This risk management report is prepared by the experts and the Head of the Risk Management Department. The picture shows an internal discussion within the Risk Management Department.

Risk management Department

Contents 1   Risk Management  ...................................................................................................................................  1  

1.1   Risk Management Strategy  ..............................................................................................................  1  

1.1.1   Asset side strategy  ......................................................................................................................  1  

1.1.2   Liability side strategy  .................................................................................................................  3  

1.1.3   Capital Conservation Strategy  ....................................................................................................  3  

1.2   Risk Management Structure  ............................................................................................................  4  

1.3   The Bank’s Risks  ............................................................................................................................  5  

1.3.1   Credit Risk  .................................................................................................................................  5  

1.3.2   Liquidity Risk and Assets and Liability Management  ...............................................................  8  

1.3.3   Market Risk  ..............................................................................................................................  11  

1.3.4   Interest Rate Risk  .....................................................................................................................  12  

1.3.5   Foreign Exchange Risk  ............................................................................................................  13  

1.4   Capital Adequacy Ratios (CAR)  ...................................................................................................  13  

1.4.1   CAR according to IRB-Foundation Approach  .........................................................................  13  

1.4.2   Basel-III Standardized Approach  .............................................................................................  15  

1.4.3   FX Market Risk and Operational Risk Calculation  ..................................................................  16  

1.4.4   Tier 1 and 2 Capital Adequacy Ratio for Middle East Bank using different approaches  .........  16  

1.5   Stress Testing  ................................................................................................................................  17  

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1 Risk Management Middle East Bank (MEB) continued building and enhancing its information technology infrastructures for risk management. In light of MEB’s commitment to implementing Basel-III accord, we further developed our internal rules and procedures for Internal Capital Adequacy Assessment Process (ICAAP). We expect to have a complete set of internal rules and regulations approved and signed by the Board of Directors by the fall of 2016.

Central Bank of Iran (CBI) has taken major steps bringing the Iranian 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 disclosures and market discipline for the current reporting period (Year ended March 19, 2016); however matters related to fair valuations are to be introduced for the next reporting period; i.e. Year ended March 20, 2017. Although CBI has not yet issued guidance on capital adequacy and liquidity ratios conforming to Basel-II or Basel-III accords, we report these ratios according to the latest guidance from Basel Committee on Banking Supervision “Basel-III” documents in addition to current CBI rules. It should be noted that recently CBI issued preliminary recommendations for the implementation of Basel-II standardized model for the calculation of capital adequacy ratio; and, has sought comments from banks for a final decision yet to be made. The Table 1 illustrates some highlights of MEB’s risk profile.

Table 1- Risk Highlights

Select Risk Ratios as of March 19, 2016 Percentage Doubtful loans /Total Loans 0.6 Capital Adequacy Ratio Basel-III Foundation-IRB 12.8 Capital Adequacy Ratio Basel-III Standardized Approach 12.5 Liquidity Coverage Ratio (LCR) 88.9 Net Stable Funding Ratio (NSFR) 137.2 Liquid Assets1/Total Assets 10.7 (Liquid Assets + Regulatory Deposits)/Total Assets 18.2 Loans / Total Assets 67.5 Loans / Deposits 81.3

1.1 Risk Management Strategy

1.1.1 Asset side strategy

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 period financing or project finance is only done when the viability of the project passes credit committee’s stringent requirement and funding is provided by the National Development Fund (NDF) against our guarantee. Larger projects may also be handled, but against guarantee of a syndicate of banks. MEB’s strategy is to minimize market risks related to equity share holdings and so engages less than 2% of its assets in a diversified marketable equity securities portfolio.

We carried on our strategy of lending short-term loans to select corporate clients with whom we had developed and maintained strong long-term banking relationships. Our loan portfolio constitutes about 68% of total assets and consists mostly of working capital financing (receivables and inventory purchases) of our corporate clients and individuals who run their businesses as proprietorship. MEB’s credit rating and credit extension is based on our assessment of the borrowers’ ability to generate the required cash flows, in addition to borrower’s

1  Cash & Equivalent + Short term equity investments and Guaranteed Bonds + Short term deposits with other banks  

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ability to pay back the interest and principal at maturity of their loans; mostly in 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 12% 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 4.4% at MEB. The national average for loans 60 days past due was not available at the time of writing this report, however, one can expect a much higher figure than the nationwide doubtful loans of 12%.

Table 2 – Loans’ Status

Loan Class Each Item as a % of Total Loans March 19, 2016 March 19, 2015

Standard 95.6 98.3 Overdue (Late between 60 days and 6 months)

3.7 1.1 Suspended (Late between 6 months and 18 months)

0.1 0.6 Doubtful (Late more than 18 months) 0.6 0.0

Total 100.0 100.0

Also, on the asset side, MEB’s short-term investments in equity stock market constitute less than 2% 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 risk weight for our short-term investments is about 304%. 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 19, 2016, MEB’s Long-term and strategic investments were about 1% 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 adopts a conservative liquidity strategy and maintains about 18% of its total assets in very liquid assets plus regulatory reserves. Customers’ loan portfolio constitutes about 68% of total assets; while about 11% of total assets are tangibles, intangibles and other assets supporting the core activities of the bank.

Table 3 - Assets composition

Asset Type Each Item as a % of Total Assets

March 19, 2016 March 19, 2015

Liquid Assets1 10.7 8.8 Regulatory Deposits with CBI 7.5 9.4 Long term and strategic investments 1.4 0.8 Loans 67.5 69.7 Tangibles, Intangibles, Receivables, and others 10.4 11.3 Encumbered Assets with CBI 2.5 -

Total 100.0 100.0

The risk profile of our on balance sheet assets is such that considering an average risk weight of 107% for our loans, the average risk weight of our on balance sheet assets is about 94%. This results in MEB having a

1  Cash equivalent + unencumbered dues from other banks + bonds + short-term equity investments  

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1 Risk ManagementMiddle East Bank (MEB) continued building and enhancing its information technology infrastructures for risk management. In light of MEB’s commitment to implementing Basel-III accord, we further developed ourinternal rules and procedures for Internal Capital Adequacy Assessment Process (ICAAP). We expect to have a complete set of internal rules and regulations approved and signed by the Board of Directors by the fall of 2016.

Central Bank of Iran (CBI) has taken major steps bringing the Iranian banking regulations in line with thelatest Basel accords and International Financial Reporting Standards (IFRS). The CBI has emphasizedimplementation of IFRS particularly for matters related to disclosures and market discipline for the currentreporting period (Year ended March 19, 2016); however matters related to fair valuations are to be introduced for the next reporting period; i.e. Year ended March 20, 2017. Although CBI has not yet issued guidance on capital adequacy and liquidity ratios conforming to Basel-II or Basel-III accords, we report these ratiosaccording to the latest guidance from Basel Committee on Banking Supervision “Basel-III” documents inaddition to current CBI rules. It should be noted that recently CBI issued preliminary recommendations for theimplementation of Basel-II standardized model for the calculation of capital adequacy ratio; and, has soughtcomments from banks for a final decision yet to be made. The Table 1 illustrates some highlights of MEB’srisk profile.

Table 1- Risk Highlights

Select Risk Ratios as of March 19, 2016 PercentageDoubtful loans /Total Loans 0.6Capital Adequacy Ratio Basel-III Foundation-IRB 12.8Capital Adequacy Ratio Basel-III Standardized Approach 12.5Liquidity Coverage Ratio (LCR) 88.9Net Stable Funding Ratio (NSFR) 137.2Liquid Assets1/Total Assets 10.7(Liquid Assets + Regulatory Deposits)/Total Assets 18.2Loans / Total Assets 67.5Loans / Deposits 81.3

1.1 Risk Management Strategy

1.1.1 Asset side strategy

MEB defines itself as a corporate bank, providing financing services to ongoing businesses for their workingcapital needs. Our loans mostly cover short term needs of our customers, usually payable in three months and reusable up to one year. Longer period financing or project finance is only done when the viability of theproject passes credit committee’s stringent requirement and funding is provided by the National DevelopmentFund (NDF) against our guarantee. Larger projects may also be handled, but against guarantee of a syndicate of banks. MEB’s strategy is to minimize market risks related to equity share holdings and so engages less than2% of its assets in a diversified marketable equity securities portfolio.

We carried on our strategy of lending short-term loans to select corporate clients with whom we had developed and maintained strong long-term banking relationships. Our loan portfolio constitutes about 68% of total assetsand consists mostly of working capital financing (receivables and inventory purchases) of our corporate clientsand individuals who run their businesses as proprietorship. MEB’s credit rating and credit extension is basedon our assessment of the borrowers’ ability to generate the required cash flows, in addition to borrower’s

1 Cash & Equivalent + Short term equity investments and Guaranteed Bonds + Short term deposits with other banks

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relatively high Capital Adequacy Ratio of 12.8%. Despite a relatively high CAR, we have stayed one of the most profitable banks in Iran. MEB’s profitability can be attributed to an efficient work force, lower cost of capital and high regulatory interest rate for loans. MEB has a lower cost of capital because relatively large section of our deposits consists of our customers’ current account deposits.

1.1.2 Liability side strategy

We 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 high quality of our services and the good 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. During much of this reporting period there was an unusual situation where the interbank overnight rates were higher than regulatory deposits interest rate. 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.

Table 4 - Composition of liabilities

Items Each Item as a % of Total Liabilities

March 19, 2016 March 19, 2015

Current account deposits 14.8 10.9 Short term deposits 44.2 36.3 Long term deposits 37.7 50.0 Due to other banks 0.2 0.1 Due to CBI 1.1 0.9 Other liabilities 2.0 1.9 Total 100.0 100.0

1.1.3 Capital Conservation Strategy

Considering the current economic situation, MEB continues to maintain high liquidity and 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 depicted in the following table 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. Also, for March 19, 2016, MEB reports its CAR based on 2014 Basel-III Revised Standardized Approach for comparison with previous year March 19, 2015.

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Table 5 - Capital Adequacy Ratios

Items

Capital Adequacy Ratios CAR (1)

March 19, 2016 March 19, 2015 Tier1 only CAR Tier1 only CAR

CAR according to Basel-I (required by CBI and displayed here for comparison) 14.9 15.8 19.7 20.9 CAR according to IRB-Foundation (Loans risk weight = 106.8%) (2) 11.9 12.8 13.0 13.8 CAR according to Basel III Standardized Approach (Loans risk weight = 100%) 11.6 12.5 12.7 13.5 CAR according to “Revised Standardized Approach” (Loans risk weight = 118%) 10.2 11.0 12.1 12.9 Stress Test scenario 2 (less severe) (3) 9.0 9.9 N/A N/A Stress Test scenario 3 (more severe)  (3) 7.3 8.1 N/A N/A Stress Test scenario 4 (most severe) (3) 5.9 6.7 N/A N/A (1) (Tier 1% +Tier 2%) / (RWA + Operational & FX Risk)(2) This is also the base case scenario for scenario 1 of stress testing. Off-balance sheet items are risk weighted at 70% in contrastto 100% of Standardized Approach, hence the higher CAR compared to Standardized Apprach.(3) Please refer to the section 1.5 “Stress Testing”

1.2 Risk Management Structure

Risk 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 five Board members 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 Risk Committee (RC) and carries the policies set forth by the RC. The Risk Department is headed by the SRM and employs four 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, interest rate risk comprised a non-significant portion of overall risks of MEB. 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 and 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 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. The Senior Risk Manager leads the implementation of a rigorous ICAAP in MEB which is expected to be finalized by the fall of 2016.

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relatively high Capital Adequacy Ratio of 12.8%. Despite a relatively high CAR, we have stayed one of themost profitable banks in Iran. MEB’s profitability can be attributed to an efficient work force, lower cost ofcapital and high regulatory interest rate for loans. MEB has a lower cost of capital because relatively large section of our deposits consists of our customers’ current account deposits.

1.1.2 Liability side strategy

We do not rely on large number of branches for expanding our financial resources. Instead, we rely on ourbusiness borrowers to bring their banking activities and financial resources to the bank. Essentially with thisstrategy we work as an intermediary to help our clients with occasional excess resources to finance our otherclients 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 alsoattract high net worth individuals (HNWI) and business owners/managers and high income earners (HIE)because of the high quality of our services and the good 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.During much of this reporting period there was an unusual situation where the interbank overnight rates werehigher than regulatory deposits interest rate. MEB was generally a provider of funds in the interbank marketwhich provided a window of opportunity to profit from the high interbank rates and low deposits rates. Thereason 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 higherthan 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.

Table 4 - Composition of liabilities

ItemsEach Item as a % of Total Liabilities

March 19, 2016 March 19, 2015

Current account deposits 14.8 10.9Short term deposits 44.2 36.3Long term deposits 37.7 50.0Due to other banks 0.2 0.1Due to CBI 1.1 0.9Other liabilities 2.0 1.9Total 100.0 100.0

1.1.3 Capital Conservation Strategy

Considering the current economic situation, MEB continues to maintain high liquidity and more capital than regulatory requirements. Despite higher than required liquidity and capital ratios, MEB has been able to stayone 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 depicted in the following table 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 FoundationalInternal Rating and Basel-III Standardized Approach. Also, for March 19, 2016, MEB reports its CAR basedon 2014 Basel-III Revised Standardized Approach for comparison with previous year March 19, 2015.

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1.3 The Bank’s Risks

1.3.1 Credit Risk

MEB’s credit extension policies ensure CBI’s rules and regulations are properly implemented. 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.

The 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 are independently evaluated by the Risk Department and are given an internal credit rate. 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 rates in the lower ranges.

1.3.1.1 Credit Risk Distributions

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

Table 6 - Loans Internal Rating

Loans Internal Ratings _ March 19, 2016 Internal Rating Risk Weight (%) % of

Total Loans

AAA 4 0.0AA 14 3.7A 34 7.4A- 42 2.3BBB+ 50 4.2BBB 60 3.9BBB- 70 3.4BB+ 80 3.3BB 92 3.5BB- 102 3.0B+ 112 2.5B 122 6.9B- 129 4.5CCC+ 137 3.3CCC 144 9.6CCC- 150 2.9CC,C 250 6.9Corporates and SMEs not rated 100 13.9Natural person borrowers not rated 100 10.4Overdue 150 3.7Suspended 150 0.1Doubtful - 0.6Average Risk Weight 106.8 100.0

The above table shows the credit quality of loans 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

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Given Default is set to the Basel-III standardized value of 45%. The overall IRB-Foundation risk weight of loan portfolio for the March 19, 2016 is calculated to be 106.8%. The overall IRB-Foundation risk weight of loan portfolio for the March 19, 2015 was calculated to be 105.6%.

The following graph shows the contribution of each credit rate in the overall risk weight of loans.

Figure 1 Risk-Weighted Distribution

1.3.1.2 Credit Risk– Borrowers payment behavior distribution

Risk department monitors and measures the payment behavior of its clients. These measurements help the risk department to improve its internal rating model. In the following table, the past payment behavior of current customers with outstanding loans are reported.

Table 7 - Credit Risk– Borrowers payment behavior distribution

Customer categorization based on days late (1) Each Item as a % of Total Loans

March 19, 2016 March 19, 2015

Customers with only payments after March 19, 2016 (2) 6.9 tba Excellent (3) 43.9 tba Good 10.0 tba Average 25.2 tba Below average 6.1 tba Unsatisfactory (however current) 3.5 tba All current customers 95.6 98.3 Late between 60 days and 6 months 3.7 1.1 Late between 6 months and 18 months 0.1 0.6 Late more than 18 months 0.6 0.0 Non-current customers 4.4 1.7 All customers 100.0 100.0

(1) The past payment behavior of clients with outstanding and current loans is evaluated and categorized according to a measure similar to standarddeviation of days clients have been late.(2) First time customers who are current and have no previous payments recorded because all their payments are due in future after March 19, 2016(3)

Quality of payment behavior Risk Dept. Measure of Past Late Payments (days)Excellent Less than 1 day Good Between 1 and less than 2 days Average Between 2 and less than 25 days Below average Between 25 and less than 60 days Unsatisfactory (however current on outstanding loans) Greater than 60 days

0.0% 2.0% 4.0% 6.0% 8.0%

10.0% 12.0% 14.0% 16.0% 18.0%

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1.3 The Bank’s Risks

1.3.1 Credit Risk

MEB’s credit extension policies ensure CBI’s rules and regulations are properly implemented. MEB’s primarycredit 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 Commerceregistration and a proper tax code are necessities prior to extension of any facilities. Concentration of MEB’scredit is in short-term requirements of its clients; namely inventory and receivable financing. Eveninternational activities are limited to the importation of raw materials, spare parts and finished consumergoods. MEB occasionally arranges and participates in syndicated guarantee facilities when funding is provided through the capital market or State financed, National Development Fund.

The 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 otherqualitative information. Risk Department’s assessment, among others, is based on a client’s ability to generatethe required cash flows for short-term financing of receivables and or inventories. All incorporated non-financial clients are independently evaluated by the Risk Department and are given an internal credit rate. Credit Department performs its own evaluation before submitting client information for risk rating. It isMEB’s risk policy to maintain an average credit risk rate of B+ or better. Collaterals as well as “supplementarycollaterals” are used to augment the credit quality of clients with credit rates in the lower ranges.

1.3.1.1 Credit Risk Distributions

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

Table 6 - Loans Internal Rating

Loans Internal Ratings _ March 19, 2016Internal Rating Risk Weight (%) % of

TotalLoans

AAA 4 0.0AA 14 3.7A 34 7.4A- 42 2.3BBB+ 50 4.2BBB 60 3.9BBB- 70 3.4BB+ 80 3.3BB 92 3.5BB- 102 3.0B+ 112 2.5B 122 6.9B- 129 4.5CCC+ 137 3.3CCC 144 9.6CCC- 150 2.9CC,C 250 6.9Corporates and SMEs not rated 100 13.9Natural person borrowers not rated 100 10.4Overdue 150 3.7Suspended 150 0.1Doubtful - 0.6Average Risk Weight 106.8 100.0

The above table shows the credit quality of loans 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

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1.3.1.3 Credit Risk – Loans Distribution based on leverage and sales (BCBS 2014 Revised Standardized Approach)

For the previous financial year ended March 19, 2015, we reported the risk weight 115% for our loan portfolio based on BCBS 2014 revised standardized approach. The BCBS 2014 approach has been superseded with a new model issued January 2016. For reasons of comparability we continue to report based on the 2014 approach.

Table 8 - Loans risk weight according to Basel III Revised Standardized Approach (Issued December 2014)

Customer type categorized by sales and leverage Risk

weight Each Item as a % of Total Loans March 19, 2016 March 19, 2015

Leverage < 3, Sales >= 1bn euros 60 0.0 0.0 Leverage between 3 and 5, Sales >= 1bn euros 70 0.0 0.0 Leverage < 3, Sales between 50m and 1bn euros 80 1.0 3.6 Leverage < 3, 5m<= Sales < 50m euros 90 7.6 6.6 Leverage > 5, Sales >= 1bn euros 90 - - Leverage between 3 and 5, Sales between 50m and 1bn euros

90 8.2 7.0 Leverage < 3, Sales < 5m euros 100 1.5 2.1 Leverage between 3 and 5, 5m<= Sales < 50m euros 100 7.2 10.3 Natural Persons Borrowers with financial data 100 0.0 0.0 Natural Persons Borrowers with no financial data 100 9.9 9.3 Leverage > 5, Sales between 50m and 1bn 110 17.6 15.4 Leverage between 3 and 5, Sales < 5m euros 110 3.1 2.8 Corporate and SME Borrowers with no financial data 110 12.1 13.9 Leverage > 5, 5m<= Sales < 50m euros 120 18.0 17.3 Leverage > 5, Sales < 5m euros 130 5.7 5.1 Past due 60 days, and 180 days 150 3.6 3.9 Negative Equity (Standard) 300 4.1 2.6 Past due 18 months 300 0.5 0.0

Average Risk Weight 117.9 115.9

Table 9 - Credit Risk / Concentration Per Economic Sector

Economic Sector Each Item as a % of Total Loans

March 19, 2016 March 19 2015

Industrial

35.2 32.2 Housing 15.4 15.1 Agriculture 1.8 0.4 Mining 1.6 3.9 Services 10.1 7.8 Commercial 35.7 40.7 Other 0.2 0.0 Total 100.0 100.0

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Table 10 – Off-Balance Sheet Commitments (Local Currency)

Title Local Currency in Million IRR March 19, 2016 March 19, 2015

Letters of credit 370,000 21,704 Guarantees 14,775,364 10,276,387 Managed accounts 957,530 880,890 Other 70,154 0 Total 16,173,048 11,178,981

Table 11- Off- Balance Sheet Commitments (Foreign Currencies)

TitleForeign Currencies in Million IRR

March 19, 2016 March 19, 2015

Letters of credit 2,137,746 648,329 Guarantees 1,974,815 1,503,346 Managed accounts 0 0 Other 0 0 Total 4,112,561 2,151,675

1.3.2 Liquidity Risk and Assets and Liability Management

A daily report regarding changes in funds, uses of funds, costs of funds, asset profitability and return on equity is provided by the finance department. Additionally a weekly meeting of managing director, assistants to managing director and other senior level managers including senior risk manager is held where the reports are discussed and decisions regarding future directions of the bank are taken. The 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 12 – Liquidity Coverage Ratio – Part 1: HQLA

Title Amount (Million IRR)

% of Total HQLA

Level 1 Assets Cash and Cash Equivalent 281,202

Regulatory Deposit with CBI

3,099,233Due from other banks (short term less than one week) 1,124,508Checks in clearing due from other banks 34,754

Total level 1 Assets 4,539,697 65.8 Level 2 Assets

Level 2A Assets 85% of participation bonds backed by government

2,107,875

Total level 2A Assets 2,107,875 30.5 Level 2B Assets 50% of Short term investments in stock exchange

255,796

15% of HQLA 1,035,505 Amount of Level 2 Assets above 15% of HQLA to be deducted

0

Total level 2B Assets 255,796 3.7

Total Level 2 Assets

2,363,671 34.2 40% of HQLA 2,761,347 Amount of Level 2 Assets above 40% of HQLA to be deducted 0

Total HQLA 6,903,368 100.0

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1.3.1.3 Credit Risk – Loans Distribution based on leverage and sales (BCBS 2014 RevisedStandardized Approach)

For the previous financial year ended March 19, 2015, we reported the risk weight 115% for our loan portfolio based on BCBS 2014 revised standardized approach. The BCBS 2014 approach has been superseded with anew model issued January 2016. For reasons of comparability we continue to report based on the 2014 approach.

Table 8 - Loans risk weight according to Basel III Revised Standardized Approach (Issued December 2014)

Customer type categorized by sales and leverageRisk

weightEach Item as a % of Total LoansMarch 19, 2016 March 19, 2015

Leverage < 3, Sales >= 1bn euros 60 0.0 0.0Leverage between 3 and 5, Sales >= 1bn euros 70 0.0 0.0Leverage < 3, Sales between 50m and 1bn euros 80 1.0 3.6Leverage < 3, 5m<= Sales < 50m euros 90 7.6 6.6Leverage > 5, Sales >= 1bn euros 90 - -Leverage between 3 and 5, Sales between 50m and1bn euros

90 8.2 7.0Leverage < 3, Sales < 5m euros 100 1.5 2.1Leverage between 3 and 5, 5m<= Sales < 50m euros 100 7.2 10.3Natural Persons Borrowers with financial data 100 0.0 0.0Natural Persons Borrowers with no financial data 100 9.9 9.3Leverage > 5, Sales between 50m and 1bn 110 17.6 15.4Leverage between 3 and 5, Sales < 5m euros 110 3.1 2.8Corporate and SME Borrowers with no financial data 110 12.1 13.9Leverage > 5, 5m<= Sales < 50m euros 120 18.0 17.3Leverage > 5, Sales < 5m euros 130 5.7 5.1Past due 60 days, and 180 days 150 3.6 3.9Negative Equity (Standard) 300 4.1 2.6Past due 18 months 300 0.5 0.0

Average Risk Weight 117.9 115.9

Table 9 - Credit Risk / Concentration Per Economic Sector

Economic SectorEach Item as a % of Total Loans

March 19, 2016 March 19 2015

Industrial 35.2 32.2Housing 15.4 15.1Agriculture 1.8 0.4Mining 1.6 3.9Services 10.1 7.8Commercial 35.7 40.7Other 0.2 0.0Total 100.0 100.0

9  

Table 13 – Liquidity Coverage Ratio – Part 2: Net Outflows & Result

Liquidity Coverage Ratio _ March 19, 2016

Outflows Amount (Million IRR)

Exit rate% Outflow

Stable Deposits

Cash Collaterals and blocked deposits 3,041,665 0% 0 Deposits of bank employees 246,826 5% 12,341 Long-term deposits of natural persons with more than one month maturity date

10,067,924 5% 503,396 Less Stable Deposits

Long-term deposits with less than one month maturity date 171 10% 17 Short-term deposits of natural persons 3,227,944 10% 322,794 Other deposits and dues to natural persons 173,076 15% 25,961 Special investment deposits 1,178,847 15% 176,827 Long-term deposits with maturity of more than one month of legal entities 3,035,532 15% 455,330

Wholesale Funding Long-term deposits with maturity of less than one month of legal entities 0 25% 0 Short-term deposits of legal entities with less than 2000 million IRR deposits each

6,882,806 25% 1,720,701 Short-term deposits of legal entities with more than 2000 million IRR deposits each

2,595,428 40% 1,038,171 Other deposits and dues to legal entities 1,628,311 40% 651,324 Deposits from other banks and financial institution 2,333,800 100% 2,333,800 Other dues to banks and financial institutions 469,037 100% 469,037

Total outflow from funds 34,881,367 7,709,701 Other dues that must be paid within 30 days

Dividend payable 4,718 100% 4,718

Tax provision 143,452 0% 0

Employee termination provisions 37,423 0% 0 Other dues and provisions 390,654 14% 54,785 Payable interest 150,230 100% 150,230 Estimated unused loan limits - - 2,332,365

Total Outflow 35,607,844 10,251,799

Inflows

Estimated inflows due to loans (under stressed condition) (2,487,856)

LCR Ratio

Net Cash Outflows 7,763,943 HQLA 6,903,368

LCR = HQLA/Net Cash Outflows 88.9%

10  

Table 14 – Net Stable Funding Ratio (NSFR)

Net Stable Funding Ratio _ March 19, 2016

Available Stable Funds (ASF) Amount)Million IRR(

Factor ASF

Liabilities and capital receiving a 100% ASF factor The total amount of regulatory capital , before the application of capital deductions, as defined in paragraph 49 of the Basel III text, excluding the proportion of Tier 2 instruments with residual maturity of less than one year

5,808,485 100% 5,808,485

Liabilities receiving a 95% ASF factor Stable funds from LCR

13,356,415 95% 12,688,594

Liabilities receiving a 90% ASF factor Term deposits from natural persons with residual maturities of less than one year , short-term deposits, demand deposits, qard-al-hasaneh deposits and similar deposits

3,228,115 90% 2,905,304

Liabilities receiving a 50% ASF factor Other deposits and prepayments from natural persons, short-term special investment deposits, investment deposits from legal entities

13,865,689 50% 6,932,844

Liabilities receiving 0% ASF factor Investment deposits from other banks, due to other banks and financial institutions, other liabilities

5,190,041 0% 0

Total ASF 41,448,745 28,335,227

Required Stable Funds (RSF) Amount(Million IRR)

Factor RSF

Assets assigned a 0% RSF factor Cash & Cash Equivalent, All central bank reserves (including required reserves and excess reserves), All unencumbered loans to banks subject to prudential supervision (including interbank placements) with residual maturities of less than six months.

4,539,697 0% 0

Assets assigned a 5% RSF factorDebt securities representing claims on or guaranteed by sovereigns, central banks that are assigned a non-0% risk-weighted sovereign or central bank debt securities as specified in the LCR

1,531,776 5% 76,589

Assets assigned a 15% RSF factor Corporate debt securities (including commercial paper) and covered bonds with a credit rating equal or equivalent to at least AA-

948,077 15% 142,212

Assets assigned a 50% RSF factor All other non- HQLA not included in the above categories that have a residual maturity of less than one year, including loans to non- bank financial institutions , loans to non -financial corporate clients, loans to retail customers (i.e. natural persons) and small business customers, and loans to sovereigns, central banks and PSEs.

27,988,380 50% 13,994,190

Assets assigned a 100% RSF factor All other assets not included in the above categories

6,440,815 100% 6,440,815

Total RSF 41,448,745 20,653,805

NSFR1= ASF/RSF 137.2%

1 Off-balance sheet commitments are not considered

9

Table 13 – Liquidity Coverage Ratio – Part 2: Net Outflows & Result

Liquidity Coverage Ratio _ March 19, 2016

Outflows Amount(Million IRR)

Exit rate%

Outflow

Stable Deposits

Cash Collaterals and blocked deposits 3,041,665 0% 0Deposits of bank employees 246,826 5% 12,341Long-term deposits of natural persons with more than one month maturity date

10,067,924 5% 503,396Less Stable Deposits

Long-term deposits with less than one month maturity date 171 10% 17Short-term deposits of natural persons 3,227,944 10% 322,794Other deposits and dues to natural persons 173,076 15% 25,961Special investment deposits 1,178,847 15% 176,827Long-term deposits with maturity of more than one month of legal entities 3,035,532 15% 455,330

Wholesale FundingLong-term deposits with maturity of less than one month of legal entities 0 25% 0Short-term deposits of legal entities with less than 2000 million IRRdeposits each

6,882,806 25% 1,720,701Short-term deposits of legal entities with more than 2000 million IRR

deposits each2,595,428 40% 1,038,171

Other deposits and dues to legal entities 1,628,311 40% 651,324Deposits from other banks and financial institution 2,333,800 100% 2,333,800Other dues to banks and financial institutions 469,037 100% 469,037

Total outflow from funds 34,881,367 7,709,701Other dues that must be paid within 30 days

Dividend payable 4,718 100% 4,718

Tax provision 143,452 0% 0

Employee termination provisions 37,423 0% 0Other dues and provisions 390,654 14% 54,785Payable interest 150,230 100% 150,230Estimated unused loan limits - - 2,332,365

Total Outflow 35,607,844 10,251,799

Inflows

Estimated inflows due to loans (under stressed condition) (2,487,856)

LCR Ratio

Net Cash Outflows 7,763,943HQLA 6,903,368

LCR = HQLA/Net Cash Outflows 88.9%

11  

Table 15 - Concentration of Funds

Number of Top Depositors Each Row as a % of Total Deposits

March 19, 2016 March 19, 2015

20 27 42 100 50 63 200 63 74 400 76 85 1000 91 94 13684 99 100 21455 100

Table 16 - Concentration of Loans

Number of Top Borrowers Each Row as a % of Total Loans

March 19, 2016 March 19, 2015

20 31 33 100 76 79 200 94 96 432 99 100 496 100

Table 17 - Other Liquidity Ratios

Other Liquidity Ratios March 19,

2016 March 19,

2015 Local currency Loans / Local Currency Deposits 81.4 89.2 Local Currency off Balance Sheet Commitments/ Local Currency Deposits 48.8 46.4 Foreign currency Loans / Foreign Currency Deposits 88.6 Foreign Currency off Balance Sheet Commitments/ Foreign Currency Deposits 323.2 245.9

1.3.3 Market Risk

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

1.3.3.1 Short-term equity Investments

The equity stock portfolio of the bank is relatively small, however, is regularly monitored and the relevant risk measurements are reported. The stock portfolio consists of 58 corporate shares (662,740 million IRR), 45 corporates are listed companies in Tehran Stock Exchange (599,699 million IRR) and others (63,042 million IRR) are shares of privately held companies.

Table 18 - Short-Term Equity Investments Portfolio Composition

Investment Type Each Item as a % of total short term investments

March 19, 2016 March 19, 2015

Tehran Stock Exchange Short-term investments 93.7 93.7 Other short-term investments 6.3 6.3

Total short-term investments 100.0 100.0

12  

According to Basel II, market risk can be calculated using the Value at Risk (VaR) methodologies. The “Value at Risk” calculation must be done based on 0.5% 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’s value at risk 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 304% (the standardized Basel-III risk weight for equity investment in acceptable equity exchanges is 300%). The high risk weight of 304% imposes a policy of minimal and prudent equity investments in TSE listed companies.

Table 19 – Calculation of Short-Term Equity Investments Risk Weight using IRB-Foundation Basel-III

Short-Term Equity Investments Risk Weight _ March 19, 2016 10 days portfolio standard deviation of returns 2.61% Basel-III VaR multiplier 4 Risk Weight 304%

The annualized standard deviation of stock portfolio return is estimated to be 13% and annualized return is estimated to be 27.8%. Assuming risk-free rate form term deposits to be 22%, the risk premium for stock portfolio is estimated to be 5.8%. From the 5.8% risk premium and the standard deviation of 13% a Sharpe Ratio of 0.4 is calculated. The Sharpe Ratio 0.4 is too low (1.0 is considered ok), and considering the higher capital requirements for equity investments, MEB plans to further reduce its short-term equity investment. The following table shows the concentration of MEB’s investments in Tehran Stock Exchange.

Table 20 –Concentration of TSE Short-Term Equity Portfolio

TSE equity short-term investments Each Row as a % of Total TSE Investments

March 19, 2016 March 19, 2015

Top 5 52 45 Top 10 70 63 Top 20 90 83 Top 45 100 99 Top 58 100

1.3.4 Interest Rate Risk

1.3.4.1 Interest 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 the regulatory fixing 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.

1.3.4.2 Interest Rate Risk on Trading Book

During the year ended March 19, 2016, 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 19, 2016), the government issued new bonds tradable in secondary markets with discount. For next year ending March 19, 2017 we would report interest rate risk on trading book.

11

Table 15 - Concentration of Funds

Number of Top DepositorsEach Row as a % of Total Deposits

March 19, 2016 March 19, 2015

20 27 42100 50 63200 63 74400 76 851000 91 9413684 99 10021455 100

Table 16 - Concentration of Loans

Number of Top BorrowersEach Row as a % of Total Loans

March 19, 2016 March 19, 2015

20 31 33100 76 79200 94 96432 99 100496 100

Table 17 - Other Liquidity Ratios

Other Liquidity RatiosMarch 19,

2016March 19,

2015Local currency Loans / Local Currency Deposits 81.4 89.2Local Currency off Balance Sheet Commitments/ Local Currency Deposits 48.8 46.4Foreign currency Loans / Foreign Currency Deposits 88.6Foreign Currency off Balance Sheet Commitments/ Foreign Currency Deposits 323.2 245.9

1.3.3 Market Risk

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

1.3.3.1 Short-term equity Investments

The equity stock portfolio of the bank is relatively small, however, is regularly monitored and the relevant riskmeasurements are reported. The stock portfolio consists of 58 corporate shares (662,740 million IRR), 45 corporates are listed companies in Tehran Stock Exchange (599,699 million IRR) and others (63,042 million IRR) are shares of privately held companies.

Table 18 - Short-Term Equity Investments Portfolio Composition

Investment TypeEach Item as a % of total short term investments

March 19, 2016 March 19, 2015

Tehran Stock Exchange Short-term investments 93.7 93.7Other short-term investments 6.3 6.3

Total short-term investments 100.0 100.0

13  

1.3.5 Foreign Exchange Risk

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 in 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.

Table 21- Foreign Exchange Open Positions Value at Risk (VaR )

FX Value at Risk (VaR) _ 10 days, 0.5% probability _ March 19, 2016 Foreign Currency Open Position Equivalent Million IRR VaR Equivalent Million IRR

US Dollar -6,078 21Swiss Frank 84 3Indian Rupiah 613 14Emirate Dirhams 1,345 5Turkish Lira 2,532 120Iraqi Dinar 1,898 130Chinese Yuan 3 0Korean won -9,815 347Euro 27,050 1080Omani Rial -

6,41830

Total 24,050 1750Diversification effect -508With diversification effect 1,242FX market risk contribution to RWA 4,968Total Risk Weighted Assets including off balance sheet items, Market risk, and Operational Risk (RWA)

48,132,277

FX market risk contribution to RWA 0.01%

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

1.4 Capital Adequacy Ratios (CAR)

1.4.1 CAR according to IRB-Foundation Approach

According to IRB-Foundation the average risk weight of loan portfolio was estimated to be 106.8%. We risk weighted our loans to other banks at a higher rate of 100%, because of our estimated low Basel-III capital adequacy ratio for other banks, The total long term and short term investment of the bank in financial institutions were less than 10% of the bank’s Basel-III Tier 1 capital, so there were no deductions 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 about 0.01% of the total risk weighted assets.

14  

Regarding off balance sheet items, on average, the customers of Letters of Credit and Bank Guarantees 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.

Table 22 - Asset Risk Weight _ IRB-Foundation

On Balance Sheet Assets _ March 19, 2016 Amount (Million IRR)

% of Total Asset

Risk Weight

(%)

Risk Weighted

AssetCash and equivalents 281,202 0.7 0 0 Regulatory Deposits with CBI 3,099,233 7.5 0 0 Due from other banks (checks in clearing) 34,754 0.1 0 0 Due from other banks (Unencumbered Deposits) 1,124,508 2.7 100 1,124,508 Due from CBI & other banks (Encumbered) 1,061,902 2.6 Participation Bonds 2,479,853 6.0 0 0 Investments in financial institutions less than 10% of Tier 1 Capital 564,777 1.4 250 1,411,943 Investments in financial institutions in excess of 10% of Tier 1 Capital 0 Non-financial short-term equity investments in Tehran Stock

Exchange 511,591 1.2 300 1,534,773

Other long-term investment 4,230 0.0 100 4,230 Account Receivables 812,901 2.0 100 812,901 Loans to employees 249,043 0.6 100 249,043 Loans excluding doubtful loans (Net of Provisions) 27,890,257 67.3 106.8 29,786,794 Doubtful Loans (Net of Provisions) 98,123 0.2 Due from subsidiaries 183,157 0.4 100 183,157 Tangible Fixed Assets 2,003,930 4.8 100 2,003,930 Intangible Assets 857,137 2.1 100 857,137 Goodwill 6,165 0.0 Other Assets 185,982 0.4 100 185,982

Total of Assets 41,448,745 100.0 38,154,398

Table 23- Off-Balance Sheet Risk Weights (IRB-Foundation)

Commitments Amount (Million IRR)

Conversion Factor %

Risk Weight

%

Risk Weighted

Guarantees for Participation Bonds 835,740 50 70 292,509 Warranties in Local Currency 14,775,364 50 70 5,171,377 Warranties in Foreign Currencies 1,974,815 50 70 691,185 Letters of Credits (Local Currency) 370,000 20 70 51,800 Letter of Credits(Foreign Currencies Equivalent to Local Currency)

2,137,746 20 70 299,284 Trust Account Commitments 121,790 100 70 85,253 Managed Accounts 70,154 100 70 49,108 Credit Card Obligations 0 100 70 0 Total of Commitments 20,285,609 6,640,157

Total of Risk weighted Assets and Commitments 44,794,555

13

1.3.5 Foreign Exchange Risk

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 in internationally recognized sanctions lists and whoseactivities are allowed according to the imposed international sanctions. The foreign exchange commitmentsrequired direct dealing with CBI where the exchange rates were both guaranteed and allowed by CBI. MEBdid not engage in direct market related foreign exchange activities or related hedging activities. MEB does notengage 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 orother foreign exchange activities. With expected increase in international activities following theimplementation of JCPOA, the foreign exchange risk is expected to increase for future reporting periods.

Table 21- Foreign Exchange Open Positions Value at Risk (VaR )

FX Value at Risk (VaR) _ 10 days, 0.5% probability _ March 19, 2016Foreign Currency Open Position Equivalent Million IRR VaR Equivalent Million IRR

US Dollar -6,078 21Swiss Frank 84 3Indian Rupiah 613 14Emirate Dirhams 1,345 5Turkish Lira 2,532 120Iraqi Dinar 1,898 130Chinese Yuan 3 0Korean won -9,815 347Euro 27,050 1080Omani Rial -

6,41830

Total 24,050 1750Diversification effect -508With diversification effect 1,242FX market risk contribution to RWA 4,968Total Risk Weighted Assets including off balance sheet items, Marketrisk, and Operational Risk (RWA)

48,132,277

FX market risk contribution to RWA 0.01%

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

1.4 Capital Adequacy Ratios (CAR)

1.4.1 CAR according to IRB-Foundation Approach

According to IRB-Foundation the average risk weight of loan portfolio was estimated to be 106.8%. We riskweighted our loans to other banks at a higher rate of 100%, because of our estimated low Basel-III capital adequacy ratio for other banks, The total long term and short term investment of the bank in financialinstitutions were less than 10% of the bank’s Basel-III Tier 1 capital, so there were no deductions concerning these investments; however these investments were risk weighted at 250%. We risk weighted our investmentsin Tehran Stock Exchange at 300%. The market risk related to interest rate risk was estimated to be nil. Themarket risk due to foreign exchange rate fluctuations was extremely small and constituted about 0.01% of thetotal risk weighted assets.

15  

1.4.2 Basel-III Standardized Approach

For calculation of CAR according to Basel-III Standardized Approach, the average risk weight of the performing loan portfolio will be set to 100% as opposed 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 were less than 10% of the bank’s Basel-III Tier 1 capital, so 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 24 - Asset Risk Weight _ Basel-III Standardized Approach

On Balance Sheet Assets _ March 19, 2016 Amount (Million IRR)

% of Total Asset

Risk Weight

(%)

Risk Weighted

Asset

Cash and equivalents 281,202 0.7 0 0 Regulatory Deposits with CBI 3,099,233 7.5 0 0 Due from other banks (checks in clearing) 34,754 0.1 0 0 Due from other banks (Unencumbered Deposits) 1,124,508 2.7 100 1,124,508 Due from CBI & other banks (Encumbered) 1,061,902 2.6 0 0 Participation Bonds 2,479,853 6.0 0 0 Investments in financial institutions less than 10% of Tier 1 Capital

564,777 1.4 250 1,411,943 Investments in financial institutions in excess of 10% of Tier 1 Capital

0 0.0 0 0 Non-financial short-term equity investments in Tehran Stock

Exchange 511,591 1.2 300 1,534,773

Other long-term investment 4,230 0.0 100 4,230 Account Receivables 812,901 2.0 100 812,901 Loans to employees 249,043 0.6 100 249,043 Loans excluding doubtful loans (Net of Provisions) 27,890,257 67.3 100 27,890,257 Doubtful Loans (Net of Provisions) 98,123 0.2 0 0 Due from subsidiaries 183,157 0.4 100 183,157 Tangible Fixed Assets 2,003,930 4.8 100 2,003,930 Intangible Assets 857,137 2.1 100 857,137 Goodwill 6,165 0.0 0 0 Other Assets 185,982 0.4 100 185,982 Total of Assets 41,448,745 100.0 36,257,861

Table 25 - Off Balance Sheet Risk Weights - Standardized Approach

Off Balance Sheet Commitments Amount

(Million IRR)

Conversion Factor %

Risk Weight

%

Risk Weighted

Guarantees for Participation Bonds 835,740 50 100 417,870 Warranties in Local Currency 14,775,364 50 100 7,387,682 Warranties in Foreign Currencies 1,974,815 50 100 987,408 Letters of Credits (Local Currency) 370,000 20 100 74,000 Letter of Credits(Foreign Currencies Equivalent to Local Currency)

2,137,746 20 100 427,549 Trust Account Commitments 121,790 100 100 121,790 Managed Accounts 70,154 100 100 70,154 Credit Card Obligations 0 100 100 0 Total of Commitments 20,285,609 9,486,453

Total of Risk weighted Assets and Commitments

45,744,314

16  

1.4.3 FX Market Risk and Operational Risk Calculation

Table 26 - Market Risk and Operational Risk

Risk Type Amount (Million IRR)

Conversion Factor

Multiplier Risk

Weighted Market risk due to exchange rate changes Risk Weighted 4,968 12.5 62,100 The risk weight for Operational Risk using basic indicator approach and applying the corporate business factor of 18% to the average of last 3 years gross income and multiplying by 12.5

1,458,054 18% 12.5 3,280,622

FX Market Risk and Operational Risk 3,342,722

Table 27 – Summary of Total Risk Weighted Assets Calculations

Title _ Million IRR IRB-Foundation Standardized

Approach Revised Standard

Approach On Balance Sheet Assets 38,154,398 36,257,861 2,907,961 Off Balance Sheet Commitments

6,640.157 9,486,453 9,486,453 Operational Risk 3,280,622 3,280,622 3,280,622 FX Market Risk 62,100 62,100 62,100 Total Risk Weighted Assets 48,132,277 49,087,036 55,737,136

1.4.4 Tier 1 and 2 Capital Adequacy Ratio for Middle East Bank using different approaches

Table 28 - CAR Calculation

Eligible Capital _ Million IRR Basel-III IRB-

Foundation Standardized

Approach Revised Standard

Approach Paid in Capital 4,000,000 4,000,000 4,000,000 Retained earnings 1,290,851 1,290,851 1,290,851 Loss due to remaining amount of doubtful loans1 (98,123) (98,123) (98,123) Statuary reserves 517,634 517,634 517,634 Common Equity Tier1 5,710,362 5,710,362 5,710,362 Less investments in financial institutions above 10% of bank capital

- - - Less goodwill (6,165) (6,165) (6,165) Eligible Common Equity Tier1 5,704,197 5,704,197 5,704,197 Additional Tier 1 - - -

Total Eligible Tier 1 Capital 5,704,197 5,704,197 5,704,197 General Loss Provision 419,956 419,956 419,956 Less exceeding 1.25% of total risk 0 0 0 Tier 2 Capital 419,956 419,956 419,956

Total Eligible Tier 1 and Tier 2 Capital 6,124,153 6,124,153 6,124,153

Total Risk Weighted Assets + Operational Risk + FX Risk 48,132,277 49,087,036 55,737,136 CAR Tier 1 11.9 11.6 10.2

CAR Tier 2 0.9 0.9 0.8

CAR (Tier1+Tier2) 12.8 12.5 11.0

1  This item is the difference between the amount of provision already taken by the financial department for doubtful loans and the amount the Risk Department decided to take which is 100% of doubtful loans  

15

1.4.2 Basel-III Standardized Approach

For calculation of CAR according to Basel-III Standardized Approach, the average risk weight of theperforming loan portfolio will be set to 100% as opposed 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 otherbanks. The long term investment of the bank in financial institutions were less than 10% of the bank’sBasel-III Tier 1 capital, so 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 at300%. The market risk related to interest rate risk was estimated to be nil. The market risk due to foreignexchange rate fluctuations was extremely small and constituted 0.01% of the total risk weighted assets.

Table 24 - Asset Risk Weight _ Basel-III Standardized Approach

On Balance Sheet Assets _ March 19, 2016 Amount(Million IRR)

% ofTotalAsset

RiskWeight

(%)

RiskWeighted

Asset

Cash and equivalents 281,202 0.7 0 0Regulatory Deposits with CBI 3,099,233 7.5 0 0Due from other banks (checks in clearing) 34,754 0.1 0 0Due from other banks (Unencumbered Deposits) 1,124,508 2.7 100 1,124,508Due from CBI & other banks (Encumbered) 1,061,902 2.6 0 0Participation Bonds 2,479,853 6.0 0 0Investments in financial institutions less than 10% of Tier 1 Capital

564,777 1.4 250 1,411,943Investments in financial institutions in excess of 10% of Tier 1 Capital

0 0.0 0 0Non-financial short-term equity investments in Tehran Stock

Exchange511,591 1.2 300 1,534,773

Other long-term investment 4,230 0.0 100 4,230Account Receivables 812,901 2.0 100 812,901Loans to employees 249,043 0.6 100 249,043Loans excluding doubtful loans (Net of Provisions) 27,890,257 67.3 100 27,890,257Doubtful Loans (Net of Provisions) 98,123 0.2 0 0Due from subsidiaries 183,157 0.4 100 183,157Tangible Fixed Assets 2,003,930 4.8 100 2,003,930Intangible Assets 857,137 2.1 100 857,137Goodwill 6,165 0.0 0 0Other Assets 185,982 0.4 100 185,982Total of Assets 41,448,745 100.0 36,257,861

Table 25 - Off Balance Sheet Risk Weights - Standardized Approach

Off Balance Sheet CommitmentsAmount

(MillionIRR)

ConversionFactor %

RiskWeight

%

RiskWeighted

Guarantees for Participation Bonds 835,740 50 100 417,870Warranties in Local Currency 14,775,364 50 100 7,387,682Warranties in Foreign Currencies 1,974,815 50 100 987,408Letters of Credits (Local Currency) 370,000 20 100 74,000Letter of Credits(Foreign Currencies Equivalentto Local Currency)

2,137,746 20 100 427,549Trust Account Commitments 121,790 100 100 121,790Managed Accounts 70,154 100 100 70,154Credit Card Obligations 0 100 100 0Total of Commitments 20,285,609 9,486,453

Total of Risk weighted Assets andCommitments

45,744,314

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1.5 Stress Testing

In order to perform our stress testing we assume that MEB will maintain the same balance sheet size and composition as of March 19, 2016 for the year ending March 20, 2017. 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. The table 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 29 - Stress Test Assumptions & Results

Economic stress scenarios

Year Average

Oil Price/ Barrel

Real GDP Growth rate

Doubtful loans as a

% of Total Loans

Loans Risk

Weight %

Expected Loss/Profit (Million IRR)

Profits Distributi

on %

CAR IRB-F

Scenario 1 (Base case) $40 +3% to +4% 0.6 107 1,271,735 80 12.8 Scenario 2 (Less severe) $35 +1% to +3% 5.3 101 -48,983 0 9.8 Scenario 3(more severe) $30 -1% to +1% 7.3 113 -616,620 0 8.1 Scenario 4 (most severe) $20 -4% to -1% 9.2 121 -1,184,256 0 6.7

1- Scenario 1 - Base case scenario: Similar to current situation. For the year ending March 20, 2017, weassume the same assets composition and the same credit worthiness for loans as of March 19, 2016 asreported in the Table 6 – Loans Internal Rating.

2- Scenario 2 - Less severe scenario: For the year ending March 20, 2017, we assume the same assetscomposition; however, the credit ratings of all performing loans with rating of CCC and above are knockeddown by one notch. 90% of performing loans rated CCC- to C go to overdue status. All currently overdue,suspended, and doubtful loans and 10% of performing loans rated CCC- to C go to default status. Also weassume 20% of all not-rated loans go to overdue status.

3- Scenario 3 - More severe scenario: For the year ending March 20, 2017, we assume the same assetscomposition; however, the credit ratings of all performing loans with rating of CCC and above are knockeddown 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 4% of not-rated loans goto default status. Also we assume 25% of all not-rated loans go to overdue status.

4- Scenario 4 - Most severe scenario: For the year ending March 20, 2017, we assume the same assetscomposition; however, the credit ratings of all performing loans with rating of CCC and above are knockeddown 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 8% of not-rated loans goto default status. Also we assume 50% of all not-rated loans go to overdue status.

Figure 2 CAR Comparison between scenarios

0.0%

10.0%

20.0%

1 2 3 4

Comparing CAR and Doubtful Loans at Different Scenarios

Doubtful loans /Total Loans Capital Adequacy Ratio