annual report 2012 His Highness Sheikh Hamad Bin Khalifa Al-Thani Emir of the State of Qatar

Transcription

1 Annual Report 2012

2 annual report 2012 His Highness Sheikh Hamad Bin Khalifa Al-Thani Emir of the State of Qatar His Highness Sheikh Tamim Bin Hamad Al-Thani Heir Apparent 3

3 annual report 2012 annual report

4 annual report 2012 annual report 2012 Table of Contents Financial Highlights...09 Board of Directors...13 Chairman s Message...17 Executive Management...21 Managing Director s Message...25 Review of Operations...29 Retail Banking...30 Corporate Banking...30 Human Resources...30 Operations & IT...31 Private Banking...31 Corporate Social Responsibility...33 Corporate governance...39 Financial Statements and Auditor s report

5 Financial Highlights

6 annual report 2012 annual report 2012 Financial Highlights Significant Balance Sheet Growth Strong Earnings Growth Assets (QAR m) Net Loans (QAR m) Operating Income (QAR m) Net Income (QAR m) CAGR 30% 22,738 32,191 24,215 6, CAGR 31% 19,799 15,433 13,504 3, % 9% CAGR 25% % 15% % 14% 15% 13% 78% 73% 151 CAGR 23% % 65% Customer Deposits (QAR m) Shareholders Equity (QAR m) Other Net fee and commission Net interest CAGR 29% 11,465 15,977 22,289 CAGR 21% 2,593 2,916 4,232 1,368 4,

7 Board of Directors

8 annual report 2012 annual report 2012 Board of Directors H.E. Sheikh Hamad Bin Jassim Bin Jabor Al-Thani Chairman Ibrahim S. Dabdoub Vice Chairman Sheikh Jabor Bin Hamad Bin Jassim Al-Thani Board Member H.E. Sheikh Sultan Bin Jassim Bin Mohammed Al-Thani Board Member H.E. Sheikh Abdullah Bin Hamad Bin Khalifa Al-Thani Board Member Sheikh Suhaim Bin Abdullah Bin Khalifa Al-Thani Board Member Mohammed Mahmoud Al-Okar Board Member Sheikha Al Bahar Board Member Jabra Ghandour Managing Director 14 15

9 Chairman s Message

10 annual report 2012 annual report 2012 Chairman s Message On behalf of the Board of Directors, it is my pleasure to present the annual report for the International Bank of Qatar ( ) for the year ending 31 December has successfully marked new milestones in moving forward to achieve its strategic objectives. The bank s ongoing development process, aiming at optimizing performance and maximizing results, enabled to show a net profit of QAR million in Qatar s economy is one of the most rapidly growing economies in the world, offering local and international businesses strong business opportunities. A robust economy supported by excellent infrastructure and attractive investment atmosphere combined with a high-level of professional standards and practices makes Qatar one of the world s leading places to do business. The government is keen on maintaining momentum for developing services in vital sectors such as: education, health and transport to support the non-hydrocarbon sector as part of its long-term strategy to achieve economic diversification as outlined in Qatar 2030 vision Qatar s economic outlook remains one of the strongest in the region, underpinned by the expansion in liquefied natural gas (LNG) capacity. However, Qatar is diversifying its income sources, and further developing its economic infrastructure in general, a cornerstone of which is a solid banking sector. Due to the strength of the Qatari economy, the unfavorable financial circumstances that overshadowed the performance of most banks worldwide had no direct implications on. As we advance, we are mindful of our clients aspirations and longterm goals. Our forward-looking strategy aims at realizing superior returns through the application of state-of-the-art banking innovations, unique products and excellence in services, to enable us to better serve our clients. We strongly believe we can always offer added value to our clients. Amid challenging times during the year, we continued implementing our customercentric vision based on providing timely and superior customer service, and adopting an effective business model that generates attractive returns across all lines of business. Moving ahead, has simultaneously continued upgrading its capabilities and infrastructure to provide improved financial solutions to our clients wherever and however they wish. Our clear focus on sustainable revenue growth will always remain a prime objective and a top priority for throughout all its business lines, while at the same time we are also carefully evaluating and avoiding operational and market risks. Our great professional team, applying the most advanced banking practices, will always remain s best formula for success that will ensure continued growth. s partnership with NBK Group makes it easier for us to open up a world of opportunities and provide competitive advantages for clients, and to be a partner for success for both individuals and businesses across the region and particularly in Qatar. To conclude, I would like to thank our valued shareholders and clients for their continued confidence, and staff for their dedicated efforts and support. Sheikh Hamad Bin Jassim Bin Jabor Al Thani Chairman 18 19

11 Executive Management

12 annual report 2012 annual report 2012 Executive Management Jabra Ghandour Managing Director Muhannad Kamal GM-Wholesale Chaouki Daher AGM Private Banking Andrew Ball Head of Retail Banking Simon Gibbons Chief Financial Officer Saleh Al Kawari Head of Human Resources Anton Mallner AGM Risk Management James Nelson-Parker AGM Operations and Information Technology Bhupendra Jain Head of Corporate Banking Shah Tajdar Chief Credit Officer Kevin Gould Chief Internal Auditor Chandramohan Pillai Head of Administration and Facilities 22 23

13 Managing Director s Message

14 annual report 2012 annual report 2012 Managing Director s Message I am proud to provide my first annual briefing. This past year has been both challenging and rewarding. It has been challenging because of the difficult business environment we faced with increased competition and new regulatory initiatives, but it also has been rewarding to see our management team overcome these challenges and achieve a strong set of results. Altogether, it has been a successful journey and we hope that expectations have been met. We look forward to further successes and more accomplishments in the future. The Qatari Economy While positively sustaining all sectors, the economy experienced a mild slowdown in 2012; however, the country continued moving forward with the adoption and implementation of best practices in regulatory policies and procedures and financial standards that have paved the way for an attractive and favourable business and investment atmosphere in Qatar. This had the added benefit of strengthening an already solid banking sector able to withstand external financial shocks. The Strength of our Philosophy Foremost of the challenges facing us, is maintaining continued and high growth rates. This will entail ongoing institutional development, upgrade of human and infrastructure capabilities to ensure continuity in achievable growth. s philosophy for moving forward and generating profits is based on three pillars: diversity of innovative products and excellent services; focusing on the most attractive market segments in which has a competitive edge; and targeting growth pools and seizing promising investment opportunities in the Qatari market. Meanwhile, we continue to upgrade infrastructure, especially enhancing automation in IT and operations as the backbone for developing all banking services. In 2012, achieved a net profit of QAR million. This profit came as a result of adopting an ambitious strategy that focused mainly on wholesale, Private and Elite banking, while maintaining momentum in Retail and other business lines. Accordingly, was awarded several international accolades that came as a testament to s robust performance. Most importantly were two prestigious Euromoney awards for the Best Private Banking Services in Qatar 2012 for HNWI and Ultra HNWI. A close look at key financial data will show that: Loans increased from QAR 16.9 billion in 2011 to QAR 19.8 billion in 2012, marking a 17% increase year on year. Additionally deposits also grew strongly by 15% to reach QAR 22.3 billion in 2012 compared to QAR 19.4 billion in Despite challenging economic conditions, grew its operational profit by 4% in Commitment to our Community As usual, continued to support a variety of community activities in line with its corporate social responsibility (CSR) policy, with special emphasis on sponsoring educational initiatives. Moreover, supported a number of activities that included, but were not limited to: women empowerment and entrepreneurship, cultural and artistic events, business networking gatherings, orphans and elderly support, as well as several sports activities. Our Winning Team The progress achieved by is mainly attributable to a professional and highly skilled team that makes up the family. attaches great importance to upgrading the professional capabilities of its staff, especially our Qatari workforce. Training is regarded as an indispensable prerequisite for the integrated banking process and is demonstrated in our ambitious training programs and plans aimed at enhancing and acquiring relevant expertise, particularly in recruiting and developing highly qualified individuals. The Way Forward will continue moving forward while maintaining its position in the Qatari market through the application of best banking practices, governance and risk management, product innovation, and customer service. We will work diligently to achieve our planned targets based on s successful strategy. Thanks and Appreciation To conclude, I would like to extend my sincere thanks to our clients for their continued confidence in and to our staff for their dedication that will ensure progress and prosperity in the future as we keep our promise to remain the bank of choice in Qatar. Jabra Ghandour Managing Director 26 27

15 Review of Operations

16 annual report 2012 annual report 2012 Review of Operations Retail Banking Against the backdrop of a challenging, low margin operating environment, 2012 was a successful year for the Retail Bank with an increase in loan sales of 46%, and strong growth in fee income of 32%. In terms of deposits, a remarkable increase of 13 % compared to 2011 was achieved. Our credit card portfolio witnessed a 23% growth in cardholders and net revenues increased three fold on the back of a stable portfolio. In September 2012, launched its Elite banking program, offering a range of superior services to reward clients with access to some of the best rates on deposit accounts and loans, as well as a range of benefits to suit their needs, whether at home or travelling. The Elite banking program is our flagship offering to our affluent customer base and further enhances our commitment to a differentiated, customer focused service model. Throughout the year, several product campaigns and promotions were launched, such as the joint and Qatar Airways promotions offering 10% off on all tickets for credit card holders; the ipad promotion offering a free ipad 3 for customers taking out a loan from ; and credit card tactical and seasonal offers with Elite partner merchants which were also well received in the market. Moreover, other product promotions also included Vehicle loan and Ramadan promotions, and the Loans postponement campaign payment holiday. Looking ahead we expect an even stronger performance in 2013 through our continued focus on driving cost efficiency, managing portfolio quality and our market leading service proposition which will drive revenue growth in our chosen segments. Corporate Banking During the year, the corporate banking team succeeded in financing strategic projects across all segments. This included financing government, local companies, regional and international companies. The corporate business is well positioned to capitalize on its extremely strong relationships and market knowledge in order to finance the very large and complex infrastructure and other projects expected to come into the market in 2013 and beyond. has maintained its conservative lending strategy with very strong focus on prudent client selection, particularly in the context of overall weak global economic outlook. As a result, the bank has maintained a very healthy credit portfolio which is a validation of our credit culture. also continued to proactively invest in improving customer service delivery and this has largely been achieved by the introduction of corporate internet banking, which was very well received by clients for meeting their operational needs. HR Initiatives s investment in the development of our people is a core component of our ability to realise our long-term goals and maintain customer service excellence. is committed to nurturing the emerging generation of Qatari nationals, playing a leading role in the government s stated goal of developing a knowledge based economy with local talent. s structured training programmes and initiatives to support key competency development have helped to ensure we remain an employer of choice in Qatar. is also a leading participant in the Qatar Career Fair and has placed a number of Qatari staff in scholarship programmes in the country s leading universities. In a highly competitive environment for the most talented graduates, we have launched our Graduate Trainee Programme, a year-long training module that incorporates an introduction to banking and business software. This ensures graduates will be immersed into the culture effectively and can apply the knowledge gained from their studies whilst gaining banking experience. During 2012 we also implemented our five-year Qatari Development Programme, a home-grown initiative which helps Qatari nationals build in-depth expertise in banking and finance and encourages ambitious nationals to progress and pursue a career within. Operations & IT During 2012, was honoured with the coveted Straight Through Processing (STP) award presented by Commerzbank for the second year in a row. The award underlines s outstanding performance in the execution of Euro payments and recognizes its state-of-the-art in-house payments architecture that produces consistently high quality instructions that can be automatically processed by recipient banks. This year also saw the launch of Corporate Internet Banking, a major milestone for the bank to further enhance the quality and speed of the service offered to corporate clients. Meanwhile, a new improved Retail internet was also launched, enhancing our clients abilities to access s retail platform. New changes also put control firmly into customers hands with the ability to open a new account online, to store beneficiary information, to look up SWIFT code, and finally set up and manage standing orders. The operations and IT team, worked this year to implement various initiatives to streamline the processing of payments and to improve the ease and speed of paying credit cards for customers. Foremost of these initiatives was the Cards Personalization project that allowed to personalize cards in-house, thus reducing turnaround time for customers needing new or replacement cards. Moreover, the implementation of an asset and liability management system was successfully accomplished to better manage the bank s liquidity and interest rate risk exposures. This is being followed by introducing a module to automate the process of calculating Funds Transfer Pricing (FTP). In addition, a major security advance was achieved with the implementation of a debit card fraud monitoring system. Finally, a Business Intelligence project was launched, an initiative that aims to invest in staff and provide managers with excellent reporting and greater insight into the business. Private Banking In 2012, Private Banking was recognized with Euromoney s prestigious award for the Best Private Banking Services in Qatar for HNWI and ultra HNWI. This year, Private Banking achieved several milestones, as our talented team managed to increase the deposit portfolio by almost 50 per cent, while a remarkable increase of 25 per cent for the loan portfolio has been achieved. Marking a 10 per cent increase compared to last year, 95 new clients have joined Private Banking in Consequently, to optimise performance and provide our increasing customers with the highest level of service and quality, two new Relationship Managers (RMs) and three Assistant RMs have been recruited. Other milestones during 2012 included the re-branding of the Private Banking identity to further enhance and distinguish our image, in addition to an overall face lifting of the Private Banking area in the first floor

17 annual report 2012 annual report 2012 Corporate Social Responsibility 33

18 annual report 2012 annual report 2012 Corporate Social Responsibility In 2012, proactively contributed to the welfare of the local community by furthering its outreach programmes and spearheading initiatives that fall strongly in line with the bank s steadfast commitment to be an exemplar and a responsible corporate social citizen. The bank s Corporate Social Responsibility efforts are distinguished by three key cornerstones that touch upon various walks of life in Qatar and that promote the crucial pillars of a better-off society. The core CSR activities of aim at strengthening education and youth development, encouraging the participation of women in the workforce and promoting local sports, arts and culture. These are implemented in partnership with government and non-governmental institutions and entities that share common values and beliefs. A brief summary of the CSR activities carried out throughout the year is provided below: 34 35

19 annual report 2012 annual report 2012 Corporate Social Responsibility Strengthening Education & Youth Development Empowering Qatari youth, promoting human capital development and supporting learning and education are the essentials of the Qatar National Vision In line with its commitment to remain an active player in the country s growth, played a key role in encouraging, enhancing and promoting educational avenues for Qatari youth to help prepare them to partner in the nation s ambitious development strategy and pave the way for a globally recognised knowledge-based hub. Continuing its tradition of participating at the Qatar National Career Fair, focused on the professional opportunities within the organisation, and shared an overview of how to nurture the skills of students and young graduates to pursue promising careers in the banking industry. also partnered with the country s Traffic Department for the 4th edition of the Schools without accidents campaign aimed at preventing road accidents and promoting safe streets. An open day to strengthen awareness on road safety was held at the Qatar National Theatre, which was attended by 197 students, representing 11 high schools in Qatar. To further promote education and highlight the talent of youngsters from different communities in Qatar, supported several activities and events at Stenden University, Qatar and Doha College. The goal was to provide a platform for young creative abilities to flourish. Additionally, was the main sponsor of the Doha College Model United Nations (MUN) event, which simulated the working of the United Nations, with the goal of developing the communication skills of students, instilling in them leadership traits, building responsibility, and educating them on global issues. Lastly, s annual Do Good Deeds as part of the Month of Charity campaign, reached out to the young and elderly patients at Rumailah Hospital where s team visited the Paediatric ward at the hospital presenting gifts to children and hosting an Iftar banquet for patients. Women in the Workforce As a bank committed to support, encourage and empower women to contribute towards Qatar s progress, participated and sponsored the yearly Qatar International Business Women s Forum (QIBWF) for the third consecutive time as a Gold sponsor. The QIBWF sets the scene for opinion leaders to discuss a range of significant topics related to women and development. also announced its strategic partnership with the annual conference of How Women Work for the third year running which was held on the 6th and 7th of March supported the launch and book-signing event of How Women Succeed book, which presents extraordinary success stories of women living and working Qatar, and serves as an inspiration to show how women can leave an indelible mark in whatever they do. Sponsoring Local Arts, Culture and Sports strongly believes in the importance of arts, culture and sports in the improvement of a nation towards a well- balanced and progressive society. To that effect, sponsored a suite of musical events including the eminent Friends of the American School of Doha Chamber Music series, with four classical concerts held in 2012 that paid tribute to some of the world s most revered artists. Now regarded as a first-class cultural event on the calendar of thousands in Qatar, the ASD Chamber Music Series engages the Qatari community with a diverse musical programme performed by accomplished international musicians. Furthermore, remained a supporter for the seventh year of the highly-acclaimed Communicator Awards organized by the ICC-ONE Toastmasters. Gaining superb momentum since inception, the Communicator Awards is a competition where 60 of Qatar s best speakers display their public-speaking and leadership skills before a live audience. Together with the Communicator Awards, also sponsored cultural and artistic events organised by different communities on a regular basis. Supporting sports events, festivals and clubs was also central to s sponsorship programme for awarded the Best Basketball 3-point shootout Champion at HH-The Emir Basketball Cup and sponsored the Lycee Bonaparte Oryx Football Team, the sports team of the French Lycée Bonaparte School in Qatar. s staff and families also participated and won top positions in the country s first National Sports Day organized by the Qatar Central Bank in line with Qatar s vision to be a regional nucleus for sports

20 annual report 2012 annual report 2012 Corporate Governance 39

21 annual report 2012 annual report 2012 Corporate Governance considers sound corporate governance to be a critical factor in protecting the rights and interest of all stakeholders, and achieving business integrity and efficiency. In 2012, the Bank continued to strengthen its corporate governance in compliance with the rules and regulation of the Qatar Central Bank and leading global practice. Ownership Structure and Board Composition is privately owned by six entities. National Bank of Kuwait owns a 30% share and the remaining 70% is owned by five Qatari Companies. These six companies, as shareholders, appoint their representative as directors. The Bank is governed by the Board, which consists of nine members, comprised of the Chairman, Vice-Chairman and seven additional members. The Chairman is elected every three years by the Board. Terms of Reference for the Board of Directors The Board provides oversight, with the prime responsibility of ensuring effective governance over s key affairs, including the review and approval of short and long-term business strategies, and credit, treasury and investment policies. The Board fulfills its responsibilities in accordance with the provisions and requirements of the Articles of Association of, the requirements of the QCB and leading global practice. Board Committees Currently, the Board committees, appointed by the Board with their own written Terms of Reference, are: (i) Board Policies, Development and Executive Committee, (ii) Board Audit Committee, (iii) Board Risk and Compliance Committee, (iv) Board Remuneration, Nominations and Corporate Governance Committee. Board and Board Committee Meetings Board of Director meetings are held a minimum of six times each year, and are attended by a minimum of five members as a quorum. Board Committees meet as required or per the minimum specified in their respective Terms of Reference. Board Training and Development Board Members are provided with a training and development package for the purpose of enhancing and maintaining their ability to meet all of their professional responsibilities and duties. Terms of Reference of the Board Policies, Development and Executive Committee The Board Policies, Development & Executive Committee consists of five Board members, including the Vice Chairman of the Board acting as the Chairman. The Managing Director attends all meetings without voting power. The Committee oversees all strategic and policy related matters. It also reviews the Bank s credit and investment portfolios, and approves within its Board delegated limits, all credit facilities above delegated management limits. Terms of Reference of the Board Audit Committee The Board Audit Committee consists of three Board Members, all of whom are independent. The main responsibility of the Committee is to review the quality, adequacy and integrity of internal controls surrounding operations, the performance and coverage of Internal Audit, and the adequacy and effectiveness of all financial reporting practices. The Committee is also responsible for appointing the external auditors and reviewing their performance on an annual basis and any reports or findings arising either internally or externally. The Managing Director does not attend Board Audit Committee meetings. Terms of Reference of the Board Risk and Compliance Committee The Board Risk and Compliance Committee consist of four members and meets, at least, on a quarterly basis. Under its Terms of Reference, its responsibilities include ensuring that risk and compliance issues are properly identified, managed, monitored and reported; that policies and procedures are in place; that risk is maintained at levels within the approved risk appetite and limits established by the Board. The Committee is charged with promoting a risk and compliance culture across the organization. Terms of Reference of the Board Remuneration, Nominations and Corporate Governance Committee The Board Remuneration, Nominations and Corporate Governance Committee is responsible for overseeing policies and structures in relation to remuneration and benefits of the Bank. The Committee is responsible for overseeing policies and structures in relation to the Bank s corporate governance structure, Board and Board Committee Terms of Reference and the Board and Board Committees composition. The Committee meets at least twice a year and consists of four members of the Board. Executive Management Team Day-to-day management of is delegated to the Managing Director, who is aided by an experienced executive management team. The team consists of the General Manager - Wholesale, Assistant General Manager and Head of Private Banking, Assistant General 40 41

22 annual report 2012 annual report 2012 Manager Operations and IT, Assistant General Manager - Risk Management, Head of Retail, Head of Corporate Banking, Chief Credit Officer, Chief Financial Officer and Head of Human Resources. Management Committees The following main committees are operative for effective corporate governance at, operating within, and guided by, recently enhanced Terms of Reference for each committee: - Management Executive Committee - Asset Liability and Investment Committee - Risk Management Committee - Executive Credit Committee - Human Resources Committee Risk Management Risk is inherent in the Bank s activities and it is managed at various levels of the Bank, including the Board level. The Board s sub-committees, the executive team, and management committees manage risk through a process of ongoing identification, measurement, monitoring and reporting, within a framework of approved risk limits and other internal controls. Documented policies, procedures and risk appetites provide the parameters within which risk is ultimately controlled. These policies provide for forward looking risk management and for stressing activities to identify any potential risks or threats. Risk Management is primarily responsible for the effective management of credit, market, operational, liquidity, legal, compliance/regulatory and reputational risks. Risk is reported using the internationally recognised Basel II standard policies and procedures where appropriate, which, among other things, includes the identification, analysis and evaluation of risks, and the appropriate response, tracking and reporting of risks. Internal Audit The Internal Audit function reports to the Board Audit Committee. The function carries out independent and comprehensive reviews of activities in all areas of using a risk-based approach, and assists in assessing its operations and identifying any potential vulnerabilities. Compliance The Compliance function reports to the AGM Risk Management of. The function ensures that procedures and activities meet statutory requirements and regulations. It also ensures and reports that the activities of the Bank are in compliance with Qatar Central Bank s regulations and laws. The Compliance function operates in accordance with an approved policy and compliance manual, updated to reflect current requirements. Board Remuneration The Board of Directors, and members of the various committees, is paid a fixed annual remuneration. For the year 2012, a total amount of QAR million was paid to the Board members

23 annual report 2012 annual report 2012 Financial Statements & Audit s Report 45

24 annual report 2012 annual report 2012 Independent Auditors Report to the Shareholders of International Bank of Qatar (Q.S.C.) STATEMENT OF FINANCIAL POSITION We have audited the accompanying financial statements of International Bank of Qatar Q.S.C. ( the Bank ), which comprise the statement of financial position as at 31 December 2012, the income statement and 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. Responsibility of the directors for the financial statements The directors of the Bank are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and applicable provisions of the Qatar Central Bank regulations and for such internal control as the directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Bank s preparation and fair presentation of the 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 Bank 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. As at 31 December Notes ASSETS Cash and balances with Qatar Central Bank 7 2,511,248 1,126,055 Due from banks 8 5,047,836 4,744,684 Loans and advances to customers 9 19,799,262 16,899,706 Investment securities 10 4,427,317 4,250,222 Property and equipment , ,133 Other assets , ,617 TOTAL ASSETS 32,190,932 27,359,417 LIABILITIES Due to banks 13 4,813,910 3,326,131 Customer deposits 14 22,289,150 19,426,434 Other liabilities , ,572 TOTAL LIABILITIES 27,959,179 23,212,137 EQUITY Share capital 16 (a) 1,100,000 1,100,000 Legal reserve 16 (b and c) 2,025,884 2,025,884 Risk reserve 16 (d) 388, ,362 Fair value reserve 16 (e) (461) (316) Retained earnings 718, ,350 TOTAL EQUITY 4,231,753 4,147,280 TOTAL LIABILITIES AND EQUITY 32,190,932 27,359,417 These financial statements for the year ended 31 December 2012 were approved by the Board of Directors on 17 January 2013 and were signed on its behalf by: Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2012, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and applicable provisions of the Qatar Central Bank regulations. Other matter The financial statements of the Bank as at and for the year ended 31 December 2011 were audited by another auditor who expressed an unqualified opinion on those financial statements on 10 January Report on other legal and regulatory requirements We have obtained all the information and explanations which we consider necessary for the purpose of our audit. The Bank has maintained proper accounting records and the financial statements are in agreement therewith. We are not aware of any violations of the applicable provisions of the Qatar Central Bank Law No. 33 of 2006, Qatar Commercial Companies Law No. 5 of 2002 and the terms of Articles of Association and the amendments thereto having occurred during the year which might have had a material adverse effect on the business of the Bank or its financial position as at 31 December H.E. Sheikh Hamad Bin Jassim Bin Jabor Al Thani Chairman Jabra Ghandour Managing Director Gopal Balasubramaniam KPMG Qatar Auditor s Registry No January 2013 Doha State of Qatar The attached notes 1 to 31 form an integral part of these financial statements

25 annual report 2012 annual report 2012 INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December Notes For the year ended 31 December Notes Continuing operations: Interest income , ,354 Interest expense 18 (274,912) (279,870) Net interest income 653, ,484 Fee and commission income 142, ,348 Fee and commission expense (32,047) (28,027) Net fee and commission income , ,321 Profit for the year 524, ,606 Other comprehensive income Available-for-sale financial assets: Net change in fair value 16 (e) (494) (2,078) Net amount transferred to income statement 16 (e) Other comprehensive income for the year (145) (1,606) Total comprehensive income for the year 524, ,000 Net gain from foreign exchange 20 81,938 81,542 Net income from investment securities 21 44,931 7,504 Net operating income 890, ,851 Staff costs 22 (207,664) (182,807) Depreciation 11 (19,907) (27,821) Net impairment loss on loans and advances to customers 9 (c) (14,056) (24,925) Other expenses 23 (124,740) (142,644) Profit from continuing operations 524, ,654 Discontinued operations: Profit from discontinued operations 24-67,952 Profit for the year 524, ,606 Earnings per share Basic and diluted earnings per share (QAR per share) Earnings per share from continuing operations Basic and diluted earnings per share (QAR per share) The attached notes 1 to 31 form an integral part of these financial statements. The attached notes 1 to 31 form an integral part of these financial statements

26 annual report 2012 annual report 2012 STATEMENT OF CHANGES IN EQUITY STATEMENT OF CHANGES IN EQUITY (CONTINUED) Notes Share capital Legal reserve Risk reserve Fair value reserve Retained earnings Total equity Balance as at 1 January ,000,000 1,125, ,324 1, ,782 2,916,280 Total comprehensive income for the year Profit for the year , ,606 Other comprehensive income (1,606) - (1,606) Total comprehensive income for the year (1,606) 572, ,000 Notes Share capital Legal reserve Risk reserve Fair value reserve Retained earnings Total equity Balance as at 1 January ,100,000 2,025, ,362 (316) 695,350 4,147,280 Total comprehensive income for the year Profit for the year , ,618 Other comprehensive income (145) - (145) Total comprehensive income for the year (145) 524, ,473 Transfer to risk reserve 16 (d) ,038 - (26,038) - Transactions with equity holders, recognised directly in equity ,038 - (26,038) - Contributions by and distributions to equity holders: Shares issued and fully paid 16 (a) 100, ,000 Transfer to legal reserve 16 (b) - 900, ,000 Dividends paid 16 (f) (340,000) (340,000) Total contributions by and distributions to equity holders 100, , (340,000) 660,000 Balance as at 31 December ,100,000 2,025, ,362 (316) 695,350 4,147,280 Transfer to risk reserve 16 (d) ,690 - (61,690) - Transactions with equity holders, recognised directly in equity ,690 - (61,690) - Contributions by and distributions to equity holders: Dividends paid 16 (f) (440,000) (440,000) Total contributions by and distributions to equity holders (440,000) (440,000) Balance as at 31 December ,100,000 2,025, ,052 (461) 718,278 4,231,753 Cash dividend of QAR 440,000 thousand (2011: QAR 440,000 thousand) has been approved by the Board of Directors and the shareholders at the Annual General Meeting for the year ended 31 December The attached notes 1 to 31 form an integral part of these financial statements. The attached notes 1 to 31 form an integral part of these financial statements

27 annual report 2012 STATEMENT OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December Notes Cash flows from operating activities Profit from continuing operations 524, ,654 Profit from discontinued operations - 67,952 Profit for the year 524, ,606 Adjustments for: Interest income (928,486) (929,354) Interest expense 274, ,870 Net impairment loss on loans and advances to customers 9 (c) 14,056 25,055 Provision for staff indemnity 15 (a) 6,324 8,490 Depreciation 11 19,907 29,549 Amortisation of (discount)/premium on investment securities (5,688) 609 Net gains on disposal of investment securities 21 (39,593) (5,451) Dividend income on available-for-sale securities 21 (5,338) (2,053) Gain on disposal of property and equipment (122) (407) Gain on disposal of discontinued operations 24 - (44,600) Profit before changes in operating assets and liabilities (139,410) (65,686) Change in cash reserve with Qatar Central Bank (238,506) (237,045) Change in due from banks (894,524) (195,589) Change in loans and advances to customers (2,765,158) (2,202,513) Change in other assets (143,936) (44,920) Change in due to banks 1,487,779 (1,649,688) Change in customer deposits 2,862,716 3,627,707 Change in other liabilities 302,371 33, ,332 (734,453) Interest received 880, ,507 Interest paid (183,707) (288,940) Dividends received 5,338 2,053 Staff indemnity paid 15 (a) (5,623) (2,904) Net cash from / (used in) operating activities 1,167,397 (59,737) Cash flows from investing activities Acquisition of investment securities (3,992,910) (2,719,256) Proceeds from disposal of investment securities 3,860, ,785 Acquisition of property and equipment 11 (40,422) (28,309) Proceeds from the disposal of property and equipment 299 4,651 Net cash flow from discontinued operations ,621 Net cash used in investing activities (172,082) (1,818,508) Cash flows from financing activities Proceeds from rights issue 16 (a) - 1,000,000 Dividends paid 16 (f) (440,000) (340,000) Net cash (used in) / from financing activities (440,000) 660,000 Net increase / (decrease) in cash and cash equivalents 555,315 (1,218,245) Cash and cash equivalents as at 1 January 4,711,540 5,929,785 Cash and cash equivalents as at 31 December 27 5,266,855 4,711, REPORTING ENTITY The International Bank of Qatar (Q.S.C.) (the Bank ) was established in the State of Qatar on 1 November 1956 as Ottoman Bank. On 31 July 2000, the Bank was incorporated as Grindlays Qatar Bank under Emiri Decree Number 4 of The principal shareholders were four Qatari incorporated companies with limited liability (W.L.L.) holding 60% of the Bank s share capital and Standard Chartered Grindlays Bank Ltd. holding 40%. Standard Chartered Grindlays Bank Ltd. sold its shareholding to the Qatari shareholders on 31 May On 30 August 2004, National Bank of Kuwait S.A.K ( NBK ) acquired 20% of the shareholding in the Bank and the name of the Bank was changed to International Bank of Qatar (Q.S.C.) effective 1 September Subsequently, the shareholding of NBK was increased to 30% effective 1 August The Bank also entered into a Management Service Agreement with NBK which was renewed in the year 2009 for a period of ten years. The Bank is engaged in commercial banking activities and operates through its Head Office at Suhaim Bin Hamad Street, Doha (Postal address P.O. Box 2001, Doha, Qatar) and ten branches established in the State of Qatar. 2. BASIS OF PREPARATION (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and the applicable provisions of Qatar Central Bank ( QCB ) regulations. (b) Basis of measurement The financial statements have been prepared on the historical cost basis except for the following items which are measured at fair value: Derivative financial instruments Available-for-sale investments (c) Functional and presentation currency These financial statements are presented in Qatari Riyals ( QAR ), which is the Bank s functional and presentation currency. Except as otherwise indicated, financial information presented in QAR has been rounded to the nearest thousand. (d) Use of estimates and judgments The preparation of the financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in Note 5. The attached notes 1 to 31 form an integral part of these financial statements

28 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Foreign currency Foreign currency transactions that are transactions denominated, or that require settlement in a foreign currency are translated into the respective functional currencies of the operations at the spot exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences resulting from the settlement of foreign currency transactions and arising on translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in income statement. (b) Financial assets and financial liabilities (i) Recognition and initial measurement The Bank initially recognises loans and advances to customers, due from / to banks and customer deposits on the date at which they are originated. All other financial assets and liabilities are initially recognised on the settlement date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. (ii) Classification Financial assets At inception a financial asset is classified in one of the following categories: loans and receivables held-to-maturity available-for-sale designated as fair value through profit or loss Financial liabilities The Bank has classified and measured its financial liabilities at amortised cost. (iii) Derecognition The Bank derecognises a financial asset when the contractual rights 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 ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a 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 income statement. 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Financial assets and financial liabilities (continued) (iv) Offsetting Financial assets and liabilities are offset and the net amounts presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS and when approved by the QCB, or for gains and losses arising from a group of similar transactions such as in the Bank s trading activity. (v) Measurement principles Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment loss. The calculation of effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date. The Bank measures the fair value of listed investments at the market closing price for the investment. For unlisted investments, the Bank recognises any increase in the fair value, when they have reliable indicators to support such an increase. These reliable indicators are limited to the most recent transactions for the specific investment or similar investments made in the market on a commercial basis between willing and informed parties who do not have any information which might affect the price. The fair value of investments in mutual funds and portfolios whose units are unlisted are measured at cost. (vi) Identification and measurement of impairment At each reporting date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired can include significant financial difficulty of the borrower, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower 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 changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group of assets. The Bank considers evidence of impairment loss for loans and advances to customers at both a specific asset and collective level. All individually significant loans and advances to customers and investment securities are assessed for specific impairment. All individually significant loans and advances to customers and investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances to customers that are not individually significant are collectively assessed for impairment by grouping together loans and advances to customers with similar risk characteristics. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire

29 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Financial assets and financial liabilities (continued) (vi) Identification and measurement of impairment (continued) Impairment losses on financial assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset s original effective interest rate. Impairment losses are recognised in income statement and reflected in an allowance account against financial assets. The Bank writes off loans and advances to customers and investment securities when it is known not to be collectible. For listed investments, a decline in the market value by 20% from cost or more, or for a continuous period of nine months or more, are considered to be indicators of impairment. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. While in subsequent periods, the appreciation in fair value of impaired available-for-sale investment securities is recorded in fair value reserves, debit instruments appreciation in fair value that can be related to an event occurring after the impairment loss is recognised as part of the income statement. (c) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. (d) Loans and advances to customers Loans and advances to customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances to customers are initially measured at the transaction price which is the fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. (e) Investment securities Subsequent to initial recognition, investment securities are accounted for depending on their classification, as either held-to-maturity or available-for-sale. (i) Held-to-maturity investments Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which were not designated at fair value through profit or loss (trading) or available-for-sale. Held-to-maturity investments are carried at amortised cost using the effective interest method. 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) Investment securities (continued) (ii) Available-for-sale investments Available-for-sale investments are non-derivative investments that are designated as available-for-sale or are not classified as another category of financial assets. Unquoted equity securities are carried at cost less impairment, and all other available-for-sale investments are carried at fair value. Interest income is recognised in income statement using the effective interest method. Dividend income is recognised in income statement when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in income statement. Other fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are reclassified to income statement. (f) Derivatives (i) Other non-trading derivatives When a derivative is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognised immediately in income statement. (ii) Derivatives held for trading purposes The Bank s derivative trading instruments includes forward foreign exchange contracts and interest rate swaps. The Bank sells these derivatives to customers in order to enable them to transfer, modify or reduce current and future risks. These derivative instruments are fair valued as at the end of reporting date and the corresponding fair value changes is taken to the income statement. (g) Property and equipment (i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and capitalised borrowing costs. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and is recognised in other expenses. (ii) Subsequent costs The cost of replacing a component of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the dayto-day servicing of property and equipment are recognised in income statement as incurred

30 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Property and equipment (continued) (iii) Depreciation Depreciable amount is the cost of property and equipment, or other amount substituted for cost, less its residual value. Depreciation is recognised in income statement on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset and is based on cost of the asset less its estimated residual value. Land is not depreciated. The estimated useful lives for the current and comparative years are as follows: Leasehold improvements Computer equipment Furniture and equipment Vehicles 5 7 years 3 years 5 7 years 5 years Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted prospectively, if appropriate. (h) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised 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 suffered impairment are reviewed for possible reversal of the impairment at each statement of reporting date. (i) Provisions A provision is recognised if, as a result of a past event, the Bank 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. Provisions are determined by discounting the expected future cash flows that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (j) Financial guarantees Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognised initially at their fair value, and the initial fair value is amortised over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment when a payment under the guarantee has become probable. (k) Contingent liabilities and other commitments As at the statement of reporting date, contingent liabilities and other commitments do not represent actual liabilities of the Bank. 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Employee benefits Defined contribution plans The Bank provides end of service benefits to its expatriate employees. The entitlement to these benefits is based upon the employees final salary and length of service, subject to the completion of a minimum service period. The expected cost of these benefits is accrued over the period of employment. The provision for employees end of service benefits is disclosed under Other liabilities. With respect to Qatari employees, the Bank makes contributions to the Qatari Pension Fund calculated as a percentage of the employees salaries. The Bank s obligations are limited to these contributions. (m) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank s shareholders. (n) Interest income and expense Interest income and expense are recognised in income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes all transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. (o) Fees and commission income and expense Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, sales commission and syndication fees are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised using effective interest rate method over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. (p) Income from investment securities Gains or losses on the sale of investment securities are recognised in income statement as the difference between fair value of the consideration received and carrying amount of the investment securities. Income from held to maturity investment securities is recognised based on the effective interest rate method

31 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) Dividend income Dividend income is recognised when the right to receive income is established. Dividend income is recognised under net income from investment securities. (r) Fiduciary assets Assets held in a fiduciary capacity are not treated as assets of the Bank in the statement of financial position. (s) Repossessed collateral Repossessed collaterals against settlement of customers debts are stated within the statement of financial position under Other assets at their acquisition value net of allowance for impairment. According to QCB instructions, the Bank should dispose of any land and properties acquired against settlement of debts within a period not exceeding three years from the date of acquisition although this period can be extended after obtaining approval from QCB. (t) Comparatives Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative information. (u) New standards and interpretations The following amendments have been applied by the Bank in preparation of these financial statements: IFRS 7 (amendment) Disclosures: Transfer of financial assets The amendments to IFRS 7 introduce new disclosure requirements about transfers of financial assets including disclosures for financial assets that are not derecognised in their entirety; and financial assets that are derecognised in their entirety but for which the entity retains continuing involvement. The amendment has no impact on the Bank s operations. In addition a number of new standards, amendments to standards and interpretations have been issued that are not yet effective for the year ended 31 December 2012, and have not been applied in preparing these financial statements. IAS 1 (amendment) - Presentation of items of other comprehensive income The amendments to IAS 1 require that an entity present separately the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss. The amendment is effective for annual periods beginning after 1 July 2012 with an option of early application. IFRS 9 Financial instruments The first standard issued as a part of a wider project to replace IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortised cost and fair value. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. The standard is effective for annual periods beginning on or after 1 January IFRS 13 - Fair value measurement. The above standards are effective for annual periods beginning on or after 1 January The Bank is currently assessing the impact of these standards on future periods. 4. FINANCIAL RISK MANAGEMENT (a) Risk management framework Risk is inherent in the Bank s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk, operational risk and market risk, which include trading and non-trading risks. The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank s strategic planning process. Risk management structure The Board of Directors is ultimately responsible for identifying and controlling risks, and for establishing and disseminating an appropriate risk appetite; however, there are separate independent bodies responsible for managing and monitoring risks. The Bank has four Management Level committees which are responsible for managing risk and report into the four Board Level committees. Board Risk and Compliance Committee The Board Risk and Compliance Committee is responsible to ensure that risk and compliance issues are properly identified, managed, monitored and reported; that policies and procedures are in place; and that risk is maintained at levels within the approved risk appetite and limits established by the Board. The committee is charged with promoting a risk and compliance culture across the organisation, and to developing an appropriate database for the ongoing management and monitoring of risk. Board Audit Committee The Board Audit Committee is responsible to review the quality, adequacy and integrity of internal controls surrounding the Bank operations, the performance and coverage of Internal Audit, and the adequacy and effectiveness of all financial reporting practices. Risk Management Committee (RMC) Constituted at the managerial level, RMC has been established to oversee the risk and compliance issues currently arising from these business activities now and potentially in the future. The RMC oversees market, credit, operational, legal, reputation and enterprise risks of the Bank. The RMC oversees the implementation and adherence to the approved policies of the Bank across its business lines to ensure that risk and compliance with these policies and with regulatory requirements is properly managed, monitored, measured and reported. Generally, the RMC is charged amongst other things, with encouraging a risk aware culture within the Bank at all levels. Management level Executive Credit Committee (ECC) A management level Executive Credit Committee (ECC) is responsible to exercise the power and authority delegated to it by the Board of Directors (BOD) and the Board Policies, Development & Executive Committee (BPD&EC). It is entrusted to ensure that the quality of the Bank s credit portfolio remains within approved risk limits. The committee has been established to oversee the strategic and overall directional issues of these business activities in terms of both qualitative and quantitative parameters and credit policies approved by the BOD

32 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Risk management framework (continued) Asset Liability and Investment Committee (ALICO) An Asset Liability and Investment Committee (ALICO) is responsible to monitor and manage specific elements of the statement of financial position; capital structure, funding and liquidity requirements, market and regulatory aspects of the trading and non-trading portfolios as well as developing the Bank s investment portfolio thereby assisting the Bank to manage investments, optimise returns and oversee risk. Internal audit Risk management processes throughout the Bank are audited regularly by the internal audit function, which examines both the adequacy of the procedures and the Bank s compliance with the procedures. Internal Audit discusses the results of all assessments with management and reports its findings and recommendations to the Audit Committee. Risk measurement and reporting systems Monitoring and controlling risks is primarily performed based on limits established by the Board. These limits reflect the business strategy of the Board and the market environment as well as the level of risk that the Board is willing to accept, with additional emphasis on selected industries. Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is presented and explained to the BOD, the Risk Committee, and the head of each business division. 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (i) Maximum exposure to credit risk before collateral held or other credit enhancements Credit risk exposures relating to assets recorded on the statement of financial position are as follows: Balances with Qatar Central Bank 2,426,974 1,038,559 Due from banks 5,047,836 4,744,684 Loans and advances to customers 19,799,262 16,899,706 Investment securities - debt 4,337,144 4,068,611 Other assets 183, ,068 Total as at 31 December 31,794,747 26,906,628 Other credit risk exposures are as follows: Guarantees 5,434,904 4,946,825 Letter of credit 892, ,245 Unutilised credit facilities 4,066,479 4,052,561 Total as at 31 December 10,394,325 9,928,631 The above table represents a worse-case scenario of credit risk exposure to the Bank, without taking account of any collateral held or other credit enhancements attached. For assets recorded on the statement of financial position, the exposures set out above are based on net carrying amounts as reported in the statement of financial position. Risk mitigation As part of its overall risk management, the Bank uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions. The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level of authority within the Bank. The effectiveness of all hedge relationships are monitored by the Risk Management monthly. In situations of ineffectiveness, the Bank will enter into a new hedge relationship to mitigate risk on a continuous basis. (b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial transaction fails to meet its contractual obligations. It arises from lending, trade finance, treasury and other activities undertaken by the Bank. The Bank has established appropriate credit standards, policies and procedures for the management and monitoring of credit risks. The Bank manages its credit risk exposure through careful screening and assessment of customers, periodic reviews and the diversification of its lending, investing and financing activities. The Bank avoids undue concentrations of risks by limiting exposures to individuals or groups of customers in specific businesses. It also obtains collateral or credit support where appropriate, as a way to mitigate credit risks. The types of collateral obtained include cash, mortgages over real estate properties and pledge over equity instruments. Credit support includes personal and/or corporate guarantees. The Bank uses the same credit risk assessment procedures when entering into derivative and treasury transactions that it does for traditional lending products. Note 9 discloses the distribution of loans and advances and to customers by industrial sector. Note 4(b)(ii) discloses the geographical distribution of the Bank s assets at the reporting date

33 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (ii) Concentration of risks of financial assets with credit risk exposure Geographical sectors The following table breaks down the Bank s credit exposure at their carrying amounts (without taking into account any collateral held or other credit support), as categorised by geographical region. For this table, the Bank has allocated exposures to regions based on the country of domicile of its counterparties. 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (ii) Concentration of risks of financial assets with credit risk exposure (continued) Industry sectors The following table, as an illustration, breaks down the Bank s credit exposure at carrying amounts before taking into account collateral held or other credit enhancements, as categorised by the industry sectors of the Bank s counterparties. 31 December 2012 Qatar GCC Countries Other Middle East Rest of the world Total Gross exposure 2012 Gross exposure 2011 Balances with Qatar Central Bank 2,426, ,426,974 Due from banks 4,967,863 4, ,111 5,047,836 Loans and advances to customers 18,282,602 1,516, ,799,262 Investment securities - debt 4,231, , ,337,144 Other assets 183, ,531 30,092,917 1,626, ,111 31,794, December 2011 Qatar GCC Countries Other Middle East Rest of the world Balances with Qatar Central Bank 1,038, ,038,559 Due from banks 3,454, , ,466 4,744,684 Loans and advances to customers 14,353,961 2,472,945-72,800 16,899,706 Investment securities - debt 3,947, , ,068,611 Other assets 155, ,068 22,950,433 2,939, ,016,266 26,906, December 2012 Qatar GCC Countries Other Middle East Rest of the world Guarantees 3,352, , ,614 1,699,171 5,434,904 Letter of credit 892, ,942 Unutilised credit facilities 4,066, ,066,479 8,312, , ,614 1,699,171 10,394, December 2011 Qatar GCC Countries Other Middle East Rest of the world Guarantees 3,188, ,436 20,483 1,475,292 4,946,825 Letter of credit 929, ,245 Unutilised credit facilities 4,052, ,052,561 8,170, ,436 20,483 1,475,292 9,928,631 Total Total Total Funded and unfunded Government 6,504,188 5,052,226 Government agencies 5,478,192 3,411,239 Industry 817, ,028 Commercial 3,440,210 3,053,259 Services 7,940,833 7,971,585 Contracting 383, ,346 Real estate 4,409,194 3,039,183 Personal 2,815,272 3,558,959 Others 6, Contingent liabilities 10,394,325 9,928,631 42,189,072 36,835,259 (iii) Credit quality Loans and advances to customers Due from banks Investment securities - debt Neither past due nor impaired Low risk 18,789,475 16,846,619 5,047,836 4,744, Special mention 889,811 16, ,679,286 16,863,107 5,047,836 4,744, Past due but not impaired Low risk 20, Special mention 84,771 23, ,602 23, Impaired Substandard 8,811 13, Doubtful 19,043 11, Bad debts 133, , , , Less: impairment allowance-specific (145,146) (121,446) Less: impairment allowance-collective (1,750) (1,750) ,374 13, Carrying amount net 19,799,262 16,899,706 5,047,836 4,744, Investment securities - debt Held to maturity ,904,783 3,984,327 Available-for-sale ,432,361 84,284 Carrying amount net ,337,144 4,068,611 Total carrying amount 19,799,262 16,899,706 5,047,836 4,744,684 4,337,144 4,068,

34 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (iii) Credit quality (continued) Impaired loans and advances to customers and investment in debt securities Individually impaired loans and advances to customers and investment debt securities are exposures which the Bank determines that there is objective evidence of impairment and it does not expect to collect all principal and interest due according to the contractual terms of the loan/investment security agreement(s). Loans and advances to customers past due but not impaired Past due but not impaired loans and advances to customers are those for which contractual interest or principal payments are past due, but the Bank believes that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage of collection of amounts owed to the Bank. Up to 30 days 9,173 18, to 60 days 91,143 3, days 5,286 1,814 Gross 105,602 23,366 Rescheduled loans and advances to customers Restructuring activities include; extended payment arrangements, approved external management plans, modification and deferral of payments. During the year the Bank has rescheduled loans amounting QAR 582,582 thousand (2011: QAR 105,297 thousand). (iv) Collateral The determination of eligible collateral and the value of collateral are based on QCB regulations and are assessed by reference to market price or indexes of similar assets. The Bank has collateral in the form of blocked deposits, pledge of shares or legal mortgage against the past dues loans and advances to customers. The aggregate collateral is QAR 6.07 million (2011: QAR 7.08 million) for past due up to 30 days, QAR 1.48 million (2011: QAR Nil) for past due from 31 to 60 days and QAR Nil (2011: QAR 0.1 million) for past due from 61 and above days. (v) Repossessed collateral During the year, the Bank obtained assets by taking possession of collateral held as security as follows: 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) (vi) Write-off policy The Bank writes off a loan or an investment debt security balance, and any related allowances for impairment losses, when the Bank determines that the loan or security is uncollectible and after QCB approval. This determination is made after considering information such as the occurrence of significant changes in the borrower s/issuer s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardised loans, write-off decisions generally are based on a product-specific past due status. The amount written off during the year was QAR 1,409 thousand (2011: QAR 2,389 thousand.). (c) Liquidity risk Liquidity risk is the risk that the Bank will be unable to meet its funding requirements. Liquidity risk arises from fluctuations in cash flows due to market disruptions or credit down grades, which may cause certain sources of funding to cease immediately. (i) Management of liquidity risk The Bank maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. In addition, the Bank maintains a statutory deposit with the QCB. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. (ii) Exposure to liquidity risk The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose, net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks, debt securities, other borrowings and commitments maturing within the next month. A similar, but not identical, calculation is used to measure the Bank s compliance with the liquidity limit established by the Bank s lead regulator, QCB. Details of the reported Bank ratio of net liquid assets to deposits from customers at the reporting date and during the year were as follows: At 31 December % % Average for the year % % Property 1,901-1,901 - Repossessed properties are sold as soon as practicable, with the proceeds used to reduce the outstanding indebtedness. Repossessed property is classified in the statement of financial position within other assets

35 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) (iii) Maturity analysis 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) (iv) Maturity analysis Carrying amount Less than 1 month 1-3 months 3-12 months 1-5 years More than 5 years 31 December 2012 Cash and balances with Qatar Central Bank 2,511,248 2,511, Due from banks 5,047,836 3,939,373 13,739 2,724 1,092,000 - Loans and advances to customers 19,799,262 3,474,838 3,077,728 2,041,492 6,224,417 4,980,787 Investment securities 4,427, , ,456 1,928,386 1,610,299 Others assets 219, ,596 17,836-34,366 - Total 32,005,461 10,093,055 3,685,479 2,356,672 9,279,169 6,591,086 Due to banks 4,813,910 4,704, , Customer deposits 22,289,150 16,349,806 2,556,018 3,278, ,900 - Other liabilities 856, , , , ,924 56,866 Total 27,959,179 21,467,252 2,824,347 3,389, ,824 56,866 Difference (11,374,197) 861,132 (1,033,218) 9,058,345 6,534, December 2011 Cash and balances with Qatar Central Bank 1,126,055 1,126, Due from banks 4,744,684 3,827, , , Loans and advances to customers 16,899,706 2,648,798 2,243,856 1,684,758 8,241,789 2,080,505 Investment securities 4,250, , , ,211 1,870,177 1,244,558 Others assets 173, ,970-43,879 11,768 - Total 27,194,284 8,020,212 3,560,227 2,165,048 10,123,734 3,325,063 Due to banks 3,326,131 3,225, , Customer deposits 19,426,434 9,868,255 8,017,133 1,525,385 15,661 - Other liabilities 459, ,135 66, , Total 23,212,137 13,235,062 8,184,398 1,777,016 15,661 - Difference (5,214,850) (4,624,171) 388,032 10,108,073 3,325,063 Carrying amount Gross undiscounted cash flows Les than 1 month 1-3 months 3-12 months 1-5 years More than 5 years 31 December 2012 Non-derivative financial liabilities Due to banks 4,813,910 4,814,309 4,704, , Customer deposits 22,289,150 22,341,045 16,356,354 2,566,610 3,313, ,900 - Other liabilities 856, , , , , ,924 56,866 Total liabilities 27,959,179 28,011,473 21,474,079 2,835,059 3,424, ,824 56,866 Derivative financial instruments Outflow 3,017,235 2,998,857 2,457, , ,624 37,971 - Inflow (3,017,235) (3,004,901) (2,463,016) (297,934) (205,763) (38,188) - 27,959,179 28,005,429 21,468,541 2,837,909 3,424, ,607 56, December 2011 Non-derivative financial liabilities Due to banks 3,326,131 3,329,168 3,228, , Customer deposits 19,426,434 19,285,789 9,678,296 8,038,175 1,553,640 15,678 - Other liabilities 459, , ,135 66, , Total liabilities 23,212,137 23,074,529 13,048,140 8,205,440 1,805,271 15,678 - Derivative financial instruments Outflow 3,700,700 3,619,425 2,182, , ,668 57,466 - Inflow (3,700,700) (3,605,891) (2,170,333) (533,841) (844,568) (57,149) - 23,212,137 23,088,063 13,060,354 8,205,343 1,806,371 15,995 - (d) Market risks The Bank takes on exposure to market risks, 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 risks arise from open positions in interest 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 interest rates, credit spreads, foreign exchange rates and equity prices. (i) Management of market risks Overall authority for market risk is vested in ALICO. Bank s Risk Department is responsible for the development of detailed risk management policies (subject to review and approval by ALICO) and for the day-to-day review of their implementation. (ii) Exposure to interest rate risk non-trading portfolios The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands. ALICO is the monitoring body for compliance with these limits and is assisted by Bank central Treasury in its day-to-day monitoring activities

36 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Market risks (continued) (ii) Exposure to interest rate risk non-trading portfolios (continued) 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Market risks (continued) (ii) Exposure to interest rate risk non-trading portfolios (continued) A summary of the Bank s interest rate gap position on non-trading portfolios is as follows: Carrying amount Less than 3 months 3-12 months Repricing in: 1-5 years More than 5 years Non-interest sensitive Effective interest rate 2012 Cash and balances in Qatar Central Bank 2,511,248 1,190, ,321, % Due from banks 5,047,836 3,921,781-1,092,000-34, % Loans and advances to customers 19,799,262 10,486,955 8,995, , % Investment securities 4,427, , ,897 1,928,386 1,610,299 90, % Property and equipment 185, , % Other assets 219, , % 32,190,932 16,098,298 9,294,296 3,020,386 1,610,299 2,167,653 Due to banks 4,813,910 4,718, , % Customer deposits 22,289,150 12,509,452 3,278, ,900-6,396, % Other liabilities 856, , % Equity 4,231, ,231, % 32,190,932 17,228,293 3,278, ,900-11,579,313 Statement of financial position items (1,129,995) 6,015,870 2,915,486 1,610,299 (9,411,660) Off statement of financial position items 12,334 (12,334) Interest rate sensitivity gap (1,117,661) 6,003,536 2,915,486 1,610,299 (9,411,660) Cumulative interest rate sensitivity gap (1,117,661) 4,885,875 7,801,361 9,411,660 - Carrying amount Less than 3 months 3-12 months Repricing in: 1-5 years More than 5 years Non-interest sensitive Effective interest rate 2011 Cash and balances in Qatar Central Bank 1,126, ,126, % Due from banks 4,744,684 4,503, , , % Loans and advances to customers 16,899,706 12,936,228 1,691, ,272, % Investment securities 4,250, , ,371 1,763,354 1,205, , % Property and equipment 165, , % Other assets 173, , % 27,359,417 18,338,701 2,091,647 1,763,354 1,205,610 3,960,105 Due to banks 3,326,131 3,292, , % Customer deposits 19,426,434 14,588,328 1,505, ,332, % Other liabilities 459, , % Equity 4,147, ,147, % 27,359,417 17,881,050 1,505, ,973,221 Statement of financial position items 457, ,501 1,763,354 1,205,610 (4,013,116) Off statement of financial position items 83,404 - (83,404) - - Interest rate sensitivity gap 541, ,501 1,679,950 1,205,610 (4,013,116) Cumulative interest rate sensitivity gap 541,055 1,127,556 2,807,506 4,013,

37 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Market risks (continued) (ii) Exposure to interest rate risk non-trading portfolios (continued) Sensitivity analysis The sensitivity of the income statement is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate non-trading financial assets and financial liabilities held at the reporting date, including the effect of hedging instruments. The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Bank s income statement. There is no impact on the Bank s equity. The effect of decreases in basis points is expected to be equal and opposite to the effect of the increases shown. Sensitivity of net interest income Currency Increase in basis points QAR +10 7,368 2,812 USD +10 3,147 4,040 EUR +10 (646) (720) GBP +10 (260) 8 Others ,676 6,235 Interest rate movements affect reported equity in the following ways: retained earnings arising from increases or decreases in net interest income and the fair value changes reported in income statement; and fair value reserves arising from increases or decreases in fair values of available-for-sale-financial instruments is reported directly in other comprehensive income. Overall non-trading interest rate risk positions are managed by Bank central Treasury, which uses investment securities, advances to banks, deposits from banks and derivative instruments to manage the overall position arising from the Bank s non-trading activities. (iii) Exposure to other market risks non-trading portfolios Foreign currency transactions Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Bank takes on exposure to the effect of fluctuation in prevailing foreign currency exchange rate on its financial position. The Bank has set limits on the level of currency exposure, which are monitored daily. The Bank had the following net open long (short positions) as of 31 December. Net foreign currency exposure: Pounds Sterling (2,770) 2,574 Euro 5,681 (4,427) AED (18,736) 480 Other currencies 2,689 2, FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Market risks (continued) (iii) Exposure to other market risks non-trading portfolios (continued) 5% change in currency exchange rate Pounds Sterling (139) 129 Euro 284 (221) AED (937) 24 Other currencies Equity price risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in the equity indices and individual stocks. The non-trading equity price risk exposure arises from equity securities classified as available-for- sale. The Bank is also exposed to equity price risk and the sensitivity analysis thereof is as follows: 5% change in QE 30 index Change in other comprehensive income 3,824 5,411 The above analysis has been prepared on the assumption that all other variables such as interest rate, foreign exchange rate, etc are held constant and is based on historical correlation of the equity securities to the relevant index. (e) Operational risks Operational risk refers to the loss resulting from inadequate or failed internal processes, people and systems or from external events. The Bank endeavors to minimise operational losses by ensuring that effective infrastructure, controls, systems and individuals are in place throughout the organisation. Regulatory, legal and reputation risks are controlled through a set of internal policies and procedures. External legal advice is obtained from lawyers to confirm legal and regulatory requirements, where required. Other risks to which the Bank is exposed are regulatory risk, legal risk and reputational risk. Regulatory risk is controlled through a framework of compliance policies and procedures. Legal risk is managed through the effective use of legal department and external legal advisers. Reputational risk is controlled through the regular examination of issues that are considered to have reputational repercussions for the Bank, with guidelines and policies being issued as appropriate. (f) Capital management Regulatory capital The primary objectives of the Bank s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong ratings and healthy capital ratios in order to support its business and to maximise shareholders value. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders or issue additional capital securities. No changes were made in the objectives, policies and process from the previous years. The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision and adopted by Qatar Central Bank in supervising the Bank

38 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (CONTINUED) (f) Capital management (continued) Regulatory capital (continued) The Bank s regulatory capital position under Basel II and QCB regulations at 31 December was as follows: Tier 1 capital* 3,404,162 3,381,234 Tier 2 capital 323, ,743 Total regulatory capital 3,727,360 3,651,977 *Tier one capital included retained earnings net of proposed dividend amounting to QAR 440,000 thousand (2011: QAR 440,000 thousand). Tier 1 capital includes share capital, legal reserve and retained earnings. Tier 2 capital includes risk reserve (up to 1.25% of the risk weighted assets) and fair value reserve (45% if positive and 100 % if negative). Risk weighted assets and carrying amounts 2012 Basel II Risk weighted amount 2011 Basel II Risk weighted amount 2012 Carrying amount 2011 Carrying amount Cash and balances with Qatar Central Bank - - 2,511,248 1,126,055 Due from banks 2,539,883 2,362,634 5,047,836 4,744,684 Loans and advances to customers 17,013,708 12,872,979 19,799,262 16,899,706 Investment securities 148, ,626 4,427,317 4,250,222 Property and equipment 185, , , ,133 Other assets 219, , , ,617 Off balance sheet assets 3,484,187 4,186,472 13,710,384 13,785,699 Total risk weighted assets for credit risk 23,591,730 19,954,461 45,901,316 41,145,116 Risk weighted assets for market risk 754, , Risk weighted assets for operational risk 1,546,667 1,293, ,892,743 21,684,718 45,901,316 41,145,116 Risk weighted assets 25,892,743 21,684,718 Regulatory capital 3,727,360 3,651,977 Risk weighted assets as a percentage of regulatory capital (Capital ratio) 14.40% 16.84% The minimum ratio limit determined by QCB is 10% and the Basel II capital adequacy requirement is 8%. 5. USE OF ESTIMATES AND JUDGMENTS (a) Key sources of estimation uncertainty The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements 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. (i) Allowances for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy. The specific counterparty component of the total allowances for impairment applies to financial assets evaluated individually for impairment and is based upon management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about counterparty s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. Minimum impairment on specific counter parties are determined based on the QCB regulations. Collectively assessed impairment allowances cover credit losses inherent in portfolios of loans and advances to customers and investment securities measured at amortised cost with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired financial assets, but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on the estimates of future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances. (ii) Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. (b) Critical accounting judgements in applying the Bank s accounting policies (i) Valuation of financial instruments The Bank accounting policy on fair value measurements is discussed in the significant accounting policies section. The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. Level 2: Valuation techniques based on observable inputs, either directly or indirectly (i.e. derived from prices). Level 3: Valuation techniques using significant unobservable inputs. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using valuation techniques

39 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 5. USE OF ESTIMATES AND JUDGMENTS (CONTINUED) (b) Critical accounting judgements in applying the Bank s accounting policies (continued) (i) Valuation of financial instruments (continued) Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, Black-Scholes and polynomial option pricing models and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm s length. The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised: 31 December 2012 Level 1 Level 2 Level 3 Total Derivative assets - 17,594-17,594 Available-for-sale securities 1,160, ,000-1,508,975 1,160, ,594-1,526,569 Derivative liabilities - 13,183-13,183-13,183-13, December 2011 Derivative assets - 33,529-33,529 Available-for-sale securities 242, , ,985 33, ,514 Derivative liabilities - 25,803-25,803-25,803-25,803 (ii) Financial asset and liability classification The Bank s accounting policies provide scope for assets and liabilities to be designated at inception into different accounting categories in certain circumstances: In classifying financial assets as held-to-maturity, the Bank has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by accounting policies. Details of the Bank s classification of financial assets and liabilities are given in Note 6. (iii) Impairment of investments in equity and debt securities Investments in equity and debt securities are evaluated for impairment on the basis described in the significant accounting policies section. (iv) Useful lives of property and equipment The Bank s management determines the estimated useful life of property and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset, physical wear and tear, technical or commercial obsolescence. 6. FINANCIAL ASSETS AND LIABILITIES Accounting classifications and fair values The table below sets out the carrying amounts and fair values of the Bank s financial assets and financial liabilities: 31 December 2012 Fair value through profit or loss Loans and receivables Other amortised cost Total fair value Total carrying amount Cash and balances with Qatar Central Bank - - 2,511, ,511,248 2,511,248 Due from banks - - 5,047, ,047,836 5,047,836 Derivative assets 17, ,594 17,594 Loans and advances to customers ,799, ,799,262 19,799,262 Investment securities: Measured at fair value ,522,534-1,522,534 1,522,534 Measured at amortised cost - 3,107, ,107,074 2,904,783 17,594 3,107,074 27,358,346 1,522,534-32,005,548 31,803,257 Derivative liabilities 13, ,183 13,183 Due to banks ,813,910 4,813,910 4,813,910 Customer deposits ,289,150 22,289,150 22,289,150 13, ,103,060 27,116,243 27,116, December 2011 Fair value through profit or loss Loans and receivables Held-tomaturity Availablefor-sale Held-tomaturity Availablefor-sale Other amortised cost Total fair value Total carrying amount Cash and balances with Qatar Central Bank - - 1,126, ,126,055 1,126,055 Due from banks - - 4,744, ,744,684 4,744,684 Derivative assets 33, ,529 33,529 Loans and advances to customers ,899, ,899,706 16,899,706 Investment securities: Measured at fair value , , ,895 Measured at amortised cost - 3,977, ,977,032 3,984,327 33,529 3,977,032 22,770, ,895-27,046,901 27,054,196 Derivative liabilities 25, ,803 25,803 Due to banks - - 3,326, ,326,131 3,326,131 Customer deposits ,426,434 19,426,434 19,426,434 25,803-3,326,131-19,426,434 22,778,368 22,778,

40 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 7. CASH AND BALANCES WITH QATAR CENTRAL BANK Cash 84,274 87,496 Cash reserve with QCB* 1,197, ,999 Other balances with QCB 1,229,469 79,560 2,511,248 1,126,055 *The cash reserve with QCB is mandatory reserve not available for use in the Bank s day to day operations. 8. DUE FROM BANKS Current accounts 34,055 41,287 Placements 4,997,318 4,459,517 Loans to banks 16, ,880 5,047,836 4,744, LOANS AND ADVANCES TO CUSTOMERS (a) By type Loans 18,026,638 15,491,908 Overdrafts 1,463,807 1,053,547 Bills discounted 138, ,723 Bankers acceptances 316, ,724 19,946,158 17,022,902 Specific impairment of loans and advances to customers (145,146) (121,446) Collective impairment allowance (1,750) (1,750) Net loans and advances to customers 19,799,262 16,899, LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) (b) By industry At 31 December 2012: Loans Overdrafts Bills discounted Bankers acceptances Government - 29, ,279 Government agencies 5,478, ,478,192 Industry 726,444 82,406 7,378 1, ,424 Commercial 2,746, ,971 54, ,165 3,339,282 Services 2,246, ,037 71, ,577 2,697,532 Contracting 79, ,210 4,848 11, ,405 Real estate 4,245,802 24, ,270,631 Personal 2,504, , ,930,413 18,026,638 1,463, , ,908 19,946,158 Less: Specific impairment of loans and advances to customers (145,146) Collective impairment allowance (1,750) 19,799,262 At 31 December 2011: Loans Overdrafts Bills discounted Bankers acceptances Government 182,135 12, ,044 Government agencies 3,399, ,399,326 Industry 434,325 57,652-2, ,028 Commercial 2,391, ,567 25, ,023 2,902,454 Services 2,693,883 70, ,066 13,272 3,058,446 Contracting 167, ,280-16, ,346 Real estate 2,967,695 16, ,984,412 Personal 3,255, , ,663,846 15,491,908 1,053, , ,724 17,022,902 Less: Specific impairment of loans and advances to customers (121,446) Collective impairment allowance (1,750) 16,899,706 Total Total The aggregate amount of non-performing loans and advances to customers amounted QAR 161,270 thousand, which represents 0.81% of total loans and advances to customers (2011: QAR 136,429 thousand, 0.81% of total loans and advances to customers)

41 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 9. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) (c) Net impairment loss on loans and advances to customers 10. INVESTMENT SECURITIES (CONTINUED) (b) Held to maturity Real Estate 2012 Personal Total Real Estate 2011 Personal Balance at 1 January 9, , ,446 10, , ,923 Charge for the year 2,767 47,260 50,027 6,842 61,761 68,603 Recoveries (3,696) (24,536) (28,232) (7,703) (25,580) (33,283) Net charges/(recovery) for 35,320 the year (929) 22,724 21,795 (861) 36,181 Amounts written off - (1,409) (1,409) (319) (2,070) (2,389) QCB Reclassification - 3,314 3,314 - (59,408) (59,408) Individual impairment 8, , ,146 9, , ,446 Collective impairment - 1,750 1,750-1,750 1,750 Allowance for impairment losses 8, , ,896 9, , ,196 Interest in suspense of QAR 20,607 thousand as at 31 December 2012 (2011: QAR 13,040 thousand) is included in the above analysis of credit losses for the purpose of QCB regulation requirements. Movement in interest in suspense during the year amounted to a net charge of QAR 7,739 thousand (2011: net charge of QAR 10,265 thousand). During the year ended 31 December 2011, QAR 59,408 thousand fully provisioned non-performing loans and advances to customers with no movements and no recoveries during the last 12 months, were transferred to off statement of financial position memorandum accounts as per QCB instructions. This has resulted in a reduction of non-performing loans and advances to customers and allowance for impairment losses. During 2012, the Bank has obtained QCB approval to upgrade QAR 3,314 thousand back to on statement of financial position. 10. INVESTMENT SECURITIES Total Available-for-sale 1,522, ,895 Held to maturity 2,904,783 3,984,327 Total 4,427,317 4,250,222 (a) Available-for-sale Quoted 2012 Unquoted Total Quoted 2011 Unquoted Equities 76,614-76, , ,530 State of Qatar debt securities 56, , , Treasury bills 798, , Other debt securities 228, ,925 84,284-84,284 Mutual funds - 13,559 13,559 50,171 22,910 73,081 Total 1,160, ,559 1,522, ,985 22, ,895 Fixed rate securities and floating rate securities amounted to QAR 1,432,361 thousand and QAR Nil, respectively (2011: QAR 66,084 thousand and QAR 18,200 thousand, respectively). Total -By issuer Quoted 2012 Unquoted Total Quoted 2011 Unquoted State of Qatar debt securities - 2,762,880 2,762,880-2,902,880 2,902,880 Treasury bills , ,276 Other debt securities 141, , , ,171 Total 141,903 2,762,880 2,904,783 1,081,447 2,902,880 3,984,327 -By interest rate Quoted 2012 Unquoted Total Quoted 2011 Unquoted Fixed rate securities - 2,762,880 2,762, ,276 2,902,880 3,802,156 Floating rate securities 141, , , ,171 Total 141,903 2,762,880 2,904,783 1,081,447 2,902,880 3,984,327 The fair value of the held to maturity investments as of 31 December 2012 was QAR 3,107,074 thousand (2011: QAR 3,977,032 thousand). 11. PROPERTY AND EQUIPMENT Land Leasehold improvements Computer equipment Furniture and equipment Vehicles Work in progress Cost Balance at 1 January ,012 49,258 81,343 17,048 1,622 60, ,078 Acquisitions / Transfers - 8,267 5,588 1,937-12,517 28,309 Sale of Islamic branches (Note 24) - (5,467) (791) (1,157) - - (7,415) Disposals - (6,808) (811) (721) (251) - (8,591) Balance at 31 December ,012 45,250 85,329 17,107 1,371 73, ,381 Acquisitions / Transfers - 9,378 10,855 1,494 1,085 17,610 40,422 Disposals - - (40) (9) (838) - (887) Balance at 31 December ,012 54,628 96,144 18,592 1,618 90, ,916 Accumulated depreciation Balance at 1 January ,455 55,858 7, ,903 Charged during the year (Note below) - 7,606 18,999 2, ,549 Sale of Islamic branches (Note 24) - (1,084) (453) (321) - - (1,858) Disposals - (3,087) (649) (466) (144) - (4,346) Balance at 31 December ,890 73,755 9,594 1, ,248 Depreciation for the year - 7,618 9,376 2, ,907 Disposals - - (38) (5) (667) - (710) Balance at 31 December ,508 83,093 12, ,445 Carrying amounts Balance at 1 January ,012 30,803 25,485 9, , ,175 Balance at 31 December ,012 23,360 11,574 7, , ,133 Balance at 31 December ,012 25,120 13,051 6, , ,471 Total Total Total Note: Included in the depreciation charged for the year ended 31 December 2011 is an amount of QAR 1,728 thousand pertaining to the property and equipment disposed off in connection with the discontinued operations (Note 24)

42 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 12. OTHER ASSETS 15. OTHER LIABILITIES Interest receivable 148,343 99,914 Prepaid expenses and advances 34,366 18,549 Positive fair value of derivatives (Note 28) 17,594 33,529 Clearing cheques 14,628 16,370 Repossesed collateral 1,901 - Fair valuation of hedged items 242 3,569 Others 2,724 1, , , DUE TO BANKS Current accounts 95,069 33,409 Placements 4,718,841 3,292,722 4,813,910 3,326, CUSTOMER DEPOSITS a) By type Current and call deposits 7,621,574 4,783,496 Saving deposits 1,480,658 1,428,017 Time deposits 13,186,918 13,214,921 22,289,150 19,426,434 b) By sector Government 1,330, ,819 Goverment and semi goverment agencies 2,007,784 1,359,984 Individuals 15,108,916 12,008,728 Corporate 3,842,196 5,146,903 22,289,150 19,426,434 Acceptances 316, ,724 Unearned income 205,824 72,986 Accrued expenses and payables 189,236 95,791 Interest payable 75,823 40,741 Staff Indemnity (Note a) 26,086 25,385 Cash margins 18,059 14,356 Negative fair value of derivatives (Note 28) 13,183 25,803 Others 11,000 13, , ,572 (a) Staff Indemnity Staff indemnity 2012 Staff indemnity 2011 Balance at 1 January 25,385 19,799 Provisions made during the year 6,324 8,490 31,709 28,289 Payments during the year (5,623) (2,904) Balance at 31 December 26,086 25, CAPITAL AND RESERVES (a) Share capital Authorised Class A 2012 thousand Number of shares Class B 2012 thousand Class A 2011 thousand Class B 2011 thousand Shares of QAR 10 each 84,000 36,000 84,000 36,000 Number of shares thousand Share class A Share class B QAR 000 Number of shares thousand QAR 000 Issued and fully paid At 1 January , ,000 33, ,000 At 31 December , ,000 33, ,000 The shareholders of the Bank at their Extra-ordinary General Assembly meeting held on 15 August 2011 approved a resolution to increase the capital of the Bank in two tranches by the issuance of 20,000,000 shares at QAR 10 each and a premium of QAR 90 each totaling QAR 2,000,000 thousand. On 29 September 2011, the shareholders subscribed to the first tranche of 10,000,000 shares increasing its share capital by QAR 100,000 thousand and share premium of QAR 900,000 thousand. Share capital comprises class (A) ordinary shares, held by the local shareholders and class (B) shares held by foreign shareholders. Both class (A) and Class (B) shares carry equal rights and have the same voting powers

43 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 16. CAPITAL AND RESERVES (CONTINUED) (b) Share premium In September 2011, the share premium account was increased by QAR 900,000 thousand arising from the increase in capital. In accordance with the provisions of Qatar Commercial Companies Law No. 5 of 2002, the share premium has been transferred to the legal reserve. (c) Legal reserve In accordance with the Bank s Articles of Association, at least 10% of the net profit for the year is required to be transferred to the legal reserve until the reserve equals 100% of the paid up capital. The minimum required percentage of transfer to legal reserve as per Qatar Central Bank rules and regulations is 10%. The balance of legal reserve is currently in excess of issued share capital. There is no requirement to appropriate additional amounts to the legal reserve from the current year profit. This reserve is not available for distribution except in circumstances specified in the Qatar Commercial Companies Law No. 5 of 2002 and with the approval of Qatar Central Bank. (d) Risk reserve In accordance with Qatar Central Bank rules and regulations, a risk reserve is made to cover contingencies on loans and advances to customers, up to 2% (2011: 2%) of the total direct credit facilities granted, net of allowance for impairment of loans and advances to customers, cash secured facilities and facilities to or guaranteed by Ministry of Finance. (e) Fair value reserve Available-for-sale investments: Balance at 1 January 2012 (316) Net change in fair value (494) Net amount transferred to income statement 349 Balance at 31 December 2012 (461) Available-for-sale investments: Balance at 1 January ,290 Net change in fair value (2,078) Net amount transferred to income statement 472 Balance at 31 December 2011 (316) (f) Proposed dividend A cash dividend of QAR 4.0 per share amounting to QAR 440,000 thousand has been approved by the Board of Directors and the shareholders at the Annual General Meeting for the year ended 31 December 2012 (2011: QAR 4.0 per share amounting to QAR 440,000 thousand). During the year, the Bank has paid an amount of QAR 4.0 per share totaling to QAR 440,000 thousand (2011: QAR 3.4 per share totaling to QAR 340,000 thousand) as cash dividends for the year INTEREST INCOME Loans and advances to customers 697, ,764 Debt securities 183, ,813 Amounts deposited with banks 42,835 23,650 Amounts deposited with Qatar Central Bank 4,366 10, , , INTEREST EXPENSE Customer deposits 258, ,168 Amount deposited by banks 16,871 21, , , NET FEE AND COMMISSION INCOME Credit related fees 56,503 92,231 Commission on unfunded facilities 39,746 39,567 Others 46,340 40,550 Total fee and commission income 142, ,348 Fee and commission expense (32,047) (28,027) Net fee and commission income 110, , NET GAIN FROM FOREIGN EXCHANGE Dealing in foreign currencies 81,593 78,446 Revaluation of derivatives securities 345 3,096 81,938 81, NET INCOME FROM INVESTMENT SECURITIES Net gains on disposal of investment securities 39,593 5,451 Dividend income 5,338 2,053 44,931 7,

44 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 22. STAFF COSTS Basic salaries and allowances 191, ,534 Staff indemnity (Note 15) 6,324 8,490 Staff pension fund 1, Others 8,101 6, , , OTHER EXPENSES Occupancy and rent 37,064 36,614 Marketing 19,494 19,141 Strategic initiative 15,821 30,973 Computer 11,937 7,285 Legal and professional fees 9,136 5,281 Communication 7,428 6,183 Management fees 5,299 5,784 Director s remuneration 4,829 4,675 Others 13,732 26, , ,644 On June 2011, the Bank decided jointly with Al Khaliji Q.S.C. to end negotiation for a proposed merger. The Bank has expensed all merger related costs amounting to QAR 14,112 thousand incurred for consultants and advisors in connection with the proposed merger with Al Khaliji Q.S.C. included under others. 24. DISCONTINUED OPERATIONS On 31 January 2011, Qatar Central Bank issued instructions to terminate the Islamic financial services offered by existing Islamic branches of conventional banks within a period ending on 31 December Accordingly, the Bank s management disposed of the retail and corporate assets and liabilities relating to Al Yusr Islamic branches. The results pertaining to the assets and liabilities relating to the Al Yusr Islamic branches are presented separately in the income statement as discontinued operations. The Bank disposed assets and liabilities (including deposits) amounting to QAR 797,182 thousand and QAR 179,161 thousand respectively, and contingent liabilities of QAR 53,230 thousand. The results recognised in the income statement related to discontinued operations of Al Yusr Islamic branches are as follows: 2011 Net income from Islamic financing and investing activities 35,941 Net gain from fee and commission and foreign exchange 939 General and administrative expenses (11,670) Depreciation (1,728) Net impairment loss on loans and advances to customers (130) Gain on disposal of discontinued operations 44,600 67, EARNINGS PER SHARE Earning per share of the Bank is calculated by dividing profit for the year by the weighted average number of ordinary shares in issue during the year: Profit from continuing operations QAR , ,654 Profit from discontinued operations QAR ,952 Profit for the year QAR , ,606 Weighted average number of shares 110,000, ,575,342 Earnings per share from continuing operations (QAR) Earnings per share from discontinued operations (QAR) Earnings per share (QAR) The weighted average number of shares has been calculated as follows: Weighted average number of shares at 1 January 110,000, ,000,000 Effect of additional share issue - 2,575,342 Weighted average number of shares at 31 December 110,000, ,575,342 The Bank issued additional shares on 29 September 2011 (Note 16 (a)). There were no potentially dilutive shares outstanding at any time during the year, and therefore, the dilutive earnings per share are equal to the basic earnings per share. 26. CONTINGENT LIABILITIES AND OTHER COMMITMENTS (a) Contingent liabilities Guarantees 5,434,904 4,946,825 Letters of credit 892, ,245 Unused credit facilities 4,066,479 4,052,561 10,394,325 9,928,631 (b) Other commitments Forward foreign exchange contracts 3,004,901 3,617,296 Interest rate swaps 12,334 83,404 Options 116,910 35,900 Total 3,134,145 3,736,600 The net operating cash flow in respect of discontinued operations amounted to QAR 63,199 thousand. In addition, proceeds of QAR 667,621 thousand received in respect of the discontinued operations were classified under net cash flow from investing activities

45 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 26. CONTINGENT LIABILITIES AND OTHER COMMITMENTS (CONTINUED) Unused credit facilities Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiry dates or other termination clauses. Since commitments may expire without being drawn upon, the total contractual amounts do not necessarily represent future cash requirements. Guarantees and letters of credit Guarantees and letters of credit commit the Bank to make payments on behalf of customers in the event of a specific event. Guarantees and standby letters of credit carry the same credit risk as loans. Options Options are contractual agreement under which the seller (writer) grants the purchaser (holder) the right, to exercise an interest rate based on certain indices with a predetermined cap and a floor at the end of the option life. These options are entered into to hedge the bank commitments to specific customer deposits. Related risks and rewards are fully passed onto the customers. Capital commitments During the year ended 31 December 2012, the Bank paid QAR 12 million (2011: QAR 8 million) as part of Phase 1 of the IBQ Tower construction, which was almost completed. Phase 2 of the project, construction of the Tower, has been delayed by a decision of the Board of Directors for review in DERIVATIVES The table below shows the positive and negative fair values of derivative financial instruments, together with the notional amounts analysed by the term to maturity. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year end, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are not indicative of the Bank s exposure to credit risk, which is generally limited to the positive fair value of the derivatives. 31 December 2012 Positive fair value Negative fair value Total notional amount Notional / Expected amount by term to maturity Within 3 month 3-12 months 1-5 years More than 5 years (a) Held for trading Forward foreign exchange contracts 13,286 12,941 3,004,901 2,760, ,760 38,192 - (b) Designated as fair value through profit and loss Interest rate swaps ,334 6,167 6, Purchased options 4, ,908-15, ,908-4, ,242 6,167 21, ,908 - Total 17,594 13,183 3,134,143 2,767, , ,100 - Lease commitments Non-cancellable operating lease rentals are payable as follows: 31 December 2011 Positive fair value Negative fair value Total notional amount Notional / Expected amount by term to maturity More Within than 5 3 month months years years Less than one year 28,227 33,971 Between one and five years 39,151 56,872 More than five years 14,536 17,974 81, ,817 The Bank leases a number of branches and office premises under operating leases. 27. CASH AND CASH EQUIVALENTS Cash 84,274 87,496 Unrestricted balances with Qatar Central Bank 1,229,469 79,560 Due from banks maturing within three months or less 3,953,112 4,544,484 5,266,855 4,711,540 (a) Held for trading Forward foreign exchange contracts 25,330 22,234 3,617,296 2,716, ,256 56,813 - (b) Designated as fair value through profit and loss Interest rate swaps - 3,569 83,404 8,386 34,743 40,275 - Purchased options 8,199-35,900-20,900 15,000-8,199 3, ,304 8,386 55,643 55,275 - Total 33,529 25,803 3,736,600 2,724, , ,088 - The derivative transactions under the designated as fair value through profit and loss category are on a back to back basis. *Cash and balances with Qatar Central Bank do not include the mandatory cash reserve

46 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 29. 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 and operating decisions. Related parties include entities over which the Bank exercises significant influence, major shareholders, directors and key management personnel of the Bank. The related party transactions and balances included in these financial statements are as follows: Board of Directors Shareholders Others Board of Directors Shareholders Others Assets Loans and advances to customers 523, , , , ,000 Due from banks - 12, ,866 - Liabilities Customer deposits 413, ,308 1,356,495 2,150,584 14,716 1,436,061 Due to banks - 2,551, ,089, RELATED PARTIES (CONTINUED) Transactions with key management personnel Key management personnel transactions for the year comprised: Loans and advances 2,056 2,457 Salaries and other benefits 27,549 20,328 Staff indemnity ,134 20,913 Contingent liabilities and other commitments Letters of guarantee, letters of credit, expected commitments and indirect credit facilities 46, , , , , , FIDUCIARY ASSETS The Bank provides custody services to customers. Those assets that are held in a fiduciary capacity are excluded from these financial statements and amounted to QAR 5,096 thousand at 31 December 2012 (2011: QAR 1,820 thousand). Income statement Interest and commission income 15,179 3,518 32,913 10,862 1,843 35,023 Interest and commission expense 10,038 17,511 20,552 21,388 16,289 33,945 A portion of the above loans and advances to customers is secured against tangible collateral or personal guarantees. 31. COMPARATIVES The comparative figures presented for 2011 have been reclassified where necessary to preserve consistency with the 2012 figures. However, such reclassifications did not have any effect on the net profit, other comprehensive income or the total equity for the comparative year. Apart from the above, the transactions during the year with related parties include the management fee payable to National Bank of Kuwait (SAK) amounting to QAR 5,299 thousand (2011: QAR 5,784 thousand) as per the terms of the Management Services Agreement. An amount of QAR 20,705 thousand (2011: QAR 20,721 thousand) represents rental expense paid for the use of premises belonging to a related party. Board of Directors remuneration amounted to QAR 4,829 thousand (2011: QAR 4,675 thousand)

47