with regard to clients rather than credit products. Hence the default probability assigned to a client with several products is the same for all products under consideration. The default of a client on his obligations for any one product is treated as a default on all obligations.All products that the Bank issues, which contain credit risk, are considered: • Credit products that are outstanding

• Credit products, which were disbursed or authorized in the year under consideration

• Credit products that are in default or written off • Credit products that were restructured Credit default events are observed for each financial year. The identification of default events is based either on write-offs or on arrears of more than 90 days. For clients with several exposures in arrears, the highest number of days in arrears is used as figure for all exposures. The credit is considered as in default if: • The arrears are more than 90 days, starting from the 90th day

after the agreed payment date • A credit is partially or fully written off, regardless of the

on an ongoing basis, covering short-term and medium-term assessments from different perspectives. The Bank implements a proportionate ICAAP that incorporates two complementary perspectives: the normative internal perspective and the economic internal perspective.Under the normative perspective, risks are determined by first calculating the risk-weighted assets (RWAs) by using the regulatory approaches, and then adding further binding regulatory capital requirements and capital buffers. The details of normative regulatory capital adequacy calculations are provided in section 1.6 - Capital Adequacy Ratios.The assessment of the risk-bearing capacity under the economic internal perspective includes risks that are not covered by regulatory methods under the normative perspective. Under the economic perspective, the Resources Available to Cover Risks (RAtCR) are determined. Thereafter the amount of economic capital required to cover at least all material risk categories is determined. The methodology for the determination of the risks incurred by the institution is described in the annex of this document.The internal models for the calculation of the risk bearing capacity under the economic internal perspective are explained below for credit risk, market risk, liquidity risk and operational risk

1.3.1 - Credit RiskThe potential losses of the credit portfolio are measured with a credit portfolio model. The calculation aims to estimate the probability distribution of the portfolio’s default losses caused by the default of clients. The credit portfolio model requires four inputs the estimation of the credit risk, which are obtained

for each client in the portfolio. • Estimates of Exposure At Default (EAD) • Estimates of Probabilities of Default (PD) • Estimates of Loss Given Default (LGD) • Estimates of Default Correlations Using this information, the portfolio loss distribution can be approximated. To this end, a Monte Carlo simulation is used. The simulation procedure evaluates a very large number of portfolio losses based on simulated defaults of clients. The likelihood of different portfolio loss levels is estimated based on the results of the simulation. The simulation is based on the portfolio data as of the beginning of a financial year. It covers the period of one year after the beginning of the simulation. Hence the results of the simulation provide information on the likelihood of defaults during the 12-month-period following the date of the simulation. Details about the four relevant input factors are provided below. For the initial estimation of the Bank’s credit risk exposure at the portfolio level, the input factors EAD, PD and LGD are multiplied. The estimation of the input factors for the initial credit risk exposure calculation is described in the sections below. The multiplication of these factors results in the Expected Loss (EL) estimates of the Bank for each years based on the business plan of the Bank. Table 9 describes the estimation of economic capital at 99.5% confidence interval using beta distribution which is equivalent to a capital multiplier six times standard deviation. It should be noted that the capital multiplier for a confidence level of 99.9% for a Normal distribution is 3.1. The capital multiplier 6 effectively covers the risk resulting from the rise of correlations in stressed conditions and loss of diversification effects.

RISK MANAGEMENT REPORT 11

number of days that the credit has been in arrears. In order to estimate the probability of default of credit exposures, the Bank conducts a credit rating analysis for each individual borrower. The credit rating takes a number of background factors into account such as balance sheet information, competitiveness and managerial factors. The information necessary for the estimation of the default probabilities will be based on the actual observed default rates for clients grouped in different risk rating categories. The credit risk categories are shown in “Table 9 - Share of Economic Capital for Credit Risk Groups”1.3.1.2 - Loss Given Default (LGD)The exposure outstanding at the time of default and all subsequent payments are considered in order to estimate LGD.1.3.1.3 - Default CorrelationsDefault correlations have significant effect when stressed conditions arise and the diversification effects become less reliable. The rise of default correlations in stressed conditions causes a loss distribution with a tail significantly fatter than normal distribution. In order to account for rise of default correlations and hence the resulting fat tail we consider the loss distribution to be a beta distribution where 99.5% confidence interval requires us to use a capital multiplier 6 times standard deviations. As a reminder, if we were to use a normal distribution with a confidence interval of 99.5% the capital multiplier would be 2.3 instead of capital multiplier 6 that we use.

1.3.2 - Equity Market Price RiskThe Bank uses Basel value-at-risk model for the monitoring of the equity price risk. For this purpose capital adequacy requirement of the equity portfolio is measured using a Value at Risk model with a confidence interval of 99.9%. The 1-day-VaR for the equity portfolio is calculated from a one year historical data and then the 1-day-VaR is scaled by the square-root-of-t-rule to obtain the 10 days-VaR. This10-days-VaR is then compared with the 10-days-VaR from the latest 60 day period and the greater of the two is selected. The greater of two Value at Risks is then multiplied by 4 to calculate the required

capital. This is effectively 12 times the standard deviation of the portfolio for a 10-day period.

1.3.3 - Liquidity RiskLiquidity risk is a material risk. Liquidity risk can be: insolvency risk or funding risk. Liquidity risk in the form of the risk type insolvency risk is based on the accessibility of liquidity at specific points of time, which is difficult to mitigate by capital. Therefore, liquidity risk is mostly managed in the specialized liquidity management process, which are largely carried out by the treasury of the Bank. Hence insolvency risk is not part of the risk- bearing capacity. The potential financial impact of liquidity risk on the Bank’s own funds is included in the Bank’s risk-bearing capacity in the quantification of the risk type funding risk. Funding risk describes an increase in funding costs that is not caused by market rate increases but by increases of risk premiums and general risk aversion in the market. Thus rising rates of interest rates or deposits are already covered by interest rate risks.

1.3.4 - Operational Risk Operational risks have been identified in the risk inventory as a material risk category and are therefore carefully and conservatively assessed. The management of the operational risks is based on a risk self-assessment (RSA). The RSA considers the frequency of event occurrence and severity in case of event occurrence. The categories of the two dimensions are detailed in the risk inventory policy. The severity estimate is also based on the sub - categories laid down in the risk inventory policy. For the estimation of the severity, the arithmetic mean of the upper and the lower bounds of the categories is used as an estimate for the severity of the losses in case of event occurrence. For events in the highest two severity categories, the RSA will provide a concrete estimate of the severity. Table 10 provides an overview over the severity categories for the RSA and the assumed average losses for branch operations.

Table 10 - Operational Risk Self-Assessment Matrix-Severity

BucketSeverity Interval (Million IRR)

Lower bound Upper bound

Very low 1 0 0.1Low 2 >0.1 10Medium 3 >10 1,000High 4 > 1,000 10,000Very high 5 > 10,000 To be Assigned

Table 11 below provides an overview over the frequency categories for the Branches RSA and the respective scaling factors.

Table 11-Branches Operational Risk Self-Assessment Matrix-Frequency

BucketSeverity Interval (Million IRR)

Lower bound Upper bound

Extremely low 1 0 0.1Very low 2 >0.1 1Low 3 >1 6Medium 4 > 6 12High 5 >12 24Very high 6 > 24 To be Assigned

MIDDLE EAST BANK12

Each bucket of Tables 10 and 11 is used by applying a presumed distribution. The identified operational risks lie within one of the buckets both in Tables 10 and 11. The severity of operational risks is multiplied by the corresponding frequency of them on which the presumed distributions are set. Therefore, the expected loss equals the sum of the product of frequency and severity of the risks. The Mont Carlo simulation results 99.9% percentile of expected loss, that is taken to consideration

as economic capital. The procedure of estimating economic capital is conducted for the branches and for other sections and departments are in process. Additionally, the operational risk estimate is challenged by the update standardized measurement approach (USMA). The capital required according to the USMA serves as floor for the calculation of the operational risks.

1.4 - Risk Management StructureRisk Management in MEB consists of Risk Committee (RC) and Risk Department. The duties of the RC are modeled based on the Basel document entitled “Guidelines - Corporate governance principles for banks”, issued in October 2014. The RC consists of four Board members, one assistant to managing director and the head of Risk Department (or Senior Risk Manager - SRM). SRM is responsible for reporting risk related matters to RC, discussing relevant information with members of the RC/Board members, as well as executing various resolutions of RC. Risk Department operates under the guidance of RC and carries the policies set forth by the RC. The Risk Department is headed by the SRM and employs five additional risk analysts. The risk analysts and SRM share the duties of credit risk modeling, credit risk rating and liquidity risk measurements. Because of the regulatory fixing of lending and deposits interest rates and an almost flat effective yield curve, the interest rate risk comprised a non-significant portion of overall risks of MEB for this reporting period. However it is expected that with the further development of debt market in Iran, we would face interest rate risk as a material risk for future reporting periods. A sensitivity analysis did not reveal a major impact on MEB’s profitability ratios from a significant regulatory change in

interest rates. However, regulatory risks remain where MEB may face loss of funds in case MEB abides by the CBI rules on fixed interest rates while other banks deviate significantly from CBI rules. The equity stock portfolio of the Bank is relatively small, however, it is regularly monitored and the relevant risk measurements such as Value at Risk (VaR) and concentration are reported. Foreign exchange rate risk in MEB arises from the off-balance sheet commitments related to imports of goods. MEB engages only with clients who are not listed as a sanctioned entity and whose activities are allowed according to the imposed international sanctions. The foreign exchange commitments required direct dealing with CBI where the exchange rates were both guaranteed and allowed by CBI. MEB did not engage in direct market related foreign exchange activities or hedging. With expected increase in international activities following the implementation of JCPOA, the foreign exchange risk is expected to increase for future reporting periods albeit such risk is always passed on to the importers or exporters. The Board assures independence of the risk function from other business activities of the Bank.

1.5 - The Bank’s Risks

1.5.1 - Credit RiskMEB’s credit extension policies implements CBI’s rules and regulations. MEB’s primary credit clients are incorporated entities with whom MEB develops and maintains strong long-term banking relationships. However, natural persons who manage their business activities personally and are not under a legal umbrella are welcomed and treated as proprietorships. Obviously in such cases, Chamber of Commerce registration and a proper tax code are necessities prior to extension of any facilities. Concentration of MEB’s credit is in short-term requirements of its clients; namely inventory and receivable financing. Even international activities are limited to the importation of raw materials, spare parts and finished consumer goods. MEB occasionally arranges and participates in syndicated guarantee facilities when funding is provided through the capital market or State-financed, National Development Fund.Risk Department assigns credit risk rates to non-financial incorporated clients based on their audited financial statements, past payment history, competitive position in the market, management quality and other qualitative information. Risk Department’s assessment, among others, is based on a client’s ability to generate the required cash flows for short-term financing of receivables and or inventories. All incorporated non-financial clients with three years of audited financial statements are independently evaluated by Risk Department and are given an internal credit rating. Credit Department performs its own evaluation before submitting client information for risk

rating. It is MEB’s risk policy to maintain an average credit risk rate of B+ or better. Collaterals as well as “supplementary collaterals” are used to augment the credit quality of clients with credit rating in the lower ranges.

Principles for Extension of Credit1. Knowing the client and his/her credibility. Credit

measurement is performed such that it is an indicator of ability and capacity of the client in paying back the loans. Making sure that the loan usage is monitored, and that the resources for repayment are identified and recognized by the Bank.

2. The approved facilities are valid for at most one year. The branches are required to periodically check the documents and financial statements in order to make sure that documents are compliant with the facilities’ covenants.

3. The interest rate charged, and the required collaterals depend on the client’s credit worthiness and client’s history with the Bank.

4. The Bank makes sure that the collaterals are unencumbered and have high degree of liquidity.

5. Clients’ receivable checks from their own customers and identifying the validity of these checks confirm the client’s business viability and these checks can be endorsed for collection by the Bank. These receivable checks constitute one method of loan repayment.

6. The level of activity of the deposit and current accounts of

RISK MANAGEMENT REPORT 13

the borrower are periodically checked in order to verify that the level of activity is conforming with the loan covenants

7. The credit quality and operations of the client are periodically checked to make sure that the borrower is conforming with loan covenants

8. The borrowers are credit risk rated by the Risk Department. The capacity of the borrower is also evaluated and then the credit committees set loan conditions and collaterals accordingly.

9. For SMEs and Corporate borrowers, at least three years of audited financial statements are required to obtain a reasonably good credit risk rate.

10. Collateral quality and amount is dependent on the credit risk rate evaluation of the Risk Department. Borrowers with bad credit risk rate are required to provide substantially higher level of liquid collaterals.

11. MEB has set its policy to maintain a minimum weighted average credit rating of B+ for its loan portfolio.

12. In general, approval and extension of large credit facilities are concentrated in MEB’s Head Quarters.

13. It is the policy of the Bank that after the Credit Department evaluates a borrower to be creditworthy, it must inform the Risk Department and provide all required information to Risk Department for proper credit risk rating. The credit risk rate should be taken in consideration for setting covenants and collaterals of the loan.

14. The Risk Department periodically reports to the Risk Committee and to the Board. The reports discuss the portfolio concentrations in credit risk, industry, borrower type, collaterals, etc.

Different levels of institutional authority to approve loans and commitmentsIn general, MEB’s credit issuance decisions making are centralized at the Bank’s Headquarter. Considering the amount of credit requested, approvals will be carried out by the following authorities:1- Branches - for credits less than IRR4 billion and commitments less than IRR8 billion. Since MEB’s strategy is to offer banking services to mostly corporate customers, Branch credit committees should use their authority in order to attract, consolidate and expand depositor customers.2- Central Credit Committee - for loans less than IRR20 billion and commitments less than IRR100 billion.3- Supreme Credit Committee - for loans less than IRR150 billion and commitments less than IRR300 billion (combined

loans and commitments must not exceed IRR400 billion.4- The Board of directors - for loans more than IRR150 billion and commitments more than IRR300 billion.

Credit rating procedureMore than 90% of MEB’s Potential borrowers are legal persons and 10% of credit facilities are extended to natural person is based on their business activities.In addition to complying with the CBI rules, all customers seeking loans and commitments must be assessed by Risk Department in terms of credit risk and this assessment must be done independently of Credit Department. Credit risk scoring of the customers is carried out based on the following major elements: 1- Three years of financial statements 2-Risk Management Department’s assessment of the customers’ cash flow from operating activities to pay back the principal and interest portions of the loans. 3- Qualitative elements including competitiveness and managerial ability 4- Past payment behavior.The summary of loans and commitment credit granting procedure to legal and natural persons running business is as follows:1. Submitting request, information, and the required

documents through CARM system which is available at the Bank’s website (http://carm.middleeastbank.ir), it including company registration and management information, operational licenses, history, and financial information.

2. After filling the required information by the customer, the relationship manager check the data and contact the customer for any additional information or corrections.

3. Having the case completed by the relationship manager, the customers information is processed for a primary risk score.

4. The credit status of the customer is then analyzed more precisely by credit analysts to obtain the final risk score.

5. The risk score obtained will play a key role for credit granting and specifying collaterals

6. Loan to natural persons is usually considered only after considering the specified business activity of such person and their need for working capital and commitments. This kind of customers form less than 10% of our customers. Their tax declaration is the base of Risk Management Department Analysis

7. The equity ratio of the customer must meet the CBI’s standard

We provide several tables describing quality measures of credit portfolio, including internal rating, late payment behavior, and concentrations.

MIDDLE EAST BANK14

Table 12-2 shows the credit quality of loans not including loans related to National Development Fund based on internal rating and the associated risk weights used for capital adequacy ratio calculations based on Basel-II IRB-Foundation Approach. In

this approach the Loss Given Default is set to the Basel-III standardized value of 45%. The overall IRB-Foundation risk weight of loan portfolio excluding NDF for March 20, 2017 is calculated to be 109.9%.

Table 12-1 – Loans’ Ratings (Including National Development Fund)Loans Internal Ratings as of March 20, 2017

Including National Development FundInternal Rating Risk Weight (Percentage) Each Item as Percentage of Total Loans AAA 4 0.0AA 14 0.0A 34 2.1A- 42 2.9BBB+ 50 1.1BBB 60 2.7BBB- 70 3.7BB+ 80 2.3BB 92 5.3BB- 102 4.5B+ 112 3.1B 122 4.0B- 129 5.3CCC+ 137 2.9CCC 144 7.9CCC- 150 3.5CC,C 250 2.1Corporates and SMEs not rated 100 3.7Natural person borrowers not rated 100 5.6National Development Fund 20 30.3Other Foreign currency Loans 100 2.6Loans granted by subsidiary not rated 100 0.4Overdue 150 1.6Suspended 150 2.1Doubtful - 0.5Total 100.0Average Risk Weight 82.6

Table 12-2 – Loans’ Rating (Excluding National Development Fund)Loans Internal Ratings as of March 20, 2017

Excluding National Development FundInternal Rating Risk Weight (Percentage) Each Item as Percentage of Total Loans AAA 4 0.0AA 14 0.0A 34 3.1A- 42 4.1BBB+ 50 1.6BBB 60 3.8BBB- 70 5.3BB+ 80 3.3BB 92 7.6BB- 102 6.5B+ 112 4.4B 122 5.7B- 129 7.6CCC+ 137 4.1CCC 144 11.3CCC- 150 5.0CC,C 250 3.0Corporates and SMEs not rated 100 5.4Natural person borrowers not rated 100 8.0Other Foreign currency Loans 100 3.7Loans granted by subsidiary not rated 100 0.6Overdue 150 2.3Suspended 150 3.0Doubtful - 0.8Total 100.0Average Risk Weight 109.9

RISK MANAGEMENT REPORT 15

The following graph shows the contribution of each credit rate in the overall risk weight of loans excluding loans related to the

National Development Fund.

Risk Department monitors and measures the payment behavior of its clients. These measurements help the risk department to improve its internal rating model. In Tables 13-1, 13-2, the past

payment behavior of current customers with outstanding loans are reported.

Graph 3 - Distribution of Credit Risk Weights

Table 13-1 - Credit Risk– Borrowers Payment Behavior Distribution – Excluding National Development FundEach Item as a Percentage of Total Loans

Customer Categorization Based on Days late 1 March 20, 2017Customers with only payments after the year ended2 5.6Excellent 3 40.0Good4 4.8Average5 26.2Below average6 9.0Unsatisfactory (however current)7 8.3All current customers 93.9 Late between 60 days and 6 months 2.3 Late between 6 months and 18 months 3.0 Late more than 18 months 0.8Non-current customers 6.1All customers 100.0

1 The past payment behavior of clients with outstanding and current loans is evaluated and categorized according to a measure similar to standard deviation of days clients have been late. 2 First time customers who were current and had no previous payments recorded (all their payments were due in a future date after the year ended)3 Less than 1 day late4 Between 1 and less than 2 days late5 Between 2 and less than 25 days late6 Between 25 and less than 60 days late7 Greater than 60 days late

Table 13-2 - Credit Risk– Borrowers Payment Behavior Distribution - Excluding National Development FundNumber of customers

Customer Categorization Based on Days late 1 Percentage of Total NumberCustomers with only payments after the year ended2 12.7 72Excellent 3 44.3 251Good4 4.6 26Average5 23.0 130Below average6 6.0 34Unsatisfactory (however current)7 3.2 18All current customers 93.8 531 Late between 60 days and 6 months 1.6 9 Late between 6 months and 18 months 3.4 20 Late more than 18 months 1.2 6Non-current customers 6.2 35All customers 100.0 566

MIDDLE EAST BANK16

Table14 - Credit Risk / Concentration per Economic SectorEach Item as a Percentage of Total Loans

Economic Sector March 20, 2017 March 19, 2016Industrial 57.9 36.8Housing 10.8 15.4Commercial 25.5 35.7Services 4.2 10.1Agriculture 1.1 1.8Banks 0.0 0.0Other 0.4 0.2Total 100.0 100.0

Table 15 – Off-Balance Sheet Commitments (Local Currency)Local Currency in IRR million

Off-Balance Sheet Commitments March 20, 2017 March 19, 2016Letters of credit 711,692 370,000Guarantees 17,448,006 14,775,364Managed accounts 651,829 70,154Others 2,752,282 957,530Total 21,563,809 16,173,048

1.5.2 - Liquidity Risk and Assets and Liability Management

The Finance Department generate a daily report regarding changes in funds, uses of funds, costs of funds, asset profitability and return on equity. Additionally a weekly meeting of the managing director, assistants to managing director and other

senior level managers including senior risk manager is held where these reports are discussed and decisions regarding future directions of the Bank are taken. Risk Management Department periodically provides reports on Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Liquidity Gaps. Additionally, Risk Management Department provides reports on concentration of funds and loans.

Table 16- Off- Balance Sheet Commitments (Foreign Currencies)Foreign Currencies in IRR million

Off-Balance Sheet Commitments March 20, 2017 March 19, 2016Letters of credit 2,263,349 2,137,746Guarantees 4,095,135 1,974,815Managed accounts 0 0Others 0 0Total 6,358,484 4,112,561

Table 17 – Liquidity Coverage Ratio – Part 1: HQLA as of March 20, 2017

High Quality Liquid Assets Amount(IRR million)

Percentage of Total HQLA

Level 1 Assets Cash and Cash Equivalent 367,531 5.2Regulatory Deposit with CBI 4,363,685 62.2Participation bonds considered level1assets 983,126 14.0

Total level 1 Assets 5,714,342 81.4Level 2A Assets

85% of participation bonds considered level 2A assets 948,617 13.5Total level 2A Assets 948,617 13.5Level 2B Assets

50% of Short term investments in stock exchange 203,723 2.950% of fixed income investment 153,626 2.2Amount of Level 2B Assets above 15% of HQLA to be deducted = 1,053,046 0

Total level 2B Assets 357,349 Amount of Level 2B Assets above 40% of HQLA to be deducted = 2,808,123 0

Total Level 2 Assets 1,305,966 18.6Total HQLA 7,020,308 100.0

RISK MANAGEMENT REPORT 17

Table 18 – Liquidity Coverage Ratio – Part 2: Net Outflows & ResultLiquidity Coverage Ratio as of March 20, 2017

Outflows Amount(IRR million)

Exit ratePercentage Outflow

Retail Deposit Stable Deposits 0Deposit of bank employees 27,306 5% 1,365Deposits of natural person-guaranteed by deposit insurance fund 1,402,813 5% 70,141Less Stable Deposits Deposits of natural person-not guaranteed by deposit insurance fund 2,288,752 10% 228,875Wholesale Funding Stable Deposits Deposits of legal entities-guaranteed by deposit insurance fund 626,839 5% 31,342Less Stable Deposits Legal entities deposits- not guaranteed by deposit insurance fund- equal or less than IRR40 billion 5,931,565 10% 593,157

Other Legal entities deposits- not guaranteed by deposit insurance fund- more than IRR40 billion 9,410,342 40% 3,764,137 Banks deposit 1,025,000 40% 410,000 Due to other banks 1,078,154 100% 1,078,154Other Funding Other deposit not considering in above items 909,938 100% 909,938 Stable- encumbered deposits (including retail and wholesale funding and other) 9,587,742 5% 479,387 Long-term deposit of National Development Fund (IRR) 16,210,000 0% 0 Deposits with maturity more than 30 days 15,361,506 5% 768,075Total 63,859,955 8,334,570Other dues that must be paid within 30 days Payable interest 418,525 100% 418,525 Off balance sheet commitments 24,518,182 10% 2,451,818 Estimated unused loan limits 4,468,776 0% 0 Dividend payable 5,747 0% 0 Tax provision 172,379 0% 0 Other dues and provisions 2,251,750 10% 225,175 Employee termination provisions 52,551 0% 0Total of Outflows 11,430,088

InflowsAmount

(Million IRR) Inflow rate% Inflow

Loans to Banks with maturity less than 30 days 71,101 100% 71,101 Loans to natural persons and legal entities with maturity less than 30 days 8,792,110 25% 2,198,028 Other inflows during the period less than 30 days 665,828 10% 66,583 Inflow Cap: 75% of total outflows = 8,572,566 0 0 Total of Inflows 2,335,711 HQLA 7,020,308Net Cash Outflows 9,094,377LCR = HQLA/Net Cash Outflows 77.2%

MIDDLE EAST BANK18

Table 19 – Net Stable Funding Ratio (NSFR)

Available Stable Funds (ASF) Amount(IRR million)

ASF (IRR million)

Liabilities and capital receiving a 100% ASF factorTier 1 and Tier 2 Capital (based on Basel-III) 7,784,612 7,784,612Long-term deposit of National Development Fund (IRR) 16,210,000 16,210,000

Liabilities receiving a 90% ASF factorStable funds from LCR 3,289,108 2,960,197

Liabilities receiving a 80% ASF factor Less stable funds from LCR 26,405,545 21,124,436

Liabilities receiving a 50% ASF factor Wholesale deposits 12,944,949 6,472,474

Liabilities receiving 0% ASF factor Banks deposit 1,025,000 0Due to other banks 1,078,154 0Other liabilities and capital not considering in above items 5,806,881 0

Total ASF 74,544,249 54,551,720

Due to other banks Amount(IRR million)

ASF (IRR million)

Assets assigned a 0% RSF factorCash and Cash Equivalent 367,531 0Participation bonds considered 0% RSF factor 802,522 0Assets assigned a 5% RSF factorParticipation bonds considered 5% RSF factor 2,182,534 109,127Assets assigned a 50% RSF factorEquity portfolio and fixed income funds 714,698 357,349Unencumbered Loans to non-financial entities with remaining maturity less than one year 31,245,715 15,622,858Assets assigned a 85% RSF factor Unencumbered Loans to natural persons with remaining maturity less than one year 3,063,959 2,604,365Assets assigned a 100% RSF factorLoans to financial entities 940,046 940,046Other loans 1,725,537 1,725,537Mid-term deposit of National Development Fund (IRR) 16,650,059 16,650,059Regulatory Deposit with CBI 4,363,685 4,363,685Other assets not considering in above items 12,487,963 12,487,963Total of On-Balance sheet RSF 74,544,249 54,860,988Off-Balance sheet assigned a 5% RSF factorOff-Balance sheet commitments 24,518,182 1,225,909Total of On-Balance and Off-Balance sheet RSF 99,062,431 56,086,897NSFR=ASF/RSF 97.3%

Table 20 - Concentration of Funds Each Row as a Percentage of Total Deposits

Number of Top Depositors March 20, 2017 March 19, 2016National Development Fund Deposit 27.54 -20 49.38 27.00100 66.86 50.00200 75.45 63.00400 84.41 76.001000 93.83 91.0021455 99.99 100.0029700 100

Table 21 - Concentration of Loans Each Row as a Percentage of Total Loans

Number of Top Borrowers March 20, 2017 March 19, 2016Loans financed by National Development Fund of Iran 30.46 -20 46.56 31.00100 77.51 76.00200 92.11 94.00432 99.89 99.00496 99.98 100.00562 100.00

RISK MANAGEMENT REPORT 19

Table 22 - Other Liquidity RatiosOther Liquidity Ratios March 20, 2017 March 19, 2016Local currency Loans / Local Currency Deposits 74.00 81.4Local Currency off Balance Sheet Commitments/ Local Currency Deposits 46.22 48.8Foreign currency Loans / Foreign Currency Deposits 93.96 88.6Foreign Currency off Balance Sheet Commitments/ Foreign Currency Deposits 232.20 323.2

1.5.3 - Market RiskRisks related to short-term equity investments, and changes in foreign exchange rate and changes in interest rates are discussed in this section.

Short-term equity InvestmentsThe equities portfolio of the Bank is relatively small and is regularly monitored and the relevant risk measurements are

reported. MEB’s short-term investments in equity stock market constitute 0.5% of total assets. The equity portfolio consists of 40 corporate shares (IRR407،446 million) of which 28 are listed companies on Tehran Stock Exchange (TSE) (IRR303,508 million), 6 are shares in investment funds (IRR73,186 million) and 6 are shares of privately held companies (IRR30،752 million) .

According to Basel-II, market risk can be calculated using the “Value at Risk” (VaR) methodologies. The VaR calculation must be done based on 1% probability (one tail) using daily standard deviation and 10 days horizon time. Each bank must meet, on a daily basis, capital requirement illustrated as the higher of previous day’sVaR or an average of the daily value at risk in 60 working days. According to Basel-II notes, the capital

requirement equals to VaR Amount *(3 + X) with X between 0 and 1. Our estimate of risk-weight of the short-term equity investments using a Basel-III Value at Risk model is 202% (the standardized Basel-III risk weight for equity investment in acceptable equity exchanges is 300%). The high risk weight of 202% imposes a policy of minimal and prudent equity investments in TSE listed companies.

The annualized standard deviation of stock portfolio return is estimated to be 8.7% and annualized return is estimated to be 14.9%. Assuming risk-free rate for term deposits to be 18%, the risk premium for stock portfolio is estimated to be -3.1%. From the -3.1% risk premium and the standard deviation of

8.7% a Sharpe Ratio of -36% is calculated. The Sharpe Ratio -36% is too low (1.0 is considered adequate), and considering the higher capital requirements for equity investments, MEB plans to further reduce its short-term equity investment. Table 25 shows the concentration of MEB’s investments in TSE.

Table 23 - Short-Term Equity Investments Portfolio CompositionEach Item as a Percentage of total short term investments

Investment Type March 20, 2017 March 19, 2016Tehran Stock Exchange Short-term Investments 90.8 93.7Other Short-Term Investments (Farabourse) 9.2 6.3Total Short-Term Investments 100.0 100.0

Table 25 – Concentration of TSE Short-Term Equity Portfolio

Tehran Stock Exchange (TSE) Equity Short-Term InvestmentsEach Row as a Percentage of Total TSE Investments

March 20, 2017 March 19, 2016Top 5 Stocks 46 52Top 10 Stocks 70 70Top 20 Stocks 89 90

Table 24 – Calculation of Short-Term Equity Investments Risk Weight using IRB-Foundation Basel-IIIShort-Term Equity Investments Risk Weight March 20, 2017 March 19, 2016

10 days portfolio standard deviation of returns 1.7% 2.61%Basel-III VaR multiplier 4 4Risk Weight 202% 304%

Interest Rate RiskInterest Rate Risk on Banking Book (IRRBB)MEB did not have any loans with floating rates, or significant optionality (e.g. early payment) affecting the profitability of its loans portfolio. IRRBB comprised a non-significant portion of overall risks of MEB because of lending and deposits interest rates and an almost regulatory fixed flat yield curve. We have not observed any significant changes on profitability ratios due to regulatory changes on fixed rates of deposits and loans.

However, regulatory interest rate risks remain where MEB may face loss of funds in case where MEB abides by the CBI rules on fixed interest rates and other banks may deviate significantly from CBI rules.

Interest Rate Risk on Trading BookDuring the year ended March 20, 2017, there was no secondary market for trading bonds at discount or premium. All the bonds were traded at the nominal value plus coupons due. Towards the end of financial year (March 20, 2017), the government issued

MIDDLE EAST BANK20

The above Table illustrates foreign exchange guarantees and commitments and impact of a major change in the foreign exchange rates.

1.5.4 - Operational risksTo identify and assess operational risks, MEB Risk Management Department uses Risk and Control Self-Assessment (RCSA) methodology. Applying RCSA we have identified 481 operational risks in the following departments: Branches, Legal, Compliance, IT, MNC, and Projects Financing. The seven operational risk event types according to Basel Committee are: 1- Internal Fraud, 2- External Fraud 3- Employment Practices and Workplace Safety, 4- Clients, Products, and Business Practice, 5- Damage to Physical Assets, 6- Business Disruption and Systems Failures, 7- Execution, Delivery, and Process Management. Risk Management Department uses this categorizing method in its RCSA collection.The following number of risks have been identified: 240 risks in the Branches, 137 risks in Compliance Department, 44 risks in IT Department, 48 risks in Legal Department, and 13 risks in MNC (Multi-National Corporates) Department. We estimated the total Expected Loss for Branches’ operational risks to be 65,676 million Rials for which the estimated economic capital is 74,751 million Rials. The economic capital is obtained for a confidence level of 99.9%. Currently, we are in process of estimating the losses resulting from Compliance and other departments’ operational risks,Previously MEB used “Basel-III Standardized Approach” for calculating operational risk capital charge (one of the three approaches proposed by Basel Committee). To calculate the operational risk capital charge MEB considered its business lines consisting only as “Corporate Banking”. According to Basel Committee, the risk factor (beta) for the business

line of Corporate Banking equals 18%. Therefore, based on Standardized Approach, 18% of MEB’s average operating income for the past three years was allocated to operational risk capital charge.Recently, MEB applied Updated Standardized Approach recommended by BCBS’s Consultative Document, updated standard measurement approach published on June 2016 by calculating business indicator (BI) based on its interest, service, and financial income and expenses to obtain operational risk capital charge. This approach is more sophisticated and leads to more precise result than compare to the older version. MEB Risk Management Department is in process of estimating required economic capital for operational risks based on Basel-II “Advanced Measurement Approach”. This approach requires estimation of loss distribution for each department. Currently, loss distributions are estimated using RCSA methodology which is based on experts’ qualitative judgments for severity and frequency of losses. Monte Carlo simulation will be used to estimate economic capital based on the estimated loss distributions. So far, this procedure has been applied on operational risks of branches. The Bank uses Basel Committee’s updated standard measurement approach (USMA) published on June 2016 to calculate operational risk capital charge. According to Basel it is estimated that the amount of operational risks and so the required capital charge are highly correlated with the interest income and interest expenses, interest earning assets, services incomes, and net profit/loss on trading book. The income generating activities and expenses consists of components such as interest income except leases, services income, and financial incomes and expenses. The USMA model uses three year averages of each of the above components. Interest income includes interest income from loans and advances, Interest

Table 26- Foreign Exchange Open Positions Value at Risk (VaR )March 20, 2017 March 20, 2017

Foreign Currency Open Position Equivalent Million IRR

VaR Equivalent Million IRR

Open Position Equivalent Million IRR

VaR Equivalent Million IRR

US Dollar 108,156 347 (6,078) 21Swiss Frank 3 0 84 3Indian Rupiah 740 15 613 14Emirate Dirhams 18,791 62 1,345 5Turkish Lira 1,678 85 2,532 120Iraqi Dinar 1,904 115 1,898 130Chinese Yuan 25 0 3 0Korean won (27) 1 (9,815) 347Euro 283,818 10,302 27,050 1080Omani Rial 3,760 17 6,418 30Total 418,848 10,943 24,050 1750Diversification effect (805) (509) 10,138 1,241Required Capital Provision Based Ball 3 40,522 4,964

new bonds tradable in secondary markets with discount

Foreign Exchange RiskForeign exchange rate risk in MEB arises from off-balance sheet commitments related to imports of goods. MEB engages only with clients who are not listed on internationally recognized sanctions lists and whose activities are allowed according to the imposed international sanctions. The foreign exchange commitments required direct dealing with CBI where the exchange rates were both guaranteed and allowed by CBI.

MEB did not engage in direct market related foreign exchange activities or related hedging activities. MEB does not engage in profiting from changes to foreign currency exchange rates, however, occasionally, MEB would end up with open long or short positions in its normal activities for servicing clients engaging in import/export or other foreign exchange activities. With expected increase in international activities following the implementation of JCPOA, the foreign exchange risk is expected to increase for future reporting periods.

RISK MANAGEMENT REPORT 21

income form assets held to maturity, Interest income form trading assets and other interest incomes such as interest from statuary deposit and fixed income securities. Interest expenses include interest expenses from deposits. Interest earning assets consist of total gross outstanding loans, advances, and interest bearing securities (including government bonds) Services income includes fee and commission income from: Securities (issuance, origination, reception, transmission, execution of orders on behalf of customers) and other operating income such as rental income from investment properties and Gains from non -current assets and disposal groups classified as

held for sale not qualifying as discontinued operations. The capital charge for the operational risk is estimated to be 240,125 million IRR according to a complex formula as described in the Basel Committee’s updated standard measurement approach (USMA) published on June 2016. The inputs for operational risk capital charge according to updated standardized measurement approach (USMA) including net profit/loss on the trading book includes unrealized net profit (loss) from investments, foreign currency exchanges, trading assets and trading liabilities are detailed in Table 27.

Table 27-MEB Income and Expense items (Inputs for Updated Standard Approach for Calculating Operational Risk Capital Charge)Year 2015 Year 2016 Year 2017 Average

Interest income, except for financial and operating lease

Interest income form loans and advances 4,236,583 6,010,603 7,803,164Interest income form assets held to maturity 627,003 342,480 806,140Interest income form trading assets 44,405 26,113 127,236Other interest income 124,752 133,007 357,799Total 5,032,743 6,512,203 9,094,339 14,503,637

Interest expens-es, except for financial and operating lease

Interest expenses from deposits 3,702,679 4,902,668 6,570,559

Total 3,702,679 4,902,668 6,570,559 5,058,635

Interest earning assets (balance sheet item, not P&L)

Total gross outstanding loans, advances, and interest bearing securities (including gov-ernment bonds) measured at the end of each financial year

22,996,377 33,717,636 63,710,141

Total 22,996,377 33,717,636 63,710,141 40,141,385

Fee and com-mission

Fee and commission income from: Securities (issuance, origination, reception, trans-mission, execution of orders on behalf of customers)

288,997 482,480 695,979

Total 288,997 482,480 695,979 489,152

Other operating income

Rental income from investment properties - 400 -Gains from non -current assets and disposal groups classified as held for sale not qualify-ing as discontinued operations (IFRS 5.37)

48 816 928

Total 48 1,216 928 731

Net profit (loss) on the trading book

Total of unrealized net profit (loss)of investments + net profit (loss) from Foreign currency exchange

190,770 264,044 322,300

Unrealized net profit/(loss) on trading assets and trading liabilities (derivatives, debt secu-rities, equity securities, loans and advances, short positions, other assets and liabilities) measured at fair value through profit and loss

(192,850) 66,749 11,048

Net profit/loss from exchange differences 56,024 45,744 100,544Total 53,944 376,537 433,892 288,124

1.6 - Capital Adequacy Ratios (CAR)

1.6.1 - CAR according to IRB-Foundation ApproachAccording to IRB-Foundation the average risk weight of loan portfolio excluding National Development Fund was estimated to be 109.9%. We risk weighted our loans to other banks at a higher rate of 100%, because of estimated low Basel-III capital adequacy ratio for other banks, The total long term and short term investment of the Bank in financial institutions was less than 10% of the Bank’s Basel-III Tier 1 capital. Accordingly there were no deductions concerning these investments; however these investments were risk weighted at 250%. We calculated the risk weight of 202% for our investments in Tehran Stock Exchange using the Value at Risk (VaR) methodologies,

multiplying VaR by multiplier (12.5) and after all adding the result into the denominator of CAR ratio. The market risk related to interest rate risk was estimated to be nil. The market risk due to foreign exchange rate fluctuations was extremely small and constituted about 0.01% of the total risk weighted assets. Off balance sheet items, (customers of Letters of Credit and Bank Guarantees) generally have a much lower risk profile than our on balance sheet loan customers. For this reason we estimated the average risk weight of our off balance sheet items to be 70% equivalent to "BBB-" credit rating.

MIDDLE EAST BANK22

Table 28 - Assets Risk Weights - IRB-Foundation

On Balance Sheet Assets as of March 20, 2017Amount

(IRR million)Each Item as Percentage of Total Assets

Risk Weight (Percentage)

Risk Weight-ed Assets

(IRR million)Cash and equivalents 730,251 0.98 0 -Due from CBI & other banks (Encumbered) 6,310,934 8.45 20 1,262,187Loans and Advances 53,562,768 -Loans funded using MEB resources excluding doubtful loans (Net of Provisions)1 36,762,902 49.25 109.9 40,387,237

Loans financed by NDF 16,650,059 22.30 20 3,330,012Doubtful Loans (Net of Provisions) 149,807 0.20 0 -Investments in equity and securities with fixed income 3,836,439 -Investment in equity2 407,751 0.55 - -Investment in Islamic treasury bill or governmental securities3 with CBI guarantee 688,386 0.92 0 -

Investment in government securities with government guarantee 2,290,851 3.07 20 458,170Investment in non-government securities with government guarantee 0 0.00 20 -Investment in non-government securities without government or banks guarantee 325,251 0.44 100 325,251

Investments in financial institutions 124,200 -Investments in financial institutions less than 10% of Tier 1 Capital4 124,200 0.17 250 310,500

Investments in financial institutions in excess of 10% of Tier 1 Capital5 0 0.00 Deducted from Capital -

Due From Subsidiaries 0 0.00 100 -Other Account Receivables 878,490 1.18 100 878,490Tangible Fixed Assets 2,090,581 2.80 100 2,090,581Intangible Assets except Goodwill 120,934 0.16 100 120,934

Goodwill 813,037 1.09 Deducted from Capital -

Regulatory Deposits with CBI 4,363,685 5.85 0 -Other Assets 1,943,887 2.60 100 1,943,887Total of Assets 74,651,006 100.00 51,107,249

1. The overall IRB-Foundation risk weight of loan portfolio is calculated based on internal rating to corporate and individual customer considering corporates and SMEs not rated, Natural persons borrowers not rated, overdue, suspended and doubtful loans.2.We calculated the risk weight of 202% for our investments in Tehran Stock Exchange using the Value at Risk (VaR) methodologies, multiplying VaR by multiplier (12.5) and after all adding the result into the denominator of CAR ratio.3. Bond4. Investment in Middle East Life Insurance5. Amount of this item will be deducted from Tier 1Capital.6. Amount of Goodwill will be deducted from Tier 1 Capital.

Table 29- Off-Balance Sheet Risk Weights - IRB-Foundation

Off Balance Sheet Commitments as of March 20, 2017Amount

(Million IRR)% of Total

CommitmentsConversion Factor % Risk Weight % Risk

Weighted

Commitments for guarantees issued (Credit Conversion Factor = 20%) 16,520,832 63.73 20 70 2,312,916

Commitments for guarantees issued (Credit Conversion Factor = 50%) 3,369,751 13.00 50 70 1,179,413

Commitments for letter of credit issued (- Credit Conversion Factor= 20%) 2,033,204 7.84 20 70 284,649

Commitments for letter of credit issued (- Credit Conversion Factor =50%) 597,133 2.30 50 70 208,997

Guaranty for non-governmental participation bonds (Credit Conversion Factor = 50%) 2,555,740 9.86 50 70 894,509

Other commitments (Credit Conversion Factor =100%) 196,542 0.76 100 70 137,579Managed Accounts 651,829 2.51 0 70 -Total of Commitments1 25,925,031Total of Risk Weighted Commitments 5,018,063

Total of Risk weighted Assets and Commitments 56,125,312

1. Current deposit required for guarantee issue and down payment required for letter of credit is deducted.

RISK MANAGEMENT REPORT 23

Table 30 - Assets Risk Weights - Basel-III Standardized Approach

On Balance Sheet Assets as of March 20, 2017Amount

(IRR million)

Each Item as Percentage of Total Assets

Risk Weight (Percentage)

Risk Weighted

Assets (IRR million)

Cash and equivalents 730,251 0.98 0 -Due from CBI & other banks (Encumbered) 6,310,934 8.45 0 -Loans and Advances 53,562,768 - Loans funded using MEB resources excluding doubtful loans (Net of Provisions) 22,663,685 30.36 100 22,663,685

Loans guaranteed by real states 12,945,477 17.34 50 6,472,739 Loans financed by NDF1 16,650,059 22.30 100 16,650,059Suspended Loan 1,153,740 10.55 150 1,730,610Doubtful Loans (Net of Provisions) 149,807 0.20 0 -Investments in shares and securities with fixed income 3,836,439 -Investment in equity 407,751 0.55 300 1,223,253Investment in Islamic treasury bill or governmental securities with CBI guarantee 688,386 0.92 0 -

Investment in government securities with government guarantee 2,290,851 3.07 20 458,170Investment in non-government securities with government guarantee 0 0.00 20 -Investment in non-government securities without government or banks guarantee 325,251 0.44 100 325,251

Investments in financial institutions 124,200 -Investments in financial institutions less than 10% of Tier 1 Capital 124,200 0.17 250 310,500

Investments in financial institutions in excess of 10% of Tier 1 Capital 0 0.00 Deducted from Capital -

Due From Subsidiaries 0 0.00 100 -Other Account Receivables 878,490 1.18 100 878,490Tangible Fixed Assets 2,090,581 2.80 100 2,090,581Intangible Assets except Goodwill 120,934 0.16 100 120,934

Goodwill 813,037 1.09 Deducted from Capital -

Regulatory Deposits with CBI 4,363,685 5.85 0 -Other Assets 1,943,887 2.60 100 1,943,887Total of Assets 74,651,006 100.00 54,868,159

1. Although we could assign risk weight of zero percent to the loans given from NDF, we assumed the risk weight to be 100 percent because Basel-III does not differen-tiate loans from internal funds and other one and suggest risk weight of 100 percent to loans

1.6.2 - Basel-III Standardized ApproachFor calculation of CAR according to Basel-III Standardized Approach, the average risk weight of the performing loan portfolio will be set to 100% compared to 106.8% for IRB-Foundation. We risk weighted our exposure to other banks at 100% considering our estimated low Basel-III capital adequacy ratios for other banks. The long term investment of the Bank in

financial institutions was less than 10% of the Bank’s Basel-III Tier 1 capital, therefore, there were no deductions from capital concerning these investments, however these investments were risk weighted at 250%. We risk weighted our investments in Tehran Stock Exchange at 300%. The market risk related to interest rate risk was estimated to be nil. The market risk due to foreign exchange rate fluctuations was extremely small and constituted 0.01% of the total risk weighted assets.

Table 31 - Off Balance Sheet Risk Weights - Standardized Approach

Off Balance Sheet Commitments as of March 20, 2017Amount

(Million IRR)% of Total

CommitmentsConversion Factor % Risk Weight % Risk

Weighted

Commitments for guarantees issued (Credit Conversion Factor = 20%) 16,520,832 63.73 20 100 3,304,166

Commitments for guarantees issued (Credit Conversion Factor = 50%) 3,369,751 13.00 50 100 1,684,876

Commitments for letter of credit issued (- Credit Conversion Factor= 20%) 2,033,204 7.84 20 100 406,641

Commitments for letter of credit issued (- Credit Conversion Factor =50%) 597,133 2.30 50 100 298,567

Guaranty for non-governmental participation bonds (Credit Conversion Factor = 50%) 2,555,740 9.86 50 100 1,277,870

Other commitments (Credit Conversion Factor =100%) 196,542 0.76 100 100 196,542Managed Accounts 651,829 2.51 0 100 0Total of Commitments1 25,925,031Total of Risk Weighted Commitments 7,168,661

Total of Risk weighted Assets and Commitments 62,036,820

1. Current deposit required for guarantee issue and down payment required for letter of credit is deducted.

MIDDLE EAST BANK24

Table 32 - Market Risk and Operational RiskRisk Type Business Type Factor Multiplier Risk WeightedMarket risk due to exchange rate volatility 40,544 12.5 506,800 Market risk due to short-term Equity Investment Portfolio1 84,368 12.5 1,054,600The risk weight for Operational Risk using updated Basel standard approach 240,125 12.5 3,001,564 FX Market Risk and Operational Risk 4,562,964

1. In IRB-Foundation approach we calculated the risk weight of 202% for our investments in Tehran Stock Exchange using the Value at Risk (VaR) methodologies, multiplying VaR by multiplier (12.5) and after all adding the result into the denominator of CAR ratio as market risk but in Standardized Approach risk weight for equity investment in acceptable equity exchanges is 300% and using in risk weighted asset.

1.6.3 - FX Market Risk and Operational Risk Calculation

1.6.4 - Tier 1 and Tier 2 Capital Adequacy Ratios Using Different ApproachesTable 33 – Summary of Total Risk Weighted Assets with Different Approaches

Risk Items (IRR million) IRB-Foundation Standardized Approach

On Balance Sheet Assets 51,107,249 54,868,159Off Balance Sheet Commitments 5,018,063 7,168,661Operational Risk 3,001,564 3,001,564FX Market Risk 1,561,400 506,800Total Risk Weighted Assets 60,688,276 65,545,184

Table 34 - CAR Calculation

Eligible Capital (IRR million) Basel-III IRB-Foundation Standardized Approach

Total Equity 7,828,832 7,828,832Loss due to remaining amount of doubtful loans1 (149,807) (149,807)Less goodwill (813,037) (813,037)Less investments in financial institutions above 10% of bank Tier 1 capital - -

Total Eligible Tier 1 Capital 6,865,988 6,865,988Tier 2 Capital(=General Loss Provision) 787,300 787,299Eligible Tier 1 and Tier 2 Capital 7,653,288 7,653,2871.25% of total risk 758,603 819,315Less exceeding 1.25% of total risk from Tier 2 Capital 28,697 -Total Eligible Tier 1 Capital + Tier 2 Capital 7,624,591 7,653,287

Total Risk Weighted Assets + Operational Risk + FX 60,688,276 65,545,184

CAR Tier 1 11.3 10.5CAR Tier 2 1.3 1.2CAR (Tier1+Tier2) 12.6 11.7

1. It is the difference between doubtful loans and the amount of provision for these loans

1.7 - Stress TestingIn order to perform our stress test we assume that MEB will maintain the same balance sheet size and composition as of March 20, 2017 for the year ending March 19, 2018. We assume the credit quality of our clients would depend on national real GDP, which in turn would depend on average oil price for the

year. Table 35 below summarizes the severity of economic situations dependent on average oil price for the year and the effect on credit worthiness of our clients and the resulting loss/profit and the Capital Adequacy Requirement (CAR).

Table 35 - Stress Test Assumptions

Economic stress scenariosExpected Loss/Profit

(IRR million) Profits Distribution (Percentage) CAR IRB-F

Scenario 1 (Base case) 40 +3 to +4 No changeScenario 2 (Less severe) 35 +1 to +3 One notch declineScenario 3(more severe) 30 -1 to +1 Two notches declineScenario 4 (most severe) 20 -4 to -1 Three notches decline

RISK MANAGEMENT REPORT 25

Scenario 1 - Base case scenario: Similar to current situation. For the year ending March 19, 2018, we assume the same assets composition and the same credit worthiness for loans as of March 20, 2017 as reported in Table 12-2 – Loans Internal Rating.Scenario 2 - Less severe scenario: For the year ending March 19, 2018, we assume the same assets composition; however, the credit ratings of all performing loans with rating of CCC and above were downgraded by one notch. 90% of performing loans rated CCC- to C went overdue status. All currently overdue, suspended, and doubtful loans and 10% of performing loans rated CCC- to C go to default status. Also, we assume 20% of all not-rated loans go to overdue status.Scenario 3 - More severe scenario: For the year ending March 19, 2018, we assume the same assets composition; however, the

credit ratings of all performing loans with rating of CCC and above were downgraded by two notches. 80% of performing loans rated CCC- to C go to overdue status. All overdue, suspended, and doubtful loans and 20% of performing loans rated CCC- to C and 10% of not-rated loans go to default status. Also, we assume 25% of all not-rated loans go to overdue status.Scenario 4 - Most severe scenario: For the year ending March 19, 2018, we assume the same assets composition; however, the credit ratings of all performing loans with rating of CCC and above were downgraded by three notches. 70% of performing loans rated CCC- to C go to overdue status. All overdue, suspended, and doubtful loans and 30% of performing loans rated CCC- to C and 20% of not-rated loans go to default status. Also, we assume 50% of all not-rated loans go to overdue status.

Table 36 - Stress Test Results

Economic Stress Scenarios Loans Risk Weight %

Expected Loss/Profit (Million

IRR)

Overdue loans as a % of Total

Loans

Suspended loans as a % of

Total Loans

Doubtful loans as a % of Total

LoansCAR IRB-F

Scenario 1 (Base case) 109.9 1,864,87 2.3 3.0 0.8 12.6%Scenario 2 (Less severe) 105.4 (437,226) 9.8 0.0 6.9 9.0%Scenario 3(More severe) 118.8 (1,713,402) 9.7 0.0 10.4 6.4%Scenario 4 (Most severe) 126.9 (2,594,520) 12.2 0.0 12.5 4.8%