twentytwelve twenty twelve Annual Report Al Hilal Bank Annual Report

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1 twentytwelve Annual Report twenty twelve Annual Report Al Hilal Bank Address Corniche Road Sh. Sultan Bin Khalifa Building PO Box Abu Dhabi UAE Telephone (02)

2 twentytwelve Annual Report twenty twelve Annual Report Al Hilal Bank Address Corniche Road Sh. Sultan Bin Khalifa Building PO Box Abu Dhabi UAE Telephone (02)

3 In the name of Allah, the most gracious, the most merciful

4 CONTENTS Chairman s Message Group Chief Executive Officer s Message Business and Economic Review Performance Highlights Al Hilal Bank Group About You About Us Financial Review Fatwa and Supervisory Board Report Audit Report Financial Statements Supplementary Information Branch Network

5 Al Hilal Bank PJSC (the Bank) was incorporated in Abu Dhabi, United Arab Emirates on 18 June 2007 as a public joint stock company (PJSC) with limited liability. The Bank is wholly owned by the Abu Dhabi Investment Council, an investment arm of the Government of Abu Dhabi. The Bank s shares are not listed on a recognised exchange. The Bank commenced operations on 19 June It is primarily involved in Islamic personal, wholesale, treasury and investment banking activities in the UAE, and in Kazakhstan through a wholly owned subsidiary. The Late His Highness Sheikh Zayed Bin Sultan Al Nahyan Founder Of The United Arab Emirates

6 His Highness Sheikh Khalifa Bin Zayed Bin Sultan Al Nahyan President of the United Arab Emirates and Ruler of the Emirate of Abu Dhabi His Highness Sheikh Mohamed Bin Zayed Bin Sultan Al Nahyan Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces

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8 9 CHAIRMAN S MESSAGE We are happy to announce that the Bank has surpassed the UAE average growth in financing book and has increased its capital adequacy, achieved significant portfolio diversification and ended the year with a larger customer base. بسم اهلل الرحمن الرحيم In the name of Allah, the Most Gracious, the Most Merciful On behalf of the Board of Directors, I am pleased to present the Annual Report of Al Hilal Bank Group for This year, the Bank has yet again delivered on its promises to our shareholder, customers, staff and the community. Continued progress in the implementation of the Group s strategy has seen us grow market share, achieve record profits growing 53% over 2011, and maintain our ranking among UAE Islamic banks for financings size (third place). We are happy to announce that the Bank has surpassed the UAE average growth in financing book and has increased its capital adequacy, achieved significant portfolio diversification and ended the year with a larger customer base. The business environment in 2012 Global uncertainty, particularly in the Eurozone, affected international markets in The impact of this situation has been limited in the UAE, as a result of strengthening hydrocarbon revenues and expansionary fiscal policies. The comparative resilience of the UAE s economy is reflected in a modest but promising 3% growth in the banking sector s financings book in the 10 months ending in October 2012, with national GDP growth estimated to be around 4% for the period. All this bodes well for 2013, as the UAE economy enters a new phase. We continue to demonstrate our commitment to sustainable business conditions for Abu Dhabi and the UAE. Regulators, locally and globally, have introduced changes in Accordingly, the Central Bank of the UAE has brought in changes that include limits on retail financings, large exposure ceilings and liquidity regulations. The impact of these reforms will be felt in short-term tightening of will create a healthier and more robust banking industry. We are working to ensure that we comply with these reforms and that our stakeholders concerns are met. Key results The Group s financial performance and position in 2012 have exceeded expectations for profits, return on average equity and capital adequacy ratio. Total revenues of AED 1.8 billion (growth of 7% over 2011) Net profit of AED 310 million (growth of 53% over 2011) Return on average equity of 10.1% (increase of 1.2% over 2011) Total assets of AED 32.1 billion (growth of 14% over 2011) Total financings of AED 22.9 billion (growth of 19% over 2011) Total deposits of AED 25.0 billion (growth of 27% over 2011) These results are the consequence of our client- focused strategy, which enables us to benefit from opportunities in the market, the work we have done to strengthen our infrastructure, and the passion and capabilities of our people. Our excellence in operations is attested by the honor that we received as the Middle East s Best Regional Retail Bank at 2012 s Islamic Business and Finance Awards. Human capital development and social responsibility We believe in the nation s human resources and see talent development as critical to our success and that of the UAE s banking sector. The Bank has increased its investment in human capital, with the deployment of programmes to develop UAE nationals as a generation of banking professionals. Our strategy is grounded in contribution to society, supporting the UAE and Abu Dhabi. We look forward to expanding our support of the Abu Dhabi Government s Vision 2030 and to playing an increasingly important role in the lives of the people of the UAE as a corporate citizen through charities, education and other social programmes. Board changes This year we said farewell to HE Mohammed Saif Al Suwaidi, who has rendered the Bank invaluable service as a director, bringing great wisdom and insight to the Board from a distinguished career in financial services. We wish him every success. Strategic vision A priority this year for the Board and Management Team was the development of a new medium-term corporate strategy. Following research and in-depth analysis of the Bank s past performance, an evaluation of our most critical strengths and areas of improvement, a plan has been prepared to maximize what we do best and capitalize on opportunities in the markets, local and international regulatory regimes and the UAE economy, for the benefit of our customers, shareholder and the UAE society at large. During 2013 and beyond, this strategy will focus our efforts internally and externally, ensuring that the Bank is financially healthy, our customers are rewarded with innovative and Sharia compliant products and services, and our shareholder s expectations are met. Recognition On behalf of our shareholder, the Board and Management Team, I would first like to express our most gratitude to the President His Highness Sheikh Khalifa bin Zayed Al Nahyan and His Highness the Crown Prince of Abu Dhabi, Sheikh Mohammed bin Zayed Al Nahyan, for their vision, rule and guidance. Second, on behalf of the Board of Directors, I am honored to convey our thanks to our shareholder for their confidence and support, our deep appreciation of the Bank s staff for their untiring effort, and our gratitude to our customers for their sustained loyalty and trust. Finally, we are extremely grateful to the Abu Dhabi Government and the Central Bank of the UAE for their guidance and assistance. Ahmed Ateeq Al Mazrouei

9 11 GROUP CHIEF EXECUTIVE OFFICER S MESSAGE "Banking as we know it will not satisfy the next generation of customers or keep pace with the Group s ambitions. Faithful to Islamic principles and traditions, we believe in transforming the banking experience and the way Islamic banks do business"

10 Al salam alaykom Group Chief Executive Officer s Message بسم اهلل الرحمن الرحيم In the name of Allah, the most gracious, the most merciful It is my pleasure to share Al Hilal Group s 2012 annual report with you. The year in review The Group celebrates approximately five years since focused directives addressing credit and liquidity risk as well establishment marking another successful year in both as enhanced reporting requirements. We welcome the Central profitability as well as contribution to the social and economic Bank s decisions and its support for a sounder banking sector development of Abu Dhabi and the United Arab Emirates at and have aligned the Group s strategy and risk management large. This year, we continued to harvest opportunities based on framework accordingly. our client centric approach, leveraging off a refreshed medium About you term strategy underpinned by the foundation that the Group has In keeping with Group s vision, we continue to toil to set new built over the last few years. standards that re-define the Islamic Banking market and exceed The economy, business and regulatory environment customer expectations of a new and fresh banking experience. The International economic landscape continued to be In meeting and exceeding these expectations, the Wholesale, overwhelmed by challenges faced by the Eurozone, US economy Personal and Investments Banking Groups made significant and political turmoil in the Arab world. Europe experienced a strides in the current year. return to the recessionary environment of 2008 to 2010, resulting This year, the Wholesale Banking Group participated in several in a liquidity squeeze and reduced appetite for both investments landmark deals, structuring solutions to meet client needs whilst and financings whilst the small but promising recovery in the US maintaining compliance with Shari a principles. The success of is still too early to call. Although emerging economies continue the Global Sukuk Fund, launched by the Investment Banking to outperform their developed counterparts, their growth has Group will be followed by the launch of other funds and capital deteriorated over the prior year with insufficient luster to ignite protected instruments in the near future. global economic growth experienced in the boom years. The Personal Banking Group launched a number of innovative As the UAE increases integration with the global economy, so products during the year which included, amongst others, the does exposure to the challenges faced by the UAE s trading launch of the Qibla card, a flexible alternative to cash payments partners. However, the impacts of these challenges were with an embedded Qibla finder. somewhat alleviated by expansionary fiscal policies, all time high oil prices and growth experienced by non-hydrocarbon sectors. Our achievements in personal banking are attested in our recognition as Middle East s Best Regional Retail Bank for 2012 On a regulatory front, the UAE Central Bank continued its at the Islamic Banking and Finance Awards. initiatives towards strengthening the UAE Banking sector with Performance The Group achieved sustained growth in profitability, assets and financings. Consolidated Group net profit was AED mn, recording growth above 50 percent over the prior year. As a result, the Group recorded earnings per share (EPS) of AED 0.10, 25% above EPS of The Group s total assets reached AED 32.1 billion, which represents 13% or AED 3.8bn growth over the prior year largely on account of growth in financings. Total financings reached AED 22.9 billion, which represents 18% or AED 3.6bn growth over the prior year derived from financings in select segments and sectors. Total deposits reached AED 25 billion, which represents 27% or AED 5.4bn growth over the prior year. The UAE witnessed a sharp increase in money supply on the back of high oil prices which resulted in increased deposits and decreasing Eibor rates. The client is always at the centre of everything we do and with this motto in mind the Group grew its loyal client base by 31% over the prior year. Our local network expanded to reach a total of 22 branches and 116 ATMs to better serve our customers. Overseas, the Group s Kazakhstan operations achieved profitability for the first time which attests to the successful traction the Group has achieved in a market newly introduced to Islamic banking. Al Hilal Takaful had another successful year with an increase in customer numbers indicating a growing affinity to the Al Hilal brand. People We remain conscious that our commitment to service excellence can only be translated through our people. In 2012, the Group s human capital pool grew by 5% reaching 828 personnel to meet the demands of our growing client base. The group continues to demonstrate its commitment to develop the next generation of UAE National banking professionals where 60% of all new appointments in 2012 were represented by UAE Nationals with total representation of 31% of total human capital. Further initiatives included development of a UAE National leadership program as well as secondment and tailored career development plans for UAE Nationals. Corporate Social Responsibility This year the Group adopted a Corporate Social Responsibility Policy which formalizes and embeds the Group s responsibility towards economic, environmental and social agenda. The Policy is an integral component of the Group s strategy and recognizes that the Group s success is dependent on the success of the communities in which we operate as well as all our other stakeholders. Risk management The continued enhancement and investment in robust risk management remains a core strategic pillar to support the growth and strategic targets of the bank within an increasing competitive environment. Group Risk Management Department launched several major transformation initiatives during the course of 2012 including the adoption of advanced approaches under the Basel II framework which are aligned best risk management industry practices. These efforts will ensure the maintenance of a healthy portfolio, continued low loan loss rates and continued overall future success of the bank. Systems, technology and internal capabilities Superior delivery channels and transaction efficiency enables us to respond to customer requirements and compete in the market. Automation and streamlining service flows continue as a priority for operations where projects initiated in early years have bought to fruition improved efficiencies and enhanced control to transactions. Customers have further benefited from e-channel enhancement, including multiple platform e-banking solutions for tablets and smart phones. Our commitment towards service delivery was rewarded by receiving the Most Improved Bank, 2012 Service Quality Award, for the second consecutive year. The coming years This year the Bank embarked on an enterprise-wide strategic review culminating in the revision of the Bank s strategy for the next five years. The revised strategy is founded on three core pillars relating to business performance and returns to shareholders, whilst the second pillar addresses sound health in the form of robust risk management; strong governance and operational excellence and the third pillar solidifies our commitment towards Abu Dhabi 2030 vision as well as development of UAE national leaders. The revision of the bank s five-year strategy reinforces our belief that focused approach to seek out areas of growth and maintain a state of readiness in the currently evolving economic and regulatory landscape. Banking as we know it will not satisfy the next generation of customers or keep pace with the Group s ambitions. Faithful to Islamic principles and traditions, we believe in transforming the banking experience and the way Islamic banks do business. In 2013, we look forward to continuing our journey of profitable growth as well as increased contribution towards the UAE, the communities in which we operate as well as our people. Recognition I reiterate our Chairman s recognition of the loyalty, effort and performance of our employees this year, confirming in every sense our belief that they are our greatest asset. I also wish to thank our Board of Directors for its insightful guidance, support and encouragement. With my best wishes, Mohammed Jamil Berro

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12 17 BUSINESS AND ECONOMIC REVIEW 18 "The UAE s economy has maintained the strength that was restored in 2011, with strong energy sector performance, expansionary Government policies and a return in market confidence" Although the EIBOR rate has fallen this year, assets, financings and deposits show only marginal increases. UAE Real GDP Growth (%) The UAE s real GDP growth rate ended 2012 slightly lower than the rate for 2011, but still well above rates in 2009 and The trend reflects a consolidation of hydrocarbon sector performance and expansionary Government policies. Brent Crude Oil, average price (USD) The average crude oil price, as measured by the Brent index,reached historically highest in 2012, supported in part by economic growth among consumer regions and by continued political uncertainty in some supplier nations Source: International Monetary Fund Source: Bloomberg UAE Inflation (%) The inflation rate has been relatively constant for the past three years in spite of GDP growth, strong signs of recovery in the economy, and large scale Government investment. Gold Closing prices (USD) Gold ended the year above its 2011 closing price. This indicates continued doubt in some sectors about the sustainability of economic recovery in the US and the Eurozone ,097 1,421 1,564 1, Source: International Monetary Fund Source: Bloomberg 3M Eibor and Libor Rates UAE Credit Defaultb Swap Index The UAE interbank rates followed a declining trend throughout As a result, the difference between EIBOR and LIBOR was fairly constant. The three-month EIBOR rate closed at 1.3%, compared to 1.52% in The drop in EIBOR reflects the trend in LIBOR. 1.54% 1.53% 1.30% 1.30% As with 2011, Abu Dhabi s Credit Default Swap (CDS) index in 2012 stayed well below that of Dubai, reflecting continued differences in perceptions of the risks associated with each emirate. Both indices fell, an indication of the growing confidence of rating agencies with conditions in the two emirates. 445 _ Libor _ EIBOR _ Abu Dhabi _ Dubai Source: Bloomberg Source: Bloomberg 0.47% 0.47% 0.41% 0.31%

13 19 BUSINESS AND ECONOMIC REVIEW 20 UAE Banking Sector UAE Assets (AED bn) Total UAE banking assets grew by 8.1 percent to AED 1,796 bn during This is nearly double the increase in volume achieved in The increase is a reflection of promising economic conditions and GDP levels. UAE Markets ESCA Index Emirates Securities and Commodities Exchange Authority (ESCA) data show a modest improvement in 2012, reversing declines of 2011, reflecting increased confidence in the UAE and global economic indicators. 1, , ,341 2,561 Source: Central Bank of UAE UAE Financings,Net (AED bn) Total UAE financings grew modestly by 3.4 percent to AED 1,107 bn. International banking regulations and UAE Central Bank lending restrictions both affected the banking sector s ability to increase financings during the year Source: Securities and Commodities Authority (SCA) Daily Trading Average Average daily trading volumes have increased significantly (72 percent), showing that investors are more confident in the UAE securities markets and the economy in general , , Source: Central Bank of UAE Source: Securities and Commodities Authority (SCA) UAE Customer Deposits (AED bn) Deposit levels across the sector rose by 10.6 percent, which is indicative of increased liquidity. 1, ,183.0 Source: Central Bank of UAE

14 21 PERFORMANCE HIGHLIGHTS 22 The Bank stands at 10th place among UAE banks in financings. Profitability is more than 50% higher than that of 2011, reflecting the Bank s ability to stand out amongst its peers in a challenging market. Financial Profitability Total Assets (AED bn) Consolidated Net Profit (AED mn) Benchmark ranking: 11th (all UAE banks) 4th (all UAE Islamic banks) AED32.1bn Total Assets (AED bn) AED310.3mn Consolidated Group Net Profit in 2012 Total financings (AED bn) Return on Equity (%) Benchmark ranking: 10th (all UAE banks) 3rd (all UAE Islamic banks) AED22.9bn 10.10% Total Financings in Total Return on Equity (ROE) in 2012 Customer Deposits (AED bn) Benchmark ranking: 11th (all UAE banks) 4th (all UAE Islamic banks) AED25.0bn Total Customer Deposits in 2012 Earnings per Share (AED) AED0.10 Earnings per Share (EPS) in 2012

15 23 PERFORMANCE HIGHLIGHTS 24 Provisions Services Collective Cover (%) Branches Specific Cover (%) % Collective Cover in UAE International 25 Total Number of Branches in % Specific Cover in 2012 ATM Network Total Cover (%) Total Number of ATMs in % Total Cover in 2012 Group Headcount Total Group Headcount in 2012

16 25 AL HILAL BANK GROUP 26 Commenced operations on 19 June 2008 with authorized capital of AED 4 billion 1 Al Hilal Takaful Commenced operations on 11 November 2008 with capital of AED 100 million Al Hilal Auto Commenced operations on 16 February 2009 with capital of 2AED 150 thousand Al Hilal Islamic Bank Kazakhstan Commenced operations on 17 March 2010 with capital of 3AED 165 million

17 27 AL HILAL BANK GROUP 28 The Bank 2012 was the fifth year of the Bank s operations. Our aim is to act as an agent of change in Islamic banking, raise and meet the expectations of corporate and retail customers, establishing sector-wide benchmarks for innovation, the use of technology and the banking experience. The Bank has six main business lines: Wholesale Banking, serving private sector corporate and government entities Investment Banking, serving corporate and retail customers with investment products, and managing the Bank s investments Personal Banking, serving retail customers Al Hilal Takaful, providing Shari a compliant insurance Al Hilal Bank Kazakhstan, serving the corporate market with Kazakhstan s first Islamic bank Al Hilal Auto, providing motor vehicle financing solutions to customers Each year, the Bank identifies new concerns, potential growth segments and strategic opportunities. Still aspiring, we have come through a period of economic uncertainty that affected markets and the industry worldwide, and have entered a phase of health, growth and development. THE AL HILAL The Group provides Islamic Banking in the UAE, a full range of takaful products, unique auto financing services, and a pioneering presence as the first Islamic bank in Kazakhstan. BANK GROUP COMPANIES Al Hilal Takaful In 2008, the Bank incorporated Al Hilal Takaful, an Islamic insurance company. Its products include general, property, casualty, engineering, marine, motor and medical insurance, structured to the requirements of corporate customers. Al Hilal Takaful has four branches in Abu Dhabi and one in Dubai. Internally, the Company s 2012 achievements reflected the Bank s emphasis on governance, efficiency and innovation in products and services. The Company concluded programs begun in 2011 for restructuring, process automation, increased process control and underwriting guidelines. Al Hilal Auto The Bank established Al Hilal Auto in 2009 as an innovative provider of motor vehicle financing solutions. Al Hilal Auto offers instant finance approval, vehicle registration, takaful, vehicle customization and sourcing. Customers can purchase vehicles with cash or financing from our Bank or other Islamic banks. Al Hilal Islamic Bank Kazakhstan Al Hilal Bank Kazakhstan was the Bank s first overseas venture, established in It is the first Islamic bank in Kazakhstan. The Bank has three branches, serving the corporate sector. In addition to creating shareholder value, the Bank aims to lead the growth of Islamic banking in Kazakhstan and neighboring countries, and act as a facilitator for UAE investment in Kazakhstan. In 2012, the Bank achieved profitability. Its customer base increased and products were structured for industrial clients.

18 29 AL HILAL BANK GROUP 30

19 31 ABOUT YOU SERVING 32 ORGANIZATIONS IN Creating opportunities for you in Islamic financing is our mission. Our strategy and operations are built to ensure that we develop innovative products and services for you, sustained by our financial health. THE PUBLIC AND PRIVATE SECTORS You are the individuals, families, corporate entities and communities that we serve. You will determine the future of banking, and thus the way we shape Islamic banking in the years to come.

20 33 ABOUT YOU 34 Our commitment Over the last few years we have brought knowledge, in-depth understanding and dedication to the banking needs of public and private sector entities. As your partner, we provide Islamic financing solutions, portfolio management and trade financing support, enabling you and your stakeholders to bring your plans to life. Our role involves building relationships, developing expertise in the nature of your business and creating products and services that satisfy Shari a principles and your industry. Wholesale and Investment Banking in 2012 New products and services included the implementation of Qard al Hassan financing and export bill financing. The latter will enable our corporate clients to benefit from our extended correspondent network, which now numbers over 500. Expansion of the Bank s correspondent network around the world provides our wholesale clients greater scope for trade and extends our global reach. The Global Sukuk Fund, launched this year, closed 2012 at over USD 50 million. The fund is available to corporate and retail customers. In Kazakhstan, we advised the Government on methods and processes for issuing sukuks. Building strength and infrastructure Internally, we improved efficiency with the automation of the liability management system. This will reduce risk, speed up treasury processes and ensure that corporate clients are better served. Goals for 2013 Next year we will complete our three-year segmentation strategy, supporting the Bank s strategic framework: performance, health and development. Segmentation will identify vertical markets and focus our activity on key customer groups and product types. Treasury automation will give us enhanced controls, help to cut costs and provide continuous monitoring of the banking book. New products currently in development include sukuks and mutual funds, as well as Shari a- compliant corporate financing solutions. Developing our network of correspondent banks will provide corporate clients wider scope when choosing the Bank for regional ventures. We will also be rolling out Internet banking for corporate clients. In addition, 2013 will see new Investment Banking products, including capital protected investments. Professional associations and industry participation This year, the Bank sponsored the Association of Corporate Treasurers (ACT) conferences in Dubai and Abu Dhabi, and co-sponsored the Global Financial Market conference with National Bank of Abu Dhabi. In addition, the Bank sent delegates to the World Islamic Banking Conference in Bahrain. Trade Finance Services Letters of credit Letters of guarantee Investment Management Services Asset management through mutual funds Investment mandate management Structured products Discretionary portfolio management services Islamic Financing Services Project and contract finance Asset acquisition finance Working capital finance Cash Management Services Account services Transaction management Channel management Islamic Hedging Services Foreign currency solutions Profit rate solutions Financial Advisory Services Initial offerings Mergers and acquisitions Finance restructuring Sukuk management and origination Takaful Services Marine Non-marine Medical and auto

21 35 ABOUT YOU brought us closer to our aim of meeting the needs of each generation and type of retail customer, targeting diverse segments with unique products. Serving individuals and their families 2012 innovation, convenience and choice The Bank added new Personal Banking products and services and extended Internet banking to smart phones and tablets, the first Islamic bank to do so. Next year will see more services on all platforms as we continue to make banking more convenient and bring the Bank s services ever closer to customers. Segmentation Our segmentation strategy was initiated in 2010 as a three-year project. This year, the Personal Banking Group launched two new segments: Seghaar and Business: The Seghaar segment caters to children up to age 13, and has five pillars: Learn : we have partnered with Emirates National Schools to introduce a program of Islamic banking education for children ( Curriculum 2030 ) Earn : children can earn rewards according to their academic scores, read books at the Al Hilal library, and deposit money in their accounts Save : children can open and manage their own savings accounts Donate : in partnership with Emirates Environmental Group, we teach children about the environment, and we will plant a tree for every Seghaar account opened in a child s name Protect : a program for financing children s education with easy repayment terms We regard the Seghaar segment as good business, because children are the next generation of banking customers. More importantly, we see this program as a way of helping families ensure that their children are well equipped for their futures as workers, parents and citizens. In addition to the five pillars, the Seghaar segment offers children the opportunity to experience banking at Kidzania, with which the Bank has partnered at Dubai Mall. The Business segment is a program for small businesses (with annual turnover of AED 50 million or less). It includes operating accounts, financing facilities and credit cards, making us a one-stop solution provider for startups and small established companies. Personal Banking products and services The Personal Banking Group launched unique products, the first of their kind in the region: Al Hilal Certificates give customers the opportunity to earn attractive profits on single deposits The Qibla card is a flexible alternative to cash payments. Provided in partnership with Visa, the card enables you to find the direction of the Qibla wherever you are Sukuk Murabaha is a personal finance product, enabling you to buy bonds from National Bonds Corporation. You can redeem the bonds according to your needs, and earn the prizes and profits offered by National Bonds Corporation The Al Hilal Football Card is a branded credit card, offered in partnership with UAE Football Association We launched a group life takaful in partnership with Dubai Islamic Insurance and Reinsurance Company (Aman). It covers payments of outstanding financing balances in the event of a customer s permanent disability or death To support the community, we have partnered with Absher, and offer reduced takaful rates to UAE Nationals working in the private sector To increase convenience, the Bank launched egrab this year, the world s first carbon-free mobile banking service. egrab is an ecofriendly bus, serving Abu Dhabi and Al Ain. Customers can use egrab for deposits, withdrawals and financing services. This service sets a regional standard for sustainability as well as for the extension of banking services to customers in remote areas. Our 2012 partnership with Mastercard gives customers the opportunity to use Mastercard credit and debit cards. Assuring customer satisfaction We worked hard this year to find out what you think of us, and to ensure that issues were resolved quickly and conveniently. The Call Back program reported a 95% satisfaction rate with account opening and loan services. Customer complaints decreased significantly, and the turnaround time for responding to complaints was reduced. Our service quality monitoring program has been successful, identifying issues of concern to customers in branches and enabling us to respond proactively. Training and development support staff product knowledge and customer interaction skills. The Bank was awarded Centre of Excellence status for its customer service programs by Purdue University, making it one of the top 100 banks globally for customer quality. In addition, Ethos Consulting rated the Bank as Most improved bank of 2012 for its score in customer satisfaction surveys. The Human Resources and Organizational Excellence Group was recertified to the ISO 9001:2008 quality management standard. Accounts and Cash Management Current and savings accounts Wakala deposit accounts Transaction management Channel management Foreign currency solutions Takaful Assets Medical Dental Card Services Shopping cards Covered cards Investment Funds Equity funds Investment mandate management Personal Finance Personal finance Home finance Construction finance Vehicle finance Financial Mall Personal banking Wealth management Etihad kiosk Etisalat kiosk Emirates Identity Authority (EID) Safe deposit lockers Ladies and children s banking E-Channels SMS banking Call centre ATMs Al Hilal Auto Vehicle purchase Vehicle registration

22 37 ABOUT YOU CONTINUING Corporate Social Responsibility is the way that the Bank supports the communities in which it operates, as a business and as a corporate citizen. It ensures that our products, the environment, our role in the community and our business performance are sustainable. TO STAND BY YOU: CORPORATE SOCIAL RESPONSIBILITY 38

23 39 ABOUT YOU 40 Formalizing Corporate Social Responsibility to enhance the achievement of the Bank s social mission In 2012, the Bank published its Corporate Social Responsibility policy, which formalized the Bank s approach and methodology for implementing its social mission in alignment with the goals of the Abu Dhabi Economic Vision The Policy goes beyond support for charitable causes, and commits the Bank to implementing and reporting corporate citizenship and outcomes essential to sustainability in the following areas: Economic performance Environmental performance Employment practices Product and service responsibility Society Economic performance The Bank contributes to the economies of the countries in which it operates. Its approach to this contribution involves: Support for local suppliers Community investments Transparency and disclosure of its business results, in terms of economic value generated and distributed (e.g., in operating costs and employee wages and benefits) Remunerating employees according to sector best practices Providing opportunities for members of local communities (e.g., Emiratization initiatives and programs) Environmental performance The Bank is committed to minimizing waste and reducing the use of environmental inputs, without compromising levels of service and quality, business performance and other aspects of corporate citizenship. Areas of environmental performance include, but are not limited to the careful use of paper, water and energy. Monitoring and reporting on the employment of citizens in the countries in which it operates Disclosing information such as staff turnover rates and employee satisfaction data Providing benefits commensurate with local market conditions, including health insurance, maternity leave and end of service benefits Ensuring occupational health and safety Fair access and information about employee training and development programmes Performance appraisal and feedback Product and service responsibility The Bank communicates product and service information to wholesale and personal banking customers to ensure that they obtain the maximum possible benefit from them. Compliance of products and services is a priority, to reduce risk and ensure customer satisfaction. Customer satisfaction is measured as part of service excellence management, using internal and external sources of information. The Bank is benchmarked against competitors as part of this process, in key customer touchpoints such as branch physicals, the professional knowledge of staff, and process time. Customers financial literacy is an objective of Corporate Social Responsibility, and the Bank considers this an essential contribution to its communities. In 2012 the Bank launched a program of Islamic banking education, in partnership with Emirates National School in Abu Dhabi and Al Ain, with the aim of helping children develop skills in understanding and saving money. Customer privacy and the security of customer information are essential to developing the trust and confidence of customers, and for ensuring regulatory compliance. Breaches of customer confidentiality are monitored closely and reported, with corrective action taken as appropriate. Society Corporate Social Responsibility governs the Bank s interaction with the communities that it serves. This is a key element in the Bank s vision and mission, and of the way in which the Bank is supporting Abu Dhabi s Vision The Bank s community relationships are as follows: Relationships with stakeholders: engagement, two-way communication, transparency in reporting and active solicitation of views and feedback Access points for financial services to stakeholders Prevention of, and action in the event of corrupt practices Demonstration of the Bank s commitment to integrity and good governance Red Crescent Khalifa bin Zayed Charity In addition, the Bank actively supports social programs in the community. During 2012, this included donations, sponsorships and partnerships with the following organizations: Zayed Care Make a Wish Foundation Fujairah Care Charities in Sharjah Employment practices Under the Corporate Social Responsibility Policy, the Bank is committed to providing a safe, healthy and nurturing environment for all its employees. To this end, the Bank has implemented the following processes:

24 41 ABOUT US 42 LEADERSHIP, The Bank s Board of Directors operates on the understanding that sound governance is fundamental to earning the trust of stakeholders, itself critical to sustained performance and stakeholder value. GUIDANCE AND ACCOUNTABILITY

25 43 ABOUT US 44 The Bank is led by the Chairman and Board of Directors, supported by the Group Chief Executive Officer and his Executive Management. Their roles and responsibilities are defined in the Bank s Corporate Governance Framework. Corporate Governance Framework Governance Purpose of the Corporate Governance Framework Board, Board Committees and Fatwa and Shari'a Supervisory Board Fatwa and Shari'a Supervisory Board Board Audit Committee Board HR Committee Board Corporate Governance Committee Board Risk Committee Board GCEO Management Management Committees Management Executive Committee Management Assets & Liabilities Committee Management Investment Committee Management Risk Committee Management Credit Risk Committee Operations and Functions Wholesale Banking Personal Banking Treasury Investment Banking Finance & Strategic Planning Legal Risk Management Support Services Human Capital & Facilities Management The Bank s Corporate Governance Framework enables the Board to balance its risk oversight and strategic counsel roles, and to ensure adherence to regulatory requirements and risk tolerance. The Board is committed to upholding the tenets of good governance, based on the values of: responsibility; accountability; fairness; and transparency. Implementation of the Corporate Governance Framework The Board embraces relevant local and international best practices, and has adopted a phased approach to implementing the Corporate Governance Framework. This approach reflects the Bank s growth in maturity and its strategy going forward. Up to 2010, the first phase of framework implementation was completed. This included the development and approval of governance charters, policies and other governance-related documents. The second phase commenced in 2011, taking governance from a compliance function to a strategic enabler of the Bank s longterm success and sustainability, meeting the goals of all the Bank s stakeholders. This phase continues, with the establishment of a governance culture that will impact the activity of all employees in their relationships with customers, regulators and other stakeholders. Internal Audit Shari'a Supervision

26 45 ABOUT US 46 Board of Directors The role and structure of the Board The Board is the Bank's highest decision-making body and is ultimately responsible for the management of the Bank. The chairman is non-executive, and two of the three directors are independent, including the deputy chairman. The Board's experience and expertise provide a balance of attributes, which enables the Board to fulfil its duties and responsibilities. Each director brings his own perspective to Board deliberations, and directors are encouraged to offer constructive challenges of each other s views. Board responsibilities The manner in which the Board discharges its duties is clearly articulated in the Corporate Governance Framework. They include: Setting the Bank's strategic direction Appointing the Bank's CEO and Executive Management Team to manage the Bank on a day-to-day basis in accordance with the strategic and business plan approved by the Board Overseeing the Bank's management and ensuring that the Bank is managed in the best interest of all stakeholders and in accordance with applicable laws and regulations Understanding the Bank's risk profile, and approving high-level risk policies and risk management procedures Ensuring that a comprehensive risk management and reporting process is in place Approving the Bank's annual budget (and specifically the capital expenditure, investments and disposals) Steering the establishment of the Corporate Governance Framework in addition to approving, reviewing and coordinating its implementation Approving the Bank's financial results announcements, reports and accounts Strategic direction and oversight The Board is responsible for the bank's strategic direction. Management presents the strategy annually, which is discussed and then agreed with the Board. The bank's strategy is based on three equally important, interlocking pillars: Performance - the Bank is a financial enterprise with a business objective of earning profit Health - an institution that manages money and third party funds requires sound policies, procedures and infrastructure, in addition to strong financials Development - the Bank's vision and mission call for the development of Abu Dhabi, the UAE and the global Islamic banking industry The Board ensures that the strategy is aligned with the Bank's values and performance targets, and monitors its implementation with reference to the Bank's risk profile. Financial performance is monitored through quarterly management reports. Board meetings Six Board meetings were held in 2012, with one meeting dedicated to reviewing the Bank's strategy. The table below shows each director's attendance: Name Number of Meetings Attended HE Ahmed Ateeq Al Mazrouei 4 HE Jassim Ahmed Al Meraikhi 5 HE Ali Majid AI-Mansoori 4 HE Jamal Sultan Al Hameli 6 HE Mohammed Saif Al Suwaidi 1 HE Mohammed Saif Al Suwaidi resigned from the Board on 15 March Board appointment policy According to the Bank s Articles of Association, the appointment of the Board falls within the authority of the Bank s sole shareholder. The Board was appointed on 10 September 2010 for a renewable period of three years. When appointing directors, the shareholder takes cognisance of their knowledge, skills and experience, as well as other attributes considered necessary for the role. Succession planning According to the Bank s Articles of Association, succession planning for the Board is the responsibility of the sole shareholder. The Board is satisfied that the Bank s current management leadership pipeline and the work under way to strengthen it provide adequate assurance of succession depth over the short and medium terms. Access to information and resources There is ongoing engagement between executive management and the Board, and where necessary the Bank's executive management attends Board and Board Committee meetings by invitation. External auditors are invited to attend audit committee meetings. Directors have unrestricted access to management and Bank information, as well as to any other resources necessary to carrying out their roles and responsibilities. This includes access to external advice at the Bank s expense. Board remuneration and evaluation In terms of the Bank s Articles of Association, the Bank s sole shareholder is responsible for determining the remuneration of the Board. The directors cumulative remuneration for 2012 was AED 1,300,000. During 2012, the board evaluation processes of a number of local and international banks were researched, and the appointment of an independent service provider has been planned, to advise the Board on an appropriate Board evaluation program for the Bank. Board professional development Ongoing director development remains a focus. Directors are kept continuously informed of applicable new legislation, regulations, standards and codes, as well as relevant sector developments that could affect the Bank. During 2012, the board agreed to adopt and implement a formal professional development program for 2013 that would focus on: Board effectiveness The role of the Board in risk management Comparative corporate governance between Islamic and conventional banks

27 47 ABOUT US 48 The Board comprises the chairman and three non-executive directors, of whom two are independent (HE Jassim Ahmed Al Meraikhi and HE Ali Majid Al Mansoori). Board Members HE Jassim Ahmed Al Meraikhi Deputy Chairman His Excellency joined the Board as Deputy Chairman in He has served as a board member of financial concerns including Abu Dhabi Commercial Bank, Abu Dhabi Retirement Pension and Benefits Fund, Oman and Emirates Investment Company, Abu Dhabi Holding, Delma Brokerage and United Brokerage Company. His Excellency is currently a director at Abu Dhabi Investment Authority. He brings extensive financial services and consumer markets expertise to the Bank. HE Jamal Sultan Al Hameli Board Member His Excellency joined the Board in He has been appointed recently as the Director of Corporate and Business Communication at Abu Dhabi Investment Council (an Investment arm of the Government of Abu Dhabi). Mr. Al Hameli is a long standing member of one of the Council s two main Governance Committees, ensuring that the Council adheres to the highest international standards of probity, integrity and accountability. His Excellency brings exemplary financial services experience to the Bank. HE Ahmed Ateeq Al Mazrouei Chairman His Excellency joined the Board as Chairman in He has served as chairman of Abu Dhabi Securities Market and as a board member of financial concerns including National Bank of Abu Dhabi, Arab Banking Corporation, Arab International Bank and Tunis Emirates Bank. His Excellency started his career with Abu Dhabi Investment Authority and is currently the head of the Infrastructure Department at Abu Dhabi Investment Council. With a strong background in financial services and chairmanship, His Excellency brings extensive international expertise and exemplary governance credentials to his position. HE Ali Majid Al Mansoori Board Member His Excellency joined the Board in He is the Executive Director at the office of the Vice Chairman at the Executive Council. HE Al Mansoori has held several high level position including being the Director of the External equities Europe and Deputy Director at External Funds-America at the Abu Dhabi Investment Authority (ADIA). Mr. Mansoori hold various board member positions such as Board Member at the Audit Committee at Abu Dhabi Investment Council (ADIC), Board Member at ZonesCorp, Board Member at Al Dar-Sorouh Company and Chairman for Abu Dhabi Airports Company (ADAC). With an outstanding financial services background, His Excellency brings extensive knowledge of North American and European markets to the Board.

28 49 ABOUT US 50 "Board committees monitor key indicators, advise and recommend action to the Board, and ensure, through the participation of independent members, that stakeholders' interests are safeguarded." Delegation of Authority (DOA), and Board Committees The board retains effective control through the Corporate Governance Framework, which provides for delegation of authority. Board committees facilitate the discharging of Board responsibilities and provide in-depth focus for specific areas of Board responsibility. Each committee has a mandate, reviewed annually. The Board Audit Committee Roles and responsibilities The Board Audit Committee is responsible for ensuring that the control environment of the Bank functions correctly and that controls comply with governing laws and regulations. The Committee s duties include, but are not limited to: Overseeing the financial reporting process and assessing the effectiveness of internal controls Emphasizing the independence of internal and external audit within the Bank Reviewing internal audit policies and procedures and recommending them to the Board for approval Reviewing internal audit reports and overseeing the audit function Maintaining regular interaction with external auditors to discuss and address any issues Membership The Committee has three members.. Meetings Five Board Audit Committee meetings were held in 2012: Name Number of Meetings Attended HE Jassim Ahmed Al Meraikhi (Chairman) 5 HE Jamal Sultan Al Hameli 4 Mr Taha Al Bahrawi 4 Mr Taha Al Bahrawi was appointed as a member of the Board Audit Committee in It is accepted governance practice to appoint non- Board members to an audit committee. Mr Al Bahrawi is a recognized financial reporting and audit expert. Highlights of the Committee s work in 2012 Prominent achievements of the Committee during 2012 include: Appointing a new Head of Internal Audit General supervision of internal audit assignments conducted by Internal Audit in the Bank and its subsidiaries Quarterly review of the Bank s financial performance and a review of the financial statements presented by external auditors, followed by endorsement for the Board's approval Monitoring the performance of the Bank s Internal Audit Division Board Risk Committee Roles and responsibilities The Board Risk Committee advises the Board on the Bank's current and future risk tolerance and risk strategy, and oversees the implementation of this strategy. The Committee monitors the concentration of diversification of the Bank's asset portfolios and ensures that the Bank has established a business continuity plan and business recovery plan. Membership The Committee consists of three members. Meetings Four Board Risk Committee meetings were held in Name Number of Meetings Attended HE Ahmed Ateeq Al Mazrouei (Chairman) 4 HE Ali Majid Al Mansoori 4 Mohammed Saif Al Suwaidi 1 Prominent achievements of the Board Risk Committee during 2012 include: Aligning the charters of the Management Risk Committee, Management Credit Risk Committee, Management Remedial Committee, Management Operational Risk Committee and Management Investment Committee to the Bank s strategic objectives Approval of the following policies: Risk Rating Policy, Early Alert and Watchlist Policy, Country Risk Policy, Remedial, Provision and Write-off Policy, and Contractor Financing Policy Human Resources Committee Roles and responsibilities The Board Human Resources Committee is responsible for: Reviewing and approving the Bank's human resources policies and procedures and ensuring that they comply with applicable laws and legislation Reviewing and approving compensation systems, packages and grading structure Ensuring that the Bank's training, career development and succession programs are effective in elevating skill levels and securing adequate succession at the top management level Membership The Committee has three members. Meetings Four Board HR Committee meetings were held during Name Number of Meetings Attended HE Jamal Sultan Al Hameli (Chairman) 4 HE Jassim Ahmed Al Meraikhi 4 HE Ali Majid Al Mansoori 4 Prominent achievement of the Committee during 2012 include: Initiating a project to define the Group s relationship with subsidiaries Initiating a project to define a comprehensive Delegation of Authority (DOA) framework for the Bank and its subsidiaries Initiating a project for the development of a formal succession and leadership development policy. Adopting a new Committee charter Approving a UAE National allowance increase Adopting a long-term incentive scheme Approving the Reward Policy for 2012 Board Corporate Governance Committee Roles and responsibilities The Board Corporate Governance Committee is responsible for the development and regular updates of appropriate corporate governance procedures and "best practices" within the bank. It monitors their implementation, ensures compliance with these guidelines and regulatory requirements and performs public reporting on corporate governance matters. The Committee is also accountable for reporting material governance concerns and violations to the Board in addition to proposing developments in the corporate governance procedures and structures. Membership The Committee consists of three members. Meetings Four Committee meetings were held during Name Number of Meetings Attended HE Jamal Sultan Al Hameli (Chairman) 4 Dr Assem Safieddine 4 Mr Shawqi Ali Taleb 3 Dr Safieddine was appointed as a member of the Committee because he is a recognized corporate governance expert in the MENA region as well as internationally. Dr Safieddine is Director of the Finance and Corporate Governance Program at the Olayan School of Business at the American University of Beirut. Mr Shawqi Taleb was appointed as a member of the Committee because of his practical corporate governance experience. Mr. Taleb is a CFA charterholder of the CFA Institute and is a financial advisor at the Abu Dhabi Fund for Development. Prominent achievements of the Committee in 2012 include: An audit of the Bank's Corporate Governance Framework A corporate governance review of the Bank's subsidiary in Kazakhstan Recommending a CSR policy for the Bank for approval by the Board Recommending an appropriate formal board professional development program to the Board

29 51 ABOUT US 52 The Fatwa and Shari a Supervisory Board ensures that the Bank s contracts, operations and transactions are in strict compliance with Shari a rules and principles. The Bank s DOA cascades accountabilities, analysis and decision making from the Board to Executive Management, supported by formal committees for specialised oversight and deliberation. Fatwa and Shari a Supervisory Board Executive Management Group Chief Executive Officer (GCEO) The purpose and role of the Fatwa and Shari a Supervisory Board In line with the requirements of the Bank s Articles, together with best governance practice for Islamic banks, the Board has appointed a Fatwa and Shari a Supervisory Board. The Board was appointed for a period of three years, in January 2008, and the appointment was renewed for a further three years in January The Board is responsible for supervising the Bank s Shari a-related activities to ensure that they comply with Islamic principles and rules. The Board has issued its 2012 report confirming that the Bank s contracts, operations and transactions, and its investments and activities conducted in 2012 were in accordance with Shari a rules and principles. Members Sheikh Dr Abdussattar Abu Ghuddah Fatwa and Shari a Supervisory Chairman Dr Abu Ghuddah joined the Fatwa and Shari a Supervisory Board as Chairman in Dr Abu Ghuddah holds a PhD in Shari a from Al- Azhar University, and is a member of Fatwa and Shari a boards at UBS, Standard Chartered Bank, Dow Jones, Calyon Bank, Samba Financial Group, Qatar Islamic Bank, Jordan Islamic and Noor Islamic Bank. Sheikh Nizam MS Yaquby Fatwa and Shari a Supervisory Vice Chairman Sheikh Nizam joined the Fatwa and Shari a Supervisory Board in He holds a BA from McGill University in Economics and Comparative Religion and is currently a candidate for PhD in Islamic Law at the University of Wales. Sheikh Esam M Ishaq Member Sheikh Esam joined the Fatwa and Shari a Supervisory Board in He teaches Fiqh, Aqeeda, and Tafseer courses in Bahrain, and holds a BA in political science from McGill University and is a member of Accounting and Auditing Organisation for Islamic Financial Institutions, Bahrain. Sheikh Esam is a member of the Fatwa and Shari a boards at Al Meezan Investment Management Limited, Al Ritaj Investment Company, Al Baraka Islamic Bank, Bahrain Development Bank and Tadhamon Capital B.S.C. Sheikh Dr Mohammad Abdul Rahim Sultan Al Olama Member Dr Al Olama joined the Fatwa and Shari a Supervisory Board in He holds a BA in Shari a from Islamic University in Al Madina Al Munawarrah, and MA and PhD degrees in jurisprudence from the University of Umm Al-Qura in Makkah Al Mukarramah, and is a member of Accounting and Auditing Organisation at Islamic Financial Institutions, Bahrain. Dr Al Olama is currently an associate professor at Emirates University, where he teaches Islamic studies. He is a member of Fatwa and Shari a boards at Takaful House, Zakat Fund, Mawarid Finance, Tabarak, Noor Islamic Bank, Al Jazira Capital, Minhaj, Awqaf and Islamic Affairs. Seven meetings were held during 2012 by the Fatwa and Shari a Supervisory Board. Mr. Mohammed Jamil Berro is the GCEO of the Bank. Mr. Berro was appointed by the Board in The GCEO is accountable for all management functions. His responsibilities include, but are not limited to: Developing the Bank s strategy for consideration and approval by the Board Developing and recommending annual business plans and budgets that support the Bank s long-term strategy Leading the Bank s managers and employees in executing the strategy and plans approved by the Board Monitoring and reporting on the performance of the Bank to the Board Establishing an organizational structure for the Bank that is appropriate to the execution of the Bank s strategic plan Recommending members of the Executive Management team to the Board On the authority of the Board, the GCEO has established the following management committees to assist in the management of the Bank: Management Executive Committee Management Credit Risk Committee Management Risk Committee Management Investment Committee Management Assets and Liabilities Committee External Auditors auditor, and the shareholder is informed of the appointment of external auditors. Currently, the Bank s external auditor is KPMG. KPMG was appointed by the Board according to authorities set out in the Bank s Articles for a renewable period of one year, at the recommendation of the Board Audit Committee. Ethics and organizational integrity The Board provides effective leadership on an ethical foundation. This is reflected in an approved Code of Conduct (Code) to ensure that management is aligned to the Bank's group's values. The Code applies in the Bank's subsidiaries as well. The Code empowers employees to make effective decisions according to Sharia-based ethical principles, and promotes the adherence to the highest standards of responsible business practice. The Bank has implemented appropriate whistle-blowing policies and processes that allow for the confidential reporting of any ethical breaches. Compulsory compliance training for all new joiners ensures that employees are aware of the ethics reporting options available to them. The GCEO and the Compliance Officer are the formal custodians of the Code and are ultimately responsible for implementing it throughout the Bank and its subsidiaries. Sheikh Nizam is a member of the Fatwa and Shari a boards at UBS, Standard Chartered Bank, HSBC, Lloyds, BNP Paribas, Dow Jones, Abu Dhabi Islamic Bank and Samba Financial Group. Name Number of Meetings Attended Sheikh Dr Abdussattar Abu Ghuddah 7 Sheikh Nizam MS Yaquby 7 Sheikh Esam M Ishaq 7 Sheikh Dr Mohammad Abdul Rahim Sultan Al Olama 7 The external auditor is independent of the Bank and its directors. The Board Audit Committee is responsible for ensuring that the auditor remains independent and the auditor may not, during assigned audit periods, undertake consultancy work related to its audit activity, where such consulting could affect its decisions or independence as an external auditor. The Board Audit Committee Charter requires that the Board Audit Committee approve all non-audit services provided by the external

30 53 ABOUT US 54 The objective of the Credit, Risk and Compliance Management Group is to achieve optimal risk levels within risk appetite parameters prescribed by the Board. This mitigates potential adverse impacts on the Bank, while ensuring that the Bank can maximize growth and profitability. Credit, Risk and Compliance Management Risk Management Framework Enhancements to infrastructure, systems and processes Risk management and the assurance of compliance for the Bank is the responsibility of the Credit, Risk and Compliance Management Group. Risk management overview Robust risk management forms the backbone of the bank s strategic pillars of growth, health and development through the adoption of local and international best practice standards. This will also enable the bank to achieve its growth and profitability targets as well as maintain capital levels that are comfortably above regulatory limits. The Bank s business strategy is to be a strong financial player with insight and transparency in risk-taking. The risk management framework supports this objective and promotes the transparency in the Bank. The framework is thus integral to the Bank s operations and culture. Under the Framework, risks are proactively managed, and framework is sufficiently flexible to incorporate new businesses into the Bank. The framework has been communicated from the Board to individual business lines. Primary risks The most significant risks that the Bank faces are as follows: Credit risk the risk of financial loss where a customer or counterparty fails to meet their financial obligations (by far the major risk for the bank in terms of capital consumption, frequency and severity) Liquidity risk the risk of not being able to fund our assets and meet obligations as they come due, without incurring unacceptable losses Market risk the risk of an adverse impact on earnings resulting from changes in market factors such as foreign exchange rates, profit rates, commodity prices and equity prices Operational risk the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition is aligned to the regulatory (Basel II) definition, including legal and regulatory risk but excluding strategic and reputation risk Compliance risk the risk of legal or regulatory sanction and financial or reputation loss arising from our failure to abide by our compliance obligations The Risk Management Framework allows the Credit, Risk and Compliance Management Group to develop, maintain, enhance and create associated policies for these risks. Risk management philosophy The Bank s risk management philosophy is based on five pillars of risk management, namely; Strong corporate governance Robust risk architecture Adherence to globally accepted risk standards Skilled and seasoned human resources Robust risk culture Risk oversight and governance To ensure effective risk control, monitoring, reporting and communication, the Board has delegated oversight of the Bank s risk and controls to the Board Risk Committee. In addition to this committee, the following management committees provide governance, control, oversight, analysis and reporting to evaluate the Bank s overall risk profile: Management Risk Committee Management Credit Risk Committee Management Remedial Committee Assets and Liabilities Committee (ALCO) Management Investment Committee Management Operational Risk Committee The Board Audit Committee provides added comfort that the internal control environment and overall risks are managed effectively. The Shari a Supervisory Board ensures that the Bank continues to follow and adopt the principles of Shari a in providing products and services to our customers. The proper management of risk is a fundamental activity as it influences the Bank s performance, reputation and ultimate success. Effective risk management involves taking an integrated and balanced approach to risk and reward, thus enabling the Bank to increase financial growth opportunities and mitigate potential loss or damage. Mitigation strategies are of equal importance and need to be effectively aligned and integrated. External oversight Independent reviews of the Credit, Risk and Compliance Management Group are carried out by internal and external auditors, and the Central Bank of the UAE maintains proactive oversight and regular inspections. Achievements in 2012 Risk transformation plan In 2012, the Credit, Risk and Compliance Management Group embarked on an aggressive enterprise wide risk transformation plan. The plan represents a spectrum of initiatives to address policies, processes and IT risk infrastructure enhancement. This transformation plan forms a core part of the Bank s strategic goal of a best- in- class risk management framework to support its near and long-term strategic objectives. The adoption of a strong risk management framework and culture is demonstrated in the Bank s very low credit and loss ratios. At the same time, the Bank achieved strong growth in terms of asset size and profitability, far superior to the market average. The strong governance culture, combined with material enhancements to, and development of the Bank s risk policies, provides increased assurance that risks are assumed in a very measured manner and in line with the Bank s risk appetite. This was achieved in a very challenging local market environment and during a period of global market instability and dislocation. Structural enhancements The organizational structure of the Credit, Risk and Compliance Management Group has been enhanced to provide clear lines of communication, transparency and accountability that support the Bank s strategic vision. In 2012, the Credit, Risk and Compliance Management Group instituted enhancements to the Bank's risk management infrastructure, systems and processes. These included: Significant enhancement of the Global Credit Risk Policy Development of Market and Liquidity Risk Policies Enhancement of the Bank s risk appetite statement Significant enhancement of the stress testing framework Development of IRB compliant rating models Development of risk adjusted pricing framework Enhancement to IT risk infrastructure and associated MIS reporting Enhancement to the governance structure of risk Development of new, and enhancement of existing training programs to develop and build risk and compliance culture and awareness Enhancement of ICAAP, in particular refinement in the assessment of Pillar 2 risks Credit risk management As part of the risk transformation plan instituted in 2012, the Bank made a number of enhancements to ensure increased credit risk diversification as well as greater levels of control and oversight. The most important of these was the implementation of credit rating models for wholesale banking, a revised internal rating methodology and associated IT platform, which is compliant with IRB standards and best international practices. This also included the development and institution of maximum exposure thresholds by rating and implementation risk adjusted pricing mechanism (RAROC), which will allow the Bank to price more accurately for specific risks. The effective implementation of these initiatives will form the foundation of the Bank s ultimate long-term strategic goal of IRB compliance and will eventually allow for a greater cascading of credit approval authority currently residing with the Board Risk Committee and Management Credit Risk Committee.

31 55 ABOUT US The Bank s human capital is its greatest asset. Our success in growing the business and in developing Islamic banking and the UAE s communities are the outcome of the capabilities and focused energy of our people. Our culture supports professional and personal development, and we provide opportunities for structured career progression. Developing the next generation of banking leaders in the UAE is a priority for us. 56 Credit, Risk and Compliance Management (continued) Market, profit rate, liquidity and concentration risk During 2012, enhancements were made in the monitoring, control and assessment of market, profit rate, liquidity and concentration risks. These included better levels of reporting at management and Assets and Liabilities Committee level, as well as the implementation of more sophisticated methodologies and multi-dimensional stress scenarios. Operational risk The Bank continues to ensure that operational risks are effectively controlled and managed. The Management Operational Risk Committee meets frequently to review the Bank s operational risk profile, heat map and risk register. The Bank also ensures that departmental Risk Control Self Assessments (RCSA) and Key Risk Indicators are embedded and updated regularly. People Emiratization Our commitment to UAE National recruitment and development has been at the top of our priorities since In 2012, we achieved 31% Emiratization, out of a total Group headcount of 828. We support our programs for attracting UAE Nationals with retention strategies to ensure fair and objective progression and development. Others 69% UAE nationals 31% 2012 Emiratisation Level Our well-established Boot Camp for senior officers and lower grades trained 143 staff. In addition, 73 staff employees are in certification programs, double the number in E-learning and e-libraries The Bank s e-learning program sets required courses according to employee grade and function. The e-library program, launched in 2012, provides easy access to required reading. Employees are made accountable for completing courses and reading assignments, and their participation is tracked. Understanding our people This year saw the launch of the National Tour program, in which we visit branches to hold focus groups with National employees to identify their concerns. Employee suggestion schemes brought 103 suggestions during Recognition and rewards Each month, employees who contribute beyond the call of duty can be given spot awards. Compliance Career growth and human development The Compliance function provides the Bank with the assurance that it complies with all laws and regulations governing its operations, such as those concerning money laundering, combating terrorism financing, fraud and financial crime risk, information security and fraud prevention. As part of the development of strong risk culture, the Bank has established a framework of comprehensive training and awareness in compliance, Know-Your Customer (KYC) and Anti-Money Laundering (AML) and beyond The launch of Leadership 2020 this year demonstrates our commitment to developing our talent, and to Emiratization. The program is designed to take potential Bank leaders to middle, senior and executive management positions to target positions through a combination of executive education, secondment and job rotation. The Bank s sponsorship and scholarship initiatives now have eight UAE Nationals at Emirates Institute of Banking and Financial Services, in a tie-up between the Bank and Tawteen, and other Nationals learning English. 43 Nationals have joined the Bank as interns, and we expect to grow this number next year. With a robust risk management framework in place, the Credit, Risk and Compliance Management Group will continue to support the growth of the Bank, its entry into new markets and the launch of new products and services within risk appetite parameters prescribed by the Board. 153 UAE National employees have been developed for higher positions in the Bank since 2010, including 30 to the second target position. Training and learning Flagship training programs introduced and conducted during 2012 include: I-know, a program focusing on Bank product and functional knowledge; to date, 350 employees have completed tests in credit risk and operational knowledge Jahez ( Know your Bank in Two Weeks ), a program launched this year for new joiners

32 57 ABOUT US 58 The products and services that you receive are delivered by automated systems, managed for security and efficiency. Ensuring our Strength, Capabilities and Security Our promise We are committed to fast, convenient and secure services that make banking easy for you. As a Bank that prioritizes innovative customer experience, we invest heavily in technology, process improvement and making sure that our staff can deliver on what we promise. What we have achieved in 2012 During 2012, the Operations Group supported the launch of new products and services such as the Global Sukuk Fund and new credit cards. This was accompanied by significant increases in both inward and outward remittances. We were able to handle substantially higher throughput in spite of a reduced Operations headcount, largely because of process improvement. Overall, productivity is up by 126 percent. Important achievements for Operations in 2012 include i-ban implementation, the adoption of the new UAE fund transfer system and implementation of straight through processing. Along with these achievements, control incidents have been reduced and the Operations Group has passed all its Shari a audits and beyond Large-scale implementations, such as T-24, continue, and we expect to bring about greater efficiencies in 2013 without compromising service quality, security and accuracy in transaction processing. Core banking upgrades have also kicked off in 2012 and are due to finish in the middle of next year. This will give additional functionality to our platforms. IT will also focus on providing robust cash management services, corporate internet banking and extensions of the mobile banking service. Such developments in Operations and IT will provide a sound basis for managing our overseas operations in Kazakhstan, and for extending our branch and ATM network, in line with our five-year strategy. Key initiatives launched in 2012 include full channel digitization, and service automation from account opening to meeting financing needs. Automation of the liability management system will reduce risk and improve the efficiency of processing transactions in the wakala and mudarib portfolios. IT is essential to the Bank s forward strategy and to its overall goal of transforming the banking experience for customers. This year, the IT Division won the Editor s Choice Award for innovative ways for which IT delivered a competitive advantage. The division went onto achieve a 100 percent customer SLA satisfaction rate, and system availability was consistently above 99.97%, over the industry benchmark. IT supported product launches, significantly retail internet banking, mobile and ipad banking and utility bill payments. The Bank s Disaster Recovery program was rolled out to ensure business continuity and the Bank has virtualized the server environment and consolidated the storage environment.

33 59 FINANCIAL REVIEW 60 Total Financings Total deposits Total Financings in bn Total Deposits in bn Share of Total Sector in % Total financings in 2012 were AED 22.9 bn, 19 percent higher than 2011 s closing level. Financings grew steadily through the year. The Bank s market share of total UAE financings was 2.07 percent at year end, an increase of 15 percent on its share at the end of Total Financings (AED bn) Share of Total Sector in % The Bank s total deposits rose by 27.6 percent in This increase reflects growth in the Bank s customer base and excess liquidity available in the economy. The Bank s share of the UAE s total bank deposits rose to 2.11 percent at the end of 2012 from a share of 1.83 percent at the end of Total Deposits DEC-11 Mar-12 Jun-12 Sep-12 DEC-12 Financings balance Market share of UAE Financings Share of Total Sector Financings Growth The Bank s share of 2012 financings growth, at 9.9 percent, is almost unchanged since This demonstrates the Bank s ability to maintain its position in the market. _ _ DEC-11 Mar-12 Jun-12 Sep-12 DEC-12 Customer deposits balance Market share of UAE Deposits Share of total sector deposit growth The Bank s share of total deposit growth at the end of 2012 was 4.8 percent, 2.7 percent below its share at the end of It is likely that in spite of excess liquidity available in the market, the Bank faced heavy competition from longer established banks. 10.1% 9.9% 7.5% 4.8%

34 61 FINANCIAL REVIEW 62 Total Assets Total Assets in bn Share of Total Sector in % Standing at AED 32.1 bn, the Bank s total assets at the end of 2012 were 13.4 percent higher than at the end of This can be attributed largely to increases in financings, enabling the Bank to expand its share of UAE banking assets to 1.79%. Total Assets (AED bn) Net Profit Net Profit in 2012 AED310.3mn In 2012 the Bank exceeded its profits of 2011 by over 50 percent. This was the result of increased revenues, balanced by a continued improvement in efficiency and cost management. Consolidated Net Profit (AED mn) _ Assets balance _ Market share of UAE Assets DEC-11 Mar-12 Jun-12 Sep-12 DEC-12 Earnings per Share Earnings per Share in 2012 Provisions Total Cover in 2012 Share of total sector asset growth The Bank s share of total UAE bank asset growth was 2.9 percent. 4.4% 2.9% AED0.10 Earnings per Share (EPS) were up by 25 percent in 2012, at AED 0.1, compared with 2011 s figure of 0.08, the result of higher profits in spite of an increase in share capital The Bank maintained adequate provision to cover non-performing loans

35 63 FINANCIAL INFORMATION 64

36 65 FINANCIAL INFORMATION 66 Fatwa and Shariah Supervisory Board Report Al Hilal Bank Group For the Financial Year Ended on 31 December 2012 بسم اهلل الرحمن الرحيم Praise be to Allah and peace be upon His Messenger, Mohammed and upon his family and companions. To: Abu Dhabi Investment Council السالم عليكم ورحمة اهلل تعالى وبركاته In line with Article No. 44 of the Bank s Articles of Association, the Fatwa and Shariah Supervisory Board (FSSB) is pleased to present its report as follows: We have examined the policies, procedures and the contracts related to the products and transactions, which the Bank has executed or launched during the period of our required monitoring and supervision, in order to pronounce whether or not the Bank has complied with the Shariah rules and principles as well as with the opinions, resolutions and instructions issued by us taking into consideration of the Sharia Standards of Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI), Bahrain. The FSSB asserts that the responsibility of ensuring the Bank s conformity, in its practice, with Shariah rules and principles rests solely with the Executive Committee and Board of Directors of the Bank. However, the responsibility of FSSB is confined only to express an independent opinion based either on its direct supervision of the Bank s activities or through the Shariah Supervision Division, and to report our findings thereof to you, in the light of the details shown by the minutes and reports of our meetings and audit; We have reviewed all products launched by the Bank during the year in question, including manuals, execution mechanisms and standard contracts as well as non-standard agreements, especially contracts related to syndicated finance which the Bank has concluded with third parties. With the help of the Shariah Supervision Division, we have planned and performed the Shariah audit on the transactions executed during the year and obtained all the information and explanations which we deem necessary to give us reasonable assurance that the Bank has not violated Shariah rules and principles. Likewise, we have reviewed periodical reports and observations raised to us by the Shariah Audit unit including different kinds of operations carried out by the Bank. The Sharia audit s findings have been reviewed by us in the light of the concerned departments clarifications and justifications and according to which resolutions and appropriate instructions have been given. This is in addition to our review of the Bank s Consolidated Financial Statements and the associated notes, and also the monthly distribution of profits among the depositors and shareholders. The FSSB held a total number of seven meetings during the year, answered the queries raised to it and approved many new products proposed by the Management. The Executive Member of the Board Dr. Abdul Sattar Abu Ghuddah in his turn, has convened four meetings during the year and answered queries received through phone. Likewise, the Executive Member of the Board His Eminence, Sheikh Nizam Yaqubi has reviewed all corporate transactions presented to him by way of s, including a number of syndications with other banks. He also provided Shariah proclamations on issues raised to him via telephone calls. In line with the duty of the Board to promulgate Shariah awareness of Islamic banking in the society, especially in those communities where Islamic banking is yet new, the Executive Member of the Board, His Eminence, Sheikh Essam Mohamed Ishaq has delivered highly advanced training programs to a number of senior officials and representatives of government and private institutions and university students in Kazakhstan, in addition to staffs of Al Hilal Islamic Bank in Kazakhstan. Accordingly, the FSSB is of the opinion that: 1. The contracts, operations and transactions executed by the Bank (and its subsidiaries), the investments entered into and the activities conducted by it during the financial year ended on 31 December 2012 as presented to us, are overall in accordance with Shariah rules and principles. And whatever discrepancies found in some of the cases, the Management has been guided as how to correct them and tackle with their effects and consequences as required by Shariah. 2. Distribution of profits and sharing of losses on investment accounts (including allocating costs and expenses to these accounts and that of the shareholders) are in conformity with the standards approved by us as per Shariah rules and principles. 3. All the revenues earned through non-shariah compliant sources and means have been forfeited for the charity account to be spent for charity causes as per our guidelines, far away from being utilized by the Bank in any manners whatsoever. 4. Owing that the Bank is fully owned by the government, its funds become public funds, and hence the Bank is not under an obligation to pay Zakat on them. However, given the Shariah opinion that public funds are subject to Zakat if they are invested or put into business, the Board advises that the Bank should pay Zakat on its funds in support of Zakat beneficiaries. As the Bank has no absolute authority to discharge Zakat directly, the obligation to discharge Zakat falls on the shareholders themselves. The FSSB extends its thanks to the Management of the Bank, and prays Allah to enable them serving the Islamic economy, and to bless the wealth of the Bank s shareholders and its customers and to bestow us all with wholesome goods, and integrity in our words and deeds. والسالم عليكم ورحمة اهلل تعالى وبركاته Dr. Abdulsattar Abughuddah Shaikh Nedham Mohamed Yaqoobi Shaikh Esam Mohamed Ishaq Dr. Mohammad Abdulrahim Sultan Alolama Place: Abu Dhabi, UAE. Date: A.H C.E. Chairman Vice-Chairman Member Member

37 67 FINANCIAL INFORMATION 68 Independent auditor s report to the Shareholder - Al Hilal Bank PJSC For the Financial Year Ended on 31 December 2012 Introduction We have audited the accompanying consolidated financial statements of Al Hilal Bank PJSC ( the Bank ) and its subsidiaries ( the Group ), which comprise the consolidated statement of financial position as at 31 December 2012, the consolidated income statement and consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Report on other legal and regulatory requirements As required by the UAE Federal Law No. 8 of 1984 (as amended), we further confirm that we have obtained all information and explanations necessary for our audit; the financial statements comply, in all material respects, with the applicable requirements of the UAE Federal Law (8) of 1984 (as amended) and the Articles of Association of the Bank; that proper financial records have been kept by the Bank and the contents of the Chairman s report which relate to these consolidated financial statements are in agreement with the Group s financial records. We are not aware of any violation of the above mentioned Law and the Articles of Association having occurred during the year ended 31 December 2012, which may have had a material adverse effect on the business of the Company or its financial position. Munther Dajani Registration No February 2013 Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2012, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

38 69 FINANCIAL INFORMATION 70 Consolidated statement of financial position as at 31 December Consolidated statement of comprehensive income Assets Note Cash and balances with banks 7 1,437,223 1,232,209 Murabaha and wakala deposits with banks and other financial institutions 8 2,805,778 2,608,204 Receivables from Islamic financing activities 9 17,859,889 15,501,327 Ijara 10 5,050,982 3,823,473 Investment securities 11 2,799,619 3,159,980 Investment property 12 39, ,475 Property and equipment 13 1,369,741 1,219,681 Other assets , ,729 Total assets 32,121,908 28,251,078 Liabilities Customers accounts 15 24,956,664 19,617,830 Wakala deposits from banks 2,491,598 4,935,829 Other liabilities 16 1,178, ,861 Total liabilities 28,626,266 25,527,520 Equity Share capital 17 3,090,000 2,590,000 Statutory reserve 17 69,410 34,252 Other reserves (11,452) (17,016) Retained earnings 321,404 45,441 Total equity attributable to the equity holder of the Bank 3,469,362 2,652,677 Non - controlling interest 26,280 70,881 Total equity 3,495,642 2,723,558 Total liabilities and equity 32,121,908 28,251,078 Income Note Income from ijara and Islamic financing activities, net 18 1,498,893 1,381,024 Income from wakala investments 77,123 79,376 Investment income 107, ,426 Commission, fees and foreign exchange income, net , ,099 1,838,848 1,716,925 Expenses Personnel costs (386,322) (339,353) General and administrative expenses 20 (274,016) (223,849) Impairment charges on financial assets 21 (257,282) (280,339) Depreciation 13 (72,105) (71,573) Profit before depositors share of profits 849, ,811 Depositors share of profits 22 (583,424) (621,806) Profit for the year 265, ,005 Attributable to: Equity holder of the Bank 310, ,346 Non-controlling interest (44,601) (22,341) Profit for the year 265, ,005 Other comprehensive income / (expenses) Net gain/(loss) on investment in equity instrument designated at fair value through 15,621 (16,875) other comprehensive income Exchange difference on translation of foreign operation (10,057) 3,011 Other comprehensive income / (expenses) for the year 5,564 (13,864) Total comprehensive income for the year 271, ,141 Attributable to: Equity holder of the Bank 315, ,482 Non-controlling interest (44,601) (22,341) Ahmed Ateeq Al Mazrouei Chairman Mohamed Jamil Berro Chief Executive Officer The accompanying notes 1 to 31 are an integral part of these consolidated financial statements The independent auditors report is set out on page 67 The accompanying notes 1 to 31 are an integral part of these consolidated financial statements The independent auditors report is set out on page 67

39 71 FINANCIAL INFORMATION 72 Consolidated statement of changes in equity Consolidated statement of changes in equity (continued) Attributable to equity holder of the Bank Attributable to equity holder of the Bank Share capital Statutory reserve Translation reserve Revaluation reserve Retained earnings Total Noncontrolling interest Total equity Share capital Statutory reserve Translation reserve Revaluation reserve Retained earnings Total Noncontrolling interest Total equity At 1 January ,590,000 34,252 3,310 (20,326) 45,441 2,652,677 70,881 2,723,558 Total comprehensive income for the year: Profit for the year , ,300 (44,601) 265,699 Other comprehensive income - - (10,057) 15,621-5,564-5,564 Total comprehensive income for the year - - (10,057) 15, , ,864 (44,601) 271,263 Transaction with equity holders recorded directly in equity Issuance of share capital 500, , ,000 Transfer to statutory reserve - 35, (35,158) Directors remunerations & others Total transaction with equity holders recorded 500,000 35, (34,337) 500, ,821 directly in equity At 31 December ,090,000 69,410 (6,747) (4,705) 321,404 3,469,362 26,280 3,495,642 At 1 January ,000,000 14, (3,451) (134,974) 1,875,891 93,222 1,969,113 Total comprehensive income for the year: Profit for the year , ,346 ( 22,341) 180,005 Other comprehensive income - - 3,011 (16,875) - (13,864) - (13,864) Total comprehensive income for the year - - 3,011 (16,875) 202, ,482 (22,341) 166,141 Transaction with equity holders recorded directly in equity Issuance of share capital 590, , ,000 Transfer to statutory reserve - 20, (20,235) Directors remunerations & others (1,696) (1,696) - (1,696) Total transaction with equity holders recorded 590,000 20, (21,931) 588, ,304 directly in equity At 31 December ,590,000 34,252 3,310 (20,326) 45,441 2,652,677 70,881 2,723,558 The accompanying notes 1 to 31 are an integral part of these consolidated financial statements The independent auditors report is set out on page 67 The accompanying notes 1 to 31 are an integral part of these consolidated financial statements The independent auditors report is set out on page 67

40 73 FINANCIAL INFORMATION 74 Consolidated statement of cash flows Notes to the consolidated financial statements Cash flows from operating activities Profit for the year 265, ,005 Adjustment for: Depreciation 72,105 71,573 Impairment charges on financial assets 260, ,339 Unrealised revaluation loss on investment property 85,775 40,407 Unwinding of impairment charge (5,939) - Unrealised revaluation gain on investment securities (22,217) - 655, ,324 Change in: Murabaha and wakala deposits with banks (353,545) 2,669,452 Receivables from Islamic financing activities (2,598,021) (4,561,228) Ijara (1,258,424) 284,936 Other assets (178,248) (163,076) Customers accounts 5,338,835 1,508,402 Other liabilities 204, ,895 Net cash from operating activities 1,810, ,705 Cash flows from investing activities Acquisition of property and equipment (222,165) (722,948) Acquisition of investment securities (802,801) (1,088,528) Sale of investment securities 1,206, ,336 Acquisition of investment property - (21,298) Net cash from / (used in) investing activities 181,299 (1,154,438) Cash flows from financing activities Issue of share capital 500, ,000 Change in wakala deposits from banks (1,690,699) (390,386) Director remuneration paid and others 821 (1,696) Net cash (used in) / from financing activities (1,189,878) 197,918 Net increase / (decrease) in cash and cash equivalents 802,002 (455,815) Cash and cash equivalents, beginning of the year 564,123 1,019,938 Cash and cash equivalents, end of the year (Note 23) 1,366, ,123 The accompanying notes 1 to 31 are an integral part of these consolidated financial statements The independent auditors report is set out on page 67 1.Legal status and principal activities Al Hilal Bank PJSC (the Bank ) was incorporated in Abu Dhabi, United Arab Emirates ( UAE ) on 18 June 2007 by virtue of Amiri Decree number 21 of 2007, with limited liability, and is registered as a Public Joint Stock Company in accordance with the United Arab Emirates Federal Law number 8 of 1984 (as amended), United Arab Emirates Federal Law number 10 of 1980 (as amended) and United Arab Emirates Federal Law number 6 of 1985 regarding Islamic banks, financial institutions and investment companies. Its registered office address is P. O. Box 63111, Abu Dhabi, United Arab Emirates. The consolidated financial statements of the Group as at and 2012 comprise the Bank and its subsidiaries (Note 26) (together referred to as the Group ). The Group is primarily involved in Islamic corporate, retail and investment banking activities as well as Islamic insurance ( Takaful ) and carries out its operations through its branches in the United Arab Emirates and subsidiaries located in the United Arab Emirates and Kazakhstan. The consolidated financial statements of the Group include the shareholder and depositors funds. The consolidated financial statements were authorized for issue by the Board of Directors on 14 February Basis of preparation The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. a. Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and the requirement of UAE Federal Law No. 8 of 1984 (as amended) b. Basis of measurement These consolidated financial statements have been prepared under the historical cost convention except for the following: Islamic derivative financial instruments, namely promises to exchange currency and / or cash flows, which are non-speculative and intended for hedging purposes, are measured at fair value; Financial instrument designated at fair value through profit and loss are measured at fair value. Investment in equity instruments is measured at fair value; Recognized financial assets and financial liabilities designated as hedged items in qualifying fair value hedge relationships are adjusted for changes in fair value attributable to the risk being hedged. Other financial assets not held in business model whose objective is to hold assets to collect contractual cash flows or whose contractual terms do not give rise solely to payment of principal and profit are measured at fair value; Investment property is measured at fair value. c. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment, estimates and assumptions in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5. d. Functional and presentation currency i. Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the respective entity operates ( the functional currency ). The consolidated financial statements are presented in Arab Emirate Dirham ( AED ), which is the Group s presentation currency. ii. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income.

41 75 FINANCIAL INFORMATION Basis of preparation (continued) d. Functional and presentation currency (continued) iii. Group companies The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of that consolidated statement of financial position; income and expenses for each consolidated statement of income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and all resulting exchange differences are recognized in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of other financial instruments designated as hedges of such investments, are taken to other comprehensive income. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the consolidated statement of comprehensive income as part of the gain or loss on sale. e. Standards early adopted by the Group IFRS 9, Financial instruments: Classification and measurement, effective 1 January IFRS 9 was issued in November It replaces the parts of IAS 39 that relate to the classification and measurement of financial assets. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. Adoption of IFRS 9 is mandatory from 1 January 2015; earlier adoption is permitted. The Group has early adopted IFRS 9 from 1 October 2010, as well as the related consequential amendments to other IFRSs, because this new accounting policy provides reliable and more relevant information for users to assess the amounts, timing and uncertainty of future cash flows. In accordance with the transition provisions of the standard, comparative figures have not been restated. The Group s management has assessed the financial assets held by the Group at the date of initial application of IFRS 9 (1 October 2010). The main effects resulting from this assessment were: Investments in Sukuk instruments, previously classified as available-for-sale, meet the criteria to be classified as at amortized cost in accordance with IFRS 9. They are now therefore classified as financial assets at amortized cost. Equity investments not held for trading that were previously measured at fair value and classified as available-for-sale have been designated as at fair value through other comprehensive income and profit and loss. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. a. Hedge accounting In order to manage profit rate risks, the Group enters into a Sharia compliant arrangements including profit rate swaps. Fair value hedges Changes in the fair value of profit rate swaps and that are designated and qualify as fair value hedging instruments are recorded in the consolidated statement of income, along with changes in the fair value of the assets, liabilities or group thereof that are attributable to the hedged risk. Hedge documentation At the inception of the hedge, formal documentation of the hedge relationship must be established. The hedge documentation prepared at the inception of the hedge must include a description of the following: The Group s risk management objective and strategy for undertaking the hedge; The nature of risk being hedged; Clear identification of the hedged item and the hedging instrument; and How the Group will assess the effectiveness of the hedging relationship on an on-going basis. Hedge effectiveness testing The hedge is regarded as highly effective if following conditions are met: At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in offsetting the changes in fair value of the hedging instruments with corresponding changes in the hedged risk and should be reliably measurable; and The actual results of the hedge are within a range of 80 to 125 percent. Discontinuance of hedge accounting The hedge accounting is discontinued when a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting. At that point of time, any cumulative gain or loss on the hedged instrument that has been previously recognised in the consolidated statement of income is immediately reversed in the consolidated statement of income. b. Islamic financial assets i. Murabaha Murabaha receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. A Murabaha contract is a sale of goods with an agreed upon profit mark up on the cost of the goods. A Murabaha contract is of two categories. In the first category, the Bank purchases the goods and makes it available for sale without any prior promise from a customer to purchase it. In the second category, the Bank purchases the goods ordered by a customer from a third party and then sells these goods to the same customer. In the latter case, the Bank purchases the goods only after a customer has made a promise to purchase them from the Bank. ii. Ijara Muntahia Bittamleek A form of leasing contract which includes a promise by a lessor to transfer the ownership in the leased property to the lessee, either at the end of the term of the Ijara period or by stage during the term of the contract. iii. Wakala deposits Wakala deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Wakala is an act of one party delegating the other to act on its behalf in what can be a subject matter of delegation and it is thus permissible. This is an agreement whereby the Bank provides a certain amount of money to an agent who invests it according to specific conditions in return for a certain fee. The agent shall be held responsible for misconduct, negligence or violation of the conditions agreed upon by the Bank. iv. Mudaraba Mudaraba is a contractual arrangement whereby two or more parties undertake an economic activity. Mudaraba is a partnership in profit between capital and work. It may be conducted between investment account holders as providers of funds and the Bank as a Mudarib. The Bank announces its willingness to accept the funds of investment account holders, the sharing of the profits being as agreed between the two parties and the losses being borne by the provider of the funds except if they were due to misconduct, negligence or violation of the conditions agreed upon by the Bank, in which case, such losses would be borne by the Bank. c. Consolidation i. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. ii. Fund management The Group manages and administers assets held in trust or in fiduciary capacity on behalf of investors. The financial statements of these funds are not included in these consolidated financial statements. Information about the Group s fund management and fiduciary activity is set out in Note 29. iii. Special purpose entities Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific financing transaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE s risks and rewards, the Group concludes that it controls the SPE.

42 77 FINANCIAL INFORMATION Significant accounting policies (continued) c. Consolidation (continued) iv. Transactions with non-controlling interests Non-controlling interest represents the equity in subsidiaries not attributable, directly or indirectly, to owners of the Bank and is presented separately in the consolidated statement of comprehensive income and within equity in the consolidated balance sheet, separately from equity attributable to owners of the Bank. d. Property and equipment Land and buildings comprise mainly branches and offices. Property and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the consolidated statement of income during the financial period in which they are incurred. Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: Leasehold improvements 7 years 7 years Computer systems and equipment 4 years 4 years Furniture, equipment, safes and vehicles 4 years 4 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in the consolidated statement of income. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings. e. Work In Progress Properties or assets in the course of construction for production, supply or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost includes all direct cost attributable to design and construction of the property including related staff costs, and for qualifying assets, financing costs capitalised in accordance with Group s accounting policy. When the assets are ready for the intended use, the capital work in progress is transferred to the appropriate property and equipment category and is depreciated in accordance with the Group s policies. f. Qard Hassan Qard Hassan receivables are non-profit bearing financing receivables whereby the customer borrows funds for a period of time with an understanding that the same amount shall be repaid at the end of the agreed period. g. Swap transactions Currency and profit rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or profit rates (for example, fixed rate for floating rate) or a combination of all these (i.e., cross-currency profit rate swaps). The Bank s credit risk represents the potential loss if counterparties fail to fulfill their obligation. h. Impairment of non-financial assets Assets that have indefinite useful life for example, goodwill or intangible assets not ready for use are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of impairment at each reporting date. i. Cash and cash equivalents In the consolidated statement of cash flows, cash and cash equivalents comprise cash in hand, due from banks, balances with the Central Bank, Murabaha and Wakala deposits with banks and financial institutions with original maturity of less than one month (2011: one month) which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. j. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are recognized as deduction from equity. k. Revaluation reserve The revaluation reserve is related to revaluation of investment securities classified at fair value through other comprehensive income, the policy of which is set out in Note 3(m). l. Customers accounts and Wakala deposits from banks Customers accounts and Wakala deposits from banks are initially recognized at fair value less transaction costs and are subsequently measured at amortized cost. m. Financial assets Classification prior to 1 October 2010 The Group classifies its financial assets in the following categories: at fair value through profit or loss, receivables from Islamic financing activities, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. i. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. ii. Receivables from Islamic financing activities Receivables from Islamic financing activities are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. iii. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. iv. Recognition and measurement Regular purchases and sales of financial assets are recognized on the trade-date the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss is initially recognized at fair value, and transaction costs are expensed in the consolidated statement of income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Receivables from Islamic financing activities are subsequently carried at amortized cost using the effective profit rate method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the consolidated statement of income in the period in which they arise. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognized in other comprehensive income. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the consolidated statement of comprehensive income. Profit on available-for-sale securities calculated using the effective profit method is recognized in the consolidated statement of income. Dividends on available-for sale equity instruments are recognized in the consolidated statement of income when the Group s right to receive payments is established. Classification after 1 October 2010 As from 1 October 2010, the Group classifies its financial assets in the following categories: those to be measured subsequently at fair value, and those to be measured at amortized cost. This classification depends on whether the financial asset is a Sukuk or equity investment.

43 79 FINANCIAL INFORMATION Significant accounting policies (continued) n. Sukuk Investments i. Financial assets at amortized cost A Sukuk investment is classified as amortized cost only if both of the following criteria are met: objective of the Group s business model is to hold assets to collect the contractual cash flows; and contractual terms give rise on specified dates to cash flows that are solely payments of principal and profit on the principal outstanding. ii. Financial assets at fair value If either of the two criteria above are not met, the Sukuk instrument is classified as fair value through profit or loss. All equity investments are measured at fair value. Equity investments that are held for trading are measured at fair value through profit or loss. For all other equity investments, the Group can make an irrevocable election at initial recognition to recognize changes in fair value through other comprehensive income rather than the consolidated statement of income. Regular purchases and sales of financial assets are recognized on the trade-date the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value though profit or loss are expensed in the consolidated statement of income. A gain or loss on a Sukuk investment that is subsequently measured at fair value and is not part of a hedging relationship is recognized in the consolidated statement of income and presented in the consolidated statement of comprehensive income in the period in which they arise. A gain or loss on a Sukuk investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in the consolidated statement of income when the financial asset is derecognized or impaired and through the amortization process using the effective profit rate method. The Group subsequently measures all equity investments at fair value. Where the Group s management has elected to present unrealized and realized fair value gains and losses on equity investments in other comprehensive income, there is no subsequent recycling of fair value gains and losses to the consolidated statement of income. Dividends from such investments continue to be recognized in the consolidated statement of income as long as they represent a return on investment. The Group is required to reclassify all affected Sukuk investments when and only when its business model for managing those assets changes. The Group makes an assessment of a business model at portfolio level as this reflect the best way the business is managed and information is provided to management. In making an assessment of whether an asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows, the Group considers: management s stated policies and objectives for the portfolio and the operation of those policies in practice; how management evaluates the performance of the portfolio; whether management s strategy focuses on earning contractual cash flow; the degree of frequency of any expected asset sales; the reason of any asset sales; and whether assets that are sold are held for an extended period of time relative to their contractual maturity or are sold shortly after acquisition or an extended time before maturity. Financial assets held for trading are not held within a business model whose objective is to hold the asset in order to collect contractual cash flows. o. Impairment of financial assets i. Assets carried at amortized cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or Group of financial assets measured at amortized cost is impaired. A financial asset or a Group of financial assets are impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include significant financial difficulty of the debtor or issuer, default or delinquency by a debtor, restructuring of a financing by the Group on terms that the Group would not otherwise consider, indication that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse change in the payment status of debtors or issuers in the group of assets, or economic conditions that correlate with defaults in the group of assets. ii. Assets classified as available-for-sale (applicable until 30 September 2010) The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For sukuk securities, the Group uses the criteria referred to (i) above. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of comprehensive income is removed from equity and recognized in the consolidated statement of income. Impairment losses recognized in the consolidated statement of income on equity instruments are not reversed through the consolidated statement of income. If, in a subsequent period, the fair value of a Sukuk instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income. p. De-recognition of financial assets The Group derecognises a financial asset when the contractual right to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of the ownership are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control on the financial asset. Any interest in transferred financial assets that qualify for derecognition that is carried or retained by the Group is recognised as separate asset or liability in the statement of financial position. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) is recognised in the consolidated statement of income. q. Financial liabilities Financial liabilities, including Group customers and wakala deposits, are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective profit method, with profit expense recognised on an effective yield basis. The effective profit rate method is a method of calculating the amortised cost of a financial liability and of allocating profit expense over the relevant period. The effective profit rate is the rate that exactly required to unwind estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. De-recognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group s obligations are discharged, cancelled or they expire. r. Revenue recognition The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. i. Profit income Profit income is recognized using the effective profit rate method. When a financing receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow required to unwind at the original effective profit rate of the instrument, and continues unwinding the discount as profit income. Profit income on impaired finance facilities and receivables is recognized using the original effective profit rate. ii. Dividend income Dividend income is recognized when the right to receive the income is established. Usually this is the ex-dividend date for equity securities. Dividends are presented in net trading income or net income from other financial instruments at fair value through profit or loss based on the underlying classification of the equity investment. Dividends on equity instruments designated as at fair value through other comprehensive income are presented in other revenue in the consolidated statement of income unless the dividend clearly represents a recovery of part of the cost of the investment, in which case it is presented in other comprehensive income. iii. Fee and commission income Fees and commissions income relating to underwriting and financing activities of the Group is recognized when earned.

44 81 FINANCIAL INFORMATION Significant accounting policies (continued) s. Investment property y. Financial guarantee Investment property is property held for rental income or for capital appreciation, or both, but not for sale in the ordinary course of business, use in the production, supply of goods or services or for administrative purposes. Investment property is measured at fair value with any change therein recognized in the consolidated statement of income. t. Lease payment Payments made under operating leases are recognised in the consolidated statement of income on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. u. Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. v. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. w. Staff terminal benefits UAE nationals employed by the Group are registered in the scheme managed by Abu Dhabi Retirement Pensions & Benefits Fund in accordance with Law number (2) of Staff terminal benefits for expatriate employees are accounted for on the basis of their accumulated services at the reporting date and in accordance with the Group s internal regulations, which comply with the applicable laws. An actuarial valuation is not performed on staff terminal and other benefits as the net impact of the discount rate and future salary and benefits level on the present value of the benefits obligation are not expected by management to be significant. x. Director s remuneration In accordance with the Ministry of Economy and Commerce interpretation of Article 119 of Federal Law No. 8 of 1984 (as amended), Directors remuneration has been treated as an appropriation from equity. Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified party fails to meet its obligation when due in accordance with the contractual terms. For other financial guarantee contracts, financial guarantees are initially recognised at their fair value (which is the premium received on issuance). The received premium is amortised over the life of the financial guarantee. The guarantee liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment. The premium received on these financial guarantees is included within other liabilities. z. Takaful contracts i. Classification The Group issues contracts that transfer either Takaful risk or both Takaful and financial risks. The Group does not issue contracts that transfer only financial risks. Contracts under which the Group accepts significant Takaful risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder is classified as Takaful contracts. ii. Recognition and measurement Gross written contributions, in respect of annual policies, are recognised in the consolidated statements of income at the inception of the policy. In respect to policies with a term of more than one year, the contributions are spread over the tenure of the policies on a straight line basis, and the unexpired portion of such contributions is included under unearned contributions in the consolidated statement of financial position. iii. Claims Claims incurred comprise the settlement, the internal and external handling costs of paid and changes in the provisions for outstanding claims arising from events occurring during the year. Where applicable, deductions are made for salvage and recoveries. Claims outstanding comprise provisions for the Group s estimate of the ultimate cost of settling all claims incurred but unpaid at the reporting date whether reported or not, and related internal and external claims handling expenses and reduced by expected salvage and recoveries. Claims outstanding are assessed by reviewing individual reported claims. Provisions for claims outstanding are not discounted. Adjustments to claims provisions established in prior periods are reflected in the period in which the adjustments are made. The methods used, and the estimates made, are reviewed regularly by management. iv. Gross claims paid Gross claims paid are recognised in the consolidated statement of income when the claim amount payable to policyholders and third parties is determined as per the terms of the Takaful contracts. v. Claims recovered Claims recovered include amounts recovered from re-takaful companies in respect of the gross claims paid by the Group, in accordance with the re-takaful contracts held by the Group. It also includes salvage and claims recoveries. vi. Gross outstanding and IBNR claims Gross outstanding claims comprise the estimated costs of claims incurred but not settled at the consolidated financial position date. Provisions for reported claims not paid as at the end of the reporting period are made on the basis of individual case estimates. This provision is based on the estimate of the loss, which will eventually be payable on each unpaid claim, established by management in the light of currently available information and past experience. An additional net provision is also made for any claims incurred but not reported ( IBNR ) at the end of the reporting period, on the basis of management estimates. The re-takaful share of the gross outstanding claims is estimated and shown separately. vii. Unearned contribution reserves A provision is made for contribution deficiency arising from general Takaful contracts where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the consolidated financial position date exceeds the unearned contributions provision and already recorded claim liabilities in relation to such policies. The provision for contribution deficiency is calculated by reference to classes of business which are managed together. viii. Re-takaful The Group cedes re-takaful in the normal course of business for the purpose of limiting its net loss potential through the diversification of its risks. Assets, liabilities, income and expense arising from ceded re-takaful contracts are presented separately from the assets, liabilities, income and expense from the related Takaful contracts because the retakaful arrangements do not relieve the Group from its direct obligations to its policyholders. Amounts due to and from re-takaful are accounted for in a manner consistent with the related contributions and is included in re-takaful assets. Re-takaful assets are assessed for impairment at the end of each reporting period. A re-takaful asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due, and that event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Impairment losses on re-takaful assets are recognised in the consolidated statement of income in the year in which they are incurred. Commission in respect of re-takaful contracts is recognised on an accrual basis. ix. Takaful receivables and payables Amounts due from and to policyholders, agents and reinsurers are financial instruments and are included in other assets and other liabilities, respectively, and not in Takaful contract provisions or retakaful assets. x. Liability adequacy test At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities using current estimates of future cash flows under Takaful contracts. In performing these, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets supporting such liabilities are used. Any deficiency in the carrying amounts is immediately charged to the consolidated statement of income by establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision). Where the liability adequacy test requires the adoption of new best estimate assumptions, such assumptions (without margins for adverse deviation) are used for the subsequent measurement of these liabilities.

45 83 FINANCIAL INFORMATION Significant accounting policies (continued) aa. New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations that are issued but not effective for the accounting period starting 1 January 2012, and have not been early adopted in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group. IFRS-9 Financial instrument : Recognition and measurement: Replaces IAS39 The International Accounting Standards Board has decided to replace IAS 39 Financial Instruments over a period of time and by three phases: Phase 1: Classification and measurement of financial assets and financial liabilities. Phase 2: Impairment methodology Phase 3: Hedge accounting. Recognition and Measurement: The early adoption of the standard continues to be permitted. Given the nature of the Groups operations, this standard is expected to have a pervasive impact on the Group s consolidated financial statement. The Group, however, already early adopted part of Phase 1 Classification and measurement of financial assets (Note 2 (e)). IFRS-10 Consolidated Financial Statement : Replaces IAS 27 Consolidated and separate financial statements and SIC 12 Consolidation - Special purpose entities. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. Effective 1 January 2013; IFRS-12 Disclosure of Interests in Other Entities : Standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. Effective 1 January IFRS-13 Fair Value Measurement : Seeks to increase consistency and comparability in fair value measurements and related disclosures across IFRSs. Effective 1 January Financial risk management Financial risk factors Introduction and overview The Group s activities expose it to a variety of financial risks and involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and the operational risks are an inevitable consequence of being in business. The Group s aim is, therefore, to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Group s financial performance. The Group s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Group regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Risk management framework The Board of Directors ( The Board ) has overall responsibility for the establishment and oversight of the Bank s risk management framework. The Board has established a Board Risk Committee, comprising members from the Board, to monitor the Group s credit, operational and market risks. The Board has further set up from within management, Assets and Liabilities Committee ( ALCO ), Management Risk Committee ( MRC ), Management Credit Risk Committee ( MCRC ), Management Remedial Committee, Management Operational Risk Committee ( MORC which is a subcommittee of MRC) and Management Investment Committee. A separate Risk Management Group, reporting to the Management Risk Committee, assists in carrying out the oversight responsibility of the Board through the Board Risk Committee ( BRC ). The Board has established a Bank Audit Committee, which is responsible for monitoring compliance with the Bank s risk management policies and procedures, and for reviewing the adequacy of the risk management framework. The Bank s Audit Committee is assisted in these functions by the Internal Audit Department. The risk management policies are established to identify and analyze the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly, on an ongoing basis, to reflect changes in market conditions, products and services offered. Risk governance and ownership A well-established risk governance and ownership structure ensures oversight of, and accountability for, the effective management of risk at Group, regional, customer group and entity levels. The Board approves the Group s Risk management framework, risk appetite, performance targets for the Group, the appointment of senior officers, and the delegation of authorities for credit and other risks and the establishment of effective control procedures. Risk appetite Risk appetite policy describes the quantum and types of risk that the Group is prepared to take in executing its strategy. It is central to an integrated approach to risk, capital and business management and supports the Group in achieving its return on equity objectives, as well as being a key element in meeting the Group s obligations under pillar II of Basel II. The risk appetite covers both the beneficial and adverse aspects of risk. The formulation of risk appetite considers the Group s risk capacity, its financial position, and the strength of its core earnings and the resilience of its reputation a. Credit risk and concentrations of risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from Islamic financing activities, Ijara and investments. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The Risk Management Group develops and maintains the Group s risk grading in order to categorize exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The current risk-grading framework consists of twenty-two grades. Each customer is rated using portfolio specific rating model which in turn assigns a risk rating and corresponding probability of default. The responsibility for assigning risk grades lies with the concerned business unit and is independently vetted by the Risk Management Group. The objective of credit risk management is to underpin sustainably profitable business. Risk Management Group assesses all credit exposures and recommends approval from the designated credit committee by the Board (i.e. MCRC ), prior to facilities being committed to customers by the business unit concerned.

46 85 FINANCIAL INFORMATION 86 4.Financial risk management (continued) a. Credit risk and concentrations of risk (continued) Renewals and reviews of facilities are subject to detailed review process by the Risk Management Group. In addition, the Group manages the credit exposure by obtaining security where appropriate and limiting the duration of exposure. In certain cases, the Group may also close out transactions or assign them to other counterparties to mitigate credit risk. Regular audits of business units and credit processes are undertaken by the Internal Audit Department. Independent review of the credit portfolio is also undertaken by a credit review team separate from both the business unit and the Risk Management Group. Assets Exposure to credit risk The Group measures its exposures to credit risk by reference to the gross carrying amount of financial assets less amounts offset, profit suspended and impairment losses, if any. At 31 December 2012 and 31 December 2011, the Group s maximum exposure to credit risk before collateral held or other credit enhancements was as follows: Cash and balances with banks (Note 7) 1,234, ,816 Murabaha and wakala deposits with banks and other financial institutions 2,805,778 2,608,204 Receivables from Islamic financing activities 17,859,889 15,501,327 Ijara 5,050,982 3,823,473 Investment securities 2,799,619 3,159,980 Other assets 758, ,729 30,509,483 26,600,529 Commitments and contingencies (Note 24) 10,842,239 12,633,267 The above table represents a worst case scenario of credit risk exposure of the Group at 31 December 2012 and 31 December 2011 without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position. At 31 December 2012 and 31 December 2011, the distribution by geographical region of major categories of assets, liabilities, contingencies and commitments was as follows: Assets United Arab Emirates Kazakhstan Others Total Cash and balances with banks 1,153,248 29,649 51,342 1,234,239 Murabaha and wakala deposits with banks and other financial institutions 2,584,825 37, ,945 2,805,778 Receivables from Islamic financing activities 17,140, , ,118 17,859,889 Ijara 5,018,043 32,939-5,050,982 Investment securities 2,799, ,799,619 Other assets 755,930 3, ,976 29,451, , ,405 30,509,483 Commitments and contingencies (Note 24) 10,748,688 93,551-10,842,239 Assets United Arab Emirates Kazakhstan Others Total Cash and balances with banks 680, ,434 91, ,816 Murabaha and wakala deposits with banks and other financial institutions 2,608, ,608,204 Receivables from Islamic financing activities 15,501, ,501,327 Ijara 3,782,098 41,375-3,823,473 Investment securities 3,159, ,159,980 Other assets 575,133 5, ,729 26,307, ,405 91,826 26,600,529 Commitments and contingencies (Note 24) 12,633, ,633,

47 87 FINANCIAL INFORMATION 88 4.Financial risk management (continued) a. Credit risk and concentrations of risk (continued) At 31 December 2012 and 31 December 2011, the distribution by sector of major categories of assets, liabilities, contingencies and commitments was as follows: Government Public Corporate /private Retail Cash and balances with banks 1,180,453-51,350 2,436 Murabaha and Wakala deposits with banks and other financial institutions - - 2,805,778 - Receivables from Islamic financing activities 27,792 2,263,368 9,073,656 6,495,073 Ijara - 1,314,270 1,320,039 2,416,673 Investment securities 2,159,314 75, ,671 - Other assets ,976 Commitments and contingencies (Note 24) 1,278, ,777 9,017,984 55,694 Government Public Corporate /private Retail Cash and balances with banks 743,757-91,856 91,203 Murabaha and Wakala deposits with banks and other financial institutions - - 2,608,204 - Receivables from Islamic financing activities - 3,240,405 6,711,099 5,549,823 Ijara - - 1,614,914 2,208,559 Investment securities 2,409, , ,224 20,115 Other assets ,729 Commitments and contingencies (Note 24) 1,396, ,314 10,272,315 52, Impairment and provisioning policies Impaired receivables from Islamic financing activities are financial assets carried at amortized cost for which the Group determines that it is probable that it will be unable to collect all principal and profit due according to the contractual terms of the related financial assets. These financial assets are graded in accordance with the Group s internal credit risk grading system. Past due but not impaired financial assets Past due but not impaired financial assets, are those for which contractual profit or principal payments are past due but the Group believes that impairment of such financial assets is not appropriate on the basis of the level of security, collateral available and / or the stage of collection of amounts owed to the Group. Financial assets with renegotiated terms Financial assets with renegotiated terms are facilities that have been rescheduled /restructured due to the deterioration in the customer s financial position and where the Group has made concessions that it would not otherwise consider. Once the facility is restructured it remains in this category independent of satisfactory performance after restructuring. During the year ended 31 December 2012, the Group renegotiated facilities with a carrying value of AED 1,012 million (2011: AED 810 million). Allowances for impairment The Group establishes an allowance for impairment losses on assets carried at amortised cost that represents its estimate of incurred losses in its financing portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective financing loss allowance for losses that have been incurred but not identified, established for group of homogeneous assets with similar risk characteristics that are indicative of the debtor s ability to pay amounts due according to the contractual terms on the basis of a credit risk evaluation or grading process that considers asset type, industry, geographical location, collateral type, past due status and other relevant factors. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Settlement Risk The Group s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a counter party to honour its obligations to deliver cash, securities or other assets as contractually agreed. Any delays in settlement are rare and are monitored and quantified as part of the Group framework and Operational Risk Management. For certain types of transactions, the Group mitigates this risk by conducting settlements through a settlement / clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval / limit monitoring process described above. Acceptance of settlement risk on free settlement trades requires transaction specific or counterparty specific approvals from the Group Management Credit Risk Committee ( MCRC ), under credit risk. Collateral Risk As at 31 December 2012, the Group held credit risk mitigants with an estimated value of AED 8,818 million against receivables from Islamic financing activities, Ijara finance and investments in the form of real estate collateral, other securities over assets, cash deposits and guarantees. The Group accepts sovereign guarantees and guarantees from well reputed local or international banks, well established local or multinational large corporate and high net-worth private individuals. Collateral generally is not held against Murabaha and Wakala deposits with banks and other financial institutions, and no such collateral was held at 31 December 2012 or 31 December 2011.

48 89 FINANCIAL INFORMATION 90 4.Financial risk management (continued) b. Market risk The Group is exposed to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk arises from open positions in profit rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, credit spreads, foreign exchange rates and equity prices. Overall authority for market risk is vested in Asset and Liability Committee ( ALCO ). The Risk Management Group is responsible for the development of detailed risk management policies (subject to review and approval by ALCO ) and for the day to day review of their implementation. The Group follows IFRS 9 guidelines for the treatment of its investment portfolio exposed to market risk. These include investment in sukuks of government and corporate issuers as well as investments in equities and mutual funds. i. Price risk The Group was exposed to price risk arising from its investment securities portfolio classified on the financial statements as Available for Sale ( AFS ) and Fair Value through Profit and Loss ( FVTPL ) until 30 September 2010 and at fair value through profit and loss and other comprehensive income subsequent to the early adoption of IFRS 9. Most of the Group s investment securities are publicly traded and the table below summarizes the impact of a 10% increase / decrease of the prices of the major components of its investment securities portfolio, on the Group s results and equity The analysis is based on the assumptions that all other variables will remain constant and, where applicable, the Group s investments moved according to the historical correlation of the relevant index. Impact on results and equity of the Group ± 10 % change in equity prices: Profit and loss 9,061 1,036 Other comprehensive income 2,685 2,196 Had the exchange rate between the various currencies and the AED increased or decreased by 10 %, with all other variables held constant, the impact on the results and equity of the Group would not have been material as the exposure primarily related to currencies that were pegged to the AED. iii. Profit rate risk Profit rate risk in trading book is applicable to the Group s exposure to sukuks issued by Governments and Corporates which are classified as Fair Value through Profit and Loss ( FVTPL ). The market value of these sukuks is impacted as a result of fluctuations in the prevailing levels of profit rates on cash flows. Senior management sets limits on the maximum exposure allowable as a result of adverse profit rate movement During the year ended 31 December 2012, if the profit rates increased/decreased by 200 basis points, with all other variables remaining constant, the impact on the market value of sukuks classified in Fair Value through Profit and loss will be as follows: Impact on results and equity of the Group ± 200 basis points change in profit rates 98, ,348 In addition to profit rate risk in trading book, the Group s profit bearing financial assets and liabilities not held for the purpose of trading are also exposed to profit rate risk. This exposure arises as a result of mis-matches in re-pricing of assets and liabilities reflected in the following net position schedule. ii. Currency risk The Group is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Senior management sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, and monitors currency positions on a daily basis. At 31 December 2012 and 31 December 2011, the Group s foreign currency exposure to significant currencies comprised: Net open position Currency Euro 21 17,403 GBP 164 1,108 JPY OMR Various currencies 353 (208)

49 91 FINANCIAL INFORMATION 92 4.Financial risk management (continued) b. Market risk (continued) iii. Profit rate risk (continued) A summary of the Group s profit rate re-pricing as at 31 December 2012 is as follows: A summary of the Group s profit rate re-pricing as at 31 December 2011 is as follows: Assets Less than 3 months 3 6 months 6 12 months 1 5 years Greater than 5 years Nonsensitive Nonsensitive Total Cash and balances with banks ,437,223 1,437,223 Murabaha and Wakala deposits with banks and other financial institutions 2,651, ,508 50, ,805,778 Receivables from Islamic financing activities 8,088,675 2,791, ,196 2,340,729 3,753, ,348 17,859,889 Ijara 2,934,686 2,027,098 29,106 60, ,050,982 Investment securities 177, ,321, , ,716 2,799,619 Other assets , ,976 Total assets 13,851,511 4,923, ,422 4,722,757 3,879,505 2,550,263 30,712,467 Liabilities Customers accounts 13,883,017 3,578,105 2,922,659 2,294,152 5,000 2,273,731 24,956,664 Wakala deposits from banks 2,481, ,471 2,491,598 Other liabilities ,178,004 1,178,004 Total liabilities 16,364,144 3,578,105 2,922,659 2,294,152 5,000 3,462,206 28,626,266 Net position (2,512,633) 1,344,904 (2,137,237) 2,428,605 3,874,505 (911,943) 2,086,201 Assets Less than 3 months 3 6 months 6 12 months 1 5 years Greater than 5 years Total Cash and balances with banks ,232,209 1,232,209 Murabaha and Wakala deposits with banks and other financial institutions 2,511,384 3,761-4,855-88,204 2,608,204 Receivables from Islamic financing activities 6,865, , ,762 3,454,349 3,046, ,334 15,501,327 Ijara 1,801,545 1,936,106 17,991 67, ,823,473 Investment securities 460, ,656,137-43,843 3,159,980 Other assets , ,729 Total assets 11,638,097 2,904, ,753 6,183,172 3,046,025 2,242,319 26,905,922 Liabilities Customers accounts 7,691,119 2,539,533 5,281,602 1,889,880-2,215,696 19,617,830 Wakala deposits from banks 4,890,231 3,760 5,105 4,855-31,878 4,935,829 Other liabilities , ,861 Total liabilities 12,581,350 2,543,293 5,286,707 1,894,735-3,221,435 25,527,520 Net position (943,253) 361,263 (4,394,954) 4,288,437 3,046,025 (979,116) 1,378,402

50 93 FINANCIAL INFORMATION 94 4.Financial risk management (continued) b. Market risk (continued) iv. Takaful and re-takaful risk Takaful risk Takaful risk is where the Group agrees to indemnify the insured parties against happening of unforeseen future insured events. The frequency and severity of claims are the main risk factors. Due to the inherent risk in the Takaful business, actual claim amounts can vary marginally compared to the outstanding claim reserves but are not expected to have a material impact. Re-takaful risk In order to minimize financial exposure arising from large claims, the Group, in the normal course of business, enters into agreements with other parties for re-takaful purposes. Such re-takaful arrangement provides for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. To minimize its exposure to significant losses from reinsurers insolvencies, the Group evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. Re-takaful ceded contracts do not relieve the Group from its obligations and as a result the Group remains liable for the portion of outstanding claims reinsured to the extent that the reinsurer fails to meet the obligations under the re-takaful agreements. Reserve for claims The Group maintains adequate reserves in respect of its Takaful business in order to protect against adverse future claims experience and developments. The uncertainties about the amount and timing of claim payments are normally resolved within a year. Sensitivities The general Takaful claims provision is sensitive to the key assumptions which are not material to the consolidated financial statements of the Group. c. Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its obligations associated with its financial liabilities. Management of liquidity risk The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient buffer of liquidity to meet its liabilities during the normal course of business. As part of its strategic liquidity management, contingency funding planning in the Group ensures that the liquidity management center (treasury) is well equipped to tap contingent funding sources during periods of market stress. The Group then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities and inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The liquidity requirements of business units and subsidiaries are met through short-term financing from the Treasury Department to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The daily liquidity position is monitored and regular stress testing is conducted under a variety of scenarios covering the normal and more severe market conditions in order to assess the viability of the contingency funding plan. All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports are produced covering the liquidity position of both the Group and operating subsidiaries. A summary report, including any exceptions and remedial action taken, is submitted regularly to ALCO. The Group relies on customers accounts and Wakala deposits from banks as its primary sources of funding. Customers accounts and Wakala deposits from banks generally have shorter maturities and a large proportion of them are repayable on demand. The short-term nature of these deposits increases the Group s liquidity risk and the Group actively manages this risk through maintaining competitive pricing and constant monitoring of market trends. Exposure to liquidity risk The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to total liabilities. For this purpose net liquid assets are considered as cash and balances with banks, balances with central bank, central bank CDs and Short Term Wakala Deposits with banks maturing within one month, investment in Sukuk of local or federal government divided by total liabilities. The Group prepares its liquidity risk profile on carrying value basis. A summary of the Group s maturity profile as at 31 December 2012 is as follows: Assets Less than Greater than months months 1 5 years 5 years Total Cash and balances with banks 1,437, ,437,223 Murabaha and Wakala deposits with banks and other financial institutions 2,651, , ,805,778 Receivables from Islamic financing activities 1,617,041 2,932,535 7,480,872 5,829,441 17,859,889 Ijara 396, ,523 2,062,748 2,002,000 5,050,982 Investment securities 103,164 7,000 2,563, ,967 2,799,619 Other assets 758, ,976 Total assets 6,964,264 3,683,687 12,107,108 7,957,408 30,712,467 Liabilities Customers accounts 13,855,365 7,483,061 3,613,238 5,000 24,956,664 Wakala deposits from banks 2,491, ,491,598 Other liabilities 1,178, ,178,004 Total liabilities 17,524,967 7,483,061 3,613,238 5,000 28,626,266 Net position (10,560,703) (3,799,374) 8,493,870 7,952,408 2,086,201

51 95 FINANCIAL INFORMATION 96 4.Financial risk management (continued) c. Liquidity risk (continued) A summary of the Group s maturity profile as at 31 December 2011 is as follows: Assets Less than Greater than months months 1 5 years 5 years Total Cash and balances with banks 1,232, ,232,209 Murabaha and Wakala deposits with banks and other financial institutions 2,511,384 3,761 4,855 88,204 2,608,204 Receivables from Islamic financing activities 1,198,286 2,827,050 7,077,839 4,398,152 15,501,327 Ijara 379, ,829 1,363,405 1,577,111 3,823,473 Investment securities 40,854-3,116,136 2,990 3,159,980 Other assets , ,729 Total assets 5,361,861 3,334,640 11,562,235 6,647,186 26,905,922 Liabilities Customers accounts 7,827,640 8,431,310 3,358,880-19,617,830 Wakala deposits from banks 4,885,358 8,865 4,855 36,751 4,935,829 Other liabilities , ,861 Total liabilities 12,712,998 8,440,175 3,363,735 1,010,612 25,527,520 Net position (7,351,137) (5,105,535) 8,198,500 5,636,574 1,378, Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Impairment charge on other financial assets The Group evaluates impairment on financial assets on an ongoing basis and a comprehensive review is carried out at least quarterly to assess whether an impairment charge should be recognized in the consolidated statement of income. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of impairment charge required. In estimating these cash flows, management makes judgments about the counterparty s financial situation and other means of settlement and the net realizable value of any underlying collateral. Such estimates are based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such impairment charges. Collective impairment charge on financial assets In addition to specific impairment charge against individually impaired assets, the Group also maintains a collective impairment allowance against portfolios of Murabaha, Wakala and Islamic financing with similar economic characteristics which have not been specifically identified as impaired. In assessing the need for collective impairment charge, management considers concentrations, credit quality, portfolio size and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modeled and to determine the required input parameters, based on historical and current economic conditions. Liability arising from claims made under Takaful contracts The estimation of the ultimate liability arising from claims made under Takaful contracts is a critical accounting estimate by the Group. There are several sources of uncertainty that need to be considered in estimating the liability that the Group will ultimately pay for such claims. The provision for claims Incurred But Not Reported ( IBNR ) is an estimation of claims which are expected to be reported subsequent to the reporting date, for which the insured event has occurred prior to the reporting date. Investment property The carrying amount of investment property is the fair value of the property as determined by a registered independent appraiser having an appropriate recognized professional qualification and recent experience in the location and category of the property being valued. Fair values have been determined using the residual method. The residual method is applicable to properties where the value would be maximized if it were to be developed, redeveloped, or refurbished. To arrive at the current market value of the property in its existing state the estimated end development value is calculated, then all costs in carrying out the development are deducted, including cost of the physical construction, professional fees, financing, and developer s profit. Contingent liability arising from litigations Due to the nature of its operations, the Group may be involved in litigations arising in the ordinary course of business. Provision for contingent liabilities arising from litigations is based on the probability of outflow of economic resources and reliability of estimating such outflow. Such matters are subject to many uncertainties and the outcome of individual matters is not predictable with assurance. Impairment on non financial assets Certain non-financial assets, including other intangible assets, are subject to impairment review. The Group records impairment losses on assets in this category when the Group believes that their carrying value may not be recoverable. A reversal of an impairment loss is recognized immediately. Intangible assets, property, plant and equipment and investments in subsidiaries, associates and joint ventures are tested for impairment whenever there is any objective evidence or indication that these assets may be impaired. The recoverable amounts of these assets and where applicable, cash-generating units, have been determined based on value-inuse calculations. These calculations require the use of estimates. The determination of the recoverable amount in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, necessitating management to make subjective judgments and assumptions. Because these estimates and assumptions could result in significant differences to the amounts reported if underlying circumstances were to change, the Group considers this estimate to be critical. Business model In making an assessment whether a business model s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to management. However, in some circumstances it may not be clear whether a particular activity involves one business model with some infrequent asset sales or whether the anticipated sales indicate that there are two different business models.

52 97 FINANCIAL INFORMATION 98 5.Critical accounting estimates and judgments (continued) In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows the Group considers: management s stated policies and objectives for the portfolio and the operation of those policies in practice; how management evaluates the performance of the portfolio; whether management s strategy focuses on earning contractual profit revenues; the degree of frequency of any expected asset sales; the reason for any asset sales; and whether assets that are sold are held for an extended period of time relative to their contractual maturity or are sold shortly after acquisition or an extended time before maturity. In particular, the Group exercises judgement to determine the objective of the business model for portfolios which are held for liquidity purposes. Certain sukuk are held by the Group Treasury Department in a separate portfolio for long term yield and as a liquidity reserve. The securities may be sold in order to meet unexpected liquidity shortfalls but such sales are not anticipated to be more than infrequent. The Group considers that these securities are held within a business model whose objective is to hold assets to collect the contractual cash flows. Certain other sukuk are held by the Group Treasury Department in separate portfolios in order to manage short-term liquidity. Sales from this portfolio are frequently made to meet ongoing business needs. The Group determines that these securities are not held within a business model whose objective is to held assets in order to collect contractual cash flows. When a business model involves transfers of contractual rights to cash flows from financial assets to third parties and the transferred assets are not derecognised, the Group reviews the arrangements to determine their impact on assessing the objective of the business model. In making the assessment, the Group considers whether, under the arrangements, the Group will continue to receive cash flows from the assets, either directly from the issuer, or indirectly from the transferee, including whether it will repurchase the assets from the transferee. Contractual cash flows of financial assets The Group exercises judgement in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and profit on the principal outstanding and so may qualify for amortised cost measurement. In making the assessment the Group considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage. For financial assets in respect of which the Group s claims are limited to specific assets of the debtor (non-recourse assets) the Group assesses whether the contractual terms of such financial assets limit the cash flows in a manner inconsistent with those payments representing principal and profit. Where the Group invests in contractually linked instruments (tranches) the Group exercises judgement to determine whether the exposure to credit risk in the acquired tranche is equal to or lowers than the exposure to credit risk of the underlying pool of financial instruments and so the acquired tranche may qualify for amortised cost measurement. Qualifying hedge relationships In designating financial instruments in qualifying hedge relationships, the Group has determined that it expects the hedges to be highly effective over the period of the hedging. Fair value estimation The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The following table presents the Group s assets and liabilities that are measured at fair value at 31 December 2012: Level 1 Level 2 Level 3 Total Equity and other investments 374, ,820 Liabilities Islamic derivatives The following table presents the Group s assets and liabilities that are measured at fair value at 31 December 2011: Level 1 Level 2 Level 3 Total Equity and other investments 32, ,317 Liabilities Islamic derivatives Capital management Regulatory capital The Group s lead regulator the Central Bank of the UAE sets and monitors capital requirements for the Group as a whole. The Group is required to comply with the provisions of the Central Bank of the UAE in respect of regulatory capital. The Group s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on return is also recognized and the Group recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Group has complied with all externally imposed capital requirements throughout the year. Capital allocation The allocation of capital between specific operations and activities is, to a large extent, driven by optimization of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory requirements do not reflect fully the varying degree of risk associated with different activities. In such cases the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation. Although maximization of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Group to particular operations or activities, it is not the sole basis used for decision-making. Account also is taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Group s longer term strategic objectives.

53 99 FINANCIAL INFORMATION Capital management (continued) 8.Murabaha and wakala deposits with banks and other financial institutions At 31 December 2012, the Bank s capital adequacy ratio as per Basel II was 15% (2011: 13%) During 2012, the Group s strategy, which was unchanged from 2011, was to: maintain capital adequacy ratios above the minimum specified by the Central Bank of the UAE and Basel accord guidelines; and efficiently allocate capital to various businesses. In implementing current capital requirements, the Group calculates its risk asset ratio in accordance with capital adequacy guidelines established by the Central Bank of the UAE prescribing the ratio of total capital to total risk-weighted assets. Further, the Group also calculates its capital adequacy ratio in accordance with Basel II Accord which was adopted by the Central Bank of the UAE Commodity murabaha with financial institutions - 100,007 Wakala deposits 2,817,008 2,520,000 Allowance for impairment (Note 21) (11,230) (11,803) 2,805,778 2,608,204 The Group s capital adequacy ratio as per effective regulatory framework, Basel II, at the minimum level is analysed into two tiers as follows: Basel II Basel II Tier 1 Capital 3,537,917 2,694,593 Tier 2 Capital 295, ,955 Deductions from capital (97,866) (94,342) Total capital base 3,735,770 2,864,206 Risk weighted assets 25,430,088 21,381,180 Risk asset ratio 14.69% 13.40% 7.Cash and balances with banks Cash in hand 202, ,393 Cash reserve deposits with the Central Bank 846, ,408 Current account with the Central Bank 336, ,552 Due from banks 51,350 91,856 1,437,223 1,232,209 Cash reserve deposits with the Central Bank are not available for the operations of the Group and are non-profit bearing.

54 101 FINANCIAL INFORMATION Receivables from Islamic financing activities Corporate commodity murabaha 11,680,851 10,026,022 Retail musawama and murabaha 10,624,964 9,936,368 Islamic credit card receivable 77,530 62,118 Murabaha deferred profit (3,922,280) (4,117,794) Allowance for impairment (Note 21) (601,176) (405,387) 17,859,889 15,501,327 Islamic credit card receivable is comprised of AED 45,703 thousand (2011: AED 56,854 thousand) and AED 31,827 thousand (2011: AED 5,264 thousand) for Ijara and Tawarruq cards respectively. Impaired and non-performing: 2012 Corporate Retail Total Substandard 20,564 19,580 40,144 Doubtful - 12,075 12,075 Legal and loss 7,894 73,999 81,893 Outstanding 28, , ,112 Specific allowance for impairment (17,805) (87,319) (105,124) Carrying amount 10,653 18,335 28,988 Performing: Regular 10,583,163 6,519,816 17,102,979 Past due but not impaired 1-29 days 140,684 59, , days 149,013 63, , days 103,002 30, ,001 Above 90 days 676, ,532 Outstanding 11,652,394 6,674,559 18,326,953 Collective allowance for impairment (392,085) (103,967) (496,052) Carrying amount 11,260,309 6,570,592 17,830,901 Total outstanding 11,680,852 6,780,213 18,461,065 Total allowance for impairment (409,890) (191,286) (601,176) Total carrying amount 11,270,962 6,588,927 17,859, Corporate Retail Total Impaired and non-performing: Substandard 17,346 21,633 38,979 Doubtful 7,468 17,650 25,118 Legal and loss - 42,447 42,447 Outstanding 24,814 81, ,544 Specific allowance for impairment (11,805) (48,284) (60,089) Carrying amount 13,009 33,446 46,455 Performing: Regular 8,981,097 5,601,414 14,582,511 Past due but not impaired 1-29 days 128, , , days 88,130 39, , days 76,533 27, ,917 Above 90 days 726, ,697 Outstanding 10,001,207 5,798,963 15,800,170 Collective allowance for impairment (262,977) (82,321) (345,298) Carrying amount 9,738,230 5,716,642 15,454,872 Total outstanding 10,026,021 5,880,693 15,906,714 Total allowance for impairment (274,782) (130,605) (405,387) Total carrying amount 9,751,239 5,750,088 15,501,327

55 103 FINANCIAL INFORMATION Receivables from Islamic financing activities (continued) Receivables from Islamic financing activities net of deferred profit by sector at 31 December 2012 and 31 December 2011 comprise: Government and public sector 2,291,160 3,761,644 Banking sector 220, ,313 Corporate and private sector 9,262,873 4,871,979 Retail sector 6,686,358 6,522,778 18,461,065 15,906,714 Movement in allowance for impairment on receivables from Islamic financing activities, during the year: At the beginning of the year 405, ,933 Charge of the year, net (Note 21) 195, ,454 At the end of the year 601, , Ijara Corporate Ijara Mawsufa Fi-aldhimma 288, ,242 Corporate standard Ijara 2,692,517 1,523,236 Retail Ijara Mawsufa Fi-aldhimma 220, ,558 Retail standard Ijara 1,960,831 1,492,917 Allowance for impairment (Note 21) (111,336) (80,480) 5,050,982 3,823, Corporate Retail Total Impaired and non-performing: Substandard - 29,401 29,401 Doubtful - 21,818 21,818 Legal and loss 2, , ,653 Outstanding 2, , ,872 Specific allowance for impairment (2,929) (48,952) (51,881) Carrying amount - 121, ,991 Performing: Regular 2,684,716 1,911,926 4,596,642 Past due but not impaired 1-29 days 12,806 26,222 39, days 85,933 33, , days - 38,820 38,820 Above 90 days 194, ,620 Outstanding 2,978,075 2,010,371 4,988,446 Collective allowance for impairment (24,445) (35,010) (59,455) Carrying amount 2,953,630 1,975,361 4,928,991 Total outstanding 2,981,004 2,181,314 5,162,318 Total allowance for impairment (27,374) (83,962) (111,336) Total carrying amount 2,953,630 2,097,352 5,050,982 Ijara assets represent net investment in assets leased for periods which either approximate or cover majority of the estimated useful lives of such assets. The lease agreements stipulate that the lessor undertakes to transfer the leased assets to the lessee upon receiving the final rental payment.

56 105 FINANCIAL INFORMATION Ijara (continued) 2011 Corporate Retail Total Impaired and non-performing: Substandard - 15,148 15,148 Doubtful 2,929 24,412 27,341 Legal and loss - 80,771 80,771 Outstanding 2, , ,260 Specific allowance for impairment (2,929) (35,322) (38,251) Carrying amount - 85,009 85,009 Performing: Regular 1,960,791 1,577,096 3,537,887 Past due but not impaired 1-29 days 49,621 53, , days - 63,327 63, days - 4,024 4,024 Above 90 days 72,137-72,137 Outstanding 2,082,549 1,698,144 3,780,693 Collective allowance for impairment (17,469) (24,760) (42,229) Carrying amount 2,065,080 1,673,384 3,738,464 Total outstanding 2,085,478 1,818,475 3,903,953 Total allowance for impairment (20,398) (60,082) (80,480) Total carrying amount 2,065,080 1,758,393 3,823,473 Movement in allowance for impairment on Ijara during the year: At the beginning of the year 80,480 25,710 Charge of the year, net (Note 21) 30,856 54,770 At the end of the year 111,336 80, Investment securities Financial assets at fair value through profit and loss Quoted equity securities 53,462 10,363 Sukuk securities 218,287 - Commodity linked securities 37,151 - Other comprehensive income Quoted equity securities 26,845 21,954 Sukuk securities 39,075 - Financial assets at amortised cost Sukuk securities 2,427,737 3,135,867 Allowance for impairment (Note 21) (2,938) (8,204) Total investment securities 2,799,619 3,159,980

57 107 FINANCIAL INFORMATION Investment securities (continued) 13.Property and equipment The investment security risk grade analysis based on external ratings or their equivalent for the year is shown below: A 55, ,175 A1 74, ,054 A2 53, ,971 A3-389 B+ 2,219 1,607 B1 189, ,863 B3-70,002 Ba3 6,874 - Baa3 7,000 70,000 BBB+ - 1,924 Unrated 2,413,757 2,430,199 2,802,557 3,168, Investment property The carrying amount of investment property is the fair value of the property as determined by a registered independent appraiser having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued At 1 January 125, ,584 Additions - 21,298 Fair value movement (85,775) (40,407) At 31 December 39, ,475 Property and equipment at 31 December 2012 comprise: Cost Leasehold improvements Computer systems Furniture and fixtures Capital work in progress Total At 1 January , ,549 58,528 1,006,112 1,378,950 Additions ,200 2, , ,165 Transfers 5,041 23,968 6,430 (35,439) - Disposal of fixed assets - - (384) - (384) At 31 December , ,717 67,252 1,175,150 1,600,731 Accumulated depreciation At 1 January ,503 58,725 35, ,269 Charge for the year 22,626 33,366 16,113-72,105 Disposal of fixed assets - - (384) - (384) At 31 December ,129 92,091 50, ,990 Net book value at 31 December ,483 78,626 16,482 1,175,150 1,369,741 Capital work in progress includes property with a carrying value of AED 1,068 million (2011: AED 942 million). Property and equipment at 31 December 2011 comprise: Cost Leasehold improvements Computer systems Furniture and fixtures Capital work in progress Total At 1 January ,002 84,436 51, , ,002 Additions 29,626 11,693 4, , ,948 Transfers 1,133 36,420 2,043 (39,596) - At 31 December , ,549 58,528 1,006,112 1,378,950 Accumulated depreciation At 1 January ,906 34,402 21,388-87,696 Charge for the year 33,597 24,323 13,653-71,573 At 31 December ,503 58,725 35, ,269 Net book value at 31 December ,258 73,824 23,487 1,006,112 1,219,681

58 109 FINANCIAL INFORMATION Other assets Prepaid expenses 38,756 48,179 Income receivable 71,683 84,036 Takaful receivable 96,399 36,963 Murabaha inventory 83,188 91,494 Prepaid staff allowances 22,347 22,012 Others 169,161 90,975 Acceptances 277, , , ,729 Others include promises to buy and sell foreign currencies which are carried at fair value and presented within other assets and other liabilities respectively. The notional amounts of these contracts are disclosed in note 24 of these consolidated financial statements. 15.Customers accounts By account: Wakala deposits 18,684,885 14,782,331 Current accounts 2,143,557 2,087,329 Time deposits 1,666,802 1,324,983 Savings accounts 2,461,420 1,423,187 24,956,664 19,617, By Sector Government 11,714,446 9,435,556 Public 168, ,519 Corporate / private 5,244,495 4,749,227 Retail 7,829,072 5,331,528 24,956,664 19,617,830 Government sector deposits include special deposits amounting to AED 42.2 million (2011: AED 42.2 million) received from the Ministry of Finance with original contractual maturity of 5 years which are exempted from reserve requirements. 16.Other liabilities Accounts payable 268, ,709 Accrued expenses 328, ,966 Charity payable 2,896 6,782 Advance administrative fees 75,005 73,056 Takaful liabilities 105,618 63,810 Others 119,980 70,468 Acceptances 277, ,070 1,178, ,861 Others include promises to buy and sell foreign currencies, which are carried at fair value and are presented within other liabilities and other assets respectively. Others include an amount of AED 21.8 million (2011: 15.7 million) of Depositors profit Reserve and the Zakat due on these reserves which pertains to depositors and charity. The group is discharging this Zakat on behalf of the depositors. Charity payable represents profits forfeited by the Fatwa and Shariah Supervisory Board and late payment and over limit fees.

59 111 FINANCIAL INFORMATION Share capital 20.General and administrative expenses Share capital The authorized share capital of the Bank comprise of 4,000 million ordinary shares of AED 1 each. The issued and fully paid up share capital at 31 December 2012 comprise of 3,090 million ordinary shares of AED 1 each (2011: 2,590 million ordinary shares of AED 1 each). Abu Dhabi Investment Council holds 100% of the issued and fully paid share capital. The Bank s shares are not listed on a recognized stock exchange. During 2012, the Bank increased issued and paid up share capital by AED 250 million in April and AED 250 million in September through cash injection. Statutory reserve The UAE Commercial Companies Law No. (8) of 1984 (as amended) and the Bank s Articles of Association require that 10% of the annual net profit to be transferred to a statutory reserve until it equals 50% of the paid-up share capital. The statutory reserve is not available for distribution. During the year, AED 35,158 thousand (2011: 20,235 thousand) has been transferred to the Statutory reserve Rent expenses 78,081 75,057 Marketing and advertising expenses 30,525 24,987 Consultancy fees 27,172 9,255 Repair and maintenance 16,858 12,978 Communication 12,215 9,398 Other expenses 109,165 92, , , Impairment charges on financial assets 18.Income from ijara and Islamic financing activities, net Income from Murabaha corporate 553, ,677 Income from Murabaha retail 663, ,658 Income from Ijara corporate 134, ,213 Income from Ijara retail 147, ,476 1,498,893 1,381, Commission, fees and foreign exchange income, net Murabaha and wakala deposits with banks and other financial institutions Ijara Receivables from Islamic financing activities Investment securities Total At 1 January 11,803 11,100 80,480 25, , ,933 8,204 1, , ,493 Charge for the year (573) ,915 54, , ,412 (5,266) 6, , ,339 Write offs and recoveries - - (59) - (30,478) (958) - - (30,537) (958) Unwinding on renegotiated (5,939) (5,939) - financings At 31 December 11,230 11, ,336 80, , ,387 2,938 8, , ,874 Fee and commission income 145, ,963 Foreign exchange gains 7,590 5,671 Foreign exchange losses (1,168) (7) Other income 3,789 9, , ,099 Commission, fees and foreign exchange income constitute part of profit distributable to the Shareholder. Fees and commission income include AED 1.7 million from fiduciary activities (2011: AED 0.6 million). Other income includes an amount of AED 1.5 million (2011: AED 7.1 million) relating to Takaful activities.

60 113 FINANCIAL INFORMATION Depositors share of profits 25.Islamic derivative financial instruments The depositors share of profits has been supported by the Shareholder and is authorized by the Bank s Fatwa and Shariah Supervisory Board Mudaraba 54,044 47,221 Wakala 529, , , , Cash and cash equivalents Cash and cash equivalents included in the consolidated statement of cash flows comprise the following amounts with original contractual maturities of less than one month: Cash and balances with banks 1,437,224 1,232,209 Murabaha and wakala deposits with banks and other financial institutions 131, ,079 Wakala deposits from banks (202,634) (956,165) 1,366, , Commitments and contingencies Letters of credit 806, ,798 Letters of guarantee 5,593,303 5,963,938 In the ordinary course of business, the Group enters into various types of transactions that involve Islamic derivative financial instruments. Islamic derivative financial instruments include Islamic promises to exchange currency and / or cash flows. Islamic derivatives are measured at fair value by reference to published price quotations in an active market, counterparty prices or valuation techniques such as discounted cash flows. The table below shows the positive and negative fair values of Islamic derivative financial instruments together with the notional amounts. The notional amounts indicate the volume of transactions outstanding at year end and are neither indicative of the market risk nor credit risk. 31 December 2012 Positive market value Negative market value Notional amount Profit rate swaps 109,259 (109,259) 1,808,420 Promises to sell foreign currencies 646 (646) 110, ,905 (109,905) 1,918,595 Held as fair value hedges: Profit rate swaps 38,128 (38,128) 3,672,500 38,128 (38,128) 3,672, ,033 (148,033) 5,591, December 2011 Positive market value Negative market value Notional amount Profit rate swaps 83,954 (83,954) 1,766,211 Promises to sell foreign currencies 1,074 (1,074) 110,175 85,028 (85,028) 1,876,386 Held as fair value hedges: Profit rate swaps ,028 (85,028) 1,876,386 Irrevocable commitments to extend credit 1,244,470 2,319,239 Revocable commitments to extend credit 3,197,994 3,906,292 Capital commitments 563, ,447 Operating lease commitments 165, ,665

61 115 FINANCIAL INFORMATION Group entities Ownership Group entities Country of incorporation Al Hilal Takaful PSC UAE 100% 100% Al Hilal Auto LLC UAE 100% 100% Al Hilal Islamic Bank PJSC Kazakhstan 100% 100% Wataniya Development Fund Limited Cayman Islands 47% 47% Al Hilal Leasing LLP Kazakhstan 100% 100% 27.Related parties Identity of related parties Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Related parties comprise major shareholders, directors and key management personal of the Group. The terms of these transactions are approved by the Group s management and are made on terms agreed by the Board of Directors or management. Parent and ultimate controlling party Abu Dhabi Investment Council holds 100% of the issued and fully paid share capital. The Bank s shares are not listed on a recognized stock exchange. Compensation of directors and key management personnel At 31 December 2012, the balances and transactions with related parties comprise: Balances: Islamic financing facilities 2,467,734 2,103,083 Investment securities 55,088 - Customers accounts 11,837,120 9,649,271 Contingent liabilities 14,561 4,805 Transactions: Fee and commission income Financing income 27,179 76,433 Depositors share of profits 258, ,881 Save for transactions carried out with the Parent and its group of companies, all transactions with the government and its related concerns are deemed to occur within the normal course of business. Key management remuneration for the years ended 31 December 2012 and 31 December 2011 comprise: Short term employment benefits 18,392 17,218 Post employment benefits 1,448 1,458 Directors remuneration 2,647 1,600 Terms and conditions Islamic financing and deposits are granted and accepted in various currency denominations and for various time periods. Profit rates earned on Murabaha financing facilities extended to related parties during the year have ranged from 0.65% to 6.85% per annum (2011: 1.50% to 6.5%). Profit distribution rates paid on customers deposits placed by related parties during the year have ranged from 0.51% to 3.76% per annum (2011: 0.71% to 4.5%) Fees and commissions earned on transactions with related parties during the year have ranged from 0.2% to 1.2% per annum (2011: 0.17% to 1.2%). Collaterals against financing to related parties range from being unsecured to fully secure.

62 117 FINANCIAL INFORMATION Accounting classification and fair values 29.Fund management and fiduciary activities The table below sets out the Group s classification of each class of financial assets and liabilities, and their fair values 2012 Amortised FVTPL FVTOCI cost Total Financial assets Cash and balances with banks - - 1,437,223 1,437,223 Murabaha and wakala deposits with banks and other financial institutions - - 2,805,778 2,805,778 Receivables from Islamic financing activities ,859,889 17,859,889 Ijara - - 5,050,982 5,050,982 Investment securities 308,900 65,920 2,424,799 2,799,619 Other assets , , ,900 65,920 30,337,647 30,712,467 Financial liabilities Customers accounts ,956,664 24,956,664 Wakala deposits from banks - - 2,491,598 2,491,598 Other liabilities - - 1,178,004 1,178, ,626,266 28,626,266 The Group manages and administers assets held in trust or in fiduciary capacity on behalf of its customers. The underlying assets held in a custodial or fiduciary capacity are excluded from the consolidated financial statements of the Group. The table below outlines the fair value of the funds and assets under management at the respective reporting dates Global Sukuk Fund 137,399 - GCC Equity Fund 23,189 26, Zakah The Articles of Association of the Bank do not require management of the Bank to pay Zakah on behalf of the Shareholder. Consequently, the Zakah obligation is to be assessed and discharged by the Shareholder. 31.Comparative notes Comparative figures have been reclassified to conform with the presentation for the current year FVTPL FVTOCI Amortised Total cost Financial assets Cash and balances with banks - - 1,232,209 1,232,209 Murabaha and wakala deposits with banks and other financial institutions - - 2,608,204 2,608,204 Receivables from Islamic financing activities ,501,327 15,501,327 Ijara - - 3,823,473 3,823,473 Investment securities 10,363 21,954 3,127,663 3,159,980 Other assets , ,729 10,363 21,954 26,873,605 26,905,922 Financial liabilities Customers accounts ,617,830 19,617,830 Wakala deposits from banks - - 4,935,829 4,935,829 Other liabilities , , ,527,520 25,527,520

63 119 FINANCIAL INFORMATION 120 RISK MANAGEMENT & BASEL II PILLAR III DISCLOSURES FOR DECEMBER 31, 2012 Introduction Al Hilal Bank is in compliance with Basel II Accord and Regulations as published by the Central Bank of U.A.E. As at December 31, 2012, the minimum regulatory requirement set by the Central Bank of U.A.E. is for Banks to maintain a Capital Adequacy ratio (CAR) of 12%. The Bank has adopted the Standardized Approach for Credit Risk and Market Risk and Basic Indicator Approach for Operational Risk. The details of disclosure required under the regulations are in this report. Overview (Table 1) Al Hilal Bank PJSC the Bank was incorporated in United Arab Emirates- Abu Dhabi in the mid of The Bank is a wholly owned subsidiary of the Abu Dhabi Investment Council (ADIC), which is one of the Sovereign Wealth Funds of the Emirates of Abu Dhabi. The Bank operates as an Islamic Financial Institution and follows the rules of Shariah. The Banks key focus has been to build and roll out robust business models to tap the Corporate and Retail market segments with specially tailored products as per Shariah Compliance and efficient processes to deliver these products. The Bank s business philosophy also revolves around the theme of ensuring outstanding service quality, enabled by the best people and technology. Al Hilal Bank operates as a full service Islamic Bank and provides specialist and Islamic banking services through the following subsidiaries: Al Hilal Auto Al Hilal Takaful Al Hilal Leasing - Kazakhstan Al Hilal Islamic Bank - Kazakhstan Al Hilal Bank also has a significant investment in Al Wataniya Development Fund. Al Hilal Bank (AHB) and its subsidiaries, collectively known as the Group assesses its capital adequacy based on the Capital Adequacy Standards of the Central Bank of UAE (CBUAE) issued in November 2009 under Standardized Approach. The Pillar 3 disclosures being made by the Group comply with the BIS Revised Framework International Convergence of Capital Measurement and Capital Standards. These disclosures include qualitative information on the Group s risk management framework, objectives and policies, risk assessment processes and capital adequacy, whilst quantitative information on risk assessment (as per standardized approach) is included as per the guideline provided by CBUAE. Risk Management Framework, Objectives and Policies Al Hilal Bank Risk Management structure ensures identification, measurement, monitoring and controlling risk in accordance with the Bank s Risk Management Framework, Policies and Regulatory guidelines provided by the Central Bank of UAE. In accordance with the latest regulatory requirements, the bank is moving towards a more refined methodology for analyzing risk based on Economic Capital. Al Hilal Bank s risk management philosophy revolves around five pillars of Risk Management : Strong Corporate Governance Robust Risk Architecture Adherence to Globally accepted Risk Standards Skilled & Seasoned Manpower Robust Risk Culture The Basel II framework was implemented in the Bank as per the guideline. The framework is based upon three Pillars: Pillar 1 Minimum capital requirements: defines rules for the calculation of credit, market and operational risk; Pillar 2 Supervisory review process: requires Banks to undertake an Individual Capital Adequacy Assessment Process (ICAAP) for other risks; and Pillar 3 Market discipline: requires expanded disclosures to allow Investors and other market participants to understand the risk profiles of individual Banks. Risk Management The risk management function is an integral part of the Group s business activities. One of the major risks incurred by the Bank arises from extending credit to customers through trading and financing operations. Beyond credit risk, the Group is also exposed to other risk types such as market risk, operational risk, liquidity risk, concentration risk, profit rate risk in the banking book and other risks that are inherent to the Group s strategy and product range. Risk Management Framework The Risk Management Framework is integral to the operations and culture of Al Hilal Bank. Risks are proactively managed within the Bank, while the framework is flexible to incorporate new activities the Bank undertakes. The framework is comprehensive and has been communicated from the Board of Directors down to individual Business lines. Al Hilal Bank s business strategy is to achieve the objective of being a strong financial player with insight and transparency in risk-taking. The risk governance framework supports this objective and promotes the transparency in the Bank. Risk Governance & Ownership The overall responsibility of risk management rests with the Board of Directors (BOD). To ensure effective governance, controls and oversight, the BOD has formed some key committees which are Board Audit Committee, Human Resource Board Committee, Board Corporate Governance Committee, and Board Risk Committee. In addition, there is also the Fatwa and Shariah Supervisory Board. It is through Group Risk Management and various Board Committees that guide and assist with overall management of the Bank s risks. The Bank has through its existing policies firmly embedded the risk governance structure used to control, manage and mitigate risk. In addition to Board Committee s, there are also Management Committees that review, monitor and provide oversight of the risk profile of AHB on a periodic basis. The chart below conveys the governance structure within Al Hilal Bank: Fatwa and Shariah Supervisory Board Management Investment Committee Board of Directors Management Executive Committee Finance Committee Board Audit Committee Board Risk Committee Management Risk Committee Management Operational Risk Committee Business & Support Units Internal Audit Human Resource Board Committee Management Credit Committee Management Remedial Committee Independent Assurance Board Corporate Governance Committee Ultimate responsibility for setting the Group s risk appetite and the effective management of risk rests with the Board. Board Risk Committee (BRC) acts within its authority delegated by the Board. The BRC, whose membership is comprised of non-executive directors of the Group, has the responsibility for oversight and review of risks including but not inclusive of, credit risk, market risk, liquidity risk and operational risk. BRC also reviews the overall risk appetite and makes recommendation thereon to the Board. The BRC receives regular comprehensive reports on key risks vis-a-vis the achievement of strategic objectives of AHB, credit risk profile, market and liquidity risk profile, capital adequacy profile and operational risk profile. A key component of Al Hilal Bank s business strategy is for risk management to support the objective of being a strong financial partner with insight and transparency in risk-taking. The Banks vision is to adopt best international standards and practices in risk management and to translate this into a comprehensive risk infrastructure that supports this vision. Board Risk Oversight ALCO Management Risk Oversight Day to Day Management of Risk

64 121 FINANCIAL INFORMATION 122 Managing risk is a process operated independently of the business units of Al Hilal Bank. It aims to promote a strong risk management culture through a comprehensive set of policies, processes and tools that are designed to effectively identify, measure, monitor and control risk exposures. The Board of Directors and senior management are involved in the establishment of the risk infrastructure and the periodic oversight and guidance of the risk management function. The processes are subject to additional scrutiny by an independent Shariah Board, as well as, internal and external auditors and the Bank s regulators, which help further strengthen the risk management practices within the Bank. Risk Appetite & Risk Tolerance The risk appetite is an expression of the amount of risk the group is willing to take in pursuit of its strategic objectives. Risk management is difficult to define precisely, but may be adequately summarized as the analysis, control and mitigation of risk exposure in relation to specific business objectives. The classical premise that any business activity should deliver a minimum return on investments (both financial and non-financial) that at least balances the entire portfolio of risks. This concept of balance is essential. Risk appetite drives business activity balancing risk and profitability with management preferences to optimize capital and resource allocation, as well as the distribution of exposure across activities and portfolios. Management understands that effective Risk Appetite management has an important role in correctly linking risk to business decisions. The Bank s detailed risk appetite includes both qualitative and quantitative aspects and ensures that the appropriate level of capital is adequate to both sustain such risks and be above the minimum regulatory requirement. Capital Structure (Table 2) Pillar-I (Table 3) Pillar I - deals with the computation of the Regulatory Capital ratio. It involves criteria- based assessment of risk for various asset classes and calculation of Risk Weighted Assets (RWAs) for credit, market and operational risk, to derive the required regulatory capital. All UAE Banks are subject to a minimum capital adequacy ratio of 12%. This is significantly higher than the global required minimum of 8% under Basel II. Al Hilal Bank management aims to ensure the efficient use of capital to meet the Bank s overall capital targets. Since the incorporation of the Bank, the Bank has applied Basel II capital adequacy rules. The Bank s risk profile considers both capital targets as well as the sufficiency of capital to cover both current and future growth requirements of the Bank. The Board of Directors defines risk and capital targets, whilst Management is responsible for ensuring that these targets are met. Credit Risk (Table 4) Credit risk constitutes the largest part of the Bank s risk exposures. The Bank measures and manages its credit risk by adhering to the following principles: Consistent standards are applied across the bank in the respective credit decision process through the use of IRB compliant rating models for corporate financing customers which also include specialized rating models. The approval of credit limits for counterparties and the management of its individual credit exposures must fit within the Bank s target portfolio guidelines and credit risk strategies, and each decision also involves a risk-versus-return analysis. Every extension of credit or material change to a credit facility (such as its tenor, collateral structure or major covenants) to any counterparty requires credit approval at Management Credit Risk Committee level. Market Risk (Table 10,13,14) Market risk is defined as exposure to adverse changes in the market value of portfolios and positions in financial instruments caused by changes in market factors such as currency rates, equity prices or profit rates. Foreign Exchange Exposures This arises as a result of volatility in foreign exchange exposure. While the Bank does not currently trade in foreign currencies for its own profit, it does have exposure to losses from open exposure to currencies the bank maintains to enable customer transactions. Capital allocation for market risk under pillar 1 is on the basis of standardized approach. Equity Exposures This arises as a result of price volatility in various asset classes held by the bank. This includes equities, mutual funds, and other tradable assets. Under Pillar 1, AHB has calculated the capital charge for equity risk on the basis of standardized approach. Profit Rate Risk Exposures The Profit Rate Risk exposure consists of exposure to profit rate movement due to mismatches in time periods its assets and liabilities. This risk is measured and monitored through limits and impact on earnings. Operational Risk Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Bank s exposure to operational risk arises as a consequence of the Bank s Business activities. It is the objective to minimize exposure to operational risk. The Bank computes the capital charge for operational risk by using the Basic Indicator Approach as per the guideline. However, it is strengthening its policy, processes and tools to ensure a gradual transition to higher approaches. The Bank has identified the risks inherent in its processes by the way of the Risk & Control Self Assessment (RCSA) exercise that is now largely complete. Inherent risk assessment has been performed on a qualitative basis. The impact and likelihood feed into a heat map, which assigns overall expected loss for the risk. The bands in the heat map are determined by the operational risk unit based on the expert judgment and qualitative assessment. This provides guidance to management on how to deal with each type of operational risk being faced by the Bank. A key risk indicator framework has been implemented across the Bank, acting as an early warning trigger to identify potential risks of activities and projects in the Bank and assist in reducing any likely loss or help in improving controls. Operational Risk processes include: Risk Identification Process Mapping & Risk Analysis Risk & Control Self Assessment Key Risk Indicators Incident Analysis External Event Analysis Scenario Analysis New Initiatives Analysis Risk Assessment Risk Grading Matrix Real Time Incident Assessment & Escalation Risk Mitigation & Control Loss Data collation and analysis Risk Database for tracking of action plans Capital of the bank consists of the following instruments: Eligible Paid-up Share Capital The Bank is a wholly owned subsidiary of the Abu Dhabi Investment Council (ADIC), which is wholly owned by the Government of Abu Dhabi. Eligible Reserves Eligible reserves are created by accumulated appropriations of profit and The Bank currently assigns credit approval authorities to Management Credit Risk Committee and Board Risk Committee for approval. The Bank envisages maintaining a credit risk profile which is line with its risk strategy and long term strategic growth and vision. The Bank has allocated credit risk capital on the basis of standardized approach for year The governance structure of operational risk management at the Bank level is through the Management Operational Risk Committee (MORC), that is responsible for overseeing all material operational risks, responses to risk issues and the adequacy and effectiveness of controls. The primary responsibility for the management of operational risk rests with the business and support functions as an integral component of their first line risk management responsibilities. They are assisted in their responsibilities by embedding unit operational risk managers at the grass roots level within Al Hilal Bank. Insurance Business Continuity Plans across the bank Risk Monitoring Operational Risk Maps/Profiles Action Plan Tracking are maintained for future growth.

65 123 FINANCIAL INFORMATION 124 Liquidity Risk Pillar-II Pillar-III The risk that the Bank may not be able to meet its obligations when due, at an acceptable market cost, is termed liquidity risk. Liquidity risk is measured by slotting all assets and liabilities with respect to cash inflow and cash outflow in predefined maturity buckets commonly known as liquidity gap analysis. Liquidity risk is defined as the risk of losses because; Bank s funding costs increase disproportionately; Lack of funding prevents the Bank from establishing new business; or Lack of funding will ultimately prevent the Bank from meeting its obligations. Liquidity management at Al Hilal Bank is based on monitoring and managing liquidity risks in various scenarios. It is a natural element of the Bank s business strategy to assume risks in the management of the liquidity profile of Al Hilal Bank. Al Hilal Bank s policies have been defined with respect to the maximum tolerance negative gap the Bank wishes to accept and the funding that is required closing and managing this gap respectively. The management of liquidity risk aims primarily at ensuring that the negative gap in each maturity bucket does not exceed internally set limits which are set in line with Bank s risk appetite. In order to meet negative cash flows during ordinary course of business as well as during the stress condition, the Bank keeps a liquidity buffer in the form of liquid assets comprising of Central Bank Reserves and Other Marketable Securities. These are sufficient to meet obligations and ensure the availability of cash or collateral to fulfill those needs at the appropriate time. Contingency plans have been implemented aiming to ensure that Al Hilal Bank is sufficiently prepared to take remedial action if an unfavorable liquidity situation should arise. The Risk Management Group has set limits for liquidity risks, which are applicable on a maximum cumulative cash outflow that the bank can allow within a specific time band. The key business & support unit stakeholders receive reports on the Bank s liquidity risks regularly. The ALCO continuously assesses developments in the Bank s liquidity position and approves long-term funding plans. This refers to the supervisory review process to ensure that Al Hilal Bank not only has adequate capital to support all the risks (both Pillar I and Pillar II) that have been identified, but also to encourage Al Hilal Bank to develop and use better risk management techniques in monitoring and managing its risks. It is through the Internal Capital Adequacy Assessment Process (ICAAP), as well as the Supervisory Review and Evaluation Process (SREP) by the CBUAE that the risk and capital adequacy assessment of the Bank is conducted. The Central Bank of UAE has issued Circular No. 27/2009 dated 17/11/2009 which requires banks to develop the ICAAP. The ICAAP document at AHB is comprehensive in its approach and its coverage includes all material risk types, corporate governance and internal control framework, capital planning and management framework, strategic plans and macro economic factors. This process verifies that management takes steps to ensure that the Bank maintains sufficient internal capital relative to its risk profile (and CBUAE minimum requirements) and that it applies and develops proper risk management systems. Pillar III relates to market discipline and requires the Bank to disclose detailed qualitative and quantitative information of its risk management and capital adequacy policies and processes. Disclosures under Pillar III follow the guidelines and formats of the Capital Adequacy Standards (Standardized Approach) provided by the CBUAE. Information on Subsidiaries and Significant Investments AS ON DECEMBER 31, 2012 Table (1) Country of Incorporation % Ownership Description Accounting Treatment Surplus Capital Capital Deficiencies Total Interest SUBSIDIARIES: Al Hilal Bank Kazakhstan Kazakhstan 100% Banking Fully Consolidated Nil Nil Nil Al Hilal Takaful UAE 100% Insurance Fully Consolidated Nil Nil Nil Al Hilal Auto UAE 100% Trading Fully Consolidated Nil Nil Nil Al Hilal Leasing Kazakhstan 100% Leasing Fully Consolidated Nil Nil Nil SIGNIFICANT INVESTMENTS: Al Wataniya Cayman Island 47.20% Real Estate Pro-rata Consolidation Nil Nil Nil

66 125 FINANCIAL INFORMATION 126 Consolidated Capital Structure AS ON DECEMBER 31, 2012 Table (2) Tier 1 Capital 1. Paid up share capital/common stock 2. Reserves a. Statutory reserve b. Special reserve Summary terms and conditions of main features of all capital instruments Amount (AED 000 s) 3,090,000-68,387 c. General reserve (11,452) 3. Minority interests in the equity of subsidiaries 4. Innovative capital instruments 1 5. Other capital instruments 6. Surplus capital from insurance companies Sub-total - 26, ,173,215 Less: Deductions for regulatory calculation (97,865) Less: Deductions from Tier 1 capital Tier 1 Capital - Subtotal Tier 2 capital Less: Other deductions from capitals Tier 3 capital - 3,075, ,718 Total Eligible Capital After Deductions 3,371, Capital Adequacy AS ON DECEMBER 31, 2012 Table (3) Quantitative Disclosures Capital Charge (AED 000 s) Capital Ratio (%) Capital Requirements 1. Credit Risk a. Standardized Approach 24,197,276 b. Foundation IRB - c. Advanced IRB - 2. Market Risk a. Standardized Approach 265,244 b. Models Approach - 3. Operational Risk a. Basic Indicator Approach 967,568 b. Standardized Approach/ASA - c. Advanced Measurement Approach - Total Capital requirements 25,430,088 Capital Ratio a. Total for Top consolidated Group 14.69% b. Tier 1 ratio only for top consolidated Group 13.91% Gross Credit Exposure by Currency Type AS ON DECEMBER 31, 2012 (AED 000 s) Table (4b) Financing (Net) Financing Securities Total Funded Commitments Hedge Instruments Other Off-Balance sheet exposures Total Non- Funded Foreign Currency 1,565,091 2,578,261 4,143, ,175 3,075,129 3,185,304 7,328,656 AED 21,345, ,359 21,567,139 4,442,465 1,808,420 3,324,646 9,575,531 31,142,670 Total 22,910,871 2,799,619 25,710,490 4,442,465 1,918,595 6,399,775 12,760,835 38,471,325 Total

67 127 FINANCIAL INFORMATION 128 Gross Credit Exposure by Geography AS ON DECEMBER 31, 2012 (AED 000 s) Table (4c) GEOGRAPHIC Financing (Net) Financing Total Commitments Hedge Other Off- Total Non- Total DISTRIBUTION Securities Funded Instruments Balance sheet exposures Funded United Arab Emirates 22,158,278 2,799,619 24,957,897 4,378,080 1,918,595 4,058,857 10,355,532 35,313,429 GCC excluding UAE , , , ,625 Arab League (excluding GCC) Asia 752, ,593 9,385-2,157,293 2,166,678 2,919,271 Africa North America South America Caribbean Europe Australia Others Total 22,910,871 2,799,619 25,710,490 4,442,465 1,918,595 6,399,775 12,760,835 38,471,325 Gross Credit Exposure by Industry Segment AS ON DECEMBER 31, 2012 (AED 000 s) Table (4d) INDUSTRY Financing Financing Total Commitments Hedge Other Off- Total Non- Gross SEGMENT (Net) Securities Funded Instruments Balance Sheet Exposures Funded Agriculture, Fishing & related 112, , ,319 activities Crude Oil, Gas, Mining & 152, , ,300 Quarrying Manufacturing 394, , , ,684 1,298,344 Electricity& Water 300, , ,000 Construction 394, , , , ,651 Trade 1,077,823 1,077, , ,985 1,821,808 Transport, Storage & Communication 692, , , , ,554 Financial Institutions 885,588 83, , , ,298 1,103,791 2,535,434 3,504,032 Services 144, , , , ,154 Government 4,599,327 2,278,180 6,877, , ,777 7,417,283 Retail/Consumer banking 11,850,628 11,850,628 55,626-55,626 11,906,254 All Others 2,307, ,429 2,745, , ,297 5,295,984 7,012,751 9,758,626 Total 22,910,871 2,799,619 25,710,490 4,442,465 1,918,595 6,399,775 12,760,835 38,471,325

68 129 FINANCIAL INFORMATION 130 Gross Credit Exposure by residual Contractual Maturity AS ON DECEMBER 31, 2012 RESIDUAL CONTRACTUAL MATURITY Financing (Net) Financing Securities Total Funded Commitments Hedge Instruments (AED 000 s) Other Off- Balance Sheet Exposures Table (4e) Total Non- Funded Less than 3 months 1,965,675 1,965,675 3,253,622 2,805,977 6,059,599 3 months to one year 3,877,285 7,049 3,884, , ,175 2,794,151 3,461,022 One to five years 9,367,878 2,649,629 12,017, ,147 1,808, ,417 2,045,150 Over five years 7,700, ,941 7,842,974 91,272 91,272 Grand Total 22,910,871 2,799,619 25,710,490 4,442,465 1,918,595 5,295,984 11,657,044 Impaired Financing by Industry Segments AS ON DECEMBER 31, 2012 (AED 000 s) Table (4f) OVERDUE PROVISIONS AD JUSTMENTS TOTAL INDUSTRY SEGMENT Less Than days & Total Specific General Write-offs Writebacks IMPAIRED days above ASSEST Agriculture, Fishing & related activities Crude Oil, Gas, Mining & Quarrying Manufacturing 3,008 12,302 15,310 10, ,432 Electricity& Water Construction 56,591 42,137 98,728 9, ,763 Trade 2,251-2, ,251 Transport, Storage & Communication Financial Institutions - 8,049 8, , (163,953) Services - 15,325 15, ,325 Government Retail/consumer banking 163, , , ,977 - (112,102) All Others 519,528 1,101,323 1,620, ,528 30,537-1,590,315 Grand Total 744,626 1,179,136 1,923, , ,507 (30,537) - 1,425,241 Impaired Financing by Geographic Distribution AS ON DECEMBER 31, 2012 (AED 000 s) Table (4g) OVERDUE PROVISIONS AD JUSTMENTS TOTAL Geographic Region Less Than days & Total Specific General Write-offs Writebacks IMPAIRED days above ASSEST United Arab Emirates 744,626 1,179,136 1,923, , ,507 (30,537) - 1,736,220 GCC (excluding UAE) Arab League (excluding GCC) Asia Africa North America South America Caribbean Europe Australia Others Grand Total 744,626 1,179,136 1,923, , ,507 (30,537) - 1,736,220 Reconciliation of Changes in Provision for Impaired Financing AS ON DECEMBER 31, 2012 Table (4h) Description AED 000 s Opening Balance of Provisions for Impaired Financing 505,874 Add: Charge for the year Specific provisions 166,654 General provisions 90,627 Add: Write-off of impaired financing to income statement - 30,537 Less: Recovery of loan loss provisions Less: Recovery of loans previously written-off Less: Write-back of provisions for financing Adjustments of loan loss provisions - 5,939 Closing Balance of Provisions for Impaired Loans 726,680

69 131 FINANCIAL INFORMATION 132 Financing Portfolio as per Standardized Approach AS ON DECEMBER 31, 2012 (AED 000 s) Table (4i) ASSET CLASSES ON BALANCE SHEET OFF BALANCE SHEET CREDIT RISK MITIGATION (CRM) GROSS OUTSTANDING NET EXPOSURE AFTER CREDIT CONVERSION FACTORS (CCF) EXPOSURE BEFORE CRM CRM AFTER CRM RISK WEIGHTED ASSETS CLAIMS ON SOVEREIGNS 3,437, ,452 4,079,349-4,079, ,453 CLAIMS ON NON-CENTRAL GOVERNMENT PUBLIC 5,181, ,436 5,583,437-5,583,437 2,101,999 SECTOR ENTITIES (PSEs) CLAIMS ON MULTI LATERAL DEVELOPMENT BANKS CLAIMS ON BANKS 3,124,709 32,910 3,157,619-3,157, ,118 CLAIMS ON SECURITIES FIRMS CLAIMS ON CORPORATES 9,059,249 2,745,401 11,804,650-11,804,650 11,457,270 CLAIMS INCLUDED IN THE REGULATORY RETAIL 6,657,220-6,657,220-6,657,220 5,556,546 PORTFOLIO CLAIMS SECURED BY RESIDENTIAL PROPERTY 1,312,497 27,813 1,340,310-1,340, ,738 CLAIMS SECURED BY COMMERCIAL REAL ESTATE 1,047,279-1,047,279-1,047,279 1,047,279 PAST DUE LOANS 330,721 2, , , ,121 HIGHER-RISK CATEGORIES OTHER ASSETS 2,588,224-2,588,224-2,588,224 2,074,752 CLAIMS ON SECURITISED ASSETS CREDIT DERIVATIVES (Banks Selling protection) TOTAL CLAIMS 32,738,798 3,852,643 36,409,143-36,409,143 24,197,276 Financing Portfolio as per Standardized Approach AS ON DECEMBER 31, 2012 (AED 000 s) Table (5b) Gross Credit Exposures Exposures Subject to Deduction Asset Class Rated Unrated Total Post CRM RWA Post CRM Rated Unrated Total Post CRM RWA Post CRM CLAIMS ON SOVEREIGNS 567,453 3,511,896 4,079, , CLAIMS ON NON-CENTRAL GOVERNMENT PUBLIC SECTOR 75,634 5,507,803 5,583,437-2,101, ENTITIES (PSEs) CLAIMS ON MULTI LATERAL DEVELOPMENT BANKS CLAIMS ON BANKS 3,052, ,070 3,157, , CLAIMS ON SECURITIES FIRMS CLAIMS ON CORPORATES 1,031,619 10,773,032 11,804,650-11,457, CLAIMS INCLUDED IN THE REGULATORY RETAIL PORTFOLIO 6,657,220 6,657,220-5,556, CLAIMS SECURED BY RESIDENTIAL PROPERTY 1,340,310 1,340, , CLAIMS SECURED BY COMMERCIAL REAL ESTATE 1,047,279 1,047,279-1,047, PAST DUE LOANS 151, , , HIGHER-RISK CATEGORIES OTHER ASSETS 2,588,224 2,588,224-2,074, CLAIMS ON SECURITISED ASSETS CREDIT DERIVATIVES (Banks Selling protection) TOTAL CLAIMS 4,727,255 31,681,888 36,409,143-24,197,

70 133 FINANCIAL INFORMATION 134 Credit Risk Mitigation: Disclosure for Standardized Approach AS ON DECEMBER 31, 2012 (AED 000 s) Table (7b) Quantitative Disclosures Exposures Risk Weighted Assets Gross Exposure prior to Credit Risk Mitigation 36,409,143 24,197,276 Less: Exposure covered by on-balance sheet netting - - Less: Exposures covered by Eligible Financial Collateral - 347,762 Exposures covered by Guarantees (not deducted) 1,804,117 Less: Exposures covered by Credit Derivatives - - Net Exposures after Credit Risk Mitigation 36,409,143 23,849,514 Total Capital Requirement for Market Risk under Standardized Approach AS ON DECEMBER 31, 2012 Table (10) Market Risk Amount (AED 000 s) Profit Rate Risk 17,271 Equity Position Risk 14,498 Foreign Exchange Risk 62 Commodity Risk - Total Capital Requirement 31,831 Equity Position QUANTITATIVE DETAILS OF EQUITY POSITION: (AED 000 s) Table (13 a) Type Current Year Previous Year Publicly Traded Privately Held Publicly Traded Privately Held Equities 156,533-32,317 - Collective investment schemes Any other investment Total 156,533-32,317 - REALISED, UNREALISED AND LATENT REVALUATION GAINS (LOSES) DURING THE YEAR 2012 Gains (Losses) Table (13b) Amount (AED 000 s) Realized gains (losses) from sales and liquidations 651 *Unrealized gains (losses) recognized in the balance sheet but not through profit and loss account 3,348 **Latent revaluation gains (losses) for investment recorded at cost but not recognized in balance sheet or profit and loss account - Total 3,999 ITEMS IN (2) ABOVE INCLUDED IN TIER 1/TIER 2 CAPITAL: Table (13 c) Tier Capital Amount (AED 000 s) Amount included in Tier I capital 651 Amount included in Tier II capital - Total 651 CAPITAL REQUIREMENTS BY EQUITY GROUPINGS: Table (13 d) Grouping Amount (AED 000 s) Strategic investments - Available for Sale (Fair Value Through statement of other Comprehensive Income) 65,920 Held for Trading (Fair Value Through Statement of Income) 90,613 Total capital requirement 156,533 PROFIT RATE RISK IN THE BANKING BOOK (PRRBB) AS ON DECEMBER 31, 2012 Table (14) Shift in Yield Curves Net Profit Income Regulatory Capital (AED 000) ±200 basis point 98, ,000

71 135 BRANCH NETWORK 136 Branch network - UAE Branch network - Kazakhstan Location Branch Name Branch Manager Location Branch Name Branch Manager Al Ain Al Ain Fatima Jabri Al Ain Al Ain Mall Fatima Jabri Abu Dhabi Airport Road Amna Hassan Almaty Jsc Islamic Bank Al Hilal Timur Alim Astana Astana Branch Of Jsc Islamic Bank Al Hilal Shamil Bibekov Shymkent Shymkent Branch Of Jsc Islamic Bank Al Hilal Nurlan Turgenbayev Abu Dhabi Corniche Ahmed Al Qbeisi Abu Dhabi Hamdan Street Faisal Jabri Abu Dhabi Mall Yaqoob Abdulla Abu Dhabi Muroor Afaf Kendi Abu Dhabi Qarm Nader Moosawi Abu Dhabi Delma Mall Yaqoob Abdulla Abu Dhabi Al Falah Mohamed Al Dosari Abu Dhabi Khalifa A Faisal Jabri Abu Dhabi Baniyas Abdullah Al Dosari Dubai Bel Rumaitha Mohd Al Awadhi Dubai Bur Dubai Hassan Khalsan Al Hilal Takaful network Location Branch Name Contact Bur Dubai Al Hilal Takaful Dubai Fahed Al Kaabi Abu Dhabi Al Hilal Takaful Head Office, Golden Fish Tower Ahmad Nayef Abu Dhabi Abu Dhabi Traffic Department, Muroor Branch Ahmad Nayef Abu Dhabi Nationalization & Residency, Immigration Branch Ahmad Nayef Abu Dhabi Mall Branch Ahmad Nayef Dubai Garhoud Ayoob Hashemi Dubai Muraqabat Marwan Al Zarouni Dubai Twar Eissa Shamsi Dubai Umm Suqeim Khalid Al Awadhi Dubai Money Station Khalid Al Awadhi Dubai Knowledge Village Jassim Al Hassani Ras Al Khaimah Ras Al Khaimah Alia Shamsi Sharjah Sharjah Eissa Shamsi