Unaudited interim condensed financial statements For the nine month period ended 30 th September 2018

Transcription

1 interim condensed financial statements For the nine month period ended 30 th September Registered office and principal place of business: Bank Dhofar Building Bank Al Markazi street Post Box 1507,Ruwi Postal Code 112 Sultanate of Oman

2 CONTENTS OF THE INTERIM CONDENSED FINANCIAL STATEMENTS Page The Board of Director s report 1 & 2 Interim condensed statement of financial position 4 Interim condensed statement of comprehensive income 5 Interim condensed statement of changes in equity 6 to 8 Interim condensed statement of cash flows 9 Notes to the interim condensed financial statements 10 45

3 BANK DHOFAR S.A.O.G. THE BOARD OF DIRECTORS REPORT FOR THE QUARTER ENDED Dear Shareholders, 30 th September On behalf of the Board of Directors of Bank Dhofar S.A.O.G., I am pleased to present to you the Bank s Financial Statements for the year-to-date 30 th September. The Bank s Financial Performance during Quarter ended September The bank continued its progress during the nine month period ended 30 th of September achieving a net profit of OMR million compared to OMR million achieved during similar period of last year, recording a year-on-year growth of 4.89%. Net Loans, Advances and Financing to customers is at OMR billion as at 30 th September, compared to OMR billion at the end of 30 th September. Customer Deposits, including Islamic deposits is at OMR billion as at 30 th September compared to OMR billion as at 30 th September. The Net Interest Income and income from Islamic Financing activities earned year-to-date September was OMR million as compared to OMR million earned during the same period last year achieving an increase of 8.17%. Non-interest income such as fees and commissions, foreign exchange profit, investment income etc. also registered a growth of 3.66% year-on-year to reach OMR million for nine months of 30 th September compared to OMR million last year. Total operating income achieved OMR million year-to-date 30 th September as against OMR million for the corresponding period of, an increase of 6.96%. Net provisions for loan impairment and non-funded was contained by 9.92% to OMR million for the nine-month period ended 30 th September as against OMR million during the same period of last year mainly due to changes in provision (Expected Credit Loss) computation in compliance with International Financial Reporting Standards 9 (IFRS-9). Non-performing loans to gross loans ratio increased from 3.04% as at 30 th September to 3.51% as at 30 th September, while Nonperforming loans, net of interest reserves, to gross loans ratio stood at 1.90% as at 30 th September as against 1.68% during the corresponding period of year. The earnings per share (EPS) for the nine-months period ended 30 th September are OMR as compared to corresponding period of year of OMR Maisarah Financial Performance Highlights:- Maisarah Islamic Banking Services has registered a positive growth in earning assets during the ninemonth period ended September. The gross financing portfolio has grown from RO million as at September to OMR million as at September, Total customer deposit for the nine month period ended 30 th of September stood at OMR million, compared to OMR million as at 30 th September. The total assets increased by 3.66% to OMR million as at 30 th September from OMR million compared to 30 th September.

4 The net financing income after cost of funds increased by 21.52% year-on-year reaching OMR 7.34 million year-to-date September against OMR 6.04 million at same period of last year. Nonfinancing Income such as fees and commissions, foreign exchange profit, investment income and other income increased by 61.02% year-on-year to OMR 2.85 million as at 30 th September, compared to OMR 1.77 million as at 30 th September. Cost to income ratio have improved to 49.91% for the nine month ended 30 th September from 59.76% same period of year., Maisarah posted year-to-date profit before tax of OMR 4.94 million, growth of % compared to last year Profit before tax of OMR 1.69 million. Awards & Accolades Following key awards were won by the Bank during nine months period ended 30 th September and those awards are testimony to the continued efforts put in by the Bank: No. 1 in Large Sized Banks Category at Best Banks Report by Oman Economic Review (OER) Best Islamic bank in Oman - Maisarah Islamic Banking Services at the Middle East Banking Awards (EMEA Finance) Best Corporate Banking Institution Oman in The Business Awards by MEA Markets Best Islamic Retail Bank Oman Maisarah Islamic Banking by Global Banking & Finance Review The Business Excellence Award from the BIZZ AWARDS (World Confederation of Business) Best mobile app from Pan Arab Web Awards Best Private Bank Oman Bank Dhofar by Global Banking & Finance Review Best Bank for Human Resources Oman by the Global Business Outlook Award Acknowledgment On behalf of the Board, I would like to thank our valuable customers for their patronage and confidence reposed in the Bank. I thank the shareholders for the continuous support and the Bank s staff and management for the good performance during the period. The Board of Directors also thanks the Central Bank of Oman and the Capital Market Authority for their valuable guidance to the local banking sector and the listed companies Finally, the Board of Directors and all staff of the Bank would like to express our most sincere gratitude to His Majesty Sultan Qaboos Bin Said for his wise leadership and generous support to the private sector. Eng. Abdul Hafidh Salim Rajab Al-Aujaili Chairman

5 INTERIM CONDENSED STATEMENT OF FINANCIAL POSITION AS AT 30TH SEPTEMBER Audited 31 December Notes RO 000 RO 000 RO 000 Assets Cash and balances with Central Bank of Oman 5 298, , ,819 Loans, advances and financing to banks 6 358, , ,896 Loans, advances and financing to customers 7 3,184,776 3,175,026 3,248,873 Investment securities 8 295, , ,855 Intangible asset ,291 1,191 Property and equipment 10 13,877 8,583 9,524 Other assets 110,509 63,863 69,552 Total assets 4,262,629 4,071,226 4,246,710 Liabilities Due to banks , , ,742 Deposits from customers 12 3,041,225 3,101,549 3,068,409 Other liabilities 163,785 98, ,677 Subordinated loans 13 63,875 88,875 88,875 Total liabilities 3,663,158 3,532,841 3,659,703 Shareholders equity Share capital 243, , ,786 Share premium 77,564 59,618 77,564 Special reserve 18,488 18,488 18,488 Legal reserve 50,254 45,176 50,254 Special reserve restructured loans 1,281-1,281 Special impairment reserve IFRS 9 7 7, Subordinated loan reserve 42,325 31,550 42,325 Special revaluation reserve investment (709) - - IFRS 9 Investment revaluation reserve (919) Retained earnings 44,822 63,243 55,302 Total equity attributable to the equity holders of the Bank 483, , ,507 Perpetual Tier 1 Capital Securities 115, , ,500 Total equity 599, , ,007 Total liabilities and equity 4,262,629 4,071,226 4,246,710 Net assets per share (Rials Omani) Contingent liabilities 19 1,020, ,878 1,018,969 The interim condensed financial statements were approved by the Board of Directors on and signed on their behalf by: Eng. Abdul Hafidh Salim Rajab Al-Aujaili Abdul Hakeem Omar Al Ojaili Chairman Chief Executive Officer The accompanying notes form an integral part of these interim condensed financial statements. 4

6 INTERIM CONDENSED STATEMENT OF COMPREHENSIVE INCOME FOR THE NINE MONTH PERIOD ENDED 30TH SEPTEMBER 9 months 30 9 months 30 3 months September September September September Notes RO 000 RO 000 RO 000 RO months Interest income 130, ,459 44,852 41,533 Interest expense (62,872) (56,551) (21,121) (20,904) Net interest income 16 67,236 62,908 23,731 20,629 Income from islamic financing 15,872 13,555 5,425 4,972 Unrestricted investment account holders share of profit (8,533) (7,512) (2,905) (2,655) Net income from islamic financing activities 7,339 6,043 2,520 2,317 Fees and commission income 15,882 15,186 5,771 5,635 Fees and commission expense (3,687) (2,716) (1,345) (1,022) Net fees and commission income 12,195 12,470 4,426 4,613 Other income 13,888 12,693 4,623 4,356 Operating income 100,658 94,114 35,300 31, Staff and administrative costs (47,192) (41,559) (15,781) (14,020) Depreciation (2,700) (2,498) (959) (809) Operating expenses (49,892) (44,057) (16,740) (14,829) Profit from operations 50,766 50,057 18,560 17,086 Provision for loan impairment and Non funded 6 & 19 (11,888) (13,195) (6,807) (4,190) Recoveries from allowance for loan impairment 6 & 19 4,585 4,412 1,651 1,339 Bad debts written-off (3) (1) - (1) Transfer to statement of comprehensive income on Provision for Investment impairment (66) (340) Profit from operations after provision 43,394 40,933 13,572 14,234 Income tax expense (6,909) (6,140) (2,036) (2,135) Profit for the period 36,485 34,793 11,536 12,099 Profit for the period 36,485 34,793 11,536 12,099 Other comprehensive income: Items that will not be reclassified to P&L Net changes in fair value reserve (equity instrument) Items that are or may be reclassified to profit or loss in subsequent periods: Net changes of fair value through other comprehensive income Impairment of investments carried as fair value through other comprehensive income sale of available-for-sale investments Reclassification adjustment on sale of available for sale financial assets (1,426) (983) (310) (229) (26) - (170) - - Other comprehensive income for the period (1,426) (813) (310) (255) Total comprehensive income for the period 35,059 33,980 11,226 11,844 Earnings per share (basic and diluted) (Rials Omani) The accompanying notes form an integral part of these interim condensed financial statements 5

7 [[ [ [ [ [ [ [ [ [ [ [ [ [[ [ [ [ [ [ BANK DHOFAR SAOG INTERIM CONDENSED STATEMENT OF CHANGES IN EQUITY Notes Share capital Share premium Legal reserve Special reserve Special reserve restructure Special impairment reserve IFRS9 Special revaluati on reserve IFRS9 Subordinated loans reserve Investment revaluation reserve Retained earnings Total Perpetual Tier 1 capital securities RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 Balances as at 1 January 225,786 77,564 50,254 18,488 1, , , , , ,007 Changes on initial application of IFRS ,455 (709) ,455-8,455 Restated balance on 1 January 225,786 77,564 50,254 18,488 1,281 8,455 (709) 42, , , , ,462 Profit for the period ,485 36,485-36,485 Other comprehensive income for the period Net changes of fair value through other comprehensive income (1,426) - (1,426) - (1,426) Total equity Total comprehensive income for the period (1,426) 36,485 35,059-35,059 Transfer to Special impairment reserve IFRS (1,439) , Additional Tier 1 coupon (3,956) (3,956) - (3,956) Transactions with owners - recorded directly in equity Dividend for (27,094) (27,094) - (27,094) Bonus shares issued for 14 18, (18,063) Balances as at () 243,849 77,564 50,254 18,488 1,281 7,016 (709) 42,325 (919) 44, , , ,471 The accompanying notes form an integral part of these interim condensed financial statements. 6

8 INTERIM CONDENSED STATEMENT OF CHANGES IN EQUITY (CONTINUED) Notes Perpetual Share Share Special Legal bordinated loans Investment revaluation Retained Tier 1 capital Total capital premium reserve reserve reserve reserve earnings Total securities equity RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 Balances as at 1 st January 189,920 59,618 18,488 45,176 31,550 1,459 72, , , ,000 Total comprehensive income for the period Profit for the period ,793 34,793-34,793 Other comprehensive income for the period Net change in fair value of available-for-sale investments (983) - (983) - (983) Transfer to statement of comprehensive income on sale of available-for-sale investments (170) - (170) - (170) Impairment of available-for-sale investments Total comprehensive income for the period (813) 34,793 33,980-33,980 Transactions with owners recorded directly in equity Additional Tier 1 coupon (3,956) (3,956) (3,956) Dividend for (25,639) (25,639) - (25,639) Bonus shares issued for , (14,244) Balances as at () 204,164 59,618 18,488 45,176 31, , , , ,385 The accompanying notes form an integral part of these interim condensed financial statements. 7

9 INTERIM CONDENSED STATEMENT OF CHANGES IN EQUITY (CONTINUED) Attributable to equity holders of Bank Share capital Share premium Legal reserve Special reserve Special reserve - restructured Subordinated loans loans reserve Investment revaluation reserve Retained earnings Total Perpetual Tier 1 capital Total equity securities Notes RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 Balances as at 1 January 189,920 59,618 45,176 18,488-31,550 1,459 72, , , ,000 Profit for the year ,627 47,627-47,627 Other comprehensive expense for the year Net change in fair value of available-for-sale (1,266) - (1,266) - (1,266) investments Reclassification adjustment on sale of (44) - (44) - (44) available-for-sale investments Impairment of available-for-sale investments Total comprehensive income for the year (952) 47,627 46,675-46,675 Transfer to legal reserve , (4,763) Transfer to subordinated loan reserve ,775 - (10,775) Issue of right shares 19 21,622 17, ,568-39,568 Excess of receipts over rights issue expenses Transfer to special reserve restructured , (1,281) loans Payment towards Perpetual Tier 1 coupon (7,912) (7,912) - (7,912) Transactions with owners recorded directly in equity Dividend paid for (25,639) (25,639) - (25,639) Bonus shares issued for , (14,244) Balances as at 31 December 225,786 77,564 50,254 18,488 1,281 42, , , , ,007 The attached notes 1 to 38 form part of these financial statements. 8

10 INTERIM CONDENSED STATEMENT OF CASH FLOWS 30th September 30th September RO 000 RO 000 Cash flows from operating activities Interest, financing income, commission and other receipts 151, ,351 Interest payments, return on Islamic Banking deposits (69,715) (60,460) Cash payments to suppliers and employees (51,172) (42,944) 30,203 44,947 Increase in operating assets Loans, advances and financing to customers 56,894 (195,217) Loans, advances and financing to banks (28,900) 23,572 Receipts from treasury bills and certificates of deposits (net) 14,908 (52,637) 42,902 (224,282) Increase / (decrease) in operating liabilities Deposits from customers 50, ,360 Due to banks 5,578 (106,123) 56, ,237 Cash flows from operating activities 129,502 (69,098) Income tax paid (7,420) (5,733) Net cash from/(used in) operating activities 122,082 (74,831) Cash flows (used in)/from investing activities Investment income 6,027 5,481 Purchase of investments (20,284) (9,124) Proceeds from sale of investments 319 8,165 Dividend received Purchase of property and equipment (4,353) (2,498) Proceeds from sale of property and equipment Net cash (used in)/from investing activities (17,975) 2,432 Cash flows used in financing activities Subordinated loan (25,000) 35,000 Additional Tier 1 Coupon (3,956) (3,956) Dividend (27,094) (25,639) Net cash used in financing activities (56,050) 5,405 Net change in cash and cash equivalents 48,057 (66,994) Cash and cash equivalents at the beginning of the period 414, ,500 Cash and cash equivalents at the end of the period 462, ,506 Cash and balances with Central Bank of Oman 298, ,903 Capital deposit with Central Bank of Oman (500) (500) Loans, advances and financing to banks due within 90 days 166,622 23,887 Due to banks within 90 days (1,538) (784) Cash and cash equivalents for the purpose of the statement of cash flows 462, ,506 [ The accompanying notes form an integral part of these interim condensed financial statements. 9 [

11 INTERIM CONDENSED STATEMENT OF CASH FLOWS Reconciliation of liabilities and equity arising from financing activities: 30th September RO th September RO 000 Subordinated loan Balance at beginning of the period 88,875 53,875 Cash flows (25,000) 35,000 Balance at end of the period 63,875 88,875 Retained earnings Balance at beginning of the period 55,302 72,289 Changes on initial application of IFRS Profit for the period 36,485 34,793 Additional Tier 1 coupon (3,956) (3,956) Transfer to special reserve (IFRS 9) 1,439 - Bonus shares issued for (18,063) (14,244) Dividend transfer (27,094) (25,639) Balance at end of the period 44,822 63,243 10

12 FOR THE NINE MONTH PERIOD ENDED 30 SEPTEMBER 1. LEGAL STATUS AND PRINCIPAL ACTIVITIES Bank Dhofar SAOG (the Bank ) is incorporated in the Sultanate of Oman as a public joint stock company and is principally engaged in corporate, retail and investment banking activities through a network of 71 branches ( : 68 branches) which comprises of 10 Islamic branches (30th September : 10 Islamic branches) and 61 conventional branches ( : 58 conventional branches). The Bank s Islamic Banking Window, Maisarah Islamic Banking Services has an allocated capital of RO 55 million from the core paid up capital of the shareholders. The Bank has a primary listing on the Muscat Securities Market ( MSM ) and the Bank s Perpetual Tier 1 Capital Securities are listed on Irish Stock Exchange. The principal place of business is the Head Office, Capital Business District ( CBD ), Muscat, Sultanate of Oman. The Bank employed 1,598 employees as of ( : 1,507 employees). 2 BASIS OF PREPARATION 2.1 Statement of compliance and basis of accounting The unaudited interim condensed financial statements for the nine month period ended of the Bank are prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, applicable regulations of the Central Bank of Oman (CBO) and the disclosure requirements set out in the Rules and Disclosure and Proformas issued by the Capital Market Authority (CMA). These unaudited interim condensed financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting, and should be read in conjunction with the Bank s last annual financial statements as at and for the year ended 31 December ( the last annual financial statements ). They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Bank s financial position and performance since the last annual financial statements. This is the first year Bank s financial statements where IFRS 15 and IFRS 9 have been applied. Changes to significant accounting policies are described in Note Functional and presentation currency Items included in the Bank s financial statements are measured using Rial Omani which is the currency of the primary economic environment in which the Bank operates, rounded off to the nearest thousand. 2.3 Use of estimates and judgments In preparing these interim condensed financial statements, management has made judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The significant judgments made by management in applying the Bank s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the financial statements as at and for the year ended 31 December, except for new significant judgments and key sources of estimation uncertainty related to the application of IFRS 15 and IFRS 9, which are described in Note 3. 11

13 3 Changes in significant accounting policies Except as described below, the accounting policies applied in these unaudited interim condensed financial statements are same as those applied in the Bank s financial statements as at and for the year ended 31 December. The changes in accounting policies are also expected to be reflected in the Bank s financial statements as at and for the year ending 31 December. The Bank has initially adopted IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments from 1 January. A number of other new standards are effective from 1 January but they do not have a material effect on the Bank s financial statements. A. IFRS 9 Financial instruments The Bank has adopted IFRS 9 as issued by the IASB in July 2014 with a date of initial application of 1 January. The key changes to the Bank s accounting policies resulting from its adoption of IFRS 9 are recognized below. Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). On initial recognition, a financial asset is classified as measured at amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 12

14 3 Changes in significant accounting policies (continued) A.IFRS 9 Financial instruments (continued) Classification of financial assets and financial liabilities (continued) On initial recognition of an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-byinvestment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. IFRS 9 removes the requirement contained in IAS 39 relating to bifurcation of an embedded derivative from an asset host contract. However, entities are still required to separate derivatives embedded in financial liabilities where they are not closely related to the host contract. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognized in profit or loss, under IFRS 9 fair value changes are generally presented as follows: The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and The remaining amount of change in the fair value is presented in profit or loss. Business model assessment The Bank makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: The stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets; How the performance of the portfolio is evaluated and reported to the Bank s management; The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; How managers of the business are compensated e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank s stated objective for managing the financial assets is achieved and how cash flows are realised. 13

15 3 Changes in significant accounting policies (continued) A.IFRS 9 Financial instruments (continued) Classification of financial assets and financial liabilities (continued) Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Assessment whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, principal is defined as the fair value of the financial asset on initial recognition. Interest is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. Modifications of financial assets If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. Impairment The Bank recognises loss allowances for (Expected credit losses) ECL on the following financial instruments that are not measured at FVTPL: Financial assets that are debt instruments; Lease receivables; Financial guarantee contracts issued; and Loan commitments issued. No impairment loss is recognised on equity investments. The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: Debt investment securities that are determined to have low credit risk at the reporting date; and Other financial instruments (other than lease receivables) on which credit risk has not increased significantly since their initial recognition 14

16 3 Changes in significant accounting policies (continued) A.IFRS 9 Financial instruments (continued) Impairment (continued) Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL. The Bank considers a debt security to have low credit risk when their credit risk rating is Equivalent to the globally understood definition of investment grade. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Measurement of ECL Credit loss allowances are measured using a three-stage approach based on the extent of credit deterioration since origination: Stage 1 Where there has not been a significant increase in credit risk (SIR) since initial recognition of a financial instrument, an amount equal to 12 months expected credit loss is recorded. The expected credit loss is computed using a probability of default occurring over the next 12 months. For those instruments with a remaining maturity of less than 12 months, a probability of default corresponding to remaining term to maturity is used. Stage 2 When a financial instrument experiences a SIR subsequent to origination but is not considered to be in default, it is included in Stage 2. This requires the computation of expected credit loss based on the probability of default over the remaining estimated life of the financial instrument. Stage 3 Financial instruments that are considered to be in default are included in this stage. Similar to Stage 2, the allowance for credit losses captures the lifetime expected credit losses. The key inputs into the measurement of ECL are the term structure of the following variables: Probability of default (PD); Loss given default (LGD); Exposure at default (EAD) These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information. Details of these statistical parameters/inputs are as follows: PD The probability of default is an estimate of the likelihood of default over a given time horizon. EAD The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date LGD The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD. 15

17 3 Changes in significant accounting policies (continued) A. IFRS 9 Financial instruments (continued) Impairment (continued) Forward-looking information The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk considers information about past events and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. The estimation and application of forward-looking information requires significant judgement. Macroeconomic factors In its models, the Bank relies on a broad range of forward looking information as economic inputs, such as: real gross domestic product (GDP) growth and oil revenue (as % of GDP). The inputs and models used for calculating expected credit losses may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays are made as temporary adjustments using expert credit judgement. Assessment of significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank s historical experience and expert credit assessment and including forward-looking information. The following quantitative guidelines are used to determine the staging of accounts: 1. An account will migrate to stage 2 if any of the changes in rating below are met For risk grades 1 4: >= 3 notch downgrade Risk grade 5: 2 notch downgrade Risk grade 6 and 7: 1 notch downgrade 2. An account will also migrate to stage 2 if it is more than 30 days past due 3. An account will also be considered stage 2 if has been placed under special mention In addition to the above, qualitative criteria as per the CBO guidelines (BM 1149, Para 12 (d)), for assessing the significant increase in credit risk are applicable to corporate clients with limits of OMR 500,000 or higher only. 16

18 3 Changes in significant accounting policies (continued) A. IFRS 9 Financial instruments (continued) Impairment (continued) Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: Financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets; Loan commitments and financial guarantee contracts: For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision. The Bank has issued no loan commitment that are measured at FVTPL. Liabilities arising from financial guarantee and loan commitments are included within provisions under other liabilities in statement of financial position; Where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision; and Debt instruments measured at FVOCI The debt instruments classified under FVOCI are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at fair value. Gains and losses arising from changes in fair value are included in other comprehensive income within a separate component of equity. ECL or reversals, interest revenue and foreign exchange gains and losses are recognised in profit and loss. Upon disposal, the cumulative gain or loss previously recognised in other comprehensive income. Definition of default The Bank considers a financial asset to be in default when: The borrower is unlikely to pay its credit obligations to the Bank in full without recourse by the Bank to actions such as realising security (if any is held); or The borrower is past due more than 90 days on any material credit obligation to the Bank. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding. In assessing whether a borrower is in default, the Bank considers indicators that are: Qualitative e.g. breaches of covenant; Quantitative e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The Bank follows the definition of default as stipulated in CBO guidelines (BM 977 and subsequent). 17

19 3. Changes in significant accounting policies (continued) A. IFRS 9 Financial instruments (continued) Hedge accounting IFRS9 introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge accounting and alignes hedge accounting more closely with risk management objectives and strategy with more qualitative approach to assess hedge effectiveness. IFRS9 also introduces new requirements on rebalancing hedge relationships and prohibiting voluntary discontinuation of hedge accounting. The Bank has entered into interest rate swaps to hedge the variability in cash flows arising from changes in interest rates relating to investments. The types of hedge accounting relationships that the Bank currently designates meet the requirements of IFRS 9 and are aligned with Bank s risk management strategy and objective. Based on Bank s assessment, there is no impact from the adoption of new standard on hedge accounting. Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below. Comparative periods have not been restated. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January. Accordingly, the information presented for does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented for under IFRS 9. The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. - The determination of the business model within which a financial asset is held. - The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL. - The designation of certain investments in equity instruments not held for trading as at FVOCI. - For financial liabilities designated as at FVTPL, the determination of whether presenting the effects of changes in the financial liability s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. If a debt security had low credit risk at the date of initial application of IFRS 9, then the Bank has assumed that credit risk on the asset had not increased significantly since its initial recognition. For more information and details on the changes and implications resulting from the adoption of IFRS 9, see below: 18

20 3. Changes in significant accounting policies (continued) A. IFRS 9 Financial instruments (continued) Transition (continued) (a)the following table reconciles the original measurement categories and carrying amounts in accordance with IAS 39 and the new measurement categories with those under IFRS 9 for the Bank s financial assets and financial liabilities as at 1 January. Original classification under IAS 39 New classification under IFRS 9 Original carrying amount Remeasurement Impact of IFRS 9 Re- New classifica- tion carrying amount Financial assets Cash and balances with central banks Loans and receivables Amortised cost 326, ,819 Due from banks Loans and receivables Amortised cost 299,896 (1,287) - 298,609 Loans and advances to customers Loans and receivables Amortised cost 3,248,873 9,742-3,258,615 Investment securities equity Available-for-sale FVOCI 4,550 - (709) 3,841 Investment securities debt Available-for-sale FVOCI 26, ,437 Investment securities equity Available-for-sale FVTPL 4, ,825 Investment securities Held to maturity Amortised cost 255, ,043 Other assets 69, ,441 Fixed assets 9, ,524 Intangible assets 1, ,191 Derivatives financial instrument FVTPL FVTPL 1, ,243 Total 4,247,842 8,455 (709) 4,255,588 Financial liabilities Due to banks Amortised cost Amortised cost 387, ,742 Customer deposits Amortised cost Amortised cost 3,068, ,068,409 Other liabilities Amortised cost Amortised cost 104, ,561 Subordinated debt Amortised cost Amortised cost 88, ,875 Derivatives with negative fair value FVTPL FVTPL 1, ,132 Current Year Tax 10, ,116 Total 3,660, ,660,835 19

21 3 Changes in significant accounting policies (continued) A. IFRS 9 Financial instruments (continued) Transition (continued) The impact from the adoption of IFRS 9 as at 1 January has been to increase retained earnings by RO 709 thousand, decrease the fair value reserve by RO 709 thousand: Retained Fair value earnings reserve Closing balance under IAS 39 (31 December ) 55,302 - Impact on reclassification and measurements: Investment securities (equity) from available-for-sale to those measured at fair value through other comprehensive income (709) Investment securities (debt) from held to maturity to those measured at fair value through other comprehensive income - - Investment securities (equity) from available-for-sale to those measured at fair value through profit or loss - - Investment securities (mutual funds) from available-for-sale to those measured at fair value through profit or loss - - Investment securities (debt) from available-for-sale to those measured at amortized cost Impact on recognition of Expected Credit Losses Due from banks - - Investment Securities (Debt) at fair value through other comprehensive income - - Investment Securities (Debt) at amortised cost - - Loans and Advances - - Off balance sheet exposures subject to credit risk Transfer from risk reserve (Opening balance under IFRS 9 on date of initial application of 1 January ) 56,011 (709) 20

22 3 Changes in significant accounting policies (continued) A. IFRS 9 Financial instruments (continued) Transition (continued) Stage 1 Stage 2 Stage 3 Total Exposure subject to ECL 4,305,607 1,011, ,493 5,433,249 Opening Balance (Day 1 impact) as at 1 January - Due from Banks Loans and Advances to Customers 15,914 21,498 36,407 73,819 - Investment Securities at FVOCI (Debt) Loan Commitments and Financial Guarantees 4,023 3,946-7,969 20,741 25,544 36,407 82,692 Net transfer between stages - Due from Banks Loans and Advances to Customers (137) Investment Securities at FVOCI (Debt) Loan Commitments and Financial Guarantees 37 (37) - - (100) Charge for the Period (net) - Due from Banks (22) (100) - (122) - Loans and Advances to Customers (1,273) (364) 2,825 1,188 - Investment Securities at FVOCI (Debt) Loan Commitments and Financial Guarantees (524) 2,529-2,005 - Acceptances Unutilised 955 2,685-3,640 - Interest Accrued (400) 4,915 2,825 7,340 Closing Balance as at 30th September - Due from Banks Loans and Advances to Customers 14,505 21,265 39,237 75,007 - Investment Securities at FVOCI (Debt) Loan Commitments and Financial Guarantees 3,536 6,438-9,974 - Acceptances Unutilised 955 2,685-3,640 - Interest Accrued ,242 30,553 39,237 90,032 B. IFRS 15 Revenue from Contract with Customers IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January. Early adoption is permitted. The Bank plans to adopt the new standard on the required effective date using the modified retrospective approach. The Bank has performed an initial impact assessment and concluded that the impact is not material as in majority of the Bank s facility agreements with customers generally expected to be the only performance obligation and accordingly, adoption of IFRS 15 is not expected to have any impact on the Bank s income and profit or loss. 21

23 4 Standards issued but not yet effective A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2019 and earlier application is permitted; however, the Bank has not early adopted them in preparing these unaudited interim condensed financial statements. The Bank has the following updates to information provided in the last annual financial statements about the standards issued but not yet effective that may have a significant impact on the Bank s financial statements. IFRS 16 Leases The IASB issued IFRS 16 Leases (IFRS 16), which requires lessees to recognized assets and liabilities for most leases. The standard includes two recognition exemptions for lessees leases of low-value assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). For lessors, there is little change to the existing accounting in IAS 17 Leases. The Bank will perform a detailed assessment in the future to determine the extent. The new standard will be effective for annual periods beginning on or after 1 January IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. In, the Bank will continue to assess the potential effect of IFRS 16 on its financial statements. 5. Cash and balances with Central Bank of Oman Audited 31 December RO 000 RO 000 RO 000 Cash in hand 33,816 27,710 30,085 Balances with the Central Bank of Oman 116, , ,909 Placements with Central Bank of Oman 147,840 29,260 55, , , ,819 At cash and balances with Central bank of Oman included balances with the Central Bank of Oman amounting to RO 500,000 ( - RO 500,000 and 31 December RO 500,000) as minimum reserve requirements. These funds are not available for the Bank s daily business. 6. Loans, advances and financing to banks Audited 31 December RO 000 RO 000 RO 000 Syndicated loans to other banks 82,989 51,205 55,247 Placements with other banks 257, , ,744 Current clearing accounts 18,397 8,487 11, , , ,305 Less: impairment allowance (collective) (782) (409) (409) Net loans, advances and financing 358, , ,896 At No placement with any bank s individually represented 20% or more of the Bank s placements and ( : Nil) and 31 st December one local bank). 22

24 7. Loans, advances and financing to customers Audited 31 December RO 000 RO 000 RO 000 Overdrafts 188, , ,297 Loans 2,544,637 2,542,960 2,628,663 Loans against trust receipts 116, , ,350 Bills discounted 9,062 17,577 13,348 Advance against credit cards 8,999 8,295 8,516 Others 58,307 55,772 58,734 Islamic Banking Window financing 387, , ,917 Gross Loans, advances and financing 3,313,160 3,308,313 3,386,825 Less: Impairment allowance (128,384) (133,287) (137,952) Net loans, advances and financing 3,184,776 3,175,026 3,248,873 The movement in the impairment allowance is analysed below: Audited 31 December (a) Allowance for loan impairment Balance at beginning of the period / year 73,709 79,242 79,242 Allowance made during the period 5,901 13,195 17,588 Released to the statement of comprehensive income during the period / year (4,585) (4,412) (6,047) Written off during the period / year (18) (36) (43) Balance at the end of the period / year 75,007 87,989 90,740 (b) Reserved interest Balance at beginning of the period / year 47,212 39,640 39,640 Reserved during the period / year 7,331 6,328 8,671 Released to the statement of comprehensive income during the period / year (1,005) (562) (948) Written-off during the period / year (161) (108) (151) Balance at the end of the period / year 53,377 45,298 47,212 Total impairment allowance 128, , ,952 The impairment allowance also includes the regulatory impairment reserve as follows: RO 000 Provisions required as per CBO norms 97,048 Impairment allowance as per IFRS 9 (90,032) Special impairment reserve IFRS 9 7,016 23

25 7. Loans, advances and financing to customers (continued) In accordance with CBO circular BM 1149 Banks should continue to maintain and update the risk classification (i.e. standard, special mention, substandard, etc.) of accounts as per the extent CBO norms, including those on restructuring of loans accounts for regulatory reporting purposes. Comparison of provision held as per IFRS 9 and required as per CBO norms Disclosure requirements containing the risk classification wise gross and net amount outstanding, provision required as per CBO norms, allowance made as per IFRS 9, interest recognized as per IFRS 9 and reserve interest required as per CBO are given below based on CBO circular BM 1149 as on 1 January. Asset Classification as per CBO Norms Asset Classifica tion as per IFRS 9 Gross Amount Provision required as per CBO Norms Provision held as per IFRS 9 Difference between CBO provision required and provision held Net Amount as per CBO norms* Net Amount as per IFRS 9 (Amounts in RO 000) Interest recognised in P&L as per IFRS 9 Reserve interest as per CBO norms (1) (2) (3) (4) (5) (6) = (4)-(5) (7)=(3)-(4)-(10) (8) = (3)-(5) (9) (10) Stage 1 2,636,217 36,238 15,890 20,348 2,599,979 2,620, Standard Stage 2 451,725 4,620 8,290 (3,670) 447, , Stage Subtotal 3,087,942 40,858 24,180 16,678 3,047,084 3,063, Stage 1 29, (126) 28,868 28, Special Mention Stage 2 219,462 6,294 13,209 (6,915) 213, , Stage Subtotal 248,628 6,592 13,633 (7,041) 242, , Stage Substandard Stage Stage 3 9,718 2,340 4,491 (2,151) 7,001 5, Subtotal 9,718 2,340 4,491 (2,151) 7,001 5, Stage Doubtful Stage Stage 3 10,517 4,348 4,471 (123) 5,452 6, Subtotal 10,517 4,348 4,471 (123) 5,452 6, Stage Loss Stage Stage 3 85,268 37,011 27,446 9,565 2,139 57,822-46,118 Subtotal 85,268 37,011 27,446 9,565 2,139 57,822-46,118 Other items not covered under CBO circular BM 977 and related instructions Stage 1 1,460,589-4,427 (4,427) 1,460,589 1,456, Stage 2 152,424-4,046 (4,046) 152, , Stage Subtotal 1,613,035-8,473 (8,473) 1,613,035 1,604, Total (1 January ) Stage 1 4,125,972 36,536 20,741 15,795 4,089,436 4,105, Stage 2 823,611 10,914 25,545 (14,631) 812, , Stage 3 105,525 43,699 36,408 7,291 14,614 69,117-47,212 Total 5,055,108 91,149 82,694 8,455 4,916,747 4,972,414-47,212 Total (30 September ) Stage 1 4,305,607 36,431 20,242 16,189 4,269,176 4,285, Stage 2 1,011,149 11,201 30,553 (19,352) 999, , Stage 3 116,493 49,416 39,237 10,179 13,700 77,256-53,377 Total 5,433,249 97,048 90,032 7,016 5,282,824 5,343,217-53,377 * Net of provision and reserve interest as per CBO norms Other items disclosed above includes exposure outstanding and respective provisions held against due from banks, investments, other assets, loan commitments and financial guarantees. 24