BAHRAIN KUWAIT OMAN EGYPT IRAQ LIBYA UNITED KINGDOM

Transcription

1 BAHRAIN KUWAIT OMAN EGYPT IRAQ LIBYA UNITED KINGDOM

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3 At the core of AUB's continued success is a focused strategy of building a strong, diversified regional bank, underpinned by the resilience of rigorous risk and cost discipline.

4 Contents

5 06 Group mission statement 07 AUB operating divisions 08 Financial highlights 16 Board of Directors report 18 Board of Directors 20 Chairman s statement 22 Group Chief Executive Officer & Managing Director s statement 24 Corporate governance 32 Group business and risk review 38 Group organisation 39 Group management 40 Contact details 43 Auditors report to the shareholders and consolidated financial statements 89 Pillar III disclosures - Basel II

6 Group Mission Statement To create an unrivalled ability to meet customer needs, provide fulfillment and development for our staff and deliver outstanding shareholder value. Objectives to maximize shareholder value on a sustainable basis. to maintain the highest international standards of corporate governance and regulatory compliance. to maintain solid capital adequacy and liquidity ratios. to entrench a disciplined risk and cost management culture. to develop a cross-cultural meritocratic management structure. to optimise staff development through business driven training and profit related incentive. AUB Vision & Strategy Develop an integrated pan regional financial services group model centered on commercial & retail banking, private banking, asset management and life insurance with an enhanced Shari'a compliant business contribution. Acquire banks and related regulated financial institutions in the Gulf countries (core markets) with minimum targeted 10% market share to be achieved through mergers, acquisitions and organic growth. Acquire complementary banking platforms in secondary markets enjoying strong cross border business flows with Gulf countries or with economic structures similar to the Gulf countries. to contribute to the social and economic advancement of the communities in which the Group operates. 6 Ahli United Bank

7 Annual Report Operating Divisions Corporate Banking, Treasury & Investments This division covers all the Bank s capital-intensive activities in risk asset generation and funding regionally and internationally. Corporate and Trade Finance Treasury Commercial Property Finance Residential Property Finance Acquisition and Structured Finance Correspondent Banking Shari'a Compliant Banking Private Banking & Wealth Management This division generally includes all the low capital-intensive sectors of the business, offering wealth management services to individuals and institutions based on performance and a balanced product mix. Private Banking and Asset Management Real Estate Fund Management Shari'a Compliant Banking Retail Banking This division covers both conventional and Shari'a Compliant individual customers deposits, loans, overdrafts, credit cards and residential mortgages. Risk Management This division is responsible for the identification, assessment and ongoing control of all material risks that could affect the Group s business & operations. Risk Management Legal Compliance Audit This division is an integral part of the control environment of the Group. The role of audit is to understand the key risks of the Bank and examine and evaluate the adequacy and effectiveness of the system of risk management and internal control in order to identify legal, regulatory or policy shortcomings. Support Services These divisions provide back end banking services to support on-going business activities of the Group, as well as support the Group s expansion through mergers and acquisitions. Finance Strategic Development Information Technology Operations Services Human Resources Ahli United Bank 7

8 Financial Highlights US $ 000s 300, , , , , , ,703 30,000,000 25,000,000 23,582,727 23,573,983 26,457,461 28,329,762 29,896, ,000 20,000, ,000 15,000, ,000 10,000,000 50,000 5,000, ,000,000 13,632,220 13,299,999 14,477,713 15,495,961 15,972,219 2,500,000 2,000,000 1,995,435 2,213,523 2,392, ,431 2,810,959 12,000,000 1,500,000 9,000,00 1,000,00 3,000, , Ahli United Bank

9 Consolidated Performance Summary Annual Report Ahli United Bank B.S.C. Dec 12 Dec 11 Dec 10 Dec 09 Dec 08 US $ 000s US $ 000s US $ 000s US $ 000s US $ 000s Net profit* 335, , , , ,723 Total assets 29,896,422 28,329,762 26,457,461 23,573,983 23,582,727 Total loans 15,972,219 15,495,961 14,477,713 13,299,999 13,632,220 Total liabilities 26,699,593 25,418,621 23,705,286 20,992,552 21,187,950 Shareholders' equity 2,810,959 2,537,431 2,392,181 2,213,523 1,995,435 Non-controlling interest 385, , , , ,342 Return on average assets 1.3% 1.2% 1.2% 0.9% 1.3% Return on average equity 13.0% 12.7% 12.0% 9.6% 11.4% Cost to income ratio 29.9% 32.4% 33.6% 31.5% 32.1% Financial leverage Risk asset ratio** 15.6% 16.0% 14.1% 15.1% 13.8% Net interest margin 2.20% 2.10% 2.30% 2.36% 2.19% Earning per share (US cents) - basic Earning per share (US cents) - diluted * Attributable to Bank s equity shareholders ** Under BASEL II Ahli United Bank 9

10 Principal Subsidiaries Continued Kuwait: Ahli United Bank K.S.C. Dec 12 Dec 11 Dec 10 Dec 09 Dec 08 KD 000s KD 000s KD 000s KD 000s KD 000s Net profit* 38,539 31,544 27,444 14,262 51,365 Total assets 2,632,922 2,627,839 2,454,337 2,260,533 2,237,018 Total loans (financing receivables) 1,728,082 1,617,722 1,609,986 1,561,104 1,472,932 Total liabilities 2,337,541 2,352,808 2,189,041 2,023,197 1,965,126 Shareholders equity 282, , , , ,066 Non-controlling interest 12,572 12,841 19,616 24,177 28,826 Return on average assets 1.4% 1.3% 1.1% 0.6% 2.2% Return on average equity 14.5% 12.7% 12.2% 6.2% 20.2% Cost to income ratio 34.2% 39.7% 38.7% 33.4% 32.0% Financial leverage Risk asset ratio ** 19.7% 21.3% 18.8% 16.8% 14.8% Earning per share (fils) * Attributable to Bank s equity shareholders ** Under BASEL II 10 Ahli United Bank

11 Annual Report United Kingdom: Ahli United Bank (UK) PLC Dec 12 Dec 11 Dec 10 Dec 09 Dec 08 US $ 000s US $ 000s US $ 000s US $ 000s US $ 000s Net profit 36,102 36,380 20,760 7,164 7,088 Total assets 3,452,278 3,419,561 2,718,253 2,030,367 2,305,646 Total loans 1,609,390 1,767,372 1,560,955 1,309,903 1,095,061 Total liabilities 3,157,319 3,158,780 2,478,638 1,813,063 2,101,818 Shareholders equity 294, , , , ,828 Return on average assets 1.1% 1.2% 0.9% 0.3% 0.3% Return on average equity 13.0% 14.5% 9.1% 3.4% 3.4% Cost to income ratio 36.0% 30.4% 38.1% 41.3% 48.3% Financial leverage Risk asset ratio * 18.9% 17.5% 15.3% 16.5% 15.6% Earning per share (US cents) * Under BASEL II Ahli United Bank 11

12 Principal Subsidiaries Continued Iraq: Commercial Bank of Iraq P.S.C. Dec 12 * Dec 11 Dec 10 Dec 09 Dec 08 IQD Millions IQD Millions IQD Millions IQD Millions IQD Millions Net profit 14,310 7,980 13,934 4,288 4,263 Total assets 293, , , , ,124 Total loans 18,291 12,889 13,845 17,567 16,904 Total liabilities 112,078 83,430 80,272 86,897 89,338 Shareholders equity 143, ,185 94,539 84,151 67,053 Return on average assets 5.3% 3.5% 6.8% 2.1% 2.2% Return on average equity 10.3% 6.9% 15.6% 5.7% 6.4% Cost to income ratio 41.0% 48.4% 50.5% 74.0% 27.2% Financial leverage Risk asset ratio 414.5% 566.3% 577.4% 351.5% 348.1% Earnings per share (fils) Based on financial statements under local GAAP. * information are subject to approval at Annual General Meeting 12 Ahli United Bank

13 Annual Report Egypt: Ahli United Bank (Egypt) S.A.E. Dec 12 Dec 11 Dec 10 Dec 09 Dec 08 EGP 000s EGP 000s EGP 000s EGP 000s EGP 000s Net profit * 244, , , , ,056 Total assets 15,602,707 12,854,828 10,012,348 7,604,071 7,282,769 Total loans 7,456,483 5,802,342 5,443,987 4,444,684 4,105,418 Total liabilities 14,040,037 11,749,022 8,985,425 6,660,982 6,418,411 Shareholders equity 1,552,780 1,096,322 1,017, , ,358 Return on average assets 1.7% 1.7% 1.9% 1.8% 2.8% Return on average equity 19.6% 18.8% 17.0% 12.9% 21.8% Cost to income ratio 30.9% 34.9% 39.4% 44.8% 41.9% Financial leverage Risk asset ratio ** 15.3% 13.1% 14.0% 16.2% 17.4% Earnings per share (EGP) Based on financial statements under Egyptian Accounting Standards in 2008 and IFRS from * Attributable to Bank s equity shareholders ** Under Basel I Ahli United Bank 13

14 Principal Associate Annual Report Oman: Ahli Bank S.A.O.G. Dec 12 Dec 11 Dec 10 Dec 09 Dec 08 OMR 000s OMR 000s OMR 000s OMR 000s OMR 000s Net profit 21,743 18,224 14,100 8,541 5,933 Total assets 1,099, , , , ,405 Total loans 927, , , , ,298 Total liabilities 931, , , , ,349 Shareholders equity 167, , ,106 92,618 87,056 Return on average assets 2.1% 2.1% 2.0% 1.6% 1.6% Return on average equity 15.1% 16.4% 14.5% 9.5% 7.1% Cost to income ratio 31.4% 30.1% 35.9% 44.3% 54.0% Financial leverage Risk assets ratio * 16.9% 17.5% 19.7% 17.6% 23.4% Earnings per share (Baiza) * Under Basel II 14 Ahli United Bank

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16 Board of Directors Report The Directors of Ahli United Bank ( AUB or the Bank ) are pleased to submit the Annual Report and accompanying consolidated Financial Statements for the year ended 31 December. General Operating Environment After a marked slowdown in 2011, global economic trends remained weak throughout with the operating environment characterised as challenging and volatile. While the US economy witnessed indications of a gradual turnaround during the year, the Euro zone continued to experience recessionary conditions. The rest of the world has generally seen contraction in economic growth rates during with certain major emerging economies like China and India achieving positive GDP growth rates, albeit at reduced rates. MENA/GCC oil economies benefited from continuing average high crude oil prices in funding their fiscal and social spending problems. Non-oil MENA economies faced greater social, political and economic pressures which impacted budgetary performances and contributed to the continuing social unrest prevailing in these markets. Performance Overview Despite adverse operating conditions in the majority of its markets, AUB successfully delivered yet another resilient and record performance in, clearly demonstrating the success and viability of its core business model based on prudent risk management, focused marketing and intelligent spend practices. The key highlights of its performance were: Consolidated net profit, attributable to the Bank s equity shareholders, of US$ million as against US$ million in 2011, a growth of 8.1%. Total operating income increased by 6.0% to US$ million from US$ million in 2011 supported by a higher Net Interest Income (+12.3%). Improved results from associates resulted in a net US$ 4.8 million higher profit share from Associates (+8.5% over 2011). Asset quality was sustained with the NPL ratio contained at 2.4% (2011:2.5%). The Group also enhanced its coverage ratio of total provisions to impaired loans to 149.8% at the end of the year (2011: 135.3%). This was achieved through higher collective impairment provisions (US$ 53.4 million) which represented 36.1% of the net loan loss and other provisions charge of US$ million raised during the year. This was primarily allocated to comply with the general guidance and requirements of the applied regulatory framework in different AUB markets and unrelated to any specific counterparty impairments. Total assets increased by 5.5% to US$ 29.9 billion (2011: US$ 28.3 billion) due to: iii) Inter-bank placements increased from US$ 3.1 billion as at 31 December 2011 to US$ 3.8 billion as at 31 December reflecting the increase in the inter-bank liabilities by US$ 0.7 billion primarily to maintain liquidity levels. Customers deposits were up by 5.1% to US$ 18.2 billion (2011: US$ 17.3 billion) to fund the measured incremental loans and advances growth of 3.1%. This is reflected in the year-end loans/total deposits ratio of 68.3% (2011:71.1%). Higher priced term debts of US$ 768 million were repaid on maturity during the year. A subordinated liability of US$ 50 million was repaid ahead of its original maturity of 2013 taking into account remaining regulatory eligibility with a resultant effective management of its funding costs. Continued focus on intelligent cost spends and enhancing productivity resulted in the improvement of cost to income ratio during the year to 29.9% (2011: 32.4%). Return on average equity further improved to 13.0% for compared to 12.7% for 2011 while the return on average assets was marginally higher at 1.3% in (2011: 1.2%). Business & Strategic Diversification During the year, AUB participated in a US$ denominated rights issue tranche launched by AUBE, by subscribing to its pro-rated share of 31.9 million common shares for a consideration of US$ 53.0 million. AUB further acquired an additional 259,946 unsubscribed common shares under the AUBE rights issue for a purchase consideration of US$ 0.4 million which resulted in its equity stake in AUBE increasing to 85.4%. AUB also increased its effective shareholding stake in CBIQ to 68.9% (59.7% at 31 December 2011) by year-end. Subsequent to the balance sheet date, AUB divested its diluted stake of 29.4% in Ahli Bank Qatar (ABQ) to the Qatar Foundation for Education, Science & Community Development at a price of QR 60 per share, generating a net exceptional profit of US$ million which will be recognised in the 2013 consolidated financial statements. The decision to sell was triggered by AUB s inability, due to legal factors, to maintain its shareholding above the minimum levels required for ABQ to qualify as a strategic core investment involving management and reputational exposure as per the AUB Group Investments Policy. The sale does not represent a reversal of our regional investment strategy and is solely driven by the specific legal constraints linked to this investment. AUB will continue to seek attractive opportunities to develop its banking franchise in the region through new acquisitions and the development of our existing banks to service our client base and enhance our shareholder value. i) Loans and advances portfolio, which increased by 3.1% to US$ 16.0 billion (2011: US$ 15.5 billion). ii) Increase in the Non-trading Investments portfolio by 17.2% to support business growth requirements and to comply with liquidity regimes imposed by regulators. 16 Ahli United Bank

17 Annual Report Recognition Consistent with its reputation over the years as a leading regional bank, AUB has been the recipient of a number of prestigious banking awards during the year: Best Bank in the Middle East Euromoney (second award) Best Bank in Bahrain Euromoney (seventh consecutive year) Best Bank in Bahrain - Global Finance (seventh consecutive year) Best Private Bank in Bahrain Euromoney (second award) Bank of the Year, Bahrain - The Banker magazine (seventh consecutive year) Best Local Bank, Bahrain - EMEA Finance magazine (third consecutive year) Best Trade Finance Provider for Bahrain Global Finance (second consecutive year) Elite Quality Recognition Award by J P Morgan Chase (fourteenth consecutive year) and STP Award by Commerzbank AG (fifth consecutive year). Directors Shareholdings & Remuneration As at 31 December, Directors held directly and through related parties 711,612,349 ordinary shares (2011: 702,835,575). The Directors also held 98,631,221 convertible notes (2011: 98,631,221 convertible notes) that are subject to vesting and other criteria. Directors fees, allowances, expenses, salaries and remuneration totalled to US$ 4,101,285 (2011: US$ 3,679,038). As at 31 December, senior management held 18,237,650 convertible notes (2011: 31,951,134 notes) that are subject to vesting and other criteria. Appropriations On the basis of the results of the Bank for the year ended 31 December, the Board of Directors recommends the following appropriations of the Bank s net profit of US$ 335,703 thousand for approval by the shareholders: US$'000 Net profit attributable to bank s equity shareholders 335,703 Transfer to statutory reserve 33,570 IFC mandatorily convertible preference shares dividend 4,538 Proposed cash dividend ordinary shares at US cents 4.0 per share 209,342 Proposed donations 1,000 Transfer to retained earnings 87,253 Conclusion In my capacity as the Chairman of the Board, it is once again my pleasure to thank our shareholders and investors for their continuing support and confidence reposed in AUB. It is needless to state that our achievements during were only made possible thanks to the guidance from all our regulators and the support and trust of our business partners and customers and the dedication, professionalism and resilience of our staff. Despite clear expected challenges in 2013, AUB is well positioned to successfully navigate through a difficult operating environment again and to exploit with a prudent approach the opportunities arising to enable us to satisfy the aspirations of all our stakeholders in a balanced and sustainable manner. Fahad Al- Rajaan Chairman 19 February 2013 Ahli United Bank 17

18 Board of Directors Fahad Al- Rajaan Hamad A. Al Marzouq Rashid Ismail Al- Meer Mohammed Saleh Abdulla MH Al-Sumait Herschel Post Behbehani Fahad Al-Rajaan Chairman and Chairman of the Executive Committee and Compensation Committee; Non-Executive Director Director since 30 July 2000, holds a BA in Business Administration from the American University of Washington D.C., Director General, The Public Institution for Social Security, Kuwait; Chairman, Ahli United Bank (UK) PLC; Chairman, Wafra Investment Advisory Group (New York); Chairman, Ahli United Bank (Egypt) S.A.E.; Board Member, National Industries Group (Kuwait); Board Member, Fransabank, Lebanon. Hamad A. Al Marzouq Deputy Chairman and Member of the Executive Committee; Executive Director Director since 30 July 2000, holds an MBA in Finance & International Business from Claremont Graduate School, 1987, and a BS in Industrial & System Engineering from University of Southern California, Chairman & Managing Director, Ahli United Bank K.S.C. Kuwait; Chairman, Kuwait Banking Association, Kuwait; Deputy Chairman, Ahli United Bank (UK) PLC; Deputy Chairman, Ahli United Bank (Egypt) S.A.E.; Deputy Chairman, Ahli Bank S.A.O.G. Oman; Deputy Chairman, Commercial Bank of Iraq, Iraq; Deputy Chairman, United Bank for Commerce & Investment S.A.C., Libya; Deputy Chairman, Kuwait & Middle East Financial Investment Company, Kuwait; Vice Chairman, Middle East Financial Investment Company, Kingdom of Saudi Arabia; Board Member, Institute of Banking Studies Kuwait; Board Member, Public Authority for Higher Education & Training, Kuwait. Rashid Ismail Al-Meer Deputy Chairman, and Member of the Executive Committee; Non- Executive Director Director since 29 March 2003, holds a High Diploma in Statistics from the University of Alexandria-Egypt, 1973 and a B. Com from Baghdad University, Iraq, Director, Ahli United Bank (UK) PLC; Chairman, Social Insurance Organisation Asset Management Co.; Deputy Chairman, Esterad Investment Co.; Deputy Chairman of the Board of Directors, Solidarity Group Holding and Chairman of Nomination & Compensation Committee; Former, Director General, Pension Fund Commission; Former, Asst. Undersecretary for Financial Affairs, Ministry of Finance & National Economy; Former, Asst. Undersecretary for Economic Affairs, Ministry of Finance & National Economy; Former, Director of Investment; Various Positions, Central Bank of Bahrain; Former, Head of Statistics Section, Ministry of Health. Mohammed Saleh Behbehani Director and Member of the Compensation Committee; Independent Director Director since 30 July 2000, Partner & President, Mohammad Saleh & Reza Yousuf Behbehani Co.; Partner & President, Shereen Travels, Kuwait.; Partner & President, Behbehani Jeep Motors Co. W.L.L.; Partner & President, Shereen Motor Co. W.L.L.; Partner & President, Behbehani Automall Co. W.L.L.; Partner & President, Shereen Real Estate Co.; Partner & President, Shereen Investment Co.; Partner Mohammed Saleh Behbehani & Co. W.L.L.: Partner, Behbehani Bros., W.L.L, Bahrain; Partner, Al Mulla & Behbehani Motor Co. W.L.L.; Board & Executive Committee Member, Ahli United Bank, K.S.C.; Chairman, Kuwait Insurance Co. S.A.K.; Chairman, Maersk Kuwait Co. W.L.L.; Chairman, Maersk Logistics Co. W.L.L.; Vice Chairman, United Beverage Co.; Former Director, Purchase & Imports, Public Works Dept., Govt. of Kuwait; Former Deputy Chairman, Al Ahli Bank of Kuwait K.S.C.; Former Board & Executive Committee Member, Ahli United Bank (UK) PLC; Former Director, Swiss Kuwaiti Bank.; Former Director, UBAF (Hong Kong) Limited. Abdulla MH Al-Sumait Director, Member of the Audit and Compliance Committee and Nominating Committee; Non-Executive Director Director since 16 May 2001, holds a B.A. in Law from Kuwait University, Legal Consultant for Director General, The Public Institution for Social Security, (Kuwait); Director, Kuwait Commercial Facilities Company; Director, Ahli United Bank (Egypt) SAE. Herschel Post Director, Chairman of the Audit & Compliance Committee and Nominating Committee & Member of the Compensation Committee; Independent Director Director since 25 December 2001, holds a Financial Advisers Certificate from The Chartered Institute of Bankers, 2000, a B.A. & M.A. (Rhodes Scholar) from Oxford University, L.L.B from Harvard Law School, 1966 and a Bachelor of Arts from Yale University, Director and Chairman of the Audit Committee, Ahli United Bank (UK) PLC; Director and Chairman of the Audit Committee, Ahli United Bank (Egypt) SAE; Director and Chairman of the Audit Committee, Ahli United Bank KSC, Kuwait; Director and Chairman of the Audit Committee, Kuwait & Middle East Financial Investment Company (KMEFIC); Director, Investors Capital Trust PLC; Director and Chairman of the Audit Committee, Threadneedle Asset Management Holdings S.A.R.L.; Director, Program Planning Professionals Inc.; Trustee, Earthwatch Institute (Europe); Former Deputy Chairman of the London Stock Exchange; Former CEO and Deputy Chairman, Coutts & Co.; Former Chief Operating Officer, Lehman Brothers International Ltd.; Former Director, Christie s International Limited; Former Director, Euroclear SA/NV, Euroclear PLC; Euroclear UK & Ireland Ltd. 18 Ahli United Bank

19 Annual Report Mohammed Jassim Al-Marzouk Mohammed Al-Ghanim Turki Bin Mohammed Al-Khater Michael Essex Adel A. El-Labban Mohammed Jassim Al-Marzouk Director and Member of the Executive Committee; Non-Executive Director Director since, 27 March 2006, holds a Bachelor of Commerce from Major Finance Kuwait University, Chairman & CEO, Tamdeen Real Estate Co.; Chairman of Tamdeen Bahraini Real Estate Co., Bahrain; Board Member, Fateh Al Khear Holding Co., Kuwait; Board Member of Al Maalem Holding Co., Bahrain; Former: Board Member of Global Omani Development & Investment Co., Oman; Former, Deputy Chairman, Tamdeen Shopping Centre Co., Kuwait; Former Board Member, Bank of Kuwait & The Middle East, Kuwait; Former, Vice Chairman, Tamdeen Investment Co., Kuwait; Former, Board Member, Al Ahli Bank of Kuwait, Kuwait; Former, Board Member, Kuwait National Cinema Co., Kuwait; Former Board Member, Arab Financial Consulting Co., Kuwait; Former Chief of Executive Staff, Real Estate Investment Fund, Kuwait, Former Board Member, The Public Warehousing Co., Kuwait. Mohammed Al-Ghanim Director, Member of the Audit & Compliance Committee and Nominating Committee; Independent Director Director since 29 March 2003, holds a degree in Business Administration from Kuwait University, Vice Chairman, Fouad Alghanim & Sons Group of Companies, Kuwait; Chairman, Al Ghanaem Industrial Company KSC, Kuwait; Member of the Board of Directors, Tamdeen Real Estate Company KSCC, Kuwait; Member of the Supervisory Board, Jet Alliance Holding AG, Austria.; Chairman, Fluor Kuwait Co., KSC, Kuwait. Turki Bin Mohammed Al-Khater Director, Member of the Audit & Compliance Committee and Nominating Committee; Independent Director Director since, 29 July 2009, holds a BSc in Economics & Social Science from Portland State University, U.S.A., President, General Retirement and Social Insurance Authority, Qatar; Board Member, Masraf Al Rayan, Qatar; Board Member of Qatar Telecommunication Co. (Qtel), Qatar. Michael Essex Director, Member of the Audit & Compliance Committee and Nominating Committee; Independent Director Director since 28 March, holds an Executive Development Program Certificate from Harvard Business School, Boston-USA, 1997, M.A. Public Administration from Carleton University, Ottawa-Canada, 1975, B.A. Economics & Political Science from The University of Western Ontario London- Canada Board Member, Member of the Investment Committee, Member of the Investor Review Committee of Macquarie Bank India Infrastructure Fund; Senior Advisor to Abraaj Capital; Board Member designate of Karachi Electricity Supply Company; Former Senior Advisor to International Finance Corporation s Asset Management Company and IFC Director of Investment & Advisory operations for 20 countries- Pakistan to Morocco in the MENA region. Adel A. El-Labban Director and Executive Committee Member; Executive Director Director since 30 July 2000, holds a Masters in Economics from the American University, Cairo, 1980, Bachelors in Economics from American University, Cairo, 1977 and a General Certificate of Education from London University, Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank K.S.C., Kuwait; Director, Ahli United Bank (Egypt) S.A.E., Director, Ahli Bank S.A.O.G., Oman; Director, Commercial Bank of Iraq P.S.C., Iraq; Director, United Bank for Commerce & Investment S.A.C., Libya; Director, Bahrain Association of Banks, Bahrain; Former Chief Executive Officer and Director of the United Bank of Kuwait PLC, UK; Former Managing Director, Commercial International Bank of Egypt; Former Chairman, Commercial International Investment Company, Egypt; Former Vice President, Corporate Finance, Morgan Stanley, USA; Former Assistant Vice President, Arab Banking Corporation, Bahrain. (The present Board was elected by the shareholders on 28 March for a period of 3 years). Ahli United Bank 19

20 Chairman s Statement AUB remains intent on seeking attractive opportunities to regionally develop its banking franchise through new acquisitions to better service our client base and enhance our shareholder value. 20 Ahli United Bank

21 Annual Report was another testing year for the banking and financial services sector, with the operating environment remaining volatile and global economic conditions remaining predominantly weak. Despite the turbulent environment, AUB witnessed record profitability and healthy growth across business lines which bear testimony to the focused growth strategy of the Bank and to its entrenched culture of strong risk management and cost discipline. For the fiscal year, I am pleased to report that net profits grew to US$ million, an increase of 8.1% over 2011, principally due to improved performances across all business segments (commercial, retail and private banking). The continued success of AUB during has demonstrated the success and viability of its strategy of creating a regional bank providing a strong local presence in each of its markets as well as targeting cross border flows between them while applying prudent risk management frameworks, focused business growth and intelligent cost spend. On the basis of the excellent results achieved in, I am pleased to advise that the Board of Directors has recommended a cash dividend of US cents 4.0 per share (2011: US cents 3.0), together with a bonus ordinary share issue of 5% (2011: 5%) to further increase the Bank s share capital and support its growth in coming years. In parallel with reinforcing the Bank s capital base, the Board of Directors has taken steps to ensure best Corporate Governance practices by implementing rigorous review processes and assessment cycles across AUB Group s operating areas and businesses for early detection and remedial treatment of any potential issues. Our goal is to ensure compliance with best international standards and applicable local regulatory requirements. Despite the recent sale, due to specific legal constraints, of our 29.4% shareholding in Ahli Bank, Qatar (ABQ) to the Qatar Foundation for Education, Science & Community Development, AUB remains intent on seeking attractive opportunities to regionally develop its banking franchise through new acquisitions so as to better service our client base and enhance our shareholder value. Continued recognition of AUB s performance by the banking industry is both gratifying and appreciated. Among several accolades received this year, Best Bank in the Middle East by Euromoney bears testimony to AUB s culture of excellence and an impressive record in navigating one of the most turbulent years in banking history. AUB had previously won the same award in Similar operational and market challenges can be expected in Nonetheless, AUB continues to remain confident in its resilience and ability to maintain its performance underpinned by a focused strategy, strong client centric fundamentals and prudent, proactive approach to management of risks. In delivering shareholder value and enhancing customer satisfaction, the Bank will continue to seek, identify and maximise organic as well as inorganic growth opportunities within an appropriate risk-return framework. In my capacity as Chairman of the Board, it is once again my pleasure to thank our shareholders and clients for their continuing support and for the trust shown in our ability to service their needs across the AUB Group. The achievements of would not have been possible without the guidance and support received from our regulators, the commitment of our business partners and clients, and the hard work and dedication of our staff at all levels throughout the AUB Group. Fahad Al-Rajaan Chairman Ahli United Bank 21

22 Group Chief Executive Officer & Managing Director s Statement AUB's focused approach has enabled it to emerge as a stronger regional bank with a diversified, tested and prudent business model capable of withstanding singular as well as multiple market disturbances. 22 Ahli United Bank

23 Annual Report The turbulence and volatility which characterized economic and political environments in 2011 reverberated throughout. While not as severe and unexpected, presented its own major challenges, in terms of weak overall global economic conditions with Far Eastern growth offset by semi recessionary conditions in most major Western economies. In the region, the pressures of political change and social unrest in some of the markets where AUB operates continued. Despite these challenges, AUB remained totally focused on its core strategy of building a regional bank committed to sustainable product growth. This focused approach enabled AUB to emerge as a stronger regional bank with a diversified, tested and prudent business model capable of withstanding singular as well as multiple market disturbances, as evidenced by the Bank s strong performance in the year. Against the backdrop of a very challenging operating environment, AUB reported a net profit of US$ million, representing an 8.1% increase over the 2011 result. Total operating income grew by 6.0% to US$ million over 2011, driven by a 12.3% increase in net interest income, a 3.5% improvement in fee based income and an 8.5% increase in share of profit from associates and joint venture investments. Effective asset liability management helped improve the net interest margin from 2.1% in 2011 to 2.2% in. Key drivers of the increase in operating income were a 3.1% growth in net loans and advances together with a 17.2% growth in the nontrading investments portfolio over December 2011, funded by a 5.1% increase in customers deposits. This growth, particularly on the loan side, reflects AUB s commitment to be a consistent partner to its client under all conditions and to benefit from the reluctance of some of its competitors to act similarly. Exposures under L/Cs and L/Gs achieved a very commendable surge of 28.4% going from US$ 2,168 million to US$ 2,783 million. The ongoing adoption of an intelligent spend culture within the AUB Group further improved the cost income ratio to 29.9% (2011: 32.4%) and positively contributed to profitability. Operating costs decreased to US$ 267 million from US$ 273 million in the previous year. AUB continued to pursue a market responsive, prudent credit philosophy backed by a conservative provisioning approach. As a result, credit quality of the loan portfolio was maintained with a non-performing loans level of 2.4% comparable to 2.5% in 2011 with a very solid total provision coverage ratio of 150% at 31 December (2011: 135%). Specific provision coverage improved from 86.0% in 2011 to 87.7% in. Return on average equity for the year stood at 13.0%, an increase over the 12.7% achieved in 2011 and the Group s return on average assets increased to 1.3% in (2011: 1.2%). During the year, the Bank s strong financial performance was complemented by notable progress in several of our operating markets. In Kuwait, AUB continued to consolidate its position as a leading provider of Shari'a compliant financial products and services as was reflected in the profit growth achieved by AUB Kuwait. In Egypt, the share capital of AUB Egypt (AUBE) was enhanced through a rights issue of US$ 62.2 million, reinforcing AUB commitment to the Egyptian market in view of its long-term growth prospects. In early, AUBE s new state of the art headquarters was officially inaugurated, coinciding with significant growth in the scope of AUBE s service offering and client base. In Oman, AUB s management agreement with Ahli Bank Oman (ABO) was renewed for a further 5 years, demonstrating the success achieved through a model joint venture arrangement. During, the share capital of ABO was reinforced through a rights issue of US$ 64.9 million with a view to benefit from the high growth prospects of the Omani banking sector and to lay the foundation for capitalizing the launch of ABO s Shari a compliant operations in Oman to seize the opportunities in this potentially high growth untapped sector. Based on AUB s demonstrated capability to deliver successful results in adverse market conditions, I am reassured that the Group can move forward with increased confidence in meeting the challenges of the future while maintaining steady growth, absolute customer focus and rigorous cost and risk discipline. In closing, I would like to express my gratitude to the Board of Directors for their active support and guidance. My sincere thanks are also due to the management team and staff of the AUB Group whose professionalism, dedication and commitment have been fundamental to our continued growth and performance this year. Adel A. El-Labban Group Chief Executive Officer & Managing Director Ahli United Bank 23

24 Corporate Governance Good Corporate Governance practice is an important function in creating and sustaining shareholder value and ensuring appropriate disclosure and transparency. The Bank s Corporate Governance Policy provides the framework for the principles of effective Corporate Governance standards across the AUB Group. The Board of Directors is committed to adhering to strong Corporate Governance practices and to continually review and align these practices with international best practices. The Bank s management are committed to ensuring that appropriate procedures and processes are in place to reflect and support the Board approved policies to ensure the highest standards of Corporate Governance throughout the AUB Group. Shareholder Information The Bank s shares are listed on the Bahrain Bourse and the Kuwait Stock Exchange. The Bank has issued 5,233,555,603 ordinary shares, each with a nominal value of $0.25. All ordinary shares are fully paid up. The Annual General Ordinary and Extraordinary Meetings were held on 28 March. Ordinary Shareholders at 31 December (holding 5% and above) Name Public Institution For Social Security Social Insurance Organization Tamdeen Investment Company Country of origin No. of shares % Holding Kuwait 967,660, % Bahrain 524,393, % Kuwait 412,899, % Al-Mazaya Company B.S.C. (c) Bahrain 309,050, % Sh. Salim Al-Nasser Al-Sabah Kuwait 282,798, % Distribution of Shares Table 1- Distribution of Ordinary Shares at 31 December % of Category No. of shares No. of shareholders Total shares 50 and above % up to less than 50% % up to less than 20% 1,492,054, % 5% up to less than 10% 1,004,748, % 1% up to less than 5% 1,183,285, % Less than 1% 1,553,467,012 3, % TOTAL 5,233,555,603 3, % Table 2- Distribution of Preference Shares at 31 December (i) Non- Cumulative Preference Shares - Class A Category No. of shares No. of shareholders % of Total shares 50% and above % up to less than 50% 101,256, % 10% up to less than 20% 164,454, % 5% up to less than 10% 57,383, % 1% up to less than 5% 121,743, % Less than 1% 41,851, % TOTAL 486,689, % (II) Mandatorily Convertible Preference Shares Category No. of shares No. of shareholders % of Total shares 50% and above 500,000, % Table 3- Government Holdings and the distribution of Ordinary Shares by Nationality No. Name No. of Shares % of Total shares 1 Kuwait Quasi Government 967,660, % 2 Bahrain Quasi Government 530,136, % 3 Qatar Quasi Government 86,075, % 4 Kuwait Individuals and Corporates 2,581,169, % 5 Bahrain Individuals and Corporates 865,843, % 6 Others 202,669, % Total 5,233,555, % Board The Board represents an appropriate mix of professional skills and expertise. The current Board of Directors was elected at the Annual General meeting held on 28 March, for a period of three years. The Board periodically reviews its composition and the contribution of Directors. The names and classification of the Directors are listed on the next page: 24 Ahli United Bank

25 Annual Report Directors Fahad Al-Rajaan - Chairman Hamad A. Al Marzouq - Deputy Chairman Rashid Ismail Al-Meer - Deputy Chairman Turki Bin Mohamed Al-Khater Mohammed Fouad Al-Ghanim Abdulla MH Al-Sumait Mohammed Jassim Al-Marzouk Mohammed Saleh Behbehani Herschel Post Michael Essex Adel A. El-Labban Classification Non-Executive Executive Non-Executive Independent Independent Non-Executive Non-Executive Independent Independent Independent Executive In compliance with the Central Bank of Bahrain (CBB) Corporate Governance requirements, the Board of Directors has outlined its criteria and materiality thresholds for the definition of Independence in relation to Directors. The independence criteria are reassessed annually by the Board and the 11 Directors comprising the Board are classified as follows: 5 Independent Directors 4 Non-Executive Directors 2 Executive Directors, including the Group CEO & Managing Director The CBB Rulebook Module HC recommends that the Chairman of the Board of Directors should be an Independent Director. While the AUB Chairman is currently classified as a Non-Executive Director, due to his position as Director General of Public Institution for Social Security, a major shareholder of the Bank, this does not compromise the Bank s high standards of Corporate Governance as the Bank follows strict policies to manage conflict of interests in Board decisions. The Role and Responsibilities of the Board of Directors The Board is responsible to shareholders for creating and delivering sustainable shareholder value through the prudent management of the Bank s business. The Board, as a whole, is collectively responsible to ensure that an effective, comprehensive and transparent corporate governance framework is in place. The Board s role is to: 1. ensure adherence to prevailing laws and regulations and to best business ethics; 2. provide entrepreneurial leadership of the Bank within a framework of prudent and effective controls, which enable all types of relevant risks to be assessed and managed; 3. set the Bank s strategic goals, ensure that the necessary financial and human resources are in place for the Bank to meet its objectives, and review management performance; and 4. set the Bank s values and standards and ensure that its obligations to its shareholders and others are understood and met. In carrying out these responsibilities, the Board must ensure that management strikes an appropriate balance between promoting long term growth and delivering short term objectives and have regard to what is appropriate for the Bank s business and reputation, the materiality of the financial and other risks inherent in the business and the relative costs and benefits of implementing specific controls. All Directors must act in the way they consider, in good faith, would be most likely to promote the success of the Bank for the benefit of its shareholders as a whole. In doing so, each director, must have regard (among other matters) to the: 1. likely consequences of any decision in the long term; 2. interests of the Bank s employees and shareholders; 3. need to foster the Bank s business relationships with suppliers, customers and others; 4. impact of the Bank s operations on the community and the environment; 5. desirability of the Bank maintaining a reputation for high standards of business conduct and ethics; and 6. need to act fairly as between the shareholders of the Bank. When carrying out their responsibilities, Directors must 1. act with integrity; 2. act with due skill, care and attention; 3. observe proper standards of market conduct; 4. deal with the regulatory authorities in an open and co-operative way and must disclose appropriately any information of which the regulator would reasonably expect notice. Ahli United Bank 25

26 Corporate Governance Continued Board Meetings and Attendance The Board is required to meet at least four times per year. The Board convenes upon the invitation of the Chairman or upon the request of at least two Directors. All Directors are expected to attend each meeting, unless there are exceptional circumstances that prevent them from doing so. A summary of the Board meetings held during and attendance of each Director are detailed below: Name of Board Committees Board of Directors Members Names Fahad Al-Rajaan - Chairman No. of Meetings Meeting Dates Meetings Attended Hamad A. Al-Marzouq 5 Rashid Ismail Al-Meer 5 Turki Bin Mohammed Al-Khater 3 Mohammed Fouad Al-Ghanim Mohammed Jassim Al-Marzouk Abdulla MH Al-Sumait 5 21 Feb 28 Mar 15 May 18 Sept 04 Dec Mohammed Saleh Behbehani 4 Herschel Post 5 Michael Essex* 4 Adel A. El-Labban 5 4 *Michael Essex was appointed on 28 March. All members of the Board, except one, have attended at least 75% of all Board meetings in the year. Mr. Turki Bin Mohammed Al-Khater did not attend 2 of the five meetings held in, due to other obligations and requirements to attend key ministerial meetings in Qatar in his capacity as the President of General Retirement and Social Insurance Authority, Qatar. The attendance of all Directors at the Board meetings is reported to the Central Bank of Bahrain on an annual basis. Meeting papers are prepared and circulated to be received in advance of meetings and include minutes of meetings of Board Committees held since the previous Board meeting. Election and Termination of Appointment of Directors Directors are elected for a 3 year term. Elections take place in accordance with the Memorandum and Articles of the Bank, the Bahrain Commercial Companies Law and the CBB Rulebook. There is no maximum age limit at which a Director must retire from the Board. Each Director s membership shall terminate upon the expiry of his term, pursuant to the terms of his Letter of Appointment and/or the provisions of the law. Induction and Training of Directors The Bank has an induction programme in place which is designed for each new Director to ensure his contribution to the Board from the beginning of his term. The induction programme includes: i) an introductory pack containing, amongst other things, the Group Overview, Group Organisational Chart, Terms of Reference of the Board and Board Committees and key policies; ii) presentations on significant financial, strategic and risk issues; and iii) orientation meetings with key management as may be required. As a standing procedure, all continuing Directors will be invited to attend orientation meetings. Ongoing professional development for Directors was conducted during. Board Evaluation Evaluations of the performance of the Board and the performance of each Director, for, have been conducted. Applying a scoring methodology proposed by Ernst & Young, rating of Good was achieved for the performance of the Board and a rating of Excellent was achieved for the performance of each director, indicating that the views of the majority of the Directors are similar and that the Board is functioning as per its stated role and responsibilities. Directors and Related Parties Interests No Director has entered into, either directly or indirectly, any material contract with the Bank or any of its subsidiaries, nor does any Director have any material conflict of interest with the Bank. The Directors are required to declare any conflict of interest or any potential conflict of interest that exists or that Directors become aware of, to the Chairman and Corporate Secretary as soon as they become aware of them. This disclosure must include all relevant material facts. 26 Ahli United Bank

27 Annual Report The Bank has a process for dealing with transactions involving Directors and related parties. Any such transaction will require the approval of the Board, excluding the conflicted Director(s). The Terms of Reference of the Board require that all Directors, whether Non-Executive or Executive, should exercise independence in their decision-making and should abstain from any decisions involving any actual or potential conflicts of interest. Should any Director have any doubts with respect to conflicts of interest or potential conflict of interest, the Director should consult the Chairman prior to doing anything that might compromise the Bank. All Directors and other Approved Persons have declared all of their interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) in writing to the Board. The number of shares owned by Directors as at 31 December, are as follows: No. Name No. of Shares * Volume Traded 1 Fahad Al-Rajaan 164,849-2 Hamad A. Al-Marzouq 85,302,274 (1,300,000) 3 Rashid Ismail Al-Meer 293,437-4 Turki Bin Mohammed Al-Khater Mohammed Fouad Al-Ghanim 462,196-6 Abdulla MH Al-Sumait Mohammed Jassim Al-Marzouk 151,653-8 Mohammed Saleh Behbehani 119,230,220-9 Herschel Post Michael Essex Adel A. El-Labban - - Total 205,604,629 - Percentage 3.93% - *Includes 5% bonus shares issued during the year. The numbers of shares owned by Senior Management as at 31 December are as follows: No. Name/Entity 31-Dec- Volume Traded 1 Keith Henry Gale 682,351-2 Sawsan Abulhassan - 877,158 3 Shafqat Anwar - 795,513 Material Transactions Besides large credit transactions that require Board approval as per the Credit Policy, the Board also approves senior unsecured medium term (greater than 1 year) funding initiatives, strategic investments decisions, as well as any other decisions which have or could have a material financial or reputational impact on the Bank. Ahli United Bank 27

28 Corporate Governance Continued Board Committees The Board may, where appropriate, delegate certain of its powers to an individual Director or to a Committee of Directors and other persons, constituted in the manner most appropriate to those tasks. The Board has constituted a number of Board Committees, membership of which is drawn from the Directors and to which it has delegated specific responsibilities through Terms of Reference approved by the Board on an annual basis. Each Committee has access to independent expert advice at the Bank s expense. The Board committees represent an appropriate mix of professional skills and expertise. The Board periodically reviews the contribution of the Committees. The names of the committee members and their memberships in the Board Committees and attendance at meetings held during are detailed below: All Committee members are expected to attend each Committee meeting, unless there are exceptional circumstances that prevent them from doing so. Board Committees Members Classification No. of Meetings Meeting Dates Meetings attended Executive Committee Audit and Compliance Committee Compensation Committee Nominating Committee Fahad Al-Rajaan - Chairman Non-Executive 3 Hamad A. Al-Marzouq Executive 21 Feb 4 Rashid Ismail Al-Meer Non-Executive 4 15 May 18 Sept 4 Mohammed Jassim Al-Marzouk Non-Executive 04 Dec 3 Adel A. El-Labban Executive 4 Herschel Post - Chairman Independent 4 Mohammed Fouad Al-Ghanim Independent 20 Feb 3 Abdulla MH Al-Sumait Non- Executive 4 18 May 21 Sept 4 Turki Bin Mohammed Al-Khater Independent 30 Nov 2 Michael Essex Independent 3 Fahad Al-Rajaan- Chairman Non-Executive 2 Herschel Post Independent 22 Mar Dec Hamad Al- Marzouq* Executive 1 Mohammed Saleh Behbehani* Independent 0 Herschel Post - Chairman Independent 2 Mohammed Fouad Al-Ghanim Independent 2 2 Abdulla MH Al-Sumait Non- Executive 20 Feb 18 Sept 2 Turki Bin Mohamed Al-Khater Independent 1 Michael Essex Independent 1 *Mohammed Saleh Behbehani, Independent Director was appointed on 28 March to replace Hamad Al-Marzouq. 28 Ahli United Bank

29 Annual Report The principal Board Committees are: Executive Committee The Executive Committee assists the Board in discharging the Board s responsibilities relating to matters including credit and market risk matters. The Executive Committee consists of 5 members comprising 3 Non- Executive Directors and 2 Executive Directors, including the Group CEO & Managing Director. Audit and Compliance Committee The Audit and Compliance Committee assists the Board in discharging its responsibilities relating to the Bank s accounting, financial reporting, corporate governance, internal audit, compliance and risk management systems to ensure compliance with all relevant regulatory requirements and consistency with best market practices. The Audit and Compliance Committee consists of 5 members comprising 4 Independent Directors, including the Chairman and 1 Non-executive Director. Compensation Committee The Compensation Committee provides an efficient mechanism for reviewing the Bank s compensation arrangements for its staff and Directors and making recommendations for the Board s own approval on these matters. The Compensation Committee consists of 3 members comprising 2 Independent Directors and 1 Non- Executive Director, who is the Chairman. The Compensation Committee, amongst other things, sets the remuneration framework for the Bank s Directors, senior management and staff. The AUB Employee Remuneration Policy provides a remuneration framework to attract, retain and motivate employees, to achieve Board approved objectives. The policy focuses on creating a performance driven culture and on achieving sustainable growth and ensures a meritocratic management structure with profit related incentives. Nominating Committee The Nominating Committee supports the Corporate Governance regime of the Bank and instills a best practice approach to the matters assigned to its responsibilities, at all times acting within the criteria set by the CBB Rulebook, the relevant sections of the Bahrain Commercial Companies Law and any other applicable legislation, following a fair and balanced approach. The principal responsibilities of the Nominating Committee include, identifying and recommending to the Board persons qualified to become a Director of the Board, or any other officer of the Bank, as considered appropriate by the Board. The Committee also oversees the Director s corporate governance educational activities in the form of a formal induction program and on-going orientation activities and programs. The Nominating Committee consists of 5 members comprising 4 independent Directors, including the Chairman and 1 Non-Executive Director. Board Committee Evaluation Evaluations of the Board Committees have been conducted. Applying a scoring methodology proposed by Ernst & Young, a rating of Excellent was achieved for each, indicating that the Board Committees continue to operate with a high degree of effectiveness. Senior Management Names Adel A. El-Labban Sanjeev Baijal Keith Gale Shafqat Anwar Abdulla Al-Raeesi Sawsan Abulhassan Lloyd Maddock James Forster Nevine El-Messeery Abdulaziz Al-Balushi Nouri Aldubaysi Ayman El-Gammal Hamad Al-Sanee Title Group CEO & Managing Director Deputy Group CEO - Finance & Strategic Development Deputy Group CEO - Risk, Legal & Compliance Deputy Group CEO - Operations & Technology Deputy Group CEO - Retail Banking Deputy Group CEO - Private Banking & Wealth Management Deputy Group CEO - Corporate Banking CEO - Ahli United Bank (UK) P.L.C. CEO - Ahli United Bank (Egypt) S.A.E. CEO - Ahli Bank S.A.O.G. CEO - Commercial Bank of Iraq P.S.C. CEO - United Bank for Commerce & Investment S.A.C. Chairman & MD - Kuwait & Middle East Financial Investments Company K.S.C.C. Ahli United Bank 29

30 Corporate Governance Continued Management Committees The Board has established a management structure with clearly defined roles, responsibilities and reporting lines. The Bank s management monitors the performance of the Bank and each of its subsidiaries and associates on an ongoing basis and reports this performance to the Board. The monitoring of performance is carried out through a regular assessment of performance trends against budget, and prior periods and peer Banks in each of the markets and collectively through AUB Group committees and sub committees at the parent bank and its subsidiary / affiliated banks level. Specific responsibilities as explained below, have been delegated to each committee, and the minutes of all management committees are sent to the Audit and Compliance Committee, that assesses the effectiveness of these committees. Group Management Committee The Group Management Committee is the collective group management forum providing a formal framework for effective consultation and transparent decision-making by the Group CEO & Managing Director and senior management on cross-organisational matters. Appropriate checks and balances ensure the four eyes regulatory requirement is met. The committee has broad mandate encompassing group wide as well as Bank and unit specific issues as determined by the Group CEO & Managing Director and other members of the committee. It is chaired by the Group CEO & Managing Director and comprises of eleven other members, including all Deputy Group CEO s and CEO s of subsidiary and affiliated banks. Group Asset and Liability Committee The Group Asset and Liability Committee sets, reviews and manages the liquidity, market risk and funding strategy of the AUB Group and reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by the Senior DGCEO-Banking Group and has seven other members. Group New Product Committee The Group New Product Committee reviews and approves new products, processes and services for wealth management, treasury, retail, commercial banking and other areas of the AUB Group. The committee assesses all related reputational, operational, credit, liquidity and market risk, IT, legal, compliance, control, staffing and capital/profit allocation issues related to approving new products. The approval by the Group New Product Committee follows the new product or process development requirements according to the New Product Approval and Development Procedure. It is chaired by Senior DGCEO-Banking Group and has eight other members. Group Information Technology Steering Committee The Group Information Technology Steering Committee oversees the information technology role, strategy formulation, prioritized implementation and delivery of IT projects of the AUB Group within an acceptable, secure and standardised framework. It recommends the annual IT budget to the Group CEO & Managing Director as part of the annual business planning/budgetary exercise for submission to the Board of Directors for review and final approval. It supervises the implementation of the approved IT annual plan within set deadlines and budgetary/board approved allocations within the Bank s overall capital expenditure policy. It is chaired by the DGCEO-Finance & Strategic Development and comprises of six other members. Group Risk Committee The Group Risk Committee reviews and manages the risk asset policies, approvals, exposures and recoveries related to credit, operational and compliance risks. It acts as a general forum for the discussions of any aspect of risk facing or which could potentially face the Bank or its subsidiaries and affiliates resulting in reputational or financial loss to the AUB Group. It also oversees the operation of the Group Operational Risk Sub-Committee and Group Special Assets Sub-Committee. It is chaired by the DGCEO-Risk, Legal & Compliance and has five other members. Group Operational Risk Sub-Committee Group Operational Risk Sub-Committee administers the management of operational risk throughout the AUB Group. It is chaired by the Group Head of Risk Management and has eight other members. Group Special Assets Sub-Committee The Group Special Assets Sub-Committee is responsible for the management of the criticized and non-performing assets of the Bank. It has responsibility for monitoring accounts downgraded to watch list and criticized asset status and ensuring that a focused and disciplined recovery strategy is adopted to maximize recoveries. It is chaired by DGCEO Risk, Legal & Compliance and has seven other members. Management Committee The Management Committee is the senior collective management forum of the Bank, providing a formal framework for effective consultation and transparent decision-making on cross-organisational matters. Appropriate checks and balances ensure the four eyes regulatory requirement is met. The committee operates in a flexible way with a minimum of formality and a broad mandate encompassing both Bank-wide and unit specific issues as determined by the GCEO & Managing Director and its other members in relation to the business of the Bank, as a legal entity. It is chaired by the Senior DGCEO-Banking Group and has six other members. AUB Assets and Liability Committee AUB Assets and Liability Committee sets, reviews and manages the liquidity, market risk and funding strategy of AUB, the parent bank and reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by Group Head of Treasury and has six other members. Other Governance Measures In addition to the Board and management committee structures, the Board has approved a number of AUB Group policies to ensure clarity and consistency in the operations of the AUB Group. These policies, which are communicated to staff, include Credit, Anti-money laundering, Corporate Governance, Personal Account Dealing, Key Persons Dealings, Banking Integrity, Compliance, Legal and Human Resources policies. 30 Ahli United Bank

31 Annual Report Underpinning these policies is the Board approved Group Code of Business Conduct which prescribes standards of ethical business behavior and personal conduct for the Bank s Directors, its senior management (officers) and its staff. The Banking Integrity Policy, which includes detailed policy and procedures on whistle blowing is specifically designed to facilitate concerns raised with regard to misconduct occurring within, or associated with, the AUB Group. The Board has also adopted a Group Communications Policy. This policy sets out the authority of AUB Group employees with respect to the communication of information to third parties in the course and scope of their employment. The Bank has an open policy on communication with its stakeholders and has adopted a communication disclosure policy consistent with Basel II requirements. Shareholders are invited by the Chairman to attend the AGM. The Chairman and other Directors attend the AGM and are available to answer any questions. The Bank is at all times mindful and conscious of its regulatory and statutory obligations regarding dissemination of information to its stakeholders. The Bank provides information on all events that merit announcement, either on its website - Bahrain Bourse, and other forms of publications, such as press releases, the Bank s annual report, quarterly financial statements and Corporate Governance policies are published on the website. As a supporting governance measure, the Board also relies on the ongoing reviews performed by internal and external auditors on the AUB Group s internal control functions. These reviews are conducted in order to identify any weaknesses, which then enable management to immediately put remedial action plans in place. Ahli United Bank 31

32 Group Business & Risk Review Private Banking & Wealth Management The division, which has significant stakes and activities in both the UK and the Middle East, was impacted by both global and regional headwinds, generated by events encountered in. In the wake of the economic and political turbulence resulting from the Arab Spring and Euro zone crisis, client behaviour underwent change, in various phases, which has created significant challenges for Private Banking. In difficult market conditions, our strategy focused on providing specific expertise in the areas of risk profiling, asset allocation, product selection, and due diligence. We were successful in achieving our objectives by adopting measures which proved both prudent and successful in negating the effects of clients changeable behaviour due to financial market volatility and adverse economic and political conditions. A major development during the year was AUB s adoption of the Retail distribution review (RDR) for activities carried out by UK relationship managers. RDR, a legal requirement in the UK, was established as a key part of the investor protection strategy. The procedures put in place by AUB to achieve RDR compliance have been considered for broader deployment across the Group Private Banking in order to enhance the consistency and quality of the sales process and service to clients. In addressing client demand for high-performing investment products, a clear focus on business strategy coupled with the appropriate set of offerings, proved successful in negating the effects of market volatility while meeting investors attitude to risk, capacity of loss and investment objectives. Clients were well rewarded by investing in income-producing portfolios, by striking the right balance between potential reward, risk, and their future financial needs. In addition, in line with market demand, a new real estate product with underlying investments in the commercial sector in the UK was introduced. AUB has become established as an important player in the private banking business. In continuing to seize opportunities and gain market share, AUB s progress received further recognition by being awarded the Best Private Bank in Bahrain - by Euromoney. The division remains focused on increasing the client base within the countries where the Group operates, by delivering products to investors that generate favourable risk-adjusted returns independent of market cycles, enabling AUB to deliver distinctive solutions to realise clients desired outcomes. In meeting this objective, AUB enhances its investments proposition while developing the quality of service offerings to clients across the Group will continue to be a key priority. Retail Banking The retail banking division leveraged its successful business model across all markets with the aim of establishing a standard suite of products with centralization of back office functions in order to enhance sales and service and deliver balance sheet growth and profitability across the regional network. During, in pursuit of prudent and sustained asset growth, Retail Banking introduced innovative products and services in the areas of consumer and mortgage finance, targeting growth in the higher income segments. AUB continued to focus on developing the MyGlobal banking proposition which offers seamless banking services for those clients with multi-entity banking requirements in markets where AUB operates. As part of that development, the Bank enhanced its e-banking platform to facilitate real time funds transfers between MyGlobal customer accounts. The Bank also launched mortgage finance in Egypt for cross border clients as well as investment products to cater to the needs of MyGlobal customers. During the year Point of Sale Acquiring (POS) was launched in Bahrain with state-of-the-art systems and terminals, and supported by innovative features to meet the growing needs and expectations of retail chains, hospitality, travel, telecom, utility services, commercial establishments and other sectors. The POS platform is supported by a dedicated sales and service team, a 24/7 help desk and systems that provide real time fraud monitoring and control enabling AUB to deliver enhanced merchant solutions in Bahrain which will subsequently be extended to cover other key AUB markets in the region. Notable progress was also made in enhancing AUB s Al Hilal Islamic Banking offering to include new products and services while the Bank established the necessary systems, products, policies and procedures for the introduction of Islamic Banking in Oman. AUB continued to consolidate and grow liability relationships through its flagship product, the MyHassad Savings scheme in Bahrain, Kuwait and Qatar. The scheme, which offers the biggest prize pool in the region, witnessed significant growth and provides a stable base of low cost funds to improve retail profitability as well as increase AUB s household penetration and the opportunity to cross sell other bank products. Among major IT enhancements were the launch of self-service kiosks, implementation of new security features for online internet banking transactions, enhancement of the e-banking service range, and the launch of 3D secure services for credit cards in association with MasterCard and Visa. The Bank also finalised a mobile commerce solution for implementation and a more advanced front-end branch banking system which will further enhance branch service capability. Further growth in the coming year will continue to be driven by efforts aimed at expanding market share through the launch of new product offerings that are aligned to changes in the market environment as well as addressing emerging market segments. Other new initiatives, which include distribution of general insurance products through the branch network with alliance partners and an expanded service offering in the area of remittances, will support continued growth in new customer acquisition and retail fee income streams. 32 Ahli United Bank

33 Annual Report Corporate Banking Corporate Banking continued to be organized around SMEs and specialized industry groups. Lending remained cash flow driven and secured or focused on large regional corporates and government entities. The business unit maintained its focus on strengthening relationship banking with selective loan growth and cross-selling in cooperation with other divisions, mainly treasury, private and retail banking. The group also continued to develop internet banking and cash management products for corporates. Despite the challenging operating environment, notable progress was achieved in selectively financing those infrastructure projects critical to the economic development of the MENA region countries. The unit was also successful in acquiring operating accounts and liability business from its corporate clients and maximising cross-border opportunities in AUB Group locations. The ongoing implementation of business to business integration and internet banking continued to enhance transaction volumes and provided clients with one-stop solutions. With selective expansion and re pricing of the loan book, profitability growth was also supported by income from trade finance and syndication fees. Going forward, prospects for domestic growth in Kuwait and Oman appear positive compared with the relatively mature market in Bahrain. Potential opportunities for growth are clearly evident in the domestic markets of Egypt, Libya and Iraq as well as cross-border business; however, progress will depend on local socio-political developments. Cross-border financing and trade finance remain core activities and will continue to support the expansion of corporate relationships throughout the region. Islamic banking will also continue to be a key growth area. Regional events in, together with the global financial uncertainty, have led the department to adopt a more cautious approach, with focus on improving cost efficiency and reducing the overall risk profile of the loan book. Whilst loan growth is expected to be modest in 2013, profitability should improve due to rigorous cost control, lower impairment charges and increased fee based activities. Treasury presented another year of unprecedented challenges, with central banks policies continuing to focus on providing liquidity and maintaining historic low levels of interest rates. During the latter part of the year, market focus shifted away from the problems that had pressured banks into restructuring their balance sheets to address political developments and government policies towards austerity, especially in the US and Euro zone, and the risks associated in running huge public sector deficits. The strategy for Treasury continued to prioritize broadening AUB s liability base and further reducing the dependence on wholesale funding. Proactive and cost effective management of the liability base enabled the Group to maintain high liquidity levels throughout the year, meeting all of its financial obligations. Despite persistently tight liquidity conditions, Treasury maintained liquidity at constant costs throughout the year while achieving profitability targets. Profitability in investments exceeded targets despite declining spreads and continued focus on credits generated strong gains in portfolio valuations. Among significant developments was the establishment of an online trading platform for equities, foreign exchange and commodities, via both web and handheld applications, enabling AUB to offer customers full 24/7 access to both regional and international markets. Although market volumes continued to decline throughout, mainly due to the global slowdown and the continued effects of the Arab Spring, AUB s market share remained secure by being able to offer clients very competitive pricing in an exceptionally difficult trading environment. It was gratifying to note that, for the sixth consecutive year, Treasury was named as Best Foreign Exchange Provider in the Middle East & Bahrain, by a leading global finance magazine. In anticipation of a broader economic recovery in 2013, the Bank will adopt a more dynamic approach to further strengthen client focus and expand its range of product offerings for both risk and asset management. Going forward, Treasury will actively source new products in order to enhance customers returns on deposits and reduce risk on their loan portfolios while the Group s extensive regional presence will continue to be leveraged, enabling Treasury to provide a one stop shop for portfolio management. Information Technology The Information Technology division delivers technological excellence that aligns with the Group s business strategies to provide customer centric, innovative and industry benchmarked secure solutions in meeting customers banking needs on an operationally robust and efficient technology platform through its target application systems and infrastructure architecture. The strategy continued to focus on the standardization of services, uniformly applied across the AUB Group wherever possible, to achieve economies of scale and a common customer experience across all the areas of its operating presence covering the breadth of the banking network. The Group is committed to being at the forefront of the latest innovations and developments in the provision of technology based products and services in the banking and financial services industry. A key strategic initiative during was the continued enhancement and adoption of the Group s electronic banking services. Ahli United Bank 33

34 Group Business & Risk Review Continued In providing a seamless electronic banking channel to our Corporate Banking customers, the Business to Business (B2B) platform has been successfully rolled out to corporate customers in Bahrain, Oman and Kuwait to complement our corporate internet banking service. As our ebanking services offer products that are continually benchmarked and enriched in comparison to the best available competition across the region, the ability to originate trade finance transactions has become an additional feature for the corporate internet banking service. In the retail sector, a new Remit to India service was launched through the retail internet banking platform which delivers an online, real time integrated transfer capability enabling customers to execute remittances to India with the entire Indian banking network accessible in partnership with a leading Indian bank. In a further initiative, customers with accounts across the AUB franchise now benefit from the ability to execute real time transfers for accounts held in the Group s Bahrain, UK and Egypt branches, without the need for external payment generation through the Group s internet banking platform. Retail customer services were further enhanced in Bahrain with the introduction of automated teller kiosks facilitating bulk cash deposits, bill payments and service requests in a seamless manner, initially, across select branches in Bahrain. This programme will be rolled out extensively in 2013 aiming to upgrade our remote teller services across Bahrain and other Group entities. In addition, as a leading provider of Treasury services across the region, an online foreign exchange trading platform was introduced. The Group s ongoing initiative to provide market leading management information systems saw the integration of modules for financial performance management and credit risk management with the enterprise-wide data management platform, thus providing local and consolidated management information capabilities across the Group. Additional new initiatives in the deployment of high-end, sophisticated retail customer analytics are planned for The bank continued to invest judiciously in its technology infrastructure to keep pace with the latest technological innovations that will further benefit the provision of technology services to our customers and improve operational effectiveness. During the year notable progress was made in server consolidation with virtualization which lowers the total cost of ownership (TCO) and improves energy efficiency by optimising resources throughout the server environment in a sustainable manner. Information security forms a central pillar of AUB s technology platform and architecture. It is essential that Bank s customers are continuously assured of integrity and confidentiality in the execution of their financial transactions. The Bank remains committed to sustaining the highest standards of information security with a view to providing independently certified assurance to our stakeholders on a continuing basis. In underlining this commitment, the Bank has once again, through an annual review/ certification process, maintained ISO and PCI DSS certification for its information processing capabilities within the recognized international standards for information security. Human Resources was a challenging year for Group Human Resources with some labour markets experiencing fragility and others rigidity. In spite of the underlying uncertainties, HR continued to move forward with important projects and Training & Development in particular made significant progress. During the third quarter a bespoke in-house Group credit programme in Egypt was launched which saw 35 candidates from entities in Egypt, Bahrain, Oman, Kuwait and Libya coming together for a course lasting 28 weeks. E-learning targets were exceeded by 45 per cent with over 2100 programmes being completed on line. Off line, over 3000 participants attended more than 360 courses held in house, on site, locally or abroad. Control over expenditure remained an ongoing commitment in both day-to-day and project based activities. The department maintained its undertaking to leverage IT based solutions for inter entity reporting and control. Sizeable IT projects to improve efficiency and to achieve economies of scale continue to be planned for the future. HR maintained its full commitment to ISO 9001 and participated in a significant number of other audits both as a peripheral and subject department. Without exception the outcome of these reviews proved or exceeded satisfactory. In supporting the communities in which AUB operates, HR continued to facilitate the Bank s contribution to social and charitable concerns, in particular sponsorship of HE the Crown Prince s Educational Trust; and maintained the Bank s consistent patronage of the Bahrain Institute for Banking and Finance. In addition to support for educational programmes, the Bank also underlined its commitment to the needs of the disabled, and to initiatives supporting the rights of women. Risk Management Risk management involves the identification, analysis, evaluation, acceptance and management of all financial and non-financial risks that could have a negative impact on the Group s performance and reputation. The Risk management function provides an oversight and advice on the Board sanctioned risk appetite and strategy, development and maintenance of a supportive system for management of risks through procedures and training. The major risks associated with AUB s business are credit risk, market risk which includes foreign exchange, interest rate and equity price risk, liquidity risk, operational risk and reputational risk. AUB s risk management policies have been developed to: identify and analyse these risks, set appropriate risk limits and controls, monitor the risks and adherence to limits. 34 Ahli United Bank

35 Annual Report While risks that are embedded in the banking business cannot be completely eliminated, the risk management function aims to effectively manage these risks with the objective of earning competitive returns over the degree of assumed risk. Risk is evaluated based on the potential impact on income and asset value, taking into consideration changes in political, economic and market conditions, and the creditworthiness of the Bank s clients. The risk management function relies on the competence, experience and dedication of its professional staff, sound risk management policies and procedures, and ongoing investment in technology and training. The Board of Directors and senior management are involved in the establishment of all risk policies and processes and the periodic oversight and guidance of the risk management function. The Board of Directors reviews and approves at least annually the Bank s key Risk Management policies. The Risk Management processes are subject to additional scrutiny by independent internal and external auditors, and the Bank s regulators which help further strengthen the risk management practices. The risk management and control process is based on detailed policies and procedures that encompass: business line accountability for all risks taken. Each business line is responsible for developing a plan that includes adequate risk/return parameters, as well as risk acceptance criteria; a credit function that understands, monitors and independently controls each credit relationship ensuring that the appropriate approvals are obtained and a uniform risk management standard including objective risk ratings have been correctly assigned to each and every credit relationship; product and business policies, which are clearly understood, monitored and are in agreement with the overall credit policy and the Board approved risk framework; the ongoing assessment of portfolio credit risk and approval of new products; and an integrated limits structure that permits management to control exposures and monitor the assumption of risk against predetermined approved tolerances. The Board of Directors establishes global limits for each major type of risk which are sub allocated to individual business units. Credit Risk Credit risk is the risk of financial loss due to the failure of a counter party to perform according to agreed terms. It arises principally from lending, trade finance and treasury activities. The credit process is consistent for all forms of credit risk to a single obligor. Overall exposure is evaluated on an ongoing basis to ensure a broad diversification of credit risk. Potential concentrations by country, product, industry, and risk grade are regularly reviewed to avoid excessive exposure and ensure a broad diversification. Credit risk within the Group is actively managed by a rigorous process from initiation to approval to disbursement. All day-to-day management is in accordance with well-defined credit policies and procedures (CP&P) that detail all credit approval requirements and are designed to identify at an early stage exposures which require more detailed review and closer monitoring. Specific impairment provisions are made against credit exposures where whole or a portion of the credit is considered doubtful of recovery. If an asset is considered unrecoverable, a mandatory writeoff takes place. This is conducted by a risk management process, which is completely independent in reporting terms from the asset generating departments. Risk rating of individual counterparties plays an important role in the approval and maintenance of credit limits. The risk rating process ensures that the quality of the credit portfolio of the Bank is maintained at the highest possible level and stays within board approved risk limits. The CP&P includes a robust risk rating system developed by a leading international rating agency, which provides a credit rating for each individual credit based on an extensive set of financial and non-financial parameters. This risk rating system is essential for the Bank to progress towards Basel II s more advanced requirements. The risk management function stratifies the credit portfolio by level of risk to monitor the credit quality and to be able to assess the pricing and aid in the prompt identification of problem exposures. Management of material problem exposures is vested with Special Assets Groups in the respective Group operating entities, all of which report to the Group Risk Management area. All exposures are subject to quarterly and in certain cases monthly reviews. In addition to the Group Risk Management function, credit risk is overseen by the Group Risk Committee (GRC) which is vested with the overall day-to-day responsibility for all matters relating to group credit risk. Its responsibilities include the following: formulating and implementation of credit policies and monitoring compliance, acts as a credit approval body for credits within its delegated authority, recommends to the Executive Committee all policy issue changes related to credit risk as well as credits falling outside its discretion, determines appropriate pricing and security guidelines for all risk asset products, reviews the ongoing risk profile of the Group as a whole and by individual products, business sectors and countries, ensures the adequacy of specific and collective impairment provisions and makes appropriate recommendations to the Executive Committee. Ahli United Bank 35

36 Group Business & Risk Review Continued Annual Report Market Risk Market risk is the risk that adverse movements in market risk factors including foreign exchange rates, interest rates, credit spreads, commodity prices and equity prices will reduce the Bank s income or the value of its portfolios. Given the Group s ongoing low risk strategy, aggregate market risk levels are low relative to the size of the Bank s balance sheet. A robust control process incorporating well defined limits is applied to effectively manage market risks and monitor daily position limits and stop losses. The Group utilizes Value-at-Risk (VaR) models to estimate potential losses that may arise from adverse market movements in addition to other quantitative and non-quantitative risk management techniques. The Group calculates VaR using a one-day holding period at a confidence level of 95%, which takes into account the actual correlations observed historically between different markets and rates. Value at Risk 2011 US$ millions US$ millions Average Minimum Maximum VaR limits are delegated by the Board to the Group Asset and Liability Committee (GALCO) and sub-delegated to the Group s subsidiary ALCO. The Group recognizes that VaR is based on the assumption of normal market conditions and that certain market shocks can result in losses greater than anticipated. Therefore, supplementary risk management techniques such as stress testing form a core part of the Group s risk control processes. Liquidity Risk Liquidity risk is the risk of being unable to meet the Bank s cash commitments without having to raise funds at unreasonable prices or sell assets on a forced basis. It is measured by estimating the Group s potential liquidity and funding requirements under different stress scenarios. The Group s liquidity management policies and procedures are designed to ensure that funds are available under all circumstances to meet the funding requirements of the Group not only under adverse conditions but at sufficient levels to capitalize on opportunities for business expansion. Prudent liquidity controls ensure access to liquidity without unexpected cost effects. Liquidity projections based on both normal and stressed scenarios are performed regularly. The control framework also provides for the maintenance of a prudential buffer of liquid, marketable assets and an adequately diversified deposit base in terms of maturity profile and number of counter parties. The Group Risk Management function continuously monitors liquidity risk and actively manages the balance sheet to control liquidity. At the subsidiary level, the respective treasury function manages this risk with monitoring by the Risk Management department and jurisdiction of its Assets and Liabilities Committee (ALCO). At the Group level liquidity risk is managed by the Group Assets and Liabilities Committee (GALCO), which is vested with the overall day-to-day responsibility for all matters relating to Group liquidity. Operational Risk Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is managed by the Group Operational Risk Committee (GORC). The Group adopts an ongoing Operational Risk Self-Assessment (ORSA) process. Assessments are made of the operational risks facing each function within the Bank and these are reviewed regularly to monitor significant changes and the adequacy of controls. Operational risk loss data is collected and reported to senior management on a regular basis. The Group s independent audit function regularly evaluates operational procedures and advises senior management and the Board of any potential problems. Additionally, the Group maintains adequate insurance coverage and business continuity contingency plans utilizing offsite data storage and backup systems. The adequacy of the Bank s business continuity plans are confirmed by a programme of regular testing with oversight being provided by GORC. 36 Ahli United Bank

37

38 Group Organisation committee CEO ABO CEO AUBK CEO AUBUK CEO CBIQ CEO AUBE CEO UBCI DGCEO treasury & investment DGCEO corporate banking group head legal, gulf (corporate secretary)

39 Group Management Annual Report Adel A. El-Labban Director and Executive Committee Member; Executive Director Group Chief Executive Officer and Managing Director Director since 30 July 2000, holds a Masters in Economics from the American University, Cairo, 1980, Bachelors in Economics from American University, Cairo, 1977 and a General Certificate of Education from London University, Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank K.S.C., Kuwait; Director, Ahli United Bank (Egypt) S.A.E.; Director, Ahli Bank S.A.O.G., Oman; Director, Commercial Bank of Iraq P.S.C., Iraq; Director, United Bank for Commerce & Investment S.A.C., Libya; Director, Bahrain Association of Banks, Bahrain; Former Chief Executive Officer and Director of the United Bank of Kuwait PLC, UK; Former Managing Director, Commercial International Bank of Egypt; Former Chairman, Commercial International Investment Company, Egypt; Former Vice President, Corporate Finance, Morgan Stanley, USA; Former Assistant Vice President, Arab Banking Corporation, Bahrain. (Total years of experience: 34 years) Sanjeev Baijal Deputy Group Chief Executive Officer - Finance and Strategic Development Deputy Chairman Legal and General Gulf B.S.C.(c) & Legal and General Gulf Takaful B.S.C.(c), Bahrain; Director and Member of the Executive Committee, Ahli United Bank K.S.C., Kuwait; Director and Member of the Audit Committee, Kuwait and Middle East Financial Investment Co., Kuwait; Director and Member of the Audit Committee, Ahli Bank S.A.O.G., Oman; Previous experience as Group Head of Finance, Ahli United Bank B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain; Held various positions at Ernst & Young, Bahrain and Price Waterhouse in India; Chartered Global Management Accountant under Association of International Certified Professional Accountants; Member of the American Institute of Certified Public Accountants (AICPA), and Associate Member of the Institute of Chartered Accountants of India (ACA). (Total years of experience: 29 years) Keith Gale Deputy Group Chief Executive Officer - Risk, Legal and Compliance Director, Ahli Bank S.A.O.G., Oman; Previously Group Head of Risk Management, Ahli United Bank, Bahrain; Former Head of Credit and Risk at ABC International Bank PLC; Former Assistant Vice President, Internal Audit Department, Arab Banking Corporation, Bahrain. Held various positions in the UK with KPMG and Ernst & Young. Associate Member of the Institute of Chartered Accountants England & Wales (ACA) and holds a BA (Hons) in Accounting and Finance from the University of Lancaster, UK. (Total years of experience: 32 years) Shafqat Anwar Deputy Group Chief Executive Officer - Operations and Technology Director, Ahli Bank S.A.O.G., Oman; Former Director, Ahli United Finance Company, Egypt; Former Director, Ahli United Bank (Egypt) S.A.E.; Former Deputy Chief Executive Officer, Finance, Risk and Operations, Ahli United Bank (Egypt) S.A.E.; Former Group Head of Operations, Ahli United Bank B.S.C., Bahrain; Former Chief Operating Officer, Commercial Bank of Bahrain, Bahrain; Former Chief Operating Officer, Grindlays Bahrain Bank, Bahrain; Former Operations Manager Gulf, ANZ Grindlays Bank, UAE. Held various management positions with ANZ Banking Group in Bangladesh, the UK, the UAE and Australia. Holds a Master of Business Administration, a Master of Public Administration and a Bachelor of Social Sciences (BSS) with Honours in Public Administration from the University of Dhaka, Bangladesh. (Total years of experience: 29 years) Abdulla Al-Raeesi Deputy Group Chief Executive Officer - Retail Banking Deputy Chairman, Ahli United Finance Company, Egypt (since May ); Director, Legal and General Gulf B.S.C.(c) & Legal & General Takaful B.S.C.(c), Bahrain since March 2009; Former Director, International Chamber of Commerce, Bahrain; Former Director, Benefit Company, Bahrain; Deputy Chief Executive Officer Retail Banking, Ahli United Bank B.S.C., Bahrain; AGM & Head of Delivery Channels, Commercial Bank of Qatar, Qatar; AGM, Support Group, Doha Bank, Qatar; Head of Business & Technology Consulting Group, Arthur Andersen. Holds an MBA in Business Administration from the United Kingdom. (Total years of experience: 29 years) Sawsan Abulhassan Deputy Group Chief Executive Officer - Private Banking and Wealth Management Director, Ahli United Bank PLC, UK; Director, AUB Nominees Ltd.; Director and Member of the Investment Committee, Securities & Investment Company (SICO), Bahrain; Director and Member of the Executive Committee, The Family Bank, Bahrain; Previously with Citibank N.A. Bahrain, Resident Vice President, Wealth Management and Distribution; and Head of Wealth Management, Standard Chartered Bank, Bahrain. Holds an MBA in Finance (with distinction) and a B.Sc. in Management from the University of Bahrain. (Total years of experience: 21 years) Lloyd Maddock Deputy Group Chief Executive Officer Corporate Banking Former CEO, HSBC, Pakistan; Former CEO, HSBC, Kuwait; Former Head, Wholesale Credit & Risk, HSBC Middle East; Former Regional Planning Manager, HSBC Middle East; Former Head of Corporate & Institutional Banking, Saudi Arabia. Held various positions in HSBC Hong Kong, Asia Pacific, Vancouver, and Mumbai. Holds a B. Eng. (Hons) in Civil & Mining Engineering from University of Exeter, UK. (Total years of experience: 22 years) Ahli United Bank 39

40 Contact Details Annual Report AHLI UNITED BANK B.S.C. Bldg. 2495, Road 2832 Al Seef District 428 P.O. Box 2424, Manama Kingdom of Bahrain Telephone : Facsimile : info@ahliunited.com AHLI UNITED BANK (UK) P.L.C. 35 Portman Square, London W1H 6LR United Kingdom Telephone : Facsimile : aubuk.info@ahliunited.com AHLI UNITED BANK K.S.C. P.O. Box 71 Safat, 12168, Kuwait Telephone : Facsimile : contact@ahliunited.com COMMERCIAL BANK OF IRAQ P.S.C. Al Sadoon Street, Baghdad, Iraq Telephone : Telephone : /9 Facsimile : AHLI UNITED BANK (EGYPT) S.A.E. 81 El-Tesseen Street Sector A, Fifth Settlement Cairo, Egypt Telephone : Facsimile : AHLI BANK S.A.O.G. P.O. Box 545 Postal Code 116 Mina Al Fahal Sultanate of Oman Telephone : Facsimile : info@ahlibank-oman.com UNITED BANK FOR COMMERCE & INVESTMENT S.A.C. Gumhouria Street - Mansoura Area Tripoli, Libya Telephone : /3/4 Facsimile : contact@ubci.ly KUWAIT AND MIDDLE EAST FINANCIAL INVESTMENT COMPANY K.S.C.(c) P.O. Box 819, Safat 13009, Kuwait Telephone : Facsimile : info@kmefic.com.kw 40 Ahli United Bank

41 Annual Report

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43 AUDITORS REPORT TO THE SHAREHOLDERS AND CONSOLIDATED FINANCIAL STATEMENTS Annual Report Independent auditors report to the shareholders of Ahli United Bank B.S.C Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Corporate information Basis of consolidation Accounting policies Basis of preparation Significant accounting judgements and estimates Summary of significant accounting policies a Interest income b Interest expense Fees and commissions Trading income a Cash and balances with central banks b Treasury bills and deposits with central banks Loans and advances Non-trading investments Investment in associates and joint venture Premises and equipment Interest receivable and other assets Goodwill and other intangible asets Deposits from banks and other financial institutions Borrowings under repurchase agreements Customers deposits Term debts Interest payable and other liabilities Subordinated liabilities Share capital Reserves Taxation Earnings per share Cash and cash equivalents Related party transactions Employee benefits Managed funds Derivatives Commitments and contingent liabilities Segment information Credit risk Concentration analysis Market risk Fair value of financial instruments Liquidity risk Capital adequacy Deposit protection scheme Islamic banking... 86

44 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK B.S.C. P.O. Box 140, 14th Floor - The Tower Bahrain Commercial Complex Manama, Kingdom of Bahrain Tel: Fax: manama@bh.ey.com C.R. No Report on the financial statements We have audited the accompanying consolidated financial statements of Ahli United Bank B.S.C. ("the Bank") and its subsidiaries ("the Group"), which comprise the consolidated balance sheet as at 31 December, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information. Board of Directors' responsibility for the consolidated financial statements The Bank's Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Board of Directors determines is necessary to enable the preparation of the consolidated 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 consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on other regulatory requirements As required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (CBB) Rule Book (Volume 1), we report that: a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith; and b) the financial information contained in the Report of the Board of Directors is consistent with the consolidated financial statements. We are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 1 and applicable provisions of Volume 6) and CBB directives, regulations and associated resolutions, rules and procedures of the Bahrain Bourse or the terms of the Bank s memorandum and articles of association during the year ended 31 December that might have had a material adverse effect on the business of the Bank or on its financial position. Satisfactory explanations and information have been provided to us by management in response to all our requests. 19 February 2013 Manama, Kingdom of Bahrain. 44 Ahli United Bank

45 CONSOLIDATED STATEMENT OF INCOME For the year ended 31 December Annual Report 2011 Note US$ 000 US$ 000 Interest income 4a 1,070, ,936 Interest expense 4b 434, ,009 Net interest income 636, ,927 Fees and commissions 5 126, ,422 Trading income 6 26,616 28,221 Net gains on investments 19,899 43,471 Share of profit from associates and joint venture 61,535 56,703 Other operating income 21,674 24,368 Fees and other income 256, ,185 OPERATING INCOME 892, ,112 Net provision for loan losses and others 8f 148, ,847 Provision for non-trading investments 9 61,800 73,376 Total provisions 209, ,223 NET OPERATING INCOME 682, ,889 Staff costs 148, ,608 Depreciation and impairment 25,786 39,123 Other operating expenses 92,523 88,503 OPERATING EXPENSES 267, ,234 PROFIT BEFORE TAX 415, ,655 Tax expense 22 37,993 29,842 NET PROFIT FOR THE YEAR 377, ,813 Attributable to: Owners of the Bank 335, ,610 Non-controlling interest 42,032 25, , ,813 EARNINGS PER SHARE ATTRIBUTABLE TO THE OWNERS OF THE BANK FOR THE YEAR: Basic earnings per share (US cents) Diluted earnings per share (US cents) The attached notes 1 to 38 form part of these consolidated financial statements Ahli United Bank 45

46 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2011 US$ 000 US$ 000 Net profit for the year 377, ,813 Other comprehensive income (OCI) Donations approved (1,000) (1,000) Foreign currency translation adjustments (28,571) (10,115) Available-for-sale investments - (164,108) Net change in fair value of financial assets measured at fair value through OCI 6,273 - Cash flow hedges Net change in fair value (7,661) 5,427 Transfers to consolidated statement of income 25,962 1,662 Revaluation of freehold land (23,313) (6,595) Share of other comprehensive income of associates - 2,411 Other comprehensive income for the year (28,310) (172,318) Total comprehensive income for the year 349, ,495 Total comprehensive income attributable to: Owners of the Bank 313, ,065 Non-controlling interest 35,594 20, , ,495 The attached notes 1 to 38 form part of these consolidated financial statements 46 Ahli United Bank

47 CONSOLIDATED BALANCE SHEET At 31 December Annual Report 2011 Note US$ 000 US$ 000 ASSETS Cash and balances with central banks 7a 735, ,800 Treasury bills and deposits with central banks 7b 1,986,236 2,612,287 Deposits with banks and other financial institutions 3,750,771 3,068,879 Loans and advances 8 15,972,219 15,495,961 Financial assets at fair value through profit or loss 27, Non-trading investments 9 5,120,421 4,370,357 Investments in associates and joint venture , ,843 Investment property 171,798 66,665 Premises and equipment , ,055 Interest receivable and other assets , ,484 Goodwill and other intangible assets , ,347 Investment held for sale ,959 - TOTAL ASSETS 29,896,422 28,329,762 LIABILITIES AND EQUITY LIABILITIES Deposits from banks and other financial institutions 14 5,145,255 4,434,645 Borrowings under repurchase agreements 15 1,861,357 1,352,601 Customers deposits 16 18,231,131 17,345,034 Term debts ,000 Interest payable and other liabilities , ,056 Subordinated liabilities , ,285 TOTAL LIABILITIES 26,699,593 25,418,621 EQUITY Ordinary share capital 20 1,303,164 1,242,135 Preference share capital , ,000 Reserves 1,382,795 1,170,296 Equity attributable to the owners of the Bank 2,810,959 2,537,431 Non-controlling interest 385, ,710 TOTAL EQUITY 3,196,829 2,911,141 TOTAL LIABILITIES AND EQUITY 29,896,422 28,329,762 Fahad Al-Rajaan Chairman Hamad Al- Marzouq Deputy Chairman Adel A. El-Labban Group Chief Executive Officer & Managing Director The attached notes 1 to 38 form part of these consolidated financial statements Ahli United Bank 47

48 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2011 Note US$ 000 US$ 000 OPERATING ACTIVITIES Profit before tax 415, ,655 Adjustments for: Depreciation 25,786 39,123 Net gains on investments (19,899) (43,471) Net provision for loan losses and others 8f 148, ,847 Provision for non-trading investments 9 61,800 73,376 Gain on sub debt disposal (799) (1,165) Share of profit from associates and joint venture (61,535) (56,703) Staff costs - fair value amortisation of share based transactions Operating profit before changes in operating assets and liabilities 569, ,240 Changes in: Mandatory reserve deposits with central banks (9,711) (34,511) Treasury bills and deposits with central banks 289, ,279 Deposits with banks and other financial institutions (839,523) (510,450) Loans and advances (597,602) (1,123,446) Interest receivable and other assets (73,730) 5,483 Deposits from banks and other financial institutions 710,610 (530,578) Borrowings under repurchase agreements 508,756 (292,460) Customers deposits 886,097 2,509,238 Interest payables and other liabilities 29,915 51,367 Cash from operations 1,474,118 1,105,162 Income tax paid (28,552) (22,097) Net cash from operating activities 1,445,566 1,083,065 INVESTING ACTIVITIES Purchase of non-trading investments (1,537,993) (1,030,222) Proceeds from sale or redemption of non-trading investments 903, ,651 Net increase in investment property (105,133) (9,086) Net increase in premises and equipment (30,874) (15,257) Dividends received from associates - 32,087 Net cash used in investing activities (770,436) (115,827) FINANCING ACTIVITIES Additional investment in subsidiaries 2 (63,201) (18,967) Proceeds from issue of preference shares - 125,000 Proceeds from issue of subordinated liabilities - 165,000 Buy back/repayment of subordinated liabilities (86,406) (10,670) Repayment of term debt (768,000) (178,562) Dividends and other appropriations paid (170,734) (135,985) Net cash used in financing activities (1,088,341) (54,184) Foreign currency translation adjustments (28,571) (10,115) (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (441,782) 902,939 Cash and cash equivalents at 1 January 3,866,097 2,963,158 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 3,424,315 3,866,097 The attached notes 1 to 38 form part of these consolidated financial statements 48 Ahli United Bank

49 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December Annual Report Ordinary share capital US$ 000 Preference share capital US$ 000 Attributable to the owners of the Bank Share premium US$ 000 Statutory reserve US$ 000 Reserves Retained earnings US$ 000 Proposed appropriations US$ 000 Other reserves (Note 21(i)) US$ 000 Total reserves US$ 000 Noncontrolling interest US$ 000 Total US$ 000 Balance at 1 January 1,242, , , , , ,430 (226,569) 1,170, ,710 2,911,141 Impact of adopting IFRS 9 at 1 January (note 3.1 (iii)) (133,378) - 246, ,900 (455) 112,445 At 1 January - restated 1,242, , , , , ,430 19,709 1,283, ,255 3,023,586 Mandatorily Convertible Preference Shares dividend paid (2,900) - (2,900) - (2,900) Ordinary share dividend paid (note 21(j)) (149,530) - (149,530) - (149,530) Dividends of subsidiaries (19,121) (19,121) Bonus shares issued 62, (62,304) - - (62,304) - - Arising on additional acquisition of a subsidiary - - 1, ,216 (3,330) (2,114) Other equity movements of a subsidiary (528) (528) Equity shares surrendered (1,275) - (714) (714) - (1,989) Total comprehensive income for the year ,703 (1,000) (20,872) 313,831 35, ,425 Transfer to statutory reserve (note 21(c)) ,570 (33,570) Proposed dividend on IFC Capitalization (Equity) Fund L.P. Preference shares (note 21(j)) (4,538) 4, Proposed dividend on ordinary shares (note 21(j)) (209,342) 209, Proposed donations (1,000) 1, Balance at 31 December 1,303, , , , , ,880 (1,163) 1,382, ,870 3,196,829 The attached notes 1 to 38 form part of these consolidated financial statements Ahli United Bank 49

50 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December Attributable to the owners of the Bank Reserves Ordinary share capital US$ 000 Preference share capital US$ 000 Share premium US$ 000 Statutory reserve US$ 000 Retained earnings US$ 000 Proposed appropriations US$ 000 Other reserves (Note 21(i)) US$ 000 Total reserves US$ 000 Noncontrolling interest US$ 000 Total US$ 000 Balance at 1 January ,223,188 13, , , , ,846 (58,191) 1,155, ,994 2,752,175 Class B preference share dividend paid (note 21(j)) (149) - (149) - (149) Ordinary share dividend paid (note 21(j)) (122,697) - (122,697) - (122,697) Dividends of subsidiaries (13,775) (13,775) Arising on additional acquisition of a subsidiary (3,139) (2,610) Conversion of preference shares (note 20 (c)) 19,119 (13,937) (2,674) (1,833) (4,507) Other equity movements of a subsidiary (883) - - (883) 10,200 9,317 Preference shares issued (note 20 (d)) - 125, ,000 Equity shares surrendered (172) - (118) (118) - (290) Total comprehensive income for the year ,610 (1,000) (166,545) 143,065 20, ,495 Transfer to statutory reserve (note 21(c)) ,061 (31,061) Proposed dividend on IFC Capitalization (Equity) Fund L.P. Preference shares (note 21(j)) (2,900) 2, Proposed dividend on ordinary shares (note 21(j)) (149,530) 149, Proposed donations (1,000) 1, Balance at 31 December ,242, , , , , ,430 (226,569) 1,170, ,710 2,911, Ahli United Bank

51 Notes to the Consolidated Financial Statements 31 December

52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 1 Corporate Information The parent company, Ahli United Bank B.S.C. (AUB or the Bank) was incorporated in the Kingdom of Bahrain on 31, May 2000 originally as a closed company and changed on 12 July 2000 to a public shareholding company by Amiri Decree number 16/2000. The Bank and its subsidiaries as detailed below (collectively known as the Group) are engaged in retail, commercial, Islamic and investment banking business, global fund management and private banking services through 91 branches, as at 31 December, in the Kingdom of Bahrain (21 branches), the State of Kuwait (29 branches), the Arab Republic of Egypt (29 branches), Republic of Iraq (10 branches) and the United Kingdom (2 branches). It also operates through its managed associates in the State of Qatar (17 branches), Sultanate of Oman (12 branches) and Libya (11 branches) with a total network of 40 branches as at 31 December. The Bank operates under a retail banking licence issued by the Central Bank of Bahrain. The Bank's registered office is located at Building 2495, Road 2832, Al Seef District 428, Kingdom of Bahrain. The consolidated financial statements for the year ended 31 December were authorised for issue in accordance with a resolution of the directors on 19 February Basis of Consolidation The consolidated financial statements comprise the financial statements of the Bank and its controlled subsidiaries as at and for the years ended 31 December and The results of subsidiaries acquired are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All material intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated on consolidation. The following are the Bank's principal subsidiaries: Name Ahli United Bank (U.K.) PLC (AUBUK) Ahli United Bank K.S.C. (AUBK) Kuwait and Middle East Financial Investment Co. K.S.C. (closed) (KMEFIC), a subsidiary of AUBK* Ahli United Bank (Egypt) S.A.E. (AUBE) Commercial Bank of Iraq P.S.C. (CBIQ) * Adjusted for subsidiary's holdings Country of incorporation United Kingdom Nominal holding 31 December 31 December % 100.0% State of Kuwait 74.9% 74.9% State of Kuwait 75.3% 75.3% Arab Republic 85.4% 85.1% of Egypt Republic of Iraq 68.9% 59.7% During the year, AUB's equity stake in CBIQ increased to 68.9% following acquisition of additional shares at a purchase consideration of US$ 9.8 million (2011: AUB's equity stake in CBIQ increased to 59.7% following acquisition of additional shares at a purchase consideration of US$ 19.0 million). During the year, AUB participated in a rights issue by AUBE, by subscribing to 31.9 million equity shares for a consideration of US$ 53.0 million. Further AUB acquired additional 259,946 shares under this rights issue in AUBE for a purchase consideration of US$ 0.4 million which resulted in its equity stake in AUBE increasing to 85.4%. 3 Accounting Policies 3.1 Basis of preparation The consolidated financial statements have been prepared on a historical cost basis as modified for the re-measurement at fair value of freehold land, certain financial investments (as detailed below in 3.1(i) and (ii) and all derivatives. In addition, as more fully discussed below in note 3.3(h) (i), assets that are fair value hedged are adjusted to the extent of the fair value of the risk being hedged. The consolidated financial statements are presented in US Dollars which is the Group's functional currency and all values are rounded to the nearest thousand (US Dollars thousand) except where otherwise indicated. Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law. New standards and interpretations issued but not yet effective The following new standards and amendments have been issued by the International Accounting Standards Board (IASB) but are not yet mandatory for the year ended 31 December : IAS 1 Financial Statement Presentation: effective for annual periods commencing 1 July. IAS 19 Employee Benefits: effective for annual periods commencing 1 January IFRS 10 Consolidated Financial Statements: effective annual periods commencing 1 January IFRS 11 Joint Arrangements: effective annual periods commencing 1 January IFRS 12 Disclosure of Interest in Other Entities: effective annual periods commencing 1 January IAS 27 Separate Financial Statements (Revised): effective for annual periods commencing 1 January IAS 28 Investments in Associates and Joint Ventures Separate Financial Statements: effective for annual periods commencing 1 January IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32: effective for annual periods commencing 1 January Ahli United Bank

53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report IFRS 13 Fair Value Measurement: effective annual periods commencing 1 January IFRS 7 Financial Instruments: Disclosures Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7: effective for annual periods commencing 1 January The management is considering the implications of these standards and amendments, their impact on the Group s financial position and results and the timing of their adoption by the Group. (i) Early Adoption of IFRS 9 IFRS 9 Financial Instruments: Recognition and Measurement With effect from 1 January, the Group has adopted IFRS 9 Financial Instruments : Recognition and Measurement, in advance of its mandatory effective date of 1 January 2015, as permitted by the Standard, to provide a better presentation of its performance and operations. The Central Bank of Bahrain approved the early adoption of the standard. The standard has been applied retrospectively and, as permitted by transitional provision of IFRS 9, comparative amounts have not been restated but the adjustments relating to early adoption of IFRS 9 as at 1 January have been recognised in the opening retained earnings. IFRS 9 (phase 1) requires all financial assets to be classified in their entirety on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are measured either at amortised cost or fair value. (ii) Accounting Treatment under IFRS 9: IFRS 9 introduces new classification and measurement requirements for financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and measurement. The key changes relating to accounting treatment of financial assets under IFRS 9 are noted below: a. Debt Instruments: Under IFRS 9, debt instruments are measured at amortised cost using the effective interest rate method if: (i) the assets are held within a business model whose objective is to hold assets in order to collect contractual cash flows and (ii) the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If either of these two criteria is not met, the financial assets are classified and measured at fair value through the profit or loss (FVTPL). Additionally, even if the financial asset meets the amortised cost criteria the entity may choose at initial recognition to designate the financial asset at FVTPL based on business model. The Group accounts for any changes in the fair value in the consolidated statement of income for assets classified as FVTPL. The change in value is not recognized for assets carried at cost or amortised cost. b. Equity investments Investments in equity instruments are classified as FVTPL, unless the Group designates an equity investment that is not held for trading as Fair Value through Other Comprehensive Income (FVTOCI) on initial recognition. At initial recognition, the Group can make irrevocable election on an instrument by instrument basis to designate equity instrument as FVTOCI. If an equity investment is designated as FVTOCI, all gains and losses, except for dividend income, are recognised in other comprehensive income and are not subsequently included in the consolidated statement of income. c. Other financial instruments: The accounting policies for other financial instruments are detailed under note 3.3 (c). d. Impairment and Hedge Accounting IAS 39 is still being followed for impairment of financial assets and hedge accounting, as these will be covered through phase 2 and phase 3 of IFRS 9, respectively, which have not yet been issued by the International Accounting Standards Board (IASB). The Group s existing financial investments at the date of the initial application of IFRS 9 on 1 January have been reviewed and assessed and as a result significant part of non-trading investments of the Group meeting the required criteria have been designated as financial assets at amortised cost. The classification categories for financial instruments which were carried under IAS 39 until the previous year are listed below, the detailed accounting policies for which have been provided in consolidated financial statements for the year ended 31 December The accounting policies up to 31 December 2011 followed under IAS 39 for the principal financials instrument categories whose classification was changed pursuant to adoption of IFRS 9 are given below. a. Available-for-sale Non-trading investments that are not classified as held-to-maturity, heldfor-trading or loans and advances are classified as available-for-sale. After initial recognition, available-for-sale investments are remeasured at fair value. For investments in equity instruments, where a reasonable estimate of the fair value cannot be determined, the investments are carried at cost less impairment provision. Unless unrealised gains and losses on remeasurement to fair value are part of an effective hedging relationship, they are reported as a separate component of equity until the investment is sold, settled or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income for the period. b. Held-to-maturity Non-trading investments with fixed or determinable payments, fixed maturities and which the Group has the intention and ability to hold to maturity are classified as held-to-maturity. After initial recognition, these are subsequently measured at amortised cost using the effective interest rate method, less allowance for impairment. The losses arising from impairment of such investments are recognised in the consolidated statement of income under Provision for non-trading investments. Ahli United Bank 53

54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 3 Accounting Policies (continued) 3.1 Basis of preparation (continued) (iii) Impact of early adoption of IFRS 9 The impact on the carrying value of non-trading investments arising from a change in measurement attributable on transition to IFRS 9 is USD million as disclosed in the table below: Impact on Financial asset Original classification New classification IAS 39 US$ 000 Retained Earnings US$ 000 Fair value reserve US$ 000 IFRS 9 US$ 000 Cash and balances with central banks Treasury bills and deposits with central banks Deposits with banks and other financial institutions Loans and advances Held to maturity Held to maturity Held to maturity Loans and advances Financial assets at amortised cost 673, ,800 Financial assets at amortised cost 2,612, ,612,287 Financial assets at amortised cost 3,068, ,068,879 Loans and advances 15,495, ,495,961 Financial assets at fair value through profit or loss Held for trading FVTPL Non-trading investments Available for sale FVTPL 193,481 (19,735) 19, ,481 Non-trading investments Non-trading investments Non-trading investments Loans and receivables FVTPL 517,955 (75,313) 13, ,429 Available for sale Loans and receivables Financial assets at amortised cost 2,559,026-63,805 2,622,831 Financial assets at amortised cost 770,657 (38,330) 148, ,278 Non-trading investments Available for sale FVTOCI 504, ,071 Non-trading investments Held to maturity Financial assets at amortised cost 19, ,957 (133,378) 246,278 Had IFRS 9 not been adopted during the current year, a positive fair value movement of US$ million would have been recorded in the Other Comprehensive Income on the instruments reclassified to amortised cost. The effective interest rate on these instruments at the date of reclassification was between 4% - 7%. 54 Ahli United Bank

55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report 3.2 Significant accounting judgements and estimates The preparation of the consolidated financial statements requires management to make judgements and estimates that affect the reported amount of financial assets and liabilities and disclosure of contingent liabilities. These judgements and estimates also affect the revenues and expenses and the resultant provisions as well as fair value changes reported in equity. Judgements Judgements are made in the classification of financial instruments into fair value and amortised cost based on business model. Further goodwill and intangible assets with indefinite lives have been allocated to cash generating units for impairment testing. Judgements are also made in determination of the objective evidence that a financial asset is impaired. Business Model - applicable from 1 January In making an assessment of whether a business model s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to Management. In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows, the Group considers: Management s stated policies and objectives for the portfolio and the operation of those policies in practice; Management s evaluation of the performance of the portfolio; Management s strategy in terms of earning contractual interest revenues or generating capital gains. Classifications - applicable up to 31 December 2011 Judgements are made in the classification of available-for-sale, heldfor-trading and held-to-maturity investments based on management s intention at acquisition of the financial asset. Estimates Pension plans Estimates and assumptions are used in determining the Group s pension liabilities. Impairment losses on loans and advances, non-trading investments and other assets Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing loans, portfolios of performing loans with similar risk characteristics where the risk of default has increased, as well as provisions for non-trading investments and other assets. These are more fully described in note 3.3 (g). Fair value of financial instruments Estimates are also made in determining the fair values of financial assets and derivatives that are not quoted in an active market. Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 3.3 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements, besides those detailed in note 3.1 are set out below. These policies have been consistently applied to all the years presented, except for those resulting from early adoption of IFRS 9 as stated in note 3.1. (a) Investments in associates and joint venture Associate companies are companies in which the Group exercises significant influence but does not control, normally represented by an interest of between 20% and 50% in the voting capital. The Group classifies an investment as joint venture when it is a party to a contractual joint venture agreement. Investments in associate companies and joint ventures are accounted for using the equity method. The reporting dates of the associates and joint venture and the Group are identical and the associates and joint venture s accounting policies materially conform to those used by the Group for like transactions and events in similar circumstances. Adjustments are made to bring into line any dissimilar accounting policies that may exist. (b) Foreign currency translation (i) Transactions and balances Transactions in foreign currencies are initially recorded in the relevant functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in trading income in the consolidated statement of income. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary investments measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined and the differences are included in other comprehensive income as part of the fair value adjustment of the respective items, unless these items are designated as FVTPL or are part of an effective hedging strategy, in which case it is recorded in the consolidated statement of income. (ii) Group companies Assets and liabilities of foreign subsidiaries whose functional currency is not US Dollars are translated into US Dollars at the rates of exchange prevailing at the balance sheet date. Income and expense items are translated at average exchange rates prevailing for the reporting period. Ahli United Bank 55

56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 3 Accounting Policies (continued) 3.3 Summary of significant accounting policies (continued) (b) Foreign currency translation (continued) Any exchange differences arising on translation are included in foreign exchange translation reserve forming part of other comprehensive income. On disposal of foreign operations, exchange differences relating thereto and previously recognised in other comprehensive income are recognised in the consolidated statement of income. (c) Financial instruments The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are initially recognised at the fair value of consideration given, including acquisition costs associated with the investment, except in the case of FVTPL securities, where the acquisition costs are expensed. Premiums and discounts are amortised on a systematic basis to maturity using the effective interest rate method and taken to interest income or interest expense as appropriate. (i) Date of recognition All regular way purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the timeframe generally established by regulation or convention in the market place. (ii) Treasury bills and deposits with central banks Treasury bills and deposits with central banks are initially recognised at cost. Premiums and discounts are amortised on a systematic basis to their maturity. (iii) Deposits with banks and other financial institutions and loans and advances Deposits with banks and other financial institutions and loans and advances are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. After initial recognition, these are subsequently measured at amortised cost using the effective interest rate method, adjusted for effective fair value hedges, less any amounts written off and provision for impairment. The losses arising from impairment of these assets are recognised in the consolidated statement of income in provision for loan losses and others and in an impairment allowance account in the consolidated balance sheet. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortisation is included in interest income in the consolidated statement of income. (iv) Derivatives (other than hedging instruments) Changes in fair values of the derivatives held for trading are included in the consolidated statement of income under trading income. Further to the adoption of IFRS 9, derivatives embedded in other financial instruments are not separated from the host contract and the entire contract is considered in order to determine its classification. Where such a contract has been classified as FVTPL, the changes in fair value of the entire hybrid contract are recognised in the consolidated statement of income. Under IAS 39, derivatives embedded in other financial instruments were treated as separate derivatives and recorded at fair value, when their economic characteristics and risks were not closely related to those of the host contract and the host contract was not carried as held for trading. Further, the changes in fair value of such embedded derivatives were recognised in the consolidated statement of income. (v) Deposits, term debts and subordinated liabilities. These financial liabilities are carried at amortised cost, less amounts repaid. (d) Derecognition of financial assets and financial liabilities A financial asset (or where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: the rights to receive cash flows from the asset have expired; the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (i) has transferred substantially all the risks and rewards of the asset, or (ii) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. (e) Repurchase agreements Where investments are sold subject to a commitment to repurchase them at a predetermined price, they remain on the consolidated balance sheet and the consideration received is included in Borrowings under repurchase agreements. The difference between the sale price and repurchase price is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method. (f) Determination of fair value The fair value of financial instruments that are quoted in an active market is determined by reference to market bid prices respectively at the close of business on the balance sheet date. The fair value of liabilities with a demand feature is the amount payable on demand. The fair value of interest-bearing financial assets and financial liabilities that are not quoted in an active market and are not payable on demand is determined by a discounted cash flow model using the current market interest rates for financial instruments with similar terms and risk characteristics. For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument that is substantially similar, or is determined using net present valuation techniques. Investments in funds are stated at net asset values provided by the fund managers. The fair value of unquoted derivatives is determined either by discounted cash flows or option-pricing models. 56 Ahli United Bank

57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report (g) Impairment of financial assets An assessment is made at each balance sheet date to determine whether there is any objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset or a group of financial assets is determined and any impairment loss, based on the net present value of future anticipated cash flows, is recognised in the consolidated statement of income and credited to an allowance account. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. The present value of the estimated future cash flows for loans and other interest bearing financial assets is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. In addition to specific provisions against individually significant financial assets, the Group also makes collective impairment provisions on groups of financial assets, which although not identified as requiring a specific provision, have a greater risk of default than the risk at initial recognition. Financial assets are grouped on the basis of similar credit risk characteristics that are indicative of the debtors ability to pay all amounts due according to the contractual terms and the collective impairment provision is estimated for any such group where credit risk characteristics of the group of financial assets has deteriorated. Factors such as any deterioration in country risk, industry, technological obsolescence as well as identified structural weaknesses or deterioration in cash flows are taken into consideration and the amount of the provision is based on the historical loss pattern within each group, adjusted to reflect current economic changes. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the provision for loan losses and others in the consolidated statement of income. (h) Hedge accounting The Group enters into derivative instruments including futures, forwards, swaps and options to manage exposures to interest rate and foreign currency risks, including exposures arising from forecast transactions. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. Derivatives are stated at fair value. Derivatives with positive market values are included in Interest receivable and other assets and derivatives with negative market values are included in interest payable and other liabilities in the consolidated balance sheet. At inception of the hedge relationship, the Group formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, management objectives and strategy for undertaking the hedge. The methods that will be used to assess the effectiveness of the hedging relationship form part of the Group s documentation. Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item. Hedges are formally assessed at each reporting date. A hedge is regarded as highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated were offset in a range of 80% to 125%. For situations where the hedged item is a forecast transaction, the Group assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated statement of income. For the purposes of hedge accounting, hedges are classified into two categories: (i) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (ii) cash flow hedges which hedge exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. (i) Fair value hedges For fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the consolidated statement of income. The hedged item is adjusted for fair value changes relating to the risk being hedged and the difference is recognised in the consolidated statement of income. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, the difference between the carrying value of the hedged item on termination and the value at which it would have been carried without being hedged is amortised over the remaining term of the original hedge. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated statement of income. (ii) Cash flow hedges For cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is recognised initially in equity. The ineffective portion of the gain or loss, if any, on the hedging instrument is recognised immediately in the consolidated statement of income as trading income. The gains or losses on effective cash flow hedges recognised initially in equity are either transferred to the consolidated statement of income in the period in which the hedged transaction impacts the consolidated statement of income or included in the initial measurement of the related asset or liability. For hedges which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of the hedging instrument are taken directly to the consolidated statement of income for the year. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. In the case of cash flow hedges, the cumulative gain or Ahli United Bank 57

58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 3 Accounting Policies (continued) 3.3 Summary of significant accounting policies (continued) (h) Hedge accounting (continued) loss on the hedging instrument recognised in equity remains in equity until the forecasted transaction occurs, unless the hedged transaction is no longer expected to occur, in which case the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income for the year. (i) Offsetting financial instruments Financial assets and financial liabilities are only offset and the net amount reported in the consolidated balance sheet when there is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis. (j) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Interest income and expense For all interest bearing financial instruments, interest income or expense is recorded using the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a short period, where appropriate, to the net carrying amount of the financial assets or financial liability. Interest that is 90 days or more overdue is excluded from income. Interest on impaired loans and advances and other financial assets is not recognised in consolidated statement of income. (ii) Fees and commissions income Credit origination fees are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party at which time it is recognised immediately. Other fees and commissions income are recognised when earned. (iii) Dividend income Dividend income is recognised when the right to receive payment is established. (k) Business combinations, goodwill and other intangible assets Business combinations are accounted for using the purchase method of accounting. Assets and liabilities acquired are recognised at the acquisition date fair values with any excess of the cost of acquisition over the net assets acquired being recognised as goodwill. Changes in parent s ownership interest in a subsidiary that do not result in loss of control are treated as transactions between equity holders and are reported in equity. Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Intangible assets are measured on initial recognition at their fair values on the date of recognition. Following initial recognition, intangible assets are carried at originally recognised values less any accumulated impairment losses. Impairment of goodwill and intangible assets is determined by assessing the recoverable amount of the cash-generating unit (or group of cashgenerating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognised immediately in the consolidated statement of income. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated: represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and is not larger than a segment based on either the Group s primary or the Group s geographic segment reporting format determined in accordance with IFRS 8 Operating Segments. (l) Premises and equipment Freehold land is initially recognised at cost. After initial recognition, freehold land is carried at the revalued amount. The revaluation is carried out periodically by independent professional property valuers. Fair value is determined by reference to market-based evidence. The resultant revaluation surplus is recognised, as a separate component under equity. Revaluation deficit, if any, is recognised in the consolidated statement of income, except that a deficit directly offsetting a previously recognised surplus on the same asset is directly offset against the surplus in the revaluation reserve. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation on buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows: Freehold buildings 25 to 40 years Leasehold land and buildings Over the lease period Other premises and equipment Up to 10 years (m) Investment Property Land and buildings held for the purpose of capital appreciation or for long term rental yields and not occupied by the Group is classified as investment properties. Investment properties are measured at cost less accumulated depreciation (based on an estimated useful life of years using the straight line method) and accumulated impairment. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of income in the period of retirement or when sale is completed. 58 Ahli United Bank

59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report (n) Cash and cash equivalents Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits, together with those deposits with banks and other financial institutions and treasury bills having an original maturity of three months or less. (o) Provisions Provisions are recognised when the Group has a present obligation arising from a past event and the costs to settle the obligation are both probable and able to be reliably estimated. (p) Employee benefits Defined benefit pension plan Pension costs are recognised on a systematic basis so that the costs of providing retirement benefits to employees are evenly matched, so far as possible, to the service lives of the employees concerned. Any excess or deficiency of the actuarial value of assets over the actuarial value of liabilities of the pension scheme, outside of a defined corridor, is charged to the consolidated statement of income over the remaining service lives of the scheme members. Defined contribution plans The Group also operates a defined contribution plan, the costs of which are recognised in the period to which they relate. (q) Taxes There is no tax on corporate income in the Kingdom of Bahrain. Taxation on income from foreign entities is provided for in accordance with the fiscal regulations of the countries in which the respective Group entities operate. Deferred taxation is provided for using the liability method on all temporary differences calculated at the rate at which it is expected to be payable. Deferred tax assets are only recognised if recovery is probable. (r) Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not incorporated in the consolidated balance sheet. (s) Non-controlling interests Non-controlling interests represents the portion of profit or loss and net assets in the subsidiaries not attributable to the Bank s equity shareholders. (t) Mandatory convertible preference shares Mandatory convertible preference shares which carry a mandatory coupon, and are redeemable at a fixed future date, are recognised under equity in the consolidated balance sheet. The corresponding dividends on those shares are accounted as appropriation of profits for the corresponding year. (u) Dividends on ordinary shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank s shareholders. (v) Employees share purchase plan The Group operates an employees share purchase plan for certain eligible employees. The difference between the issue price and the fair value of the shares at the grant date is amortised over the vesting period in the consolidated statement of income with a corresponding effect to equity. (w) Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the commission received. Subsequent to initial recognition, the Group s liability under each guarantee is measured at the higher of the amortised commission and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. (x) Islamic banking The Islamic banking activities of the group are conducted in accordance with Islamic Shari'a principles, as approved by the Shari'a Supervisory Board. The financial statements extracts relating to these activities are prepared in accordance with the Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), IFRS and Central Bank of Bahrain regulations, as applicable. (y) Islamic products Murabaha An agreement whereby the Group sells to a customer commodities, real estate and certain other assets at cost plus an agreed profit mark up whereby the Group (seller) informs the purchaser of the price at which the asset had been purchased and also stipulates the amount of profit to be recognized. Ijara A lease agreement between the Group (lessor) and the customer (lessee), whereby the Group earns profit by charging rentals on assets leased to customers. Tawarruq A sales agreement whereby a customer buys commodities from the Group on a deferred payment basis and then immediately resells them for cash to a third party. Mudaraba An agreement between two parties; one of them provides the funds and is called Rab-Ul-Mal and the other provides efforts and expertise and is called the Mudarib and is responsible for investing such funds in a specific enterprise or activity in return for a pre-agreed percentage of the Mudaraba income. In the case of normal loss, the Rab-Ul-Mal would bear the loss of its funds while the Mudarib would bear the loss of its efforts. However, in the case of default, negligence or violation of any of the terms and conditions of the Mudaraba agreement, only the Mudarib would bear the losses. The Group acts as Mudarib when accepting funds from depositors and as Rab-Ul-Mal when investing such funds on a Mudaraba basis. Dividends for the period that are approved after the balance sheet date are shown as an appropriation and reported in the consolidated statement of changes in equity, as an event after the balance sheet date. Ahli United Bank 59

60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 3 Accounting Policies (continued) 3.3 Summary of significant accounting policies (continued) Wakala An agreement whereby the Group provides a certain sum of money to an agent who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in the case of default, negligence or violation of any of the terms and conditions of the Wakala. Istisna a Istisna a is a sale contract between a contract owner and a contractor whereby the contractor based on an order from the contract owner undertakes to manufacture or otherwise acquire the subject matter of the contract according to specifications, and sells it to the contract owner for an agreed upon price and method of settlement whether that be in advance, by installments or deferred to a specific future time. Revenue recognition Revenue is recognised on the above Islamic products as follows: Income from Murabaha, Tawarruq and Istisna a are recognised on an effective yield basis which is established on the initial recognition of the asset and is not revised subsequently. Income from Ijara is recognized over the term of the Ijara agreement so as to yield a constant rate of return on the net investment outstanding. Income (loss) on Mudaraba financing is based on expected results adjusted for actual experience as applicable, while similarly the losses are charged to income. Estimated income from Wakala is recognised on an accrual basis over the period, adjusted by actual income when received. Losses are accounted for on the date of declaration by the agent. (z) Unrestricted investment accounts share of profit The profit computed after taking into account all income and expenses at the end of a financial year is distributed between unrestricted investment account holders which include Mudaraba depositors and the Bank s shareholders. The share of profit of the unrestricted account holders is calculated on the basis of their daily deposit balances over the year, after reducing the agreed and declared Mudaraba fee. Unrestricted investment account holders do not bear the expenses relating to non compliance with Shari'a regulations. 4. Net Interest Income (a) Interest Income 2011 US$ 000 US$ 000 Treasury bills 35,331 30,240 Deposits with banks and other financial institutions 51,291 49,464 Loans and advances 798, ,118 Non-trading investments 185, ,114 1,070, ,936 During the year, the Bank repurchased a portion of its subordinated liabilities with a nominal value of US$ 5.9 million (2011 : US$ 7.5 million). The resultant net gain on the repurchase amounting to US$ 0.8 million (2011 : US$ 1.2 million) is included as a part of "interest income" above. (b) Interest Expense 2011 US$ 000 US$ 000 Deposits from banks and other financial institutions (including repurchase agreements) 113,437 94,677 Customers' deposits 289, ,325 Term debts 9,164 14,402 Subordinated liabilities 21,668 19, , ,009 Net Interest Income 636, , Fees and Commissions 2011 US$ 000 US$ 000 Fees and commissions income - Transaction banking services 101,817 90,631 - Management, performance and brokerage fees 29,518 36,148 Fees and commissions expense (4,626) (4,357) 126, ,422 Included in management, performance and brokerage fees is US$ 9.2 million (2011: US$ 9.8 million) of fee income relating to trust and other fiduciary activities. 6. Trading Income 2011 US$ 000 US$ 000 Foreign exchange 28,413 29,548 Other trading activities (1,797) (1,327) 26,616 28,221 Trading income includes a gain of US$ 0.2 million (2011: nil) on instruments classified as FVTPL attributable to credit risk. 7 (a) Cash and Balances with Central Banks 2011 US$ 000 US$ 000 Cash and balances with central banks, excluding mandatory reserve deposits (note 24) 513, ,050 Mandatory reserve deposits with central banks 222, , , ,800 Mandatory reserve deposits are not available for use in day-to-day operations. 60 Ahli United Bank

61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report 7 (b) Treasury Bills and Deposits with Central Banks 2011 US$ 000 US$ 000 Central Bank of Bahrain 241, ,354 Central Bank of Kuwait 1,341,696 2,187,432 Central Bank of Egypt 271, ,956 Central Bank of Iraq 131,860 68,545 1,986,236 2,612,287 All the above deposits are in the local currencies of the respective countries. 8. Loans and Advances 2011 US$ 000 % US$ 000 % a) By industry sector Consumer/ personal 3,624, ,609, Residential mortgage 1,518, ,346, Trading and manufacturing 3,305, ,790, Real estate 3,357, ,238, Banks and other financial institutions 1,020, ,167, Services 3,081, ,042, Government/ public sector 484, , Others 188, , ,580, ,046, Less: Specific impairment provision (356,012) (349,786) Less: Collective impairment provision (252,042) (200,629) 15,972,219 15,495, US$ 000 % US$ 000 % b) By geographic region Kingdom of Bahrain 3,266, ,101, State of Kuwait 7,006, ,871, Other GCC countries 2,022, ,248, United Kingdom 1,857, ,701, Arab Republic of Egypt 1,740, ,494, Europe (excluding United Kingdom) 365, , Asia (excluding GCC countries) 232, , Rest of the world 89, , ,580, ,046, Less: Specific impairment provision (356,012) (349,786) Less: Collective impairment provision (252,042) (200,629) 15,972,219 15,495,961 Other GCC countries comprise the members of the Gulf Cooperation Council being Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates. Please refer note 31 (c) for disclosure of credit quality of loans and advances. c) Age analysis of past due but not impaired loans and advances Up to 30 days US$ to 60 days US$ to 89 days US$ 000 Total US$ 000 Loans and advances Retail 69,035 33,685 15, ,457 Corporate 107,939 21,101 10, , ,974 54,786 26, ,187 Ahli United Bank 61

62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 8. Loans and Advances (continued) c) Age analysis of past due but not impaired loans and advances Up to 30 days US$ to 60 days US$ to 89 days US$ 000 Total US$ 000 Loans and advances Retail 29,598 44,749 27, ,487 Corporate 36,889 29,380 71, ,701 66,487 74,129 98, ,188 The past due loans and advances up to 30 days include those that are only past due by a few days. None of the above past due loans are considered to be impaired. d) Individually impaired loans and advances Retail US$ 000 Corporate US$ 000 Total US$ 000 Gross impaired loans 90, , ,964 Specific impairment provisions (77,335) (278,677) (356,012) 13,445 36,507 49,952 Impaired loan coverage 85.2 % 88.4 % 87.7 % Gross loans 2,683,703 13,896,570 16,580,273 Impaired loan ratio 3.4 % 2.3 % 2.4 % 2011 Retail US$ 000 Corporate US$ 000 Total US$ 000 Gross impaired loans 94, , ,742 Specific impairment provisions (74,290) (275,496) (349,786) 19,712 37,244 56,956 Impaired loan coverage 79.0% 88.1% 86.0% e) Impairment allowance for loans and advances A reconciliation of the allowance for impairment losses for loans and advances by class is as follows: Retail US$ 000 Corporate US$ 000 Total US$ 000 At 1 January 104, , ,415 Add/(Less): Amounts written off during the year (14,830) (71,160) (85,990) Charge for the year 26, , ,783 Recoveries during the year (7,664) (14,379) (22,043) Interest suspended during the year (net) 901 (4,508) (3,607) Exchange rate and other adjustments (702) (2,802) (3,504) At 31 December 108, , , Retail US$ 000 Corporate US$ 000 Total US$ 000 At 1 January 102, , ,568 Add/(Less): Amounts written off during the year (16,096) (21,356) (37,452) Charge for the year 25, , ,476 Recoveries during the year (9,241) (17,893) (27,134) Interest suspended during the year (net) 415 4,841 5,256 Exchange rate and other adjustments 1,791 2,910 4,701 At 31 December 104, , ,415 Gross loans 2,937,510 13,108,866 16,046,376 Impaired loan ratio 3.2% 2.4% 2.5% The fair value of collateral that the Group holds relating to loans individually determined to be impaired at 31 December amounts to US$ million (2011: US$ million). The collateral consists of cash, securities and properties. 62 Ahli United Bank

63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report f) Net provision for loan losses and others The net charge for the year for provision for loan losses and others in the consolidated statement of income is determined as follows: 2011 US$ 000 US$ 000 Impairment charge for the year on loans and advances (note 8(e)) 172, ,476 Recoveries from loans and advances during the year (including from fully provided loans written off in previous years) (51,439) (67,281) Net charge for others 26,756 24,652 Net provision for loan losses and others 148, , Non-Trading Investments Quoted investments Held at amortised cost US$ 000 Held at FVTOCI US$ 000 Total US$ 000 GCC government bonds and debt securities 567, ,823 Other government bonds and debt securities 840, ,589 GCC government entities securities 624, ,912 Floating rate notes and certificates of deposit: - issued by banks and other financial institutions 1,930,233-1,930,233 - issued by corporate bodies 778, ,582 Equity shares - 8,891 8,891 Funds at net asset value - 65,141 65,141 4,742,139 74,032 4,816,171 Unquoted investments GCC government bonds 120, ,211 Other government bonds and debt securities 14,587-14,587 Equity shares - 144, ,616 Funds at net asset value - 136, ,603 Other investments - 56,870 56, , , ,887 Total 4,876, ,121 5,289,058 Less: Allowance for impairment (168,637) 5,120,421 Ahli United Bank 63

64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 9. Non-Trading Investments (continued) Held-tomaturity US$ (As per IAS 39) Availablefor-sale US$ 000 Loans and receivables US$ 000 Total US$ 000 Quoted investments GCC government bonds and debt securities - 383,127 14, ,860 Other government bonds and debt securities - 371,179 25, ,337 GCC government entities securities - 172, , ,763 Floating rate notes and certificates of deposit: - issued by banks and other financial institutions - 1,249, ,077 1,946,583 - issued by corporate bodies 19, , , ,611 Equity shares - 7,975-7,975 Funds at net asset value - 150, ,140 19,957 2,777,700 1,288,612 4,086,269 Unquoted investments GCC government bonds - 100, ,347 Other government bonds and debt securities - 32,575-32,575 Floating rate notes and certificates of deposit: - issued by banks and other financial institutions issued by corporate bodies Equity shares at cost - 135, ,368 Funds at net asset value - 135, ,669 Other investments - 74,919-74, , ,878 Total 19,957 3,256,578 1,288,612 4,565,147 Less: Allowance for impairment (194,790) 4,370, Ahli United Bank

65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report As at 31 December, the Group does not have any sovereign exposures towards Eurozone countries comprising Greece, Italy, Ireland, Portugal and Spain. (31 December 2011: nil) The fair value of the assets reclassified at amortised cost as a result of the transition to IFRS 9 is US$ 4,952.9 million as at 31 December. Please refer note 31 (c) for disclosure of credit quality of non-trading investments. The movements in provision for impairment on investments were as follows: 2011 US$ 000 US$ 000 At 1 January 194, ,565 Add/(Less) Charge for the year 61,800 73,376 Amounts written off during the year (82,380) (3,040) Exchange rate and other adjustments (5,573) 889 At 31 December 168, , Investments In Associates And Joint Venture The principal associates and joint venture of the Group are: a) Associates Name Country of incorporation Holding 2011 Ahli Bank Q.S.C. State of Qatar * 33.3% Ahli Bank S.A.O.G. Sultanate of Oman 35.0% 35.0% United Bank for Commerce and Investment S.A.C. (UBCI) Libya 40.0% 40.0% * Subsequent to the balance sheet date, AUB divested its diluted stake of 29.4% in Ahli Bank Qatar (ABQ) to the Qatar Foundation for Education, Science and Community Development at a price of QR 60 per share, generating a net exceptional profit of US$ million which will be recognised in the 2013 consolidated financial statements. ABQ's contribution to AUB's net profit (inclusive of management fees) was US$ 44.1 million in (2011: US$ 43.1 million). b) Joint venture Name Country of incorporation Holding 2011 Legal & General Gulf B.S.C. (c) * Kingdom of Bahrain 50.0% 50.0% The summarised financial information of the Group s associates and joint venture was as follows: 2011 US$ 000 US$ 000 Assets 3,225,486 7,591,984 Liabilities 2,698,862 6,498,781 Revenues 135, ,900 Net profit for the year 55, , Premises and Equipment The net book values of the Group s premises and equipment are: 2011 US$ 000 US$ 000 Freehold land 116, ,052 Freehold buildings 45,139 23,312 Leasehold land and buildings 29,315 33,711 IT equipment and others 57,560 60,557 Capital work-in-progress 18,134 41, , , Interest Receivable and Other Assets 2011 US$ 000 US$ 000 Tax assets (note 22) - 1,991 Interest receivable 169, ,539 Derivative assets (note 28) 83,353 98,610 Prepayments and others 256, , , , Goodwill and Other Intangible Assets Goodwill US$ 000 Intangible assets US$ 000 Total US$ 000 At 1 January 500, , ,347 Acquisitions during the year Exchange rate and other adjustments (3,283) (8,142) (11,425) At 31 December 497, , ,922 * Provides conventional and takaful life and health insurance. Ahli United Bank 65

66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 13. Goodwill and Other Intangible Assets (continued) Goodwill US$' Intangible assets US$'000 Total US$'000 At 1 January 519, , ,358 Acquisitions during the year Exchange rate and other adjustments (19,039) (5,972) (25,011) At 31 December 500, , ,347 Goodwill: Goodwill acquired through business combinations has been allocated to the cash-generating units of the acquired entities for impairment testing purposes. The carrying amount of goodwill and intangible assets allocated to each of the cash-generating units is shown under note 30. Key assumptions used in estimating recoverable amounts of cash-generating units The recoverable amount of each cash-generating unit s goodwill is based on value-in-use calculations using cash flow projections from financial budgets approved by the Board of Directors, extrapolated for five year projections using nominal Gross Domestic Product growth rate in the respective countries in which they operate. The discount rate applied to cash flow projections represent the cost of capital adjusted for an appropriate risk premium for these business segments. The discount rate used in relation to the significant portion of the goodwill requiring impairment testing was 8.9 % (2011: 9.4%). The key assumptions used in estimating recoverable amounts of cash generating units were sensitised to test the resilience of value-in-use calculations. On this basis, management believes that reasonable changes in the key assumptions used to determine the recoverable amount of the Group's cash-generating units will not result in an impairment. Intangible assets: Intangible assets comprises primarily the Group s banking licenses which have indefinite lives. Based on an annual impairment assessment of the intangible assets, no indications of impairment were identified. The fair value of a banking license is determined at the time of acquisition by discounting the future expected profits from its acquisition and its projected terminal value. 14. Deposits from Banks and Other Financial Institutions 15. Borrowings Under Repurchase Agreements The Group has collateralized borrowing lines of credit with various financial institutions through Global Master Repurchase Agreements (GMRA), under which it can borrow up to US$ 2.4 billion (31 December 2011: US$ 2.4 billion). Collateral is provided in the form of investment grade securities held within the non-trading investments portfolio. As at 31 December, the borrowings under these agreements were US$ 1,861 million (31 December 2011: US$ 1,353 million) and the fair value of investment securities that had been pledged as collateral was US$ 2,235 million (2011: US$ 1,534 million). 16. Customers Deposits 2011 US$ 000 US$ 000 Current and call accounts 3,371,038 3,325,333 Saving accounts 1,837,025 1,678,475 Time deposits 13,023,068 12,341,226 18,231,131 17,345, Term Debts 2011 US$ 000 US$ 000 Medium Term Syndicated Deposit (Repaid on maturity in April ) - 618,000 Long term debt (Repaid on maturity in September ) - 150, , Interest Payable and Other Liabilities 2011 US$ 000 US$ 000 Accruals 87,905 83,766 Interest payable 138, ,359 Derivative liabilities (note 28) 293, ,616 Other credit balances 225, ,807 Tax liabilities (note 22) 29,279 12, , , US$ 000 US$ 000 Demand and call 1,540,129 1,460,618 Time deposits 2,942,342 2,725,640 Other deposits 662, ,387 5,145,255 4,434,645 Other deposits relate to bilateral arrangements with a term of 364 days. 66 Ahli United Bank

67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report 19. Subordinated Liabilities These borrowings are subordinated to the claims of all other creditors of the respective banks Maturity US$ 000 US$ 000 International Finance Corporation (IFC): Convertible into ordinary shares at the holder s option at the rate of US cents (2011: US 97.6 cents) per share between the third and eighth anniversary ending on 17 November 2014 from the loan agreement dated 18 November 2006, as amended , ,000 Repayable in four equal semiannual installments commencing on 15 April 2019 and falling on each Interest Payment Date falling thereafter up to and including 15 October 2020 (note 20 (d)) , , , ,000 Others: Repayable at maturity - 30,842 Repayable in 2013 with issuer option to extend for a further period of 5 years and one day ,000 Non-convertible portion (50%) of Class A non-cumulative preference share, with an issuer option to redeem after 1 January 2010, at US$ 0.45 per share, subject to three months notice , ,000 Issuer option to redeem after 2 December 2010 subject to one month notice ,528 67, year subordinated debt repayable at maturity ,997 17,997 Repayable at maturity 5 years & one day notice 12,480 12,174 Repayable at maturity ,864 4, , , , , Share Capital 2011 US$ 000 US$ 000 (a) Authorised : - Share capital 8,000 million shares (2011: 8,000 million shares) of US$ 0.25 each 2,000,000 2,000,000 Available for issuance of ordinary shares and various classes of preference shares (b) Issued and fully paid: 2011 US$ 000 US$ 000 Ordinary share capital (US$ 0.25 each) 1,303,164 1,242,135 Number of shares (millions) (note 20 (c)) 5, ,984.3 Movement in ordinary shares 2011 (number in millions) Opening balance as at 1 January 4, ,907.9 Add: issuance of shares upon conversion of Class B preference shares (note 20 (c)) Add: bonus share issue Closing balance as at 31 December 5, ,984.3 On 23 July, AUB prepaid the US$ 50 million subordinated liability ahead of its original contractual maturity on 20 February Ahli United Bank 67

68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 20. Share Capital (continued) Movement in Class B preference shares 2011 (number in millions) Opening balance as at 1 January Less: Conversion of tranche III to ordinary shares (note 20 (c)) - (55.7) Closing balance as at 31 December US$ 000 US$ 000 IFC Mandatory Convertible preference shares (US$ 0.25 each) (note 20 (d)) 125, ,000 Number of shares (millions) (c) On 1 January 2011, the 55.7 million Class B non-cumulative fully convertible preference shares were converted, including the effect of prior year ordinary bonus share issues, to 76.4 million ordinary shares. These ordinary shares will rank pari-passu with the other ordinary shares in issue. Consequent to the above conversion, the total number of ordinary shares was 4,984.3 million (note 20 (b)). (d) During 2011, with regulatory consents and approval by the shareholders at the Extraordinary General Assembly held on 8 March 2011, the Bank concluded agreements with IFC Capitalization (Equity) Fund L.P. and IFC Capitalization (Subordinated Debt) Fund L.P. (jointly launched by International Finance Corporation "IFC" and the Japan Bank for International Cooperation "JBIC") to raise US$ 125 million Tier-I qualifying capital through a fully paid Mandatorily Convertible Preference Shares (MCPS) issue and US$ 165 million Tier-II qualifying 10 year subordinated debt facility (Refer note 19). The mandatorily convertible preference shares are convertible at a bonus adjusted issue price of US cents per share (note 21 (j)). d) Property revaluation reserve The revaluation reserve arising on revaluation of freehold land is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. e) Foreign exchange translation reserve It comprises of translation effects arising on consolidation of subsidiaries, non-monetary equity investments and investments in associates. f (i) Other comprehensive income reserve (OCI Reserve) This reserve represents changes in the fair values of equity investments that have been classified as Fair Value Through Other Comprehensive Income. (ii) Available-for-sale reserve This reserve represents changes in the fair values of available-for-sale investments under IAS 39 up to 31 December g) Cash flow hedge reserve This reserve represents the effective portion of gain or loss on the Group's cash flow hedging instruments. h) Employee share purchase plan reserve The Group operates an employees' share purchase plan (ESPP) for certain eligible employees, as detailed under note 20(c) and (d) of 2011 consolidated financial statements through the issuance of Non- Cumulative Fully Convertible Class B Preference Shares. The difference between the issue price and the fair value of the shares at the grant date is amortised over the vesting period in the consolidated statement of income with a corresponding effect to ESPP reserve under consolidated statement of changes in equity. Upon conversion of these shares, the fair value reserve is transferred to share premium. 21. Reserves a) Share premium The share premium arising on the issue of ordinary and preference shares is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. b) Capital reserve As required by the Bahrain Commercial Companies Law, any profit on the sale of treasury stock is transferred to a capital reserve. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. c) Statutory reserve As required by the Bahrain Commercial Companies Law and the Bank s Articles of Association, 10% of the net profit is transferred to a statutory reserve on an annual basis. The Bank may resolve to discontinue such transfers when the reserve totals 50% of the paid up capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. 68 Ahli United Bank

69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report i) Movements in other reserves Capital reserve Property revaluation reserve Foreign exchange translation reserve OCI reserve Cumulative changes in Cash flow hedge reserve ESPP reserve Total other reserves US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balance at 1 January ,690 (13,733) (234,367) (26,584) - (226,569) Impact of adopting IFRS 9 at 1 January (note 3.1 (iii)) , ,278 At 1 January ,690 (13,733) 11,911 (26,584) - 19,709 Currency translation adjustments - - (23,087) (23,087) Transfers to consolidated statement of income (305) 25,962-25,657 Net fair value movements during the year ,172 (7,661) - (2,489) Revaluation of freehold land - (20,953) (20,953) Balance at 31 December ,737 (36,820) 16,778 (8,283) - (1,163) Capital reserve Property revaluation reserve Foreign exchange translation reserve Availablefor-sale reserve Cumulative changes in Cash flow hedge reserve ESPP reserve Total other reserves US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balance at 1 January ,842 (4,406) (76,068) (33,673) 1,689 (58,191) Currency translation adjustments - - (9,327) (9,327) Share of changes in fair value reserve of associates , ,411 Transfers to consolidated statement of income ,795 1,662-5,457 Net fair value movements during the year (164,505) 5,427 - (159,078) Fair value amortisation of share based transactions Conversion of preference shares (note 20(c)) (1,833) (1,833) Revaluation of freehold land - (6,152) (6,152) Balance at 31 December ,690 (13,733) (234,367) (26,584) - (226,569) Ahli United Bank 69

70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 21. Reserves ( continued) j) Dividends paid and proposed US$ 000 Proposed for approval at the forthcoming Annual General Assembly of Shareholders Meeting Cash dividend on IFC Capitalization (Equity) Fund L.P. Preference shares 4,538 Cash dividend on the Ordinary US cents 4.0 per share 209,342 Bonus share issue 5% 2011 US$ 000 Declared and paid during the year Cash dividend on IFC Capitalization (Equity) Fund L.P. Preference shares (2011: nil) 2,900 Cash dividend on the Ordinary US cents 3.0 per share (2011: US cents 2.5 per share) 149,530 Bonus share issue (2011: nil) 5% 70 Ahli United Bank

71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report 22. Taxation 2011 US$ 000 US$ 000 Consolidated balance sheet (note 12 and note 18): - Current tax asset - 1,991 - Deferred tax liability (4,920) (3,718) - Current tax liability (24,359) (8,790) (29,279) (10,517) Consolidated statement of income - Current tax expense on foreign operations 36,791 28,940 - Deferred tax expense on foreign operations 1, ,993 29,842 The Group's tax expense includes all direct taxes that are accrued and paid on taxable profits of entities to the authorities in the respective countries of incorporation, in accordance with the tax laws prevailing in those jurisdictions. Consequently, it is not practical to provide a reconciliation between the accounting and taxable profits together with the details of effective tax rates. Tax expense primarily relates to AUBUK, AUBE, AUBK and CBIQ. 23. Earnings Per Share Basic earnings per share is calculated by dividing the net profit for the year attributable to the Bank s ordinary equity shareholders less Class B preference share dividends, by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share amounts are calculated by dividing the net profit attributable to the Bank's ordinary equity shareholders by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of Class B preference shares into ordinary shares and IFC mandatorily convertible preference shares. The convertible subordinated debt issued (note 19) is anti-dilutive for and 2011 and therefore ignored in calculating diluted earnings per share. The number of ordinary shares potentially issuable upon conversion of this debt amounts to million shares as at 31 December (2011: million shares). The following reflects the income and share data used in basic and diluted earnings per share computations: 2011 US$ 000 US$ 000 Net profit for basic earnings per share computation Net profit attributable to Bank's equity shareholders 335, ,610 (Less): IFC mandatorily convertible preference shares dividend (note 21(j)) (4,538) (2,900) Adjusted net profit attributable to Bank's ordinary equity shareholders for basic earnings per share 331, ,710 Net profit for diluted earnings per share computation Net profit attributable to Bank's equity shareholders before preference share dividend 335, ,610 Add: Staff costs - fair value amortisation of share based transactions - - Adjusted net profit attributable to Bank's ordinary equity shareholders for diluted earnings per share 335, ,610 Number of shares (in millions) 2011 Weighted average ordinary shares outstanding during the period adjusted for bonus shares 5,203 5,211 Net weighted average number of ordinary shares for basic earnings per share 5,203 5,211 Add: Effect of dilution IFC mandatorily convertible preference shares (note 20(d)) Weighted average number of ordinary shares for diluted earnings per share 5,362 5,370 Issued and fully paid ordinary shares of US$ 0.25 each (in million) 5,233 4,984 Ahli United Bank 71

72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 24. Cash And Cash Equivalents Cash and cash equivalents included in the consolidated statement of cash flows include the following balance sheet amounts: 2011 US$ 000 US$ 000 Cash and balances with central banks, excluding mandatory reserve deposits (note 7(a)) 513, ,050 Deposits with Central banks, other banks and financial institutions - with an original maturity of three months or less 2,911,248 3,405,047 3,424,315 3,866, Related Party Transactions The Group enters into transactions with major shareholders, associates, directors, senior management and companies which are controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business at arm's length. All the loans and advances to related parties are performing and are free of any provision for possible loan losses. The income, expense and the period end balances in respect of related parties included in the consolidated financial statements were as follows: US$ 000 Directors Major shareholders Associates and senior management Total Interest income ,385 7,938 Interest expense 76, ,340 Fees and commissions (net) - 5,161-5,161 Deposits with banks and other financial institutions - 83,797-83,797 Loans and advances , ,600 Deposits from banks and other financial institutions - 6,691-6,691 Customers deposits (a) 5,278,911 3,228 10,832 5,292,971 Subordinated liabilities 10, ,942 Commitments and contingent liabilities (notional) - 96,742 24, ,467 Derivatives (notional) - 230, , Ahli United Bank

73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report Major shareholders Associates 2011 US$ 000 Directors and senior management Interest income - 1,841 4,797 6,638 Interest expense 77, ,108 Fees and commissions (net) - 5,123-5,123 Deposits with banks and other financial institutions - 86,800-86,800 Loans and advances , ,581 Deposits from banks and other financial institutions - 89,860-89,860 Customers deposits (a) 5,499,793 9,142 6,621 5,515,556 Subordinated liabilities 91, ,516 Commitments and contingent liabilities (notional) - 57,885 21,822 79,707 Derivatives (notional) - 191, ,938 (a) Customers deposits include deposits from GCC government-owned institutions totaling US$ 5,262 million (31 December 2011: US$ 5,496 million). The compensation of key management personnel of the Group included under staff costs was as follows: Total 2011 US$ 000 US$ 000 Short term employee benefits 14,652 14,997 End of service benefits 1,232 1,004 Post employment benefits Total benefits 16,214 16,295 Fair value amortisation charge relating to share based transactions for key management personnel during is nil. (2011: US$ 0.3 million included in short term employee benefits). 26. Employee Benefits The Group operates Defined Benefit and Defined Contribution retirement benefit schemes for its employees in accordance with the local laws and regulations in the countries in which it operates. The costs of providing retirement benefits including current contributions, are charged to the consolidated statement of income. Defined benefit plans The charge to the consolidated statement of income on account of end of service benefits for the year amounted to US$ 8,158 thousand (2011: US$ 7,722 thousand). There are no material differences between the carrying amount of the provision for end of service benefits at both 31 December and 2011 and the amount arising from an actuarial computation thereof. AUBUK's defined benefit pension scheme was closed to future service accruals on 31 March The charge to consolidated statement of income is calculated in accordance with the IAS 19 corridor method, which is the deficit of the actuarial value of assets over the actuarial value of liabilities, outside of the defined corridor, over the average remaining service lives of the scheme. Defined contribution plans The Group contributed US$ 5,884 thousand (2011: US$ 5,718 thousand) during the year towards defined contribution plans. The Group s obligations are limited to the amounts contributed to various schemes. 27. Managed Funds Funds administrated on behalf of customers to which the Group does not have legal title are not included in the consolidated balance sheet. The total market value of all such funds at 31 December was US$ 4,077 million (2011: US$ 4,033 million). 28. Derivatives In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rates or indices. Ahli United Bank 73

74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 28. Derivatives ( continued) Derivatives include financial options, futures and forwards, interest rate swaps and currency swaps, which create rights and obligations that have the effect of transferring between the parties of the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On inception, a derivative financial instrument gives one party a contractual right to exchange financial assets or financial liabilities with another party under conditions that are potential favourable, or a contractual obligation to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable. However, they generally do not result in a transfer of the underlying primary financial instrument on inception of the contract, nor does such a transfer necessarily take place on maturity of the contract. Some instruments embody both a right and an obligation to make an exchange. Because the terms of the exchange are determined on inception of the derivative instruments, as prices in financial markets change those terms may become either favourable or unfavourable. The table below shows the net fair values of derivative financial instruments. Derivative assets Derivative liabilities US$ 000 US$ 000 Derivatives held for risk management: Interest rate swaps 39,466 26,309 Forward foreign exchange contracts 33,050 24,936 Forward rate agreements 4, Options 1,532 1,617 Interest rate futures - 1,932 Credit derivatives - 1 Derivatives held as fair value hedges: Interest rate swaps 5, ,581 Currency swaps - 3,783 Options 46 - Derivatives held as cash flow hedges: Interest rate swaps - 8,283 83, , Derivative assets Derivative liabilities US$ 000 US$ 000 Derivatives held for risk management: Interest rate swaps 43,040 29,409 Forward foreign exchange contracts 37,321 21,187 Forward rate agreements 1, Options Interest rate futures 1,297 1,038 Credit derivatives Derivatives held as fair value hedges: Interest rate swaps 7, ,345 Currency swaps 6,442 - Options Derivatives held as cash flow hedges: Interest rate swaps ,804 98, ,616 Cash flow hedges The time periods in which the hedged cash flows are expected to occur and their impact on the consolidated statement of income is as follows: At 31 December 3 months or less More than 3 months up to 1 year More than 1 year up to 5 years Total US$'000 US$'000 US$'000 US$'000 Cash outflows from liabilities 1, ,016 19,580 At 31 December 2011 Cash outflows from liabilities 216 2,490 34,871 37,577 No hedge ineffectiveness on cash flow hedges was recognised in and Fair value hedges Losses arising from fair value hedge instruments during were US$ 20.3 million (2011 : US$ 91.8 million) while the gains on the hedged items attributable to the hedged risk were US$ 20.3 million (2011 : US$ 91.8 million). These gains and losses are included in trading income-net in the consolidated statement of income during and Ahli United Bank

75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report Derivatives held for risk management purposes Most of the Group s derivative trading activities relate to customer driven transactions as well as positioning and arbitrage. Positioning involves managing positions with the expectation of profiting from favourable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price differentials between markets or products. Derivatives held for hedging purposes The Group has adopted a comprehensive system for the measurement and management of risk. As part of its asset and liability management the Group uses derivatives for hedging purposes in order to reduce its exposure to currency and interest rate movements. This is achieved by hedging specific financial instruments and forecasted transactions, as well as strategic hedging against overall balance sheet exposures. The Group uses options and currency swaps to hedge against specifically identified currency and equity risks. In addition, the Group uses interest rate swaps and forward rate agreements to hedge against the interest rate risk arising from specifically identified, or a portfolio of, fixed interest rate investments and loans. The Group also uses interest rate swaps to hedge against the cash flow risks arising on certain floating rate deposits. In all such cases the hedging relationship and objective, including details of the hedged item and hedging instrument, are formally documented and the transactions are accounted for as fair value hedges. Hedging of interest rate risk is also carried out by monitoring the duration of assets and liabilities and entering into interest rate swaps to hedge net interest rate exposures. Since hedging of net positions does not qualify for special hedge accounting, related derivatives are accounted for the same way as trading instruments. 29. Commitments and Contingent Liabilities Credit-related commitments Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances which are designed to meet the requirements of the Group s customers. Commitments to extend credit represent contractual commitments to make loans and revolving credits available and generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. Standby letters of credit, guarantees and acceptances (standby facilities) commit the Group to make payments on behalf of customers contingent upon their failure to perform under the terms of the contract. Standby facilities would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at floating rates. The Group has the following credit related commitments: 2011 US$ 000 US$ 000 Contingent liabilities and commitments Guarantees 1,760,266 1,651,977 Acceptances 64,531 44,302 Letters of credit 958, ,173 2,783,490 2,168,452 Irrevocable commitments: Undrawn loan commitments 535, ,798 The Group s commitments in respect of non-cancellable operating leases were as follows: 2011 US$ 000 US$ 000 Within one year 1,993 1,893 Between one to five years 8,008 7,490 Over five years 7,670 9,147 17,671 18, Segment Information For management purposes the Group is organised into three major business segments: Retail banking Corporate banking, treasury and investments Private banking and wealth management Principally handling individual customers deposit and current accounts, providing consumer loans, residential mortgages, overdrafts, credit cards and fund transfer facilities. Principally handling loans and other credit facilities, and deposit and current accounts for corporate and institutional customers and providing money market, trading and treasury services, as well as management of the Group s funding. Principally servicing high net worth clients through a range of investment products, funds, credit facilities, trusts and alternative investments. Ahli United Bank 75

76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 30. Segment Information ( continued) These segments are the basis on which the Group reports its primary segment information. Transactions between segments are conducted at approximate market rates on an arm s length basis. Interest is charged/credited to business segments based on a pool rate which approximates the cost of funds. Segmental information for the year was as follows: Retail banking Corporate banking, treasury and investments Private banking and wealth management Total US$ 000 US$ 000 US$ 000 US$ 000 Year ended 31 December : Net interest income 129, ,678 49, ,373 Fees and commissions - net 31,441 71,496 23, ,709 Share of profits from associates and joint venture 14,697 45,707 1,131 61,535 Other operating income 1,223 66,990 (24) 68,189 OPERATING INCOME 176, ,871 74, ,806 Net provision for loan losses and others (7,646) 145,098 10, ,100 Provision for non-trading investments - 61,800-61,800 NET OPERATING INCOME 184, ,973 63, ,906 Operating expenses 102, ,677 32, ,178 PROFIT BEFORE TAX 81, ,296 30, ,728 Tax expense 4,691 31,155 2,147 37,993 NET PROFIT FOR THE YEAR 76, ,141 28, ,735 Less : Attributable to non-controlling interest 42,032 NET PROFIT ATTRIBUTABLE TO THE OWNERS' OF THE BANK 335,703 Segment assets 2,872,930 23,081,392 1,721,604 27,675,926 Goodwill 165, ,049 67, ,548 Other intangible assets 60,183 93,010 29, ,374 Investment in associates and joint venture 278,125 Investment held for sale 397,959 Unallocated assets 864,490 TOTAL ASSETS 29,896,422 Segment liabilities 4,702,240 18,552,275 2,670,107 25,924,622 Unallocated liabilities 774,971 TOTAL LIABILITIES 26,699, Ahli United Bank

77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report Retail banking Corporate banking, treasury and investments Private banking and wealth management Total US$ 000 US$ 000 US$ 000 US$ 000 Year ended 31 December 2011: Net interest income 121, ,190 38, ,927 Fees and commissions - net 33,427 64,472 24, ,422 Share of profits from associates and joint venture 15,302 38,994 2,407 56,703 Other operating income 2,418 93, ,060 OPERATING INCOME 172, ,244 65, ,112 Net provision for loan losses and others (4,031) 132,714 1, ,847 Provision for non-trading investments - 73,376-73,376 NET OPERATING INCOME 176, ,154 64, ,889 Operating expenses 95, ,238 32, ,234 PROFIT BEFORE TAX 80, ,916 31, ,655 Tax expense 5,516 20,218 4,108 29,842 NET PROFIT FOR THE YEAR 75, ,698 27, ,813 Less : Attributable to non-controlling interest 25,203 NET PROFIT ATTRIBUTABLE TO THE OWNERS' OF THE BANK 310,610 Segment assets 3,031,087 21,796,546 1,492,345 26,319,978 Goodwill 178, , , ,831 Other intangible assets 62,870 97,164 30, ,516 Investment in associates and joint venture 629,843 Investment held for sale - Unallocated assets 688,594 TOTAL ASSETS 28,329,762 Segment liabilities 4,333,971 17,688,750 2,650,844 24,673,565 Unallocated liabilities 745,056 TOTAL LIABILITIES 25,418,621 Ahli United Bank 77

78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 30. Segment Information ( continued) Geographic segmentation Although the management of the Group is based primarily on business segments, the Group's geographic segmentation is based on the countries where the Bank and its subsidiaries are incorporated. Thus, the operating income generated by the Bank and its subsidiaries based in the GCC are grouped as GCC Countries, while those generated by the Bank's subsidiaries located outside the GCC region is grouped under Rest of the World. Similar segmentation is followed for the distribution of total assets. The following table shows the distribution of the Group s operating income and total assets by geographical segment: Operating income Total assets US$ 000 US$ 000 US$ 000 US$ 000 GCC Countries 695, ,068 19,441,634 19,196,034 Rest of the World 197, ,044 10,454,788 9,133,728 Total 892, ,112 29,896,422 28,329,762 Net profit from Bahrain onshore operations included above is US$ 44.0 million (2011: US$ 38.2 million) amounting to 13.1% (2011: 12.3%) of the Group's net profit attributable to equity shareholders. Risk Management 31. Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge a financial obligation and cause the other party to incur a financial loss. In the case of derivatives this is limited to positive fair values. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. a) Concentration risk Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Group s performance to developments affecting a particular industry or geographic location. The Group manages its credit risk exposure so as to avoid over concentration to a particular sector or geographic location. It also obtains security where appropriate. Guidelines are in place regarding the acceptability of types of collateral and valuation parameters. The principal collateral types are as follows: In the commercial sector cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees; In the commercial real estate sector charges over the properties being financed; and In the financial sector charges over financial instruments, such as debt securities and equities. The Group monitors the market value of collateral and requests additional collateral when necessary in accordance with the underlying agreement. Details of the concentration of the loans and advances by industry sector and geographic region are disclosed in notes 8(a) and 8(b) respectively. Details of the industry sector analysis and the geographical distribution of the assets, liabilities and commitments on behalf of customers are set out in note 32. b) Maximum exposure to credit risk without taking account of any collateral and other credit enhancements The table below shows the maximum exposure to credit risk for the components of the balance sheet. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements, but after provision for impairment where applicable. Gross maximum exposure Gross maximum exposure 2011 US$ 000 US$ 000 Balances with central banks 643, ,583 Treasury bills and deposits with central banks 1,986,236 2,612,287 Deposits with banks and other financial institutions 3,750,771 3,068,879 Loans and advances 15,972,219 15,495,961 Financial assets at fair value through profit or loss 25,639 - Non-trading investments 4,708,300 4,005,854 Interest receivable and other assets 492, ,228 Total 27,579,050 26,129,792 Contingent liabilities 2,783,490 2,168,452 Undrawn loan commitments 535, ,798 Total credit related commitments 3,318,815 2,803,250 Total credit risk exposure 30,897,865 28,933,042 Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. In the personal sector cash, mortgages over residential properties and assignments over salary income; 78 Ahli United Bank

79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report c) Credit quality per class of financial assets The table below shows distribution of financial assets neither past due nor impaired. Neither past due nor impaired High standard grade Standard grade Total US$ 000 US$ 000 US$ 000 At 31 December Balances with central banks 582,422 61, ,431 Treasury bills and deposits with central banks 1,986,236-1,986,236 Deposits with banks and other financial institutions 3,250, ,626 3,750,771 Loans and advances Retail 593,768 1,880,698 2,474,466 Corporate 7,936,915 5,504,741 13,441,656 Financial assets at fair value through profit or loss 25,639-25,639 Non trading investments 4,643, ,292 4,876,937 Interest receivable and other assets 219, , ,101 Other assets - derivatives 83,353-83,353 The table below shows distribution of financial assets neither past due nor impaired. Neither past due nor impaired High standard grade Standard grade Total US$ 000 US$ 000 US$ 000 At 31 December 2011 Balances with central banks 437,854 93, ,583 Treasury bills and deposits with central banks 2,612,287-2,612,287 Deposits with banks and other financial institutions 2,751, ,052 3,068,879 Loans and advances Retail 910,561 1,831,461 2,742,022 Corporate 7,740,888 4,917,536 12,658,424 Non trading investments Available-for-sale 2,703,960 48,547 2,752,507 Held to maturity - 19,957 19,957 Loans and receivables 1,201,899 86,713 1,288,612 Interest receivable and other assets 177, , ,618 Other assets - derivatives 98,610-98,610 It is the Group's policy to maintain consistent internal risk ratings across the credit portfolio. The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Group s internal credit rating system. This facilitates focused portfolio management of the inherent level of risk across all lines of business. The credit quality ratings disclosed above can be equated to the following risk rating grades: Credit quality rating Risk rating Definition High standard Risk rating 1 to 4 Undoubted through to good credit risk Standard Risk rating 5 to 7 Satisfactory through to adequate credit risk The risk rating system is supported by various financial analytics and qualitative market information for the measurement of counterparty risk. There are no financial assets which are past due but not impaired as at 31 December and 2011 other than those disclosed under note 8(c). Ahli United Bank 79

80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 32. Concentration Analysis The distribution of assets, liabilities and commitments on behalf of customers by geographic region and industry sector was as follows: Assets Liabilities Contingent liabilities & commitments on behalf of customers US$ 000 US$ 000 US$ 000 Geographic region: Kingdom of Bahrain 5,183,876 5,116, ,434 State of Kuwait 9,626,483 12,198, ,376 Other GCC countries 4,631,275 2,602, ,266 United Kingdom (UK) 3,001,191 1,046,904 10,019 Arab Republic of Egypt 3,044,871 2,471, ,237 Europe (excluding UK) 1,754, ,221 44,754 Asia (excluding GCC) 1,361,288 1,607,053 22,146 United States of America 794, ,406 17,119 Rest of the World 497, ,045 22,139 29,896,422 26,699,593 2,783, Assets Liabilities Contingent liabilities & commitments on behalf of customers US$ 000 US$ 000 US$ 000 Geographic region: Kingdom of Bahrain 4,736,657 4,855, ,448 State of Kuwait 9,752,340 12,846, ,252 Other GCC countries 4,707,037 1,756, ,564 United Kingdom (UK) 2,865, ,091 78,015 Arab Republic of Egypt 2,581,326 1,707, ,034 Europe (excluding UK) 1,800,800 1,068,054 98,749 Asia (excluding GCC) 929,692 1,465,078 35,699 United States of America 512, ,165 15,542 Rest of the World 444, ,386 7,149 28,329,762 25,418,621 2,168,452 Assets Liabilities Contingent liabilities & commitments on behalf of customers US$ 000 US$ 000 US$ 000 Industry sector: Banks and other financial institutions 11,825,491 9,888, ,997 Consumer/personal 3,481,775 5,980,433 24,274 Residential mortgage 1,489,545 1,265 1,618 Trading and manufacturing 3,518,547 1,774, ,828 Real estate 3,532, ,851 9,581 Services 3,052,181 3,036, ,865 Government/public sector 2,123,198 4,284, ,030 Others 873,506 1,202,718 99,297 29,896,422 26,699,593 2,783,490 Assets 2011 Liabilities Contingent liabilities & commitments on behalf of customers US$ 000 US$ 000 US$ 000 Industry sector: Banks and other financial institutions 11,089,273 10,432, ,140 Consumer/personal 3,440,612 4,857,841 22,645 Residential mortgage 1,343,580 1, Trading and manufacturing 3,009,766 2,305, ,049 Real estate 3,220, ,819 3,477 Services 3,290,654 2,601, ,890 Government/public sector 2,085,477 3,606,963 31,785 Others 850,117 1,126,181 76,588 28,329,762 25,418,621 2,168, Ahli United Bank

81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report 33. Market Risk Market risk is the risk of potential financial loss that may arise from adverse changes in the value of a financial instrument or portfolio of financial instruments due to movements in interest rates, foreign exchange rates, equity prices, commodity prices and derivatives. This risk arises from asset - liability mismatches, changes that occur in the yield curve, foreign exchange rates and changes in volatilities/implied volatilities in the market value of derivatives. The Group classifies exposures to market risk into either trading or non-trading portfolios. Given the Group's low risk strategy, aggregate market risk levels are considered low. The Group utilises Value-at-Risk (VaR) models to assist in estimating potential losses that may arise from adverse market movements in addition to non-quantitative risk management techniques. The market risk for the trading portfolio is managed and monitored on a VaR methodology which reflects the interdependency between risk variables. Non-trading portfolios are managed and monitored using stop loss limits and other sensitivity analyses. The data given below is representative of the information during the year. a. Market risk-trading The Group calculates Historical Simulation VaR using a one day holding period at a confidence level of 95%, which takes into account the actual correlations observed historically between different markets and rates. Since VaR is an integral part of the Group's market risk management, VaR limits have been established for all trading operations and exposures are reviewed daily against the limits by management. Actual outcomes are compared to the VaR model derived predictions on a regular basis as a means of validating the assumptions and parameters used in the VaR calculation. The table below summarises the risk factor composition of the VaR including the correlative effects intrinsic to the trading book: Foreign exchange Interest rate Effects of correlation Total US$ 000 US$ 000 US$ 000 US$ December December b. Market risk-non-trading Interest rate risk Sensitivity analysis- interest rate risk 2011 US$ 000 US$ 000 at 10 bps - increase (+)/decrease (-) +/ at 25 bps - increase (+)/decrease (-) +/- 2,321 2,349 Currency risk Currency risk is the risk that the functional currency value of a financial instrument will fluctuate due to changes in foreign exchange rates. The risk management process manages the Group s exposure to fluctuations in foreign exchange rates (currency risk) through the asset and liability management process. It is the Group s policy to reduce its exposure to currency fluctuations to acceptable levels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currency position exposures. Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits. Sensitivity analysis - currency risk All foreign currency exposures with the exception of investments in subsidiaries and associates are captured as part of the trading book. The risk of the exposures are subject to quantification via a daily VaR calculation, the results of which are disclosed in note 33 (a). The effect of foreign currency translation on the Group's investments in subsidiaries and associates are reported under the "foreign exchange translation reserve" under the note 21(i). Equity price risk Equity price risk arises from fluctuations in equity indices and prices. The Board has set limits on the amount and type of investments that may be accepted. This is monitored on an ongoing basis by the Group Risk Committee. The non-trading equity price risk exposure arises from the Group's investment portfolio. The effect on equity valuations (as a result of a change in the fair value of equity investments held as Fair Value Through Other Comprehensive Income) due to a reasonably possible change in equity indices, with all other variables held constant is as follows: Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments or the future profitability of the Group. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group measures and manages interest rate risk by establishing levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gaps on assets and liabilities are reviewed on a weekly basis and hedging strategies are used to reduce the interest rate gaps to within the limits established by the Bank's Board of Directors. The following table demonstrates the sensitivity of the Group's net interest income to a change in interest rates, with all other variables held constant. The sensitivity is based on the floating rate financial assets and financial liabilities held at 31 December and 31 December 2011 including the effect of hedging instruments. Ahli United Bank 81

82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 33. Market Risk (continued) b. Market risk-non-trading (continued) 2011 Change in equity indices Effect on OCI Effect on OCI Market indices % US$ 000 US$ 000 Doha Securities Market (DSM) +/- 10% +/ Muscat Stock Exchange (MSCI) +/- 10% +/ Kuwait Stock Exchange (KSE) +/- 10% +/- 1,670 1,948 Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant. 34. Fair Value of Financial Instruments The fair value of financial instruments, with the exception of non-trading investments that are carried at amortised cost, approximate their carrying values. Please refer note 9 for the fair value of non-trading investments carried at amortised cost. The Group's primary medium and long-term financial liabilities are the term debts and subordinated liabilities. The fair values of these financial liabilities are not materially different from their carrying values, since these liabilities are repriced at intervals of three or six months, depending on the terms and conditions of the instrument and the resultant applicable margins approximate the current spreads that would apply for borrowings with similar maturities. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:- Level 1 : Quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3 : Techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. Level 1 Level 2 Total US$ 000 US$ 000 US$ 000 Financial assets at FVTPL 1,760 25,639 27,399 Equities & funds (As per IAS 39) Financial assets at FVTOCI 74, , ,121 Derivative assets 32,496 50,857 83,353 Derivative liabilities (30,143) (263,667) (293,810) 78, , , Level 1 Level 2 Total US$ 000 US$ 000 US$ 000 Financial assets at FVTPL Equities & funds (As per IAS 39) 158, , ,787 Financial assets at FVTOCI Derivative assets 44,749 53,861 98,610 Derivative liabilities (21,635) (263,981) (285,616) 181, ,865 There are no financial instruments that qualify for classification under Level 3 as at 31 December and During the year and 2011 there have been no transfers between Levels 1, 2 and 3. For an explanation of valuation techniques used to value these financial instruments please refer to note 3.3 (f ). 35. Liquidity Risk Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows. Funding risk arises when the necessary liquidity to fund illiquid asset positions cannot be obtained at the expected terms and when required. The management of the Group s liquidity and funding management is the responsibility of the Group Asset and Liability Committee (GALCO) under the chairmanship of the Senior Deputy Group Chief Executive Officer Banking Group supported by the Group Treasurer, and is responsible for ensuring that all foreseeable funding commitments, including deposit withdrawals, can be met when due, and that wholesale market access is co-ordinated and controlled. The Group maintains a stable funding base comprising core retail and corporate customer deposits and institutional balances, augmented by wholesale funding and portfolios of highly liquid assets which are diversified by currency and maturity, in order to enable the Group to respond quickly to any unforeseen liquidity requirements. The Group subsidiaries and affiliates maintain a strong individual liquidity position and manage their liquidity profiles so that cash flows are balanced and funding obligations can be met when due. Treasury limits are set by the GALCO and allocated as required across the various group entities. Specifically GALCO and the Group Treasurer are responsible for: projecting cash flows by major currency under various stress scenarios and considering the level of liquid assets necessary in relation thereto; monitoring balance sheet liquidity ratios against internal and regulatory requirements; maintaining a diverse range of funding sources with adequate back-up facilities; managing the concentration and profile of debt maturities; managing contingent liquidity commitment exposures within predetermined caps; monitoring depositor concentration in order to avoid undue reliance on large individual depositors and ensure a satisfactory overall funding mix; and 82 Ahli United Bank

83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report maintaining liquidity and funding contingency plans. These plans must identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises while minimising adverse long-term implications for the business. The maturity profile of the assets and liabilities at 31 December given below reflects management's best estimates of the maturities of assets and liabilities. These have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date, except in the case of customer deposits. The liquidity profile of customer deposits has been determined on the basis of the effective maturities indicated by the Group s deposit retention history. ASSETS Less than 1 year US$ 000 Above 1 year Undated Total Cash and balances with central banks 735, ,528 Treasury bills and deposits with central banks 1,986, ,986,236 Deposits with banks and other financial institutions 3,302, ,656-3,750,771 Loans and advances 6,638,134 9,334,085-15,972,219 Financial assets at fair value through profit or loss 11,697 15,702-27,399 Non-trading investments 336,256 4,784,165-5,120,421 Investments in associates and joint venture , ,125 Investment property , ,798 Premises and equipment , ,830 Interest receivable and other assets 298, , ,214 Goodwill and other intangible assets , ,922 Investment held for sale 397, ,959 Total 13,706,752 14,792,995 1,396,675 29,896,422 LIABILITIES Deposits from banks and other financial institutions 5,054,070 91,185-5,145,255 Borrowings under repurchase agreements 1,820,708 40,649-1,861,357 Customers deposits 9,469,474 8,761,657-18,231,131 Term debts Interest payable and other liabilities 440, , ,971 Subordinated liabilities 4, , ,879 Total 16,790,090 9,909,503-26,699,593 Net liquidity gap (3,083,338) 4,883,492 1,396,675 3,196,829 The Group has collateralized borrowing lines of credit with various financial institutions through Global Master Repurchase Agreements (GMRA), under which it can borrow up to US$ 2.4 billion (31 December 2011: US$ 2.4 billion). Please refer note 15 for further details. Ahli United Bank 83

84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 35. Liquidity Risk (continued) The maturity profile of the assets and liabilities at 31 December 2011 was as follows: Less than 1 year US$' 000 Above 1 year Undated Total ASSETS Cash and balances with central banks 673, ,800 Treasury bills and deposits with central banks 2,612, ,612,287 Deposits with banks and other financial institutions 3,068, ,068,879 Loans and advances 6,078,356 9,417,605-15,495,961 Financial assets at fair value through profit or loss Non-trading investments 520,696 3,849,661-4,370,357 Investments in associates and joint venture , ,843 Investment property ,665 66,665 Premises and equipment , ,055 Interest receivable and other assets 301, , ,484 Goodwill and other intangible assets , ,347 Investment held for sale Total 13,255,834 13,401,018 1,672,910 28,329,762 LIABILITIES Deposits from banks and other financial institutions 4,434, ,434,645 Borrowings under repurchase agreements 1,352, ,352,601 Customers deposits 9,402,145 7,942,889-17,345,034 Term debts 768, ,000 Interest payable and other liabilities 674,475 70, ,056 Subordinated liabilities 30, , ,285 Total 16,662,708 8,755,913-25,418,621 Net liquidity gap (3,406,874) 4,645,105 1,672,910 2,911, Ahli United Bank

85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report Analysis of financial liabilities by remaining contractual maturities The table below summarises the maturity profile of the Group's financial liabilities (including interest) based on contractual undiscounted repayment obligations. Less than 1 year US$' 000 Above 1 year Total As at 31 December Deposits from banks and other financial institutions 5,065,076 93,155 5,158,231 Borrowings under repurchase agreements 1,825,751 40,722 1,866,473 Customers deposits 16,686,482 1,632,862 18,319,344 Term debts Subordinated liabilities 4, , ,188 Total 23,582,259 2,525,977 26,108,236 Credit related commitments 213, , ,325 Derivatives - net outflow 14, , ,697 Less than 1 year US$' 000 Above 1 year Total As at 31 December 2011 Deposits from banks and other financial institutions 4,444,239-4,444,239 Borrowings under repurchase agreements 1,355,564-1,355,564 Customers deposits 16,559, ,888 17,459,148 Term debts 774, ,579 Subordinated liabilities 31, , ,654 Total 23,164,999 1,718,185 24,883,184 Credit related commitments 127, , ,798 Derivatives - net outflow 7, , ,504 Ahli United Bank 85

86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 36. Capital Adequacy The primary objectives of the Group's capital management policies are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders value. Capital adequacy for each of the group companies is also managed separately at individual company level. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. The risk asset ratio, calculated in accordance with the capital adequacy guidelines, under Basel II, issued by the Central Bank of Bahrain, for the Group, is disclosed under Pillar III Table 1, which is included in the Annual Report. The risk asset ratio is 15.6% as of 31 December (2011: 16.0%). 37. Deposit Protection Scheme Certain customers deposits of the Group are covered by deposit protection schemes established by the Central Bank of Bahrain (CBB) and the Financial Services Compensation Scheme, UK. Bahrain : Customers' deposits held with the Bank in the Kingdom of Bahrain are covered by the Regulation Protecting Deposits and Unrestricted Investment Accounts issued by the Central Bank of Bahrain in accordance with Resolution No. (34) of UK: Customers' deposits in AUBUK are covered under the Financial Services Compensation Scheme, up to a limit of GBP 85,000 per customer. No up-front contribution is currently required under these schemes and no liability is due unless any member bank of the Deposit Protection Scheme is unable to meet its depository obligations. 38. Islamic Banking The Group's Shari'a compliant Islamic banking activities are offered through its fully fledged Islamic Banking subsidiary AUBK and Islamic banking window at AUB Bahrain. The results of its Islamic banking activity, which is included in the consolidated financial statements, is presented below US$ 000 US$ 000 ASSETS Cash and balances with central banks 320, ,753 Deposits with central banks 1,341,695 2,187,432 Deposits with banks and other financial institutions (a) 1,491,214 1,278,669 Receivable balances from Islamic financing activities (b) 7,055,089 6,676,306 Financial investments 334, ,804 Investment property 114,322 8,949 Premises and equipment 132, ,376 Profit receivable and other assets 92, ,591 TOTAL ASSETS 10,882,645 10,928,880 LIABILITIES Deposits from banks and other financial institutions (c) 2,303,310 2,444,353 Customers' deposits (d) 7,041,014 7,131,933 Profit payable and other liabilities 161, ,555 Restricted investment accounts 7,435 12,920 9,513,485 9,753,761 Unrestricted investment accounts (URIA) 468, ,333 TOTAL LIABILITIES AND URIA 9,982,379 10,139,094 TOTAL EQUITY 900, ,786 TOTAL LIABILITIES, URIA AND EQUITY 10,882,645 10,928, Ahli United Bank

87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December Annual Report Statement of income for the year ended 31 December 2011 US$ 000 US$ 000 Net income from Islamic financing activities (e) 286, , , ,477 Fees and commissions 24,455 26,356 Other operating income 2,266 2,185 Foreign exchange gains 13,508 11,887 OPERATING INCOME 327, ,905 Provision for impairment 64,365 52,376 NET OPERATING INCOME 262, ,529 Staff costs 54,603 53,547 Depreciation 10,527 9,311 Other operating expenses 31,856 29,905 OPERATING EXPENSES 96,986 92,763 PROFIT FOR THE YEAR BEFORE THE TAX EXPENSE 165, ,766 Tax expense 6,711 5,315 PROFIT FOR THE YEAR BEFORE THE SHARE OF PROFIT OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS 158, ,451 Less : Share of profit of unrestricted investment account holders (1,177) (1,473) NET PROFIT FOR THE YEAR 157, ,978 Attributable to: Owners of the Bank 124, ,944 Non-controlling interest 33,664 32, , ,978 Notes 2011 US$ 000 US$ 000 (a) Deposits with banks and other financial institutions Murabaha finance with other banks and financial institutions 1,201,042 1,098,274 Wakala with banks and financial institutions 124,271 63,960 Current account and others 165, ,435 1,491,214 1,278, US$ 000 US$ 000 (b) Receivable balances from Islamic financing activities Tawarruq receivables 5,535,898 4,946,985 Murabaha receivables 960,695 1,399,557 Ijara receivables 780, ,817 Others 63,201 23,399 Less: Allowance for impairment (285,115) (252,452) 7,055,089 6,676,306 Ahli United Bank 87

88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2011 US$ 000 US$ 000 (c) Deposits from banks and other financial institutions Murabaha 1,279,828 1,385,546 Wakala 877, ,740 Current accounts 74,283 38,041 Mudaraba 71,594 28,026 2,303,310 2,444, US$ 000 US$ 000 (d) Customers' deposits Wakala 3,503,866 3,273,251 Mudaraba 1,057, ,960 Current accounts 1,202, ,315 Murabaha 1,277,169 2,032,407 7,041,014 7,131,933 (e) Net income from Islamic financing activities 2011 US$ 000 US$ 000 Income from Murabaha 93,426 76,017 Income from Ijara 35,662 28,604 Income from Tawarruq 264, ,022 Income from Financial Investments 14,724 15,014 Income from Islamic financing activities 408, ,657 Profit expenses on Wakala 58,140 51,712 Profit expenses on Mudaraba 18,998 33,938 Profit expenses on Murabaha 44,160 56,530 Less: Distribution to depositors 121, ,180 Net income from Islamic financing activities 286, , Ahli United Bank

89 Annual Report Pillar III Disclosures Basel II 31 December

90

91 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report Introduction to the Central Bank of Bahrain's Basel II guidelines 92 Pillar III quantitative & qualitative disclosures 01. Capital structure Table 1. Capital structure Group risk governance structure Credit risk management Table 2. Gross credit risk exposures 97 Table 3. Exposures secured by eligible financial collateral and guarantees 97 Table 4. Risk exposure post CRM and credit conversion 97 Table 5. Capital requirements for credit, market and operational risks 98 Table 6. Geographic distribution of gross credit exposures 99 Table 7. Sectoral classification of gross credit exposures 100 Table 8. Residual contractual maturity of gross credit exposures 100 Table 9. Sectoral breakdown of impaired loans and impairment provisions 101 Table 10. Geographical distribution of impairment provisions for loans and advances 102 Table 11. Movement in impairment provision for loans and advances 102 Table 12. Past due and impaired loans - age analysis 103 Table 13. Restructured credit facilities 104 Table 14. Counterparty credit risk in derivative transactions 104 Table 15. Related party transactions Market risk Table 16. Capital requirement for components of market risk 105 Table 17. Interest rate risk 106 Table 18. Equity position in banking book 107 Table 19. Gains on equity instruments Liquidity risk and funding management Operational risk Information technology risk Strategic risk Legal, compliance, regulatory and reputational risks Environmental risk 108

92 PILLAR III DISCLOSURES - BASEL II 31 December Introduction to The Central Bank of Bahrain s Basel II Guidelines The Central Bank of Bahrain (CBB) Basel II Guidelines, based upon the Bank of International Settlements (BIS) Revised Framework International Convergence of Capital Measurement and Capital Standards, were introduced on 1 January Basel II is structured around three Pillars : Pillar I - Minimum Capital Requirements; Pillar II the Supervisory Review Process and the Internal Capital Adequacy Assessment Process (ICAAP); and Pillar III - Market Discipline. Group Structure The public disclosures under this section have been prepared in accordance with the CBB Rules concerning Public Disclosure Module ("PD"), section PD-1: Annual Disclosure Requirements. The disclosures under this section are applicable to Ahli United Bank B.S.C. (the "Bank"), which is the parent bank incorporated in Bahrain. The Bank operates under a retail banking license issued by the CBB. The Bank and its subsidiaries (as detailed under note 2 to the audited consolidated financial statements) are collectively known as the "Group". Pillar I Minimum Capital Requirements Pillar I deals with the basis for the computation of the regulatory capital ratio. It defines the various classes and the calculation of Risk Weighted Assets (RWAs) in respect of credit risk, market risk and operational risk, as well as deriving the regulatory capital base. The capital adequacy ratio is then calculated as the ratio of the Bank s regulatory capital to its total RWAs. All Bahrain incorporated banks are currently required to maintain a minimum capital adequacy ratio of 12%. In addition, the CBB requires banks to maintain an additional 0.5% buffer above the minimum capital adequacy ratio. The Group ensures that each subsidiary maintains sufficient capital levels for their respective legal and compliance purposes. Credit risk Basel II provides three approaches to the calculation of credit risk regulatory capital. The Standardised approach which the Bank has adopted, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties, and groups other counterparties into broad categories and applies standardised risk weightings to these categories. Market risk The Bank has adopted the Standardised approach for determining the market risk capital requirement. Operational risk Under the basic indicator approach, which the Bank has adopted for operational risk, the regulatory capital requirement for operational risk is calculated by applying a co-efficient of 15 per cent to the average gross income for the preceding three financial years. Pillar II The Supervisory Review and Evaluation Process Pillar II involves the process of supervisory review of a financial institution s risk management framework and its capital adequacy. Accordingly, this involves both, the Bank and its regulators taking a view on whether additional capital should be held against risks not covered in Pillar I. Part of the Pillar II process is the Internal Capital Adequacy Assessment Process (ICAAP) which is the Bank s self assessment of risks not captured by Pillar I. As part of the CBB s Pillar II guidelines, each bank is required to be individually reviewed and assessed by the CBB with the intention of setting individual minimum capital adequacy ratios. The Bank is currently required to maintain a 12 percent minimum capital adequacy ratio at group level. Pillar III Market Discipline The third pillar is related to market discipline and requires the Bank to publish detailed qualitative and quantitative information of its risk management and capital adequacy policies and processes to complement the first two pillars and the associated supervisory review process. The disclosures in this report are in addition to the disclosures set out in the audited consolidated financial statements of the Group for the year ended 31 December. Pillar III Quantitative And Qualitative Disclosures For the purpose of computing regulatory minimum capital requirements, the Group follows the rules as laid out under the CBB Rulebook module PCD: Prudential Consolidation and Deduction Requirements, PCD-1 and PCD-2 and the Capital Adequacy (CA) Module. Accordingly, a) All subsidiaries as per note 2 to the audited consolidated financial statements are consolidated on a line by line basis in accordance with International Financial Reporting Standards (IFRS). Non-controlling interest arising on consolidation is reported as part of Tier 1 capital; b) Investments in associates as reported under note 10 to the audited consolidated financial statements are pro-rata consolidated for the purpose of regulatory minimum capital requirements and capital deducted from Tier 1 and 2. The prorated capital is included under Tier 1 and Tier 2 respectively as aggregation; c) Goodwill is deducted from Tier 1 capital; d) Subordinated term debts, as reported under liabilities in the consolidated balance sheet, are reported as part of Tier 2 capital, subject to maximum thresholds and adjusted for remaining life; e) Unrealized gains arising from fair valuing equities is reported only to the extent of 45%; f ) Property revaluation reserve is included under Tier 2 capital to the extent of 45%; and g) Collective impairment provisions to the extent of maximum threshold of 1.25% of total Risk Weighted Assets are included under Tier 2 capital. There are no restrictions on the transfer of funds or regulatory capital within the Group and all investments are made fully complying with CBB approval instructions. 92 Ahli United Bank

93 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report 1. Capital Structure Table - 1 Tier 1 Tier 2 US$ 000 US$ 000 A. NET AVAILABLE CAPITAL Paid-up share capital 1,428,164 Less: Loans against Employee Stock Purchase Plan (18,192) Reserves: Share premium 540,508 Capital reserve 425 Statutory reserve 204,307 Others (36,820) Retained earnings 303,440 Minority interest in the equity of subsidiaries 385,870 Less: Goodwill (497,548) Less: Unrealized gross losses arising from fair valuing equities (961) Current year profit 335,703 Asset revaluation reserve-property, plant and equipment (45% only) 12,032 Unrealized gains arising from fair valuing equities (45% only) 7,724 Collective impairment provisions 253,954 Eligible subordinated term debt 522,960 TOTAL CAPITAL BEFORE REGULATORY DEDUCTIONS 2,309,193 1,132,373 Less: Regulatory deductions: Material holdings of equities 153, ,283 2,155, ,090 Add: Proportionate aggregation 158,562 35,585 NET AVAILABLE CAPITAL 2,314,472 1,014,675 TOTAL ELIGIBLE CAPITAL BASE (Tier 1 + Tier 2) 3,329,147 The terms and conditions and main features of the capital instruments listed above as part of the Tier 1 and Tier 2 capital are explained in note 19 and note 20 to the audited consolidated financial statements of the Group for the year ended 31 December. B. Capital Adequacy Ratio As at 31 December, the capital adequacy ratio of the Group and significant subsidiaries were: Subsidiaries Consolidated Ahli United Bank K.S.C. (AUBK) Ahli United Bank (U.K.) P.L.C. (AUBUK) Ahli United Bank (Egypt) S.A.E. (AUBE) Tier 1 - Capital Adequacy Ratio 10.8% 17.8% 17.0% 13.7% Total - Capital Adequacy Ratio 15.6% 19.7% 18.9% 15.3% Ahli United Bank 93

94 PILLAR III DISCLOSURES - BASEL II 31 December 2. Group Risk Governance Structure Risk Governance The Group Board seeks to optimise the Bank s performance by enabling the various group business units to realize the Group s business strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters and Group risk policy framework. AUB Group Board Risk Governance Structure The above group committees are set up as part of the group board risk governance structure. The terms of reference for these committees are approved by the Board. AUB Group Management Risk Governance Structure The Board approves the risk parameters and the Group Risk Committee monitors the Group s risk profile against these parameters. The Deputy Group CEO Risk, Legal and Compliance, under the delegated authority of the Group CEO & MD, supported by the Group Head of Risk Management and the Group Head of Credit Risk has responsibility for ensuring effective risk management and control. Within Group Risk Management, specialist risk-type heads and their teams are responsible for risk oversight and establishing appropriate risk control frameworks. Internal Audit is responsible for the independent review of risk management and the Group s risk control environment. The Board and its Executive Committee receive quarterly risk updates including detailed risk exposures analysis reports. The Board approves all risk policies as well as the Group risk framework on an annual basis. The Group Audit Committee considers the adequacy and effectiveness of the Group risk control framework and receives quarterly updates on any control issues, regulatory and compliance related issues. Systems and procedures are in place to identify, control and report on all major risks. 94 Ahli United Bank

95 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report 3. Credit Risk Management Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from lending, trade finance and treasury activities. Credit risk also arises where assets are held in the form of debt securities, the value of which may fall. The Group has policies and procedures in place to monitor and manage these risks and the Group Risk Management function provides highlevel centralized oversight and management of credit risk. The specific responsibilities of Group Risk Management are to: Set credit policy, risk appetite for credit risk exposure to specific market sectors; Control exposures to sovereign entities, banks and other financial institutions and set risk ratings for individual exposures. Credit and settlement risk limits to counterparties in these sectors are approved and managed by Group Risk Management, to optimize the use of credit availability and avoid risk concentration; Control cross-border exposures, through the centralized setting of country limits with sub-limits by maturity and type of business; Manage large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography remain within internal and regulatory limits in relation to the Group s capital base; Maintain the Bank s Internal Risk Rating framework; Manage watchlisted and criticised asset portfolios and recommend appropriate level of provisioning and write-offs; Report to the Group Risk Committee, Audit Committee and the Board of Directors on all relevant aspects of the Group s credit risk portfolio. Regular reports include detailed analysis of: risk concentrations corporate and retail portfolio performance specific higher-risk portfolio segments, e.g. real estate individual large impaired accounts, and details of impairment charges country limits, cross-border exposures Specialised management and control of all non-performing assets; Manage and direct credit risk management systems initiatives; and Interface, for credit-related issues, with external parties including the CBB, rating agencies, investment analysts, etc. All credit proposals are subjected to a thorough comprehensive risk assessment which examines the customer s financial condition and trading performance, nature of the business, quality of management and market position. In addition our internal risk rating model scores these quantitative and qualitative factors. The credit approval decision is then made and terms and conditions set. Exposure limits are based on the aggregate exposure to the counterparty and any connected entities across the AUB Group. All credit exposures are reviewed at least annually. Counterparty Exposure Classes The CBB s capital adequacy framework for the standardised approach to credit risk sets the following counterparty exposure classes and the risk weightings to be applied to determine the risk weighted assets: Exposure Class Sovereign Portfolio Public Sector Entity [PSE] Portfolio Banks Portfolio Investment Company Portfolio Corporate Portfolio Regulatory Retail Portfolio Risk Weighting Criteria Exposures to governments of GCC (refer table 6 for definition of GCC) member states and their central banks are zero % risk weighted. Other sovereign exposures denominated in the relevant domestic currency are also zero % risk weighted. All other sovereign exposures are risk weighted based on their external credit ratings. Bahrain PSEs and domestic currency claims on other PSEs [which are assigned a zero % risk weighting by their own national regulator] are assigned a zero % risk weighting. Other PSEs are risk weighted based on their external credit ratings. Exposures to banks are risk weighted based on their external credit ratings, with a preferential weighting given to short term exposures (i.e. with an original tenor of 3 months or less). Exposures to investment companies which are supervised by the CBB are treated in the same way as exposures to banks but without the preferential short term exposure weighting. Other exposures will be treated as a corporate exposure for risk weighting purposes. Exposures to corporates are risk weighted based on their external credit rating. Unrated corporates are 100% risk weighted. A number of corporates owned by the Kingdom of Bahrain have been assigned a preferential zero % risk weighting. Eligible regulatory retail exposures are risk weighted at 75%. Ahli United Bank 95

96 PILLAR III DISCLOSURES - BASEL II 31 December 3. Credit Risk Management (continued) Basel II Reporting of Credit Risk Exposures Residential Property Portfolio Commercial Property Portfolio Equities and Funds Investment Portfolio Exposures fully secured by first mortgages on owner occupied residential property are risk weighted between 35%-100% based on applicable regulatory guidance. Exposures secured by mortgages on commercial real estate are subject to a minimum 100% risk weighting, except where the borrower has an external rating below BB- in which case the rating risk weighting applies. Investments in listed equities carry a 100% risk weighting. Unlisted equities are 150% risk weighted. As a result of the methodologies applied credit risk exposures presented under Basel II reporting differs in a number of respects from the exposures reported in the consolidated financial statements. 1. As per the CBB Basel II framework, off balance sheet exposures are converted, by applying a credit conversion factor (CCF), into direct credit exposure equivalents. 2. Under the Basel II capital adequacy framework eligible collateral is applied to reduce exposure. Credit Risk Mitigation The Group s first priority when making loans is to establish the borrower s capacity to repay and not rely principally on security / collateral. Where the customer s financial standing is strong facilities may be granted on an unsecured basis, but when necessary collateral is an essential credit risk mitigations. Past Due Portfolio Holdings of Real Estate Other Assets External Rating Agencies Investments in rated instruments are risk weighted according to their external rating and treated as a corporate exposure. If not rated the investment is treated as an equity investment and risk weighted 100% for listed and 150% for others. The unsecured portion of any exposure [other than a residential mortgage loan] that is past due for more than 90 days is: 150% risk weighted when specific provisions are less than 20% of the outstanding amount; and 100% risk weighted when specific provisions are greater than 20%. All holdings (directly or indirectly) of real estate in the form of real estate companies, subsidiaries or associate companies or other arrangements such as trusts, funds or REITs are risk-weighted at 200%. Premises occupied by the bank are weighted at 100%. All other assets not classified above are risk weighted at 100%. The Group uses the following external credit assessment institutions (ECAI s): Moody s, Standard & Poors and Fitch. The external rating of each ECAI is mapped to the prescribed internal risk rating that in turn produces standard risk weightings. Acceptable forms of collateral are defined within the Group risk framework and conservative valuation parameters are also pre-set and regularly reviewed to reflect any changes in market conditions. Security structures and legal covenants are also subject to regular review to ensure that they continue to fulfill their intended purpose and remain in line with the CBB's prescribed minimum requirements set out in their capital adequacy regulations. The principal collateral types are as follows: in the personal sector cash, mortgages over residential properties and assignments over salary income; in the commercial sector cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees; in the commercial real estate sector charges over the properties being financed; and In the financial sector charges over financial instruments, such as debt securities and equities. Valuation of Collateral The type and amount of collateral taken is based upon the credit risk assessment of the borrower. The market or fair value of collateral held is closely monitored and when necessary top-up requests are made or liquidation initiated as per the terms of the underlying credit agreements. Gross Credit Risk Exposures subject to Credit Risk Mitigations (CRM) The following table details the Group's gross credit risk exposures before the application of eligible Basel II CRM techniques. The CBB s Basel II guidelines detail which types of collateral and which issuers of guarantees are eligible for preferential risk weighting. The guidelines also specify the minimum collateral management processes and collateral documentation requirements necessary to achieve eligibility. 96 Ahli United Bank

97 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report Table - 2 Gross Credit Risk Exposures As at 31 December Average monthly balance US$ 000 US$ 000 Balances with central banks 643, ,656 Treasury bills and deposits with central banks 1,986,236 2,303,012 Deposits with banks and other financial institutions 3,750,771 3,479,233 Loans and advances 15,972,219 15,747,046 Financial assets at fair value through profit or loss 25,639 25,333 Non-trading investments 4,708,300 4,407,403 Interest receivable and other assets 492, ,483 TOTAL FUNDED EXPOSURES 27,579,050 27,040,166 Contingent liabilities 2,783,490 2,306,269 Undrawn loan commitments 535, ,299 TOTAL UNFUNDED EXPOSURES 3,318,815 2,867,568 TOTAL CREDIT RISK EXPOSURE 30,897,865 29,907,734 The gross credit exposures reported above are as per the consolidated balance sheet as reduced by exposures which do not carry credit risk. Table - 3 Exposures Secured by Eligible Financial Collateral and Guarantees Gross exposure Secured by eligible CRM US$ 000 US$ 000 Claims on sovereigns 4,115,093 - Claims on public sector entities 900,342 1,414 Claims on banks 6,705, ,398 Claims on corporates 13,747,004 1,997,702 Regulatory retail exposures 1,738,269 32,575 Residential retail exposures 1,366,795 - Equity 522,790 - Investments in funds 181,230 - Other exposures 1,706,399 43,826 TOTAL 30,983,423 2,225,915 The gross exposure in the above table represents the on and off balance sheet credit exposures before credit risks mitigations (CRM), determined in accordance with the CBB issued Pillar III guidelines. The off balance sheet exposures are computed using the relevant conversion factors. Under the CBB Basel II Guidelines, banks may choose between two options when calculating credit risk mitigation capital relief. The simple approach which substitutes the risk weighting of the collateral for the risk weighting of the counterparty or the comprehensive approach whereby the exposure amount is adjusted by the actual value ascribed to the collateral. The Bank has selected to use the comprehensive method where collateral is in the form of cash or bonds or equities. The Bank uses a range of risk mitigation tools including collateral, guarantees, credit derivatives, netting agreements and financial covenants to reduce credit risk. Table - 4 Risk Exposure Post CRM and Credit Conversion The following table details group risk weighted exposures after applying risk mitigation. US$ 000 Claims on sovereigns 156,164 Claims on public sector entities 694,177 Claims on banks 2,148,325 Claims on corporates 11,058,382 Regulatory retail exposures 1,279,270 Residential retail exposures 478,378 Equity 563,667 Investments in funds 271,845 Other exposures 1,801,112 18,451,320 Add : Proportionate aggregation 1,009,318 TOTAL 19,460,638 TOTAL CREDIT RISK CAPITAL REQUIREMENT 2,335,276 Ahli United Bank 97

98 PILLAR III DISCLOSURES - BASEL II 31 December 3. Credit Risk Management (continued) Table - 5 Capital Requirements for Credit, Market and Operational Risks Capital requirement US$ 000 Claims on sovereigns 18,740 Claims on public sector entities 83,301 Claims on banks 257,799 Claims on corporates 1,327,006 Regulatory retail exposures 153,512 Residential retail exposures 57,405 Concentration Risk Refer note 31(a) to the audited consolidated financial statements for definition and policies for management of concentration risk. As per the CBB s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB s approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15 percent of the regulatory capital base. As at 31 December the Group had no single obligor exposures which exceeded 15 percent of the Group s regulatory capital base (i.e. exceeded US$ million). Geographic Distribution of Gross Credit Exposures The geographic distribution of credit exposures is monitored on an ongoing basis by Group Risk Management and reported to the Board on a quarterly basis. The following table details the Group's geographic distribution of gross credit exposures as at 31 December. Equity 67,640 Investments in funds 32,621 Other exposures 216,134 2,214,158 Add : Proportionate aggregation 121,118 TOTAL CREDIT RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 2,335,276 TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 58,985 TOTAL OPERATIONAL RISK CAPITAL REQUIREMENT (BASIC INDICATOR APPROACH) 168,394 TOTAL 2,562, Ahli United Bank

99 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report Table - 6 Geographic Distribution of Gross Credit Exposures Kingdom of Bahrain State of Kuwait Other GCC countries * United Kingdom Europe (excluding United Kingdom) Arab Republic of Egypt Asia (excluding GCC countries) Rest of the World US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balances with central banks 143, ,583 3,891 1, ,548 61, ,431 Treasury bills and deposits with central banks 241,269 1,341, , ,860-1,986,236 Deposits with banks and other financial institutions 27, , , ,384 1,002, , , ,375 3,750,771 Total Loans and advances 3,179,159 6,679,242 1,935,229 1,817, ,327 1,697, ,196 88,204 15,972,219 Financial assets at fair value through profit or loss , ,590 4,944 25,639 Non-trading investments 691,591-1,642, , , , , ,334 4,708,300 Interest receivable and other assets 273,425 41,375 36,874 52,596 11,245 62,775 8,378 5, ,454 Total funded exposures 4,556,148 8,680,804 4,158,010 2,989,712 1,669,909 2,978,019 1,347,805 1,198,643 27,579,050 Contingent liabilities 594, , ,266 10,019 44, ,237 22,146 39,258 2,783,490 Undrawn loan commitments 75,301 28,248 66,467 55,654 28, ,293 8,814 3, ,325 Total unfunded exposures 669, , ,733 65,673 73, ,530 30,960 43,046 3,318,815 TOTAL 5,225,883 9,643,428 5,041,743 3,055,385 1,743,423 3,567,549 1,378,765 1,241,689 30,897, % 31.2% 16.3% 9.9% 5.6% 11.5% 4.5% 4.1% 100.0% * Other GCC countries are countries which are part of the Gulf Cooperation Council comprising Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates apart from Kingdom of Bahrain and State of Kuwait which are disclosed separately. Ahli United Bank 99

100 PILLAR III DISCLOSURES - BASEL II 31 December 3. Credit Risk Management (continued) Table - 7 Sectoral Classification of Gross Credit Exposures Funded Unfunded Total % US$ 000 US$ 000 US$ 000 US$ 000 Balances with central banks 2,629,667-2,629, Banks and other financial institutions 7,426, ,853 8,037, Consumer/personal 3,481,775 30,998 3,512, Residential mortgage 1,489,545 54,313 1,543, Trading and manufacturing 3,514, ,221 4,370, Real estate 3,487,234 54,353 3,541, Services 3,042,777 1,018,863 4,061, Government/public sector 2,123, ,098 2,705, Others 383, , , TOTAL 27,579,050 3,318,815 30,897, Table - 8 Residual Contractual Maturity of Gross Credit Exposures 89.3% 10.7% 100.0% Up to one month One month to three months Over three months to one year Over one year to five years Over five to ten years Over ten to twenty years Over twenty years Total US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balances with central banks 643, ,431 Treasury bills and deposits with central banks 869, , , ,986,236 Deposits with banks and other financial institutions 2,291, , , , ,750,771 Loans and advances 1,906,786 2,345,641 2,385,707 4,664,564 3,572, , ,587 15,972,219 Financial assets at fair value through profit or loss ,105 15, ,639 Non-trading investments 40,914 27, ,784 2,993, , , ,083 4,708,300 Interest receivable and other assets 123,170 94,856 70, ,523 48, ,454 Total funded exposures 5,874,914 3,721,154 3,609,010 8,278,207 4,527,264 1,139, ,670 27,579,050 Contingent liabilities 502, , ,159 1,267,636 15,573 1,906-2,783,490 Undrawn loan commitments 22, ,672 90, ,704 16, ,325 Total unfunded exposures 525, , ,839 1,572,340 32,230 1,906-3,318,815 TOTAL 6,400,139 4,071,429 4,445,849 9,850,547 4,559,494 1,141, ,670 30,897, Ahli United Bank

101 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report Impairment Provisions The Group Risk Committee regularly evaluates the adequacy of the established allowances for impaired loans. Two types of impairment allowance are in place: Individually assessed impairment provisions These are determined by evaluating the exposure to loss, case by case, on all individually significant accounts based upon the following factors: aggregate exposure to the customer; the viability of the customer s business model and its capacity to trade successfully out of financial difficulties, generating sufficient cash flow to service debt obligations; the amount and timing of expected receipts and recoveries; the extent of other creditors commitments ranking ahead of, or pari passu with the Bank, and the likelihood of other creditors continuing to support the company; Collectively assessed impairment provisions Impairment is assessed on a collective basis as follows: Incurred but not yet identified impairment: Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics. A collective loan loss allowance is calculated to reflect potential impairment losses estimated at the balance sheet date which may be individually identified in the future. The collective impairment provision is determined based upon: historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, risk rating or product segment); and judgment as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. the realisable value of security (or other credit mitigations) and likelihood of successful repossession; the likely dividend available on liquidation or bankruptcy; the likely costs involved in recovering amounts outstanding, and when available, the secondary market price of the debt. Table - 9 Sectoral Breakdown of Impaired Loans and Impairment Provisions Impaired and past due loans Specific impairment provision Net specific charge for the year ended 31 December Write off during the year ended 31 December Collective impairment provision US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Consumer/personal 103,395 87,885 28,473 22,181 54,943 Trading and manufacturing 41,412 36,862 12,846 23,489 50,773 Real estate 85,214 72,541 22,412-51,027 Residential mortgage 6,694 5,556 (11) 1,240 23,505 Banks and other financial institutions 36,632 31,602 12,318-15,361 Services 92,872 84,460 19,628 34,058 46,563 Government/public sector ,520 Others 39,745 37,106 1,695 5,022 2,350 TOTAL 405, ,012 97,361 85, ,042 Ahli United Bank 101

102 PILLAR III DISCLOSURES - BASEL II 31 December 3. Credit Risk Management (continued) Table - 10 Geographical Distribution of Impairment Provisions for Loans and Advances Kingdom of Bahrain State of Kuwait Other GCC countries United Kingdom Europe (excluding United Kingdom) Arab Republic of Egypt Asia (excluding GCC countries) Total US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Specific impairment provision 55, ,584 67,750 22,844-21,394 13, ,012 Collective impairment provision 31, ,781 19,028 17,497 6,285 21,495 2, ,042 TOTAL 87, ,365 86,778 40,341 6,285 42,889 15, ,054 Table - 11 Movement in Impairment Provision for Loans and Advances Rest of the world Retail Corporate Total Specific Collective Total Specific Collective Total Specific Collective US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Balance at 1 January 74,291 30, , , , , , ,629 Amounts written off during the year (14,830) - (14,830) (71,160) - (71,160) (85,990) - Net charge for the year 18, ,011 78,558 53, ,729 97,361 53,379 Interest suspended during the year (net) (4,508) - (4,508) (3,607) - Exchange rate adjustments / other movements (458) (244) (702) (1,080) (1,722) (2,802) (1,538) (1,966) Balance at 31 December 78,707 30, , , , , , ,042 Past Due and Impaired Credit Facilities As per CBB guidelines, credit facilities are placed on non-accrual status and interest income suspended when either principal or interest is overdue by 90 days whereupon unpaid and accrued interest is reversed from income. Interest on non-accrual facilities is included in income only when received. Credit facilities classified as past due are assessed for impairment in accordance with IFRS guidelines. A specific provision is established where there is objective evidence that a credit facility is impaired. Impaired credit facilities comprise those facilities where there is objective evidence that the Bank will not collect all amounts due, including both principal and interest. Objective evidence would include: Refer to notes 8(a) to 8(d) and note 31(c) to the audited consolidated financial statements for the year ended 31 December for the distribution of the loans and advances portfolio by quality. Ratings 1-4 comprise of corporate facilities demonstrating financial condition, risk factors and capacity to repay that are good to excellent and retail borrowers where cash collateral [or equivalent such as pledged investment funds] has been provided. Ratings 5-7 represents satisfactory risk and includes corporate facilities that require closer monitoring, and retail accounts which are maintained within generally applicable product parameters. a breach of contract, such as default or delinquency in interest or principal payments, the granting of a concession that, for economic or legal reasons relating to the borrower s financial difficulties, would not otherwise be considered, indications that it is probable that the borrower will enter bankruptcy or other financial reorganisation. 102 Ahli United Bank

103 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report Table - 12 Past Due and Impaired Loans - Age Analysis i) By Geographical area Three months to one year One to three years Total US$ 000 US$ 000 US$ 000 US$ 000 Kingdom of Bahrain 42,082 18,907 3,702 64,691 State of Kuwait 110,362 35,879 52, ,092 Other GCC Countries - 3,000 64,750 67,750 United Kingdom 12, ,384 34,236 Arab Republic of Egypt 5,103 2,560 18,811 26,474 Asia (excluding GCC countries) ,721 13,721 TOTAL 170,337 60, , ,964 Over three years ii) By Sector 42.0% 14.9% 43.1% 100.0% Three months to one year One to three years Total US$ 000 US$ 000 US$ 000 US$ 000 Consumer/personal 64,555 7,026 31, ,395 Trading and manufacturing 9,726 5,472 26,214 41,412 Real estate 53,180 10,650 21,384 85,214 Residential mortgage 11 6,683-6,694 Banks and other financial institutions 9,984 26,648-36,632 Services 32,881 2,644 57,347 92,872 Others - 1,285 38,460 39,745 TOTAL 170,337 60, , ,964 Over three years 42.0% 14.9% 43.1% 100.0% Ahli United Bank 103

104 PILLAR III DISCLOSURES - BASEL II 31 December 3. Credit Risk Management (continued) Table - 13 Restructured Credit Facilities US$ 000 Balance of any restructured credit facilities as at year end 161,718 Loans restructured during the year 141,910 The above restructurings did not have any significant impact on the present or future earnings and were primarily extensions of the loan tenor. Table - 14 Counterparty Credit Risk in Derivative Transactions i) Breakdown of the credit exposure Notional amount Gross positive fair value Credit conversion factor US$ 000 US$ 000 US$ 000 Foreign exchange related 6,620,582 33, ,210 Interest rate related 9,542,347 48, ,801 Options 53,852 1,578 55,431 Derivatives credit exposure 16,216,781 83, ,442 Gross positive fair value represents the replacement cost of the derivatives US$ 000 ii) Amounts of collateral 26,380 iii) Notional value of credit derivative exposures US$ 000 Protection sold 5,000 Table - 15 Related Party Transactions Refer note 25 to the audited consolidated financial statements of the Group for the year ended 31 December. 104 Ahli United Bank

105 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report 4. Market Risk Market risk is the risk that movements in market risk factors, including foreign exchange rates, interest rates, credit spreads and equity prices will reduce the Group s income or the value of its portfolios. Market Risk Management, Measurement and Control Responsibilities The Board approves the overall market risk appetite and delegates responsibility for providing oversight on the Bank's market risk exposures and the sub allocation of Board limits to the Group Asset and Liability Committee (GALCO). Group Risk Management is responsible for the market risk control framework and for monitoring compliance with the GALCO limit framework. The Group separates market risk exposures into either trading or nontrading portfolios. Trading portfolios include those positions arising from market-making, proprietary position-taking and other marked-to-market positions. Non-trading portfolios include positions that arise from the interest rate management of the Group s retail and commercial banking assets and liabilities, and financial assets designated as at amortised cost and fair value through other comprehensive income statement. Each Group operating entity has an independent market risk function which is responsible for measuring market risk exposures in accordance with the Group Trading Book Policy and the Interest Rate Risk in the Banking Book Policy, and monitoring these exposures against prescribed limits. Market risk reports covering Trading Book risk exposures and profit and loss are published daily to the Bank s senior management. A risk presentation covering both Trading and Banking Book is also compiled monthly and discussed at the GALCO. The measurement techniques used to measure and control market risk include: Value at Risk (VaR); and Stress tests Sensitivities and position size related metrics Daily Value at Risk (VaR) The Group VaR is an estimate of the potential loss which might arise from unfavourable market movements: VaR Type Sample Size Holding Period Confidence Interval Frequency of Calculation Management VaR 260 days 1 day 95% Daily Regulatory VaR 260 days 10 day 99% Daily Although a useful guide to risk, VaR should always be viewed in the context of its limitations. For example: the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature; the use of a 1-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a 1-day holding period may be insufficient to liquidate or hedge all positions fully; the use of a confidence level, by definition, does not take into account losses that might occur beyond the applied level of confidence; and VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures. The VaR for the Group was as follows: Average Minimum Maximum US$ 000 US$ 000 US$ 000 As at 31 December Table - 16 Capital Requirement for Components of Market Risk Capital requirement as at 31 December Maximum value Minimum value US$ 000 US$ 000 US$ 000 Interest rate risk 8,241 9,643 4,185 Equity position risk Foreign exchange risk 46,033 47,590 46,033 Options 1,115 3, TOTAL MARKET RISK CAPITAL REQUIREMENT BEFORE PROPORTIONATE AGGREGATION OF ASSOCIATES 55,408 Add : Proportionate aggregation 3,577 10,265 1,473 TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 58,985 Daily losses exceeding the VaR figure are likely to occur, on average, either once or five times in every 100 business days depending on the confidence interval employed in the VaR calculation (per the above). The Group routinely validates the accuracy of its VaR models by back testing the actual daily profit and loss results. The actual number of excesses over a given period can be used to gauge how well the models are performing. Ahli United Bank 105

106 PILLAR III DISCLOSURES - BASEL II 31 December 4. Market Risk (continued) Interest Rate Risk (non-trading) Interest rate risk is the risk that the earnings or capital of the Group, or its ability to meet business objectives, will be adversely affected by movements in interest rates. Accepting this risk is a normal part of banking practice and can be an important source of profitability and shareholder value. Changes in interest rates can affect a bank's earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the Group's assets, liabilities and off-balance sheet instruments because the present value of future cash flows and / or the cash flows themselves change when interest rates change. The Bank employs a risk management process that maintains interest rate risk within prudent levels. The Board recognises that it has responsibility for understanding the nature and the level of interest rate risk taken by the Bank, and has defined a risk framework pertaining to the management of non trading interest rate risk and has identified lines of authority and responsibility for managing interest rate risk exposures. The Board has delegated the responsibility for the management of interest rate risk to Group Assets Liability Committee (GALCO). GALCO is responsible for setting and monitoring the interest rate risk strategy of the Group, for the implementation of the interest rate risk framework and ensuring that the management process is in place to maintain interest rate risk within prudent levels. GALCO reviews the interest rate risk framework annually and submits recommendations for changes to the Executive Committee and Board as applicable. The responsibility for the implementation of the Bank s interest rate risk policies resides with the Group Treasurer. An independent review of all interest exposure present in the Banking Book is undertaken by the Group Market Risk team and communicated to GALCO on a monthly basis. Interest rate re-pricing reports are based on each product's contractual re-pricing characteristics overlaid where appropriate by behavioural adjustments. Behavioural adjustments are derived by an analysis of customer behaviour over time augmented by input from the business units. Reports detailing the interest rate risk exposure of the Bank are reviewed by GALCO and the Board on a regular basis. The following table summarises the repricing profiles of the Group s assets and liabilities as at 31 December. Table - 17 Interest Rate Risk Less than three months Three months to one year Over one year ASSETS Total US$'000 US$'000 US$'000 US$'000 Treasury bills and deposits with central banks 1,476, ,958-1,986,236 Deposits with banks and other financial institutions 2,750, , ,656 3,584,875 Loans and advances 9,418,750 2,529,654 3,174,031 15,122,435 Financial assets at fair value through profit or loss - 10,105 15,534 25,639 Non-trading investments 602, ,105 3,741,113 4,708,300 14,247,430 3,800,721 7,379,334 25,427,485 LIABILITIES Deposits from banks and other financial institutions 3,696,658 1,371,891-5,068,549 Borrowings under repurchase agreements 1,190, ,922-1,861,357 Customers' deposits 11,338,592 5,300, ,159 16,946,607 Subordinated liabilities 321, , ,879 16,547,564 7,708, ,159 24,563,392 On balance sheet gap (2,300,134) (3,907,948) 7,072,175 Off balance sheet gap 3,569, ,065 (4,008,284) Total interest sensitivity gap 1,269,085 (3,468,883) 3,063,891 Cumulative interest sensitivity gap 1,269,085 (2,199,798) 864, Ahli United Bank

107 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report Interest rate risk sensitivity analysis The Group s interest rate risk sensitivity is analysed in note 33(b) to the consolidated financial statements of the Group for the year ended 31 December. Equity Risk Equity risk is the risk of changes in the fair value of an equity instrument. AUB Group is exposed to equity risk on non-trading equity positions that are primarily focused on the GCC stock markets. The Board has set limits on the amount and type of investments that may be made by the Bank. This is monitored on an ongoing basis by the Group Risk Committee with pre approved loss thresholds. The Bank's equity risk appetite is minimal. Valuation and accounting policies: a) Equity investments held for strategic reasons - investments in associates and joint venture Associated companies are companies in which the Group exerts significant influence but does not control, normally represented by an interest of between 20% and 50% in the voting capital. The Group classifies its investments as joint venture where it is a party to a contractual joint venture agreement. Investments in associated companies and joint ventures are accounted for using the equity method. b) Other equity investments After initial recognition, equity investments are remeasured at fair value. For investments in equity instruments, where a reasonable estimate of the fair value cannot be determined, the investment is carried at cost less impairment provision. The fair value of equity instruments that are quoted in an active market is determined by reference to market prices at the close of business on the balance sheet date. For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined using net present valuation techniques. For accounting policies on equity instruments please refer to note 3.1(ii) (b) of the consolidated financial statements. Table - 18 Equity Position In Banking Book Gross exposures Risk-weighted weighted exposures Capital requirement US$ 000 US$ 000 US$ 000 Listed 441, ,036 52,924 Unlisted 81, ,631 14,716 TOTAL 522, ,667 67,640 Table - 19 Gains on Equity Instruments US$ 000 Unrealised (loss) gains recognised in the balance sheet: - Tier one (eligible portion) (961) - Tier two (eligible portion) 7, Liquidity Risk and Funding Management Liquidity risk and funding management of the Group have been explained in note 35 of audited consolidated financial statements for the year ended 31 December. Maturity Analysis of Assets and Liabilities A maturity analysis of cash flows payable by the Group under financial liabilities by remaining contractual maturities at the balance sheet date is shown in note 35 to the audited consolidated financial statements of the Group for the year ended 31 December. 6. Operational Risk Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events, whether intentional, unintentional or natural. It is an inherent risk faced by all businesses and covers a large number of operational risk events including business interruption and systems failures, internal and external fraud, employment practices and workplace safety, customer and business practices, transaction execution and process management, and damage to physical assets. The Board acknowledges that it has ultimate responsibility for operational risk. Oversight rests with the Group Risk Committee, whilst day to day monitoring is carried out by the Group Operational Risk Committee. The Board has approved the operational risk framework and reviews it annually. The operational risk management framework has been in place for a number of years and is ingrained in the Bank s culture and processes. The Bank has developed a comprehensive 'operational risk self assessment' (ORSA) process. 7. Information Technology Risk All computer system developments and operations are centrally controlled and common systems are employed across the Group wherever possible. Information security is defined through the AUB Group Information Security framework and is executed through the various information security processes and controls that support the framework. The Group follows an enterprise wide approach to business continuity to ensure that all identified critical operations, services and systems are recovered in time in the event of a disruption. The Business Continuity Policy is updated annually while the Disaster Recovery and Business Continuity capabilities are each tested twice per year and critical systems are continuously replicated at the disaster recovery site. Ahli United Bank 107

108 PILLAR III DISCLOSURES - BASEL II 31 December Annual Report 8. Strategic Risk The Board supported by Strategic Development Unit and the Group Finance manages strategic risk on an ongoing basis. The Board receives regular performance reports with details of strategic / regulatory issues as they arise. 9. Legal, Compliance, Regulatory and Reputational Risks Protecting the Legal, Compliance, Regulatory and Reputational Risks of the Group is of paramount importance and all management and staff are expected to apply highest standards of business conduct and professional ethics at all times. The Board approved policies, including AUB Group Reputation Risk policy, Communications Policy, Personal Account Dealing Policy, Compliance Policy, Anti Money Laundering policy, Banking Integrity Policy and Code of Business conduct policy, prescribes the required standards of ethical behavior and personal conduct for all staff (including the Bank s Directors), and the Board exercises an oversight of these risks through various management functions, including Legal, Risk Management, Compliance, Human Resources and Internal Audit Department. 10. Environmental Risk The Bank recognises the importance of environmental and social issues within its risk framework, and has established a Social and Environmental Management System (SEMS) which details the policy, procedures and workflow that will be followed by the Bank and its subsidiaries / affiliates in respect of environmental risk. The Bank continually endeavours to implement effective social and environmental management practices in all its activities, products and services with a focus on the applicable national laws on environmental, health, safety and social issues. The Bank has adopted the Equator Principles (EP), a globally recognized benchmark for managing social and environmental risks in project finance. EP is an arrangement by financial institutions worldwide to adhere to the environmental, health and safety standards while financing projects. As such the Bank will finance projects only when they are expected to be designed, built, operated and maintained in a manner consistent with the applicable national laws. 108 Ahli United Bank

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