Management Discussion & Analysis Consolidated Financial Statements. Chairman s Letter. Key Figures. Organizational Chart.

Transcription

1 ANNUAL REPORT 2012

2 ANNUAL REPORT 2012

3 06 Chairman s Letter 68 Consolidated Financial Statements Key Figures Organizational Chart Group Chart Consolidated Financial Statements Auditors Report Consolidated Income Statement for the year ended 31 December 2012 Consolidated Statement of Comprehensive Income for the year ended 31 December Corporate Governance Code of Corporate Governance BLOM BANK S.A.L. Major Common Shareholders Board of Directors List of Board Members Information about Board of Directors Board Meetings held in Consolidated Statement of Financial Position at 31 December 2012 Consolidated Statement of Changes in Equity for the year ended 31 December 2012 Consolidated Statement of Cash Flows for the year ended 31 December 2012 Notes to the Consolidated Financial Statements Information on Key Members of BLOM BANK S.A.L. Management BLOM BANK S.A.L. Commercial Arrangements General Management of BLOM BANK S.A.L. 160 Worldwide Correspondent Banks 161 BLOM BANK Group Management & Network 30 Management Discussion & Analysis Banks & Financial Subsidiaries BLOM BANK S.A.L. BLOMINVEST Bank S.A.L Operating Environment Overview Evolution of Total Assets Sources of Funds Uses of Funds Liquidity Profitability Dividend Distribution and Preferred Shares Revenue Interest Rate Risk Risk Management and Basel III Preparations Universal Banking Services Information Systems and Technology People Development Bank s Operational Efficiency 180 BLOM Development Bank S.A.L. BLOM Bank France BLOM Bank (Switzerland) S.A. Bank of Syria and Overseas S.A. Syria and Overseas For Financial Services Ltd BLOM Bank Egypt BLOM Egypt Securities BLOMINVEST Saudi Arabia BLOM Bank Qatar LLC Experts Financial Services Insurance Subsidiaries AROPE Insurance AROPE Syria - Syria International Insurance AROPE Egypt Insurance AROPE Egypt Life Insurance

4 Dr. Naaman AZHARI - Chairman of BLOM BANK Group Mr. Saad AZHARI - Chairman and General Manager of BLOM BANK S.A.L.

5

6 5

7 Chairman s Letter Chairman s Letter Driven by a conservative culture, a constructive vision, and a stable management team, BLOM BANK weathered the difficult year of 2012 with stride and strength. This has always been a trademark of its robust banking profile that enables it to navigate difficult operating conditions with success and growth. And as one of the leading banks in Lebanon, this also reflects the sound and sturdy nature of the Lebanese banking system and its enduring qualities in the face of economic hardships and political instability. The numbers speak for themselves. True to its record, BLOM BANK achieved once again in 2012 the highest rate of profitability among listed banks with an ROAE of 17.78% and an ROAA of 1.39%. And despite the troubled conditions in Lebanon and in the region, BLOM BANK s operations in all the countries in which it is present remained profitable: profits reached an all-time high of $335.5 million in 2012, an achievement that was extended to 1Q-2013 where profits stood at $87.2 million, the highest in the Lebanese banking system. The growth in profitability was also underlined by a growth in the Bank s balance sheet. In 2012, assets stood at $25.02 billion, increasing by 7.99%; deposits reached $21.75 billion, rising by 7.14%; shareholders equity rose to $2.1 billion, increasing by 10%; and loans to customers stood at $6.03 billion, rising by 7.8%. What makes the growth of these aggregates noteworthy is that they were attained despite a drastic reduction in the balance sheet of the Bank s Syrian unit, Bank of Syria and Overseas, with deposits in 2012 at 35.3% and loans at 27.4% of what they were in 2010 before the onset of the Syrian crisis. Mr. Saad AZHARI What also makes these achievements even more noteworthy is that they were achieved while maintaining BLOM BANK s traditional concern for controlling banking risks and expenses and its observance of sound financial indicators. In this context, the cost-to-income ratio stood at 38.25% in 2012 the lowest among listed banks; the capital adequacy ratio according to Basel III at 13.7%; the primary liquidity ratio at 66.4%; and the non-performing loans coverage ratio at 140.3% including collective provisions and real guarantees. Perhaps more important, these achievements are bound to grow and prosper given the Bank s commitment to prudent horizontal and vertical expansion. They will also be underscored by the Bank s excellent record of universal banking activities and products, made prominent by the following: The Bank s dominance in retail banking that saw its retail loans rise to $2.1 billion in 2012, increasing by a notable 14.1%, and constituting 34.8% of our loan portfolio. This was bolstered by agreements with the Association of 6 BLOM BANK s.a.l. Annual Report 2012

8 Chairman s Letter Lebanese Industrialists to provide easy and subsidized loans and services to its members, and with the Beirut Traders Association to provide credit and loyalty cards to the customers of its small-and medium-sized members. Also, the Bank s retail dominance in the Lebanese market is extending to neighboring markets, especially in Jordan and Egypt where it is enjoying the highest market growth in retail services. The Bank s pioneering activity in asset and wealth management where it is considered the market leader in the mutual funds industry. The total value of its funds reached $538 million in 2012, having increased by 190.2% from $184.9 million in Two additional funds were added recently, BLOM-Quilvest Real Estate Fund focusing on assets in the US market, and the Arab Market Fund comprising equity shares from leading Arab companies. The Bank s strengthening of the activities of its overseas units, especially in the Gulf and in relation to our recently established entities in Qatar and Saudi Arabia where both have turned the corner and have become highly profitable, not to mention the strong improvement of our operations in the UAE. Our Saudi unit, BLOMINVEST Saudi Arabia, is now among the leaders in real estate funds, the latest of which is the SR 250 million Amjal Real Estate Fund investing in the development of luxurious villas north of Riyadh City. The same is true of BLOM BANK EGYPT where it had a buoyant 2012 year and still represents a major part of our Group with tremendous medium-term potential. In this respect, prudent overseas expansion will also carry the Bank to a new promising country, Iraq, with branches opening in Baghdad and Irbil in late The Bank s enhancing of its corporate banking and project financing activities that put their share at 47.5% of our loan portfolio in 2012, and encompassed some of the biggest companies and leading sectors in Lebanon and the region. This was coupled by our constant upgrading of our private banking services to serve the needs of our high net-worth clients, with assets under management reaching $5.3 billion in 2012 and contributing handsomely to our fee income which stood at $272 million, increasing by 32.7% and constituting 34.3% of operating income. The Bank s record of achievements is also a witness to the success of its strategic vision and of its operational efficiency, and the utmost regard that it gives to asset safety and risk management. This of course extends to its well-paced foreign expansion that sees the region as a fruitful source of banking opportunities despite the current upheavals taking place. Not surprisingly, the Bank s record has not gone un-noticed, for it was bestowed the most prestigious awards by leading international and regional organizations, making BLOM Bank their unanimous choice as the Best Bank in Lebanon in BLOM BANK s commitment to the Peace of Mind of its clients has gone hand in hand with delivering the best returns to its shareholders. Earnings per share stood at $1.53 in 2012, 3.4% higher than 2011, and dividend per share was $0.45, amounting to a dividend yield of 5.41% and a payout ratio of 30%. And, as always, the Bank s commitment of Peace of Mind to the larger community through its Corporate Social Responsibility (CSR) activities has gone farther with its sole funding of the ProtectEd program that aims at promulgating safety in all schools, and with its sponsorship of the Open Your Tomorrow program that provides zerointerest funding for electronic tablets to all school students in addition to its unique BLOM shabab program and its world-renowned BLOM Giving card. In closing, BLOM BANK s success as a leading bank in the Arab world and its consistent delivery of world-class financial services are a product of the trust that our clients has in the Bank and the dedication of our professional staff and management team. These are assets that we dearly cherish and deeply recognize as the crucial attributes that lift the Bank towards new heights of outreach, profitability, and success. Thank you, Saad Azhari Chairman and General Manager 7

9 Key Figures Key Figures Consolidated Customers Deposits Evolution (in USD Million) ,791 20,296 19,606 18, ,109 13,737 10,161 11, ,992 7,686 6,215 5, ,056 4,330 3,861 3, , ,259 1, years 0 4,000 8,000 12,000 16,000 20,000 24,000 8 BLOM BANK s.a.l. Annual Report 2012

10 Key Figures Strong and Continuous Growth Total Assets (in USD Million) ,051 23,165 22,344 20, ,898 16,639 14,212 11,918 10,835 years 0 6,000 12,000 18,000 24,000 30,000 Net Profits (in USD Million) years Total Capital Funds (in USD Million) ,182 1,983 1,891 1,708 1,459 1,388 1, years ,200 1,600 2,000 9

11 Key Figures Evolution of Main Indicators (in USD Million or LL Billion) Change 12/11 Total Assets LL 37, , % cv USD 25, , % Total Net Loans And Advances LL 9, , % CV USD 6, , % Total Customers Deposits LL 32, , % cv USD 21, , % Tier 1 Equity LL 3, , % cv USD 2, , % Total Capital Funds LL 3, , % cv USD 2, , % Total Net Liquid Assets LL 21, , % cv USD 14, , % Net Income After Tax LL % cv USD % Consolidated Financial Ratios (in % or USD) Liquidity Ratios Net liquidity in LL 98.61% 99.07% Net immediate liquidity in foreign currency 52.53% 53.12% Liquid assets over total assets 57.99% 57.59% Loans to Deposits Ratios LL 16.50% 16.00% F/C 31.99% 31.76% Total 27.66% 27.54% Asset Quality Net Non-Performing Loans / Total Net Loans 2.18% 1.04% Gross Non-Performing Loans / Gross Loans 5.44% 3.20% Coverage of Non-Performing Loans (Monetary provisions) 61.62% 68.54% Coverage of Non-Performing Loans (Monetary provisions & Real guarantees) 121% 142% Capital Adequacy Ratios After dividend distribution (Basel III) 13.65% 12.84% Profitability Ratios Return on average equity 16.20% 17.49% Return on average equity (Common) 17.80% 19.20% Return on average assets 1.39% 1.46% Cost to income ratio 37.99% 36.21% Earnings per share USD 1.53 USD 1.48 Book value per common share USD 9.06 USD 8.08 Dividend per common share USD 0.45 USD 0.45 Dividend payout ratio 30.15% 30.99% Retention Ratio 69.85% 69.01% 10 BLOM BANK s.a.l. Annual Report 2012

12 Organizational Chart External Auditors Ernst & Young Semaan Gholam & Co. Shareholders Board of Directors Solicitors Me. Georges ABOU ZAMEL Me. Antoine MERHEB Board Committees Board Audit Committee Board Risk Management Committee Consulting, Strategy & Corporate Governance Committee Nomination & Remuneration Committee Divisions/Depts./Units Committees Administration Back Office Operations Central Fund Transfer Communications Compliance Corporate Credit Relationship Credit & Facilities Finance Financial Institutions Group Inspection Hedging Advisory Human Resources Information Systems Interest Management Internal Audit Legal Affairs Marketing Overseas Marketing Overseas - Gulf Region Procurement Recovery Retail Banking Risk Management SME Relationship Strategic Planning & Organization Syndications & Structured Finance Syrian Desk Trade Finance Treasury & Forex Assets & Liabilities Compliance Credit Committee 1 Credit Committee 2 Executive Exceptional Credit Follow-up Credit Risk Foreign Branches & Subsidiaries Human Resources Internal Audit Information System Security Information Systems Investment & Treasury Legal Marketing Operations & Internal Procedures Provisions Purchasing & Maintenance Retail Credit Succession Planning Branch Managers 68 in Lebanon 1 in Cyprus 11 in Jordan 1 Representative office in Abu Dhabi 11

13 Group Chart 99.99% BLOM BANK FRANCE S.A. Head Office: Branches: Paris London - Dubai - Sharjah - Jabal Ali Romania (4 Branches) 49.00% BANK OF SYRIA & OVERSEAS S.A. Head Office: Branches: Damascus Syria - 27 Branches 99.93% BLOMINVEST BANK S.A.L. BLOM BANK S.A.L. Head Office: Beirut Branches: Lebanon - 68 Branches Cyprus - Jordan (11 Branches) - Abu Dhabi (Representative Office) 10% 33.31% 88.94% 99.42% 99.75% 10% 99.00% Head Office: Beirut BLOMINVEST SAUDI ARABIA Head Office: Riyadh BLOM DEVELOPMENT BANK S.A.L. Head Office: Beirut Branches: Lebanon - 2 Branches AROPE INSURANCE S.A.L. Head Office: Beirut Branches: Lebanon - 8 Branches BLOM BANK EGYPT S.A.E. Head Office: Cairo Branches: Egypt - 27 Branches BLOM BANK QATAR L.L.C Head Office: Doha AROPE SYRIA S.A. (Syria International Insurance) Head Office: Damascus Branches: Syria - 6 Branches Representative Offices: 14 EXPERTS FINANCIAL SERVICES Head Office: Amman 34% 5% 50% 66.64% 12 BLOM BANK s.a.l. Annual Report 2012

14 Group Chart 100% BLOM BANK (SWITZERLAND) S.A. Head Office: Geneva 52% 23.5% SYRIA & OVERSEAS FOR FINANCIAL SERVICES Head Office: Damascus 51% BLOM EGYPT SECURITIES S.A.E. Head Office: Cairo 0.25% 60% AROPE INSURANCE OF PROPERTIES & RESPONSIBILITIES - Egypt S.A.E. Head Office: Branches: Cairo Egypt - 14 Branches 48.97% 39.75% 19.75% 80% 0.25% AROPE LIFE INSURANCE - EGYPT S.A.E. Head Office: Branches: Cairo Egypt - 14 Branches * as at March

15 14 BLOM BANK s.a.l. Annual Report 2012

16 15

17 Corporate Governance 1. Code of Corporate Governance The Code of Corporate Governance was approved at the end of 2007 by the Board of Directors at BLOM BANK and most recently updated in November It sets out the structure that identifies the rights and responsibilities of each of the Board members, general management, employees and external stakeholders. It complies with all local laws and regulations to which the Bank is subject, as well as the Basel Committee s principles on Corporate Governance and outlines the expected conduct of all parties in order to achieve the objectives set for the Bank. The Bank recognizes the paramount importance of Corporate Governance for its proper functioning and for the creation of an optimal operational environment. To that end, the Board and management deployed all means for the proper implementation of the Code in The Board itself partly exercises its duties and authorities through four Board Committees (the Audit Committee, the Risk Management Committee, the Consulting Strategy and Corporate Governance Committee in addition to the Nomination and Remuneration Committee) and is the body ultimately responsible for ensuring the best possible practice of Corporate Governance at BLOM BANK. Awareness sessions for all BLOM employees on Corporate Governance were organized and are planned for new employees in order to introduce the Code and related principles, while enhancements will be communicated to all personnel. The Code is also published on the Bank s Website. Relevant information on the Board charter and shareholders rights were made available to the public in compliance with the disclosure requirements of the Code. In light of the current global financial situation, the Bank s Board of Directors view the ongoing development of Corporate Governance as a matter of even greater importance and necessity in enhancing its competitive position by continuing to further raise its standards vis-à-vis internal organization and services to clients. 2. BLOM BANK S.A.L. Major Common Shareholders NAME Address Common Shares in Capital * Bank of New York** United States % Banorabe S.A., SPF*** Luxembourg % AZA Holding Lebanon 9.33 % Actionnaires Unis Lebanon 1.83% Azhari Family Lebanon 2.86 % Chaker Family Lebanon 5.39 % Mrs. Nada Aoueini Lebanon 5.00 % Jaroudi Family Lebanon 3.46 % Saade Family Lebanon 2.37 % Khoury Family Lebanon 1.95 % Rest of Shareholders % Total % * As at 31st March, ** Starting 1998, and after the issuance of Global Depositary Receipts (GDR) by BLOM BANK Shareholders, the Bank of New York as Depositary, became shareholder on the Bank s register. ***The major shareholders of Banorabe S.A. SPF (formerly Banorabe Holding S.A.) are the same as in BLOM BANK (except Bank of New York and AZA Holding). 16 BLOM BANK s.a.l. Annual Report 2012

18 Corporate Governance 3. Board of Directors Dr. Naaman W. AZHARI Sheikh Salim B. EL-KHOURY Chairman of BLOM BANK GROUP Honorary Board Member 3.1 List of Board Members NAME Position Background / Competencies Number of directorship years with the Bank Mr. Saad N. AZHARI Chairman & General Manager Master in Engineering & MBA Director since 1996 Chairman and General Manager since 2007 H.E. Sheikh Ghassan I. SHAKER Grand Officier de la Légion d Honneur Director B.A in Finance Director since 1964 Mr. Samer N. AZHARI Director & Secretary General of BLOM BANK Group Master in Civil Engineering & MBA Director since 1997 Secretary General of BLOM BANK Group since 2007 H.E. Me Youssef S. TAKLA Director Diploma in Law Director since 2006 Mr. Habib L. RAHAL Director & General Manager B.A. in Accounting Economics Director since 2008 General Manager since 1992 Mr. Nicolas N. SAADE Director MBA in Finance & B.A. in Economics Director since 1990 Dr. Fadi T. OSSEIRAN Director Ph.D. in Economics Director since 2008 Mr. Joseph E. KHARRAT Director B.A. in Ecomomics Director since 1984 Mr. Marwan T. JAROUDI Director MBA in Ecomomics Director since

19 Corporate Governance Dr. Naaman W. AZHARI Chairman of BLOM BANK Group Born in 1928 Head of the Nomination and Remuneration Committee at BLOM BANK S.A.L. Dr. Naaman AZHARI started his banking experience in He worked in a French bank in Paris (which became Société Générale). At the end of the 1950s, he established one of the largest banks in Syria, Banque de l Orient Arabe and was appointed Chairman of the Bank. From 1961 to 1962, he occupied the position of Minister of Finance, Economy and Planning in Syria. From 1971 until 2007, he occupied the position of Chairman and General Manager of BLOM BANK S.A.L. In 2007, he was appointed Chairman of BLOM BANK Group. Dr. Naaman AZHARI holds a State Degree Ph.D. in Economics from the University of Paris, a Diploma in Law and a Diploma in Political Sciences from the Institut des Sciences Politiques (Sc.Po.) in Paris. In 1962, he was appointed General Manager of BLOM BANK S.A.L. Sheikh Salim B. EL-KHOURY Honorary Board Member of BLOM BANK S.A.L. Born in 1931 Honorary Board Member of BLOM BANK S.A.L. Sheikh Salim EL KHOURY has been a Member of the Board of Directors of BLOM BANK S.A.L. since He holds a degree in French law from the University of Lyon in France, a degree in Lebanese Law from Saint Joseph University s Ecole de Droit de Beyrouth and has completed an Advanced Management Program at Harvard Business School. 18 BLOM BANK s.a.l. Annual Report 2012

20 Corporate Governance 3.2 Information about Board of Directors Mr. Saad N. AZHARI Chairman of the Board and General Manager of BLOM BANK S.A.L. Born in 1961 Chairman and General Manager of BLOMINVEST BANK S.A.L. Chairman of BLOM BANK (SWITZERLAND) Chairman of BLOM BANK EGYPT Chairman of BLOM BANK QATAR L.L.C. Board Member of BLOMINVEST SAUDI ARABIA Board Member of BLOM DEVELOPMENT BANK S.A.L. Member of the Board Risk Management Committee at BLOM BANK S.A.L. Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Mr. Saad AZHARi is the Chairman of BLOM BANK since 2008, and prior to that, between 2001 and 2007, he was the Vice-Chairman and General Manager of BLOM BANK. Mr. Saad AZHARI also assumes several functions on the Board of Directors of BLOM BANK Group s entities. He is, in addition, the Vice President of the Association of Banks in Lebanon since He joined BLOM BANK (SWITZERLAND) in 1991, was appointed its General Manager in 1997 and its Chairman in He worked from 1986 to 1991 in PBZ Privatbank, an affiliate of UBS Group, in Zurich-Switzerland where he was promoted to run, from Zurich, the Bank s operations in the Middle East and in its Hong Kong office. Mr. Saad AZHARI obtained a Master Degree in Computer Engineering, and afterwards a Master Degree in Business Administration (MBA), from the University of Michigan-Ann Arbor in the United States of America. H.E. Sheikh Ghassan I. SHAKER Grand Officier de la Légion d Honneur Non-Executive Director of BLOM BANK S.A.L. Born in 1937 Director of BLOM BANK FRANCE Businessman, banker, industrialist and diplomat, H.E. Ghassan SHAKER, is among the most highly decorated personalities from the Arab World, including being a Grand Officier de la Legion D Honneur-France. He was educated at Victoria College Alexandria Egypt ( ) and at St. John s College Cambridge University England ( ). H.E. Sheikh Ghassan SHAKER has been a Member of BLOM BANK S.A.L. Board since 1964, is also a Board Member of BLOM BANK FRANCE and a Board Member in Banorabe S.A, SIF. Personal Advisor to His Majesty The Sultan of Oman, Ambassador of the Omani Mission at the United Nations in Geneva, Dean of Unesco Goodwill Ambassadors in Paris and Plenipotentiary Minister at the Embassy of the Sultanate of Oman at The Court of St. James, United Kingdom, Economic Counselor at the Oman Embassy in Rome and Egypt. Sheikh SHAKER is a founder and patron of academic and charity organizations in the Middle East and Turkey. Member of the Board of trustees and Patron at Georgetown University Washington DC, a Patron of Kings Academy in Jordan, University of Virginia USA, the Lebanese American University Beirut and the Royal Textile Academy of Bhutan, Fellow of the Chancellor s Court of Benefactors Oxford University and an Honorary Fellow of St. Anthony s College Oxford University. 19

21 Corporate Governance Mr. Samer N. AZHARI Director of BLOM BANK S.A.L. Born in 1958 Secretary General of BLOM BANK GROUP Chairman and General Manager of BLOM BANK FRANCE Board Member of BLOMINVEST BANK S.A.L. Board Member of BANK OF SYRIA AND OVERSEAS Board Member of Banorabe SA, SPF Board Member of AROPE Insurance S.A.L. Board Member of AROPE Syria Mr. Samer AZHARI joined Banque Banorabe, affiliated bank of BLOM BANK S.A.L., in Paris in 1985 and became its General Manager in In 1997, he was appointed as General Manager of BLOM BANK S.A.L. and occupied this position until Since 2001, Mr. Samer AZHARI has been Chairman & General Manager of BLOM BANK FRANCE (formerly BANQUE BANORABE). From 1999 until 2001, he occupied the position of Vice President of the Association of Banks in Lebanon. Mr. Samer AZHARI has been BLOM BANK Group s Secretary General since Mr. Samer AZHARI holds a Master of Science degree in Civil Engineering from the University of Illinois, USA and an MBA from INSEAD, France. He was Chairman and General Manager of AROPE INSURANCE, an affiliated insurance company of BLOM BANK S.A.L. from 1998 until H.E. Me. Youssef S. TAKLA Independent Director of BLOM BANK S.A.L. Born in 1937 Member of The Nomination and Remuneration Committee at BLOM BANK S.A.L. Member of The Board Risk Management Committee at BLOM BANK S.A.L. H.E. Me. Youssef TAKLA has been a Board Member of BLOM BANK S.A.L. since He was a member of the Beirut Bar Association since 1961 and a Member of the Paris Bar Association since Between 1993 and 1999, Me. TAKLA was also member of the International Court of Arbitration of the International Chamber of Commerce. He has been additionally, since 1992, a Member of the Legislative Commission in the Lebanese Ministry of Justice and a Member of the Committee of Modernization and Coordination of Banking Laws at the Central Bank of Lebanon since H.E. Me. TAKLA was nominated Minister of State in Lebanon from 2008 till He holds a diploma in law from the Saint-Joseph University in Beirut. 20 BLOM BANK s.a.l. Annual Report 2012

22 Corporate Governance Mr. Habib L. RAHAL Director and General Manager of BLOM BANK S.A.L. Born in 1944 Director and General Manager of BLOM BANK S.A.L. Chairman & General Manager of AROPE INSURANCE S.A.L. Chairman of Société des Services d Assurances et de Marketing S.A.L. Board Member of BLOMINVEST BANK S.A.L. Board Member of AROPE EGYPT LIFE INSURANCE Board Member of AROPE EGYPT PROPERTIES INSURANCE Board Member of Société Foncière du Liban et d Outre-Mer S.A.L. Member of the Board Risk Management Committee at BLOM BANK S.A.L. Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Mr. Habib RAHAL started his banking experience at Société Centrale de Banques and occupied several managerial positions at Moscow Narodny Bank and Royal Bank of Canada before joining Banque du Crédit Populaire where he was appointed General Manager from 1974 to In 1990, he joined BLOM BANK S.A.L. as Chairman s Advisor and was appointed in 1992 as the Bank s General Manager. Mr. Habib RAHAL has been a Member of the Board of Directors of AROPE INSURANCE since 2004 and was elected its Chairman and General Manager in Mr. RAHAL has been a Board Member of BLOM BANK S.A.L. since 2008 and a Board Member of BLOMINVEST BANK S.A.L. since He is also the Chairman of Société des Services d Assurances et de Marketing since In 2008, he became Board Member of AROPE EGYPT LIFE INSURANCE and a Board Member of AROPE EGYPT PROPERTIES INSURANCE. Mr. RAHAL represents BLOM BANK S.A.L. and sits as Director on the following Boards of Directors: Banque de L Habitat and Société Financière du Liban. Mr. Habib RAHAL is holder of a Bachelor Degree in Accounting & Economics from ESEC. Mr. Nicolas N. SAADE Independent Director of BLOM BANK S.A.L. Born in 1950 Board Member of BLOM DEVELOPMENT BANK Board Member of BLOM BANK QATAR Board Member of BLOMINVEST BANK S.A.L. Head of the Board Audit Committee at BLOM BANK S.A.L. Head of the Board Risk Management Committee of BLOM BANK QATAR. Head of the Consulting, Strategy and Corporate Governance Committee of BLOM BANK S.A.L. Head of the Board Audit Committee of BLOMINVEST BANK S.A.L. Head of the Board Audit Committee of BLOM BANK QATAR Head of the Board Audit Committee of BLOM DEVELOPMENT BANK Mr. Nicolas SAADE has been a Board Director of BLOM BANK S.A.L. since From April 1985 to July 1987, he was Regional Manager of BLOM BANK S.A.L. in Dubai, UAE. Between 1980 and 1985, he was Deputy General Manager of Union de Banques en Côte d Ivoire (BANAFRIQUE). In 1975, he joined the Toronto Dominion Bank in which he stayed until July 1980, occupying various managerial positions. Mr. Nicolas SAADE is the owner and Managing Director of the Nicolas SAADE Est. in Dubai, which is a banking, investment and financial consulting firm. He is also the Managing Director of Elite Consultants International, Inc. in Delaware, USA, an SEC registered investment advisory firm, and owner of Pioneer Auditing in Dubai. Previously, he was Fund Manager at Royal Life International and Friends Provident International Elite Fund in the Isle of Man. Mr. Nicolas SAADE is holder of an Honors BA in Economics from McMaster University in Canada and has an MBA in Banking and Financial Management from Wharton School, University of Pennsylvania, USA. 21

23 Corporate Governance Dr. Fadi T. OSSEIRAN Director of BLOM BANK S.A.L. Born in 1956 General Manager of BLOMINVEST BANK S.A.L. Board Member of BLOM BANK EGYPT Board Member of BLOMINVEST SAUDI ARABIA Board Member of SYRIA AND OVERSEAS For Financial Services LTD Board Member of BLOMINVEST SAUDI ARABIA Dr. Fadi OSSEIRAN started his banking career at BLOM BANK S.A.L. as Assistant Dealer from 1981 to From 1990 until1993, he was Manager of Corporate Planning and Human Resources Development at Méditerranée Group Services. From 1985 to 1987, he moved to teach in the Economics Department at the American University of Beirut and became Assistant Professor at the Institute of Money and Banking of AUB from 1988 to Since 1994, he has been General Manager of BLOMINVEST BANK S.A.L. and Advisor to the Chairman General Manager of BLOM BANK S.A.L. Dr. Osseiran became a Member of the Board of Directors of BLOM BANK S.A.L. in 2008, and a Member of the Board of BLOM BANK EGYPT in He has been a Director of BLOMINVEST BANK SAUDI ARABIA since Dr. OSSEIRAN has held the position of President of the Association of Stock Brokers in Beirut since 2004 and has been a Member of the Lebanese Economic Association since He was also Member of the Research Committee ( ) and Member of the Training Committee ( ) of the Association of Banks in Lebanon. He was Board Member of the Lebanese Management Association from 1992 to 1996 and has many publications in the Banking and Economics Fields. Dr. OSSEIRAN is holder of a Ph.D. in Economics from New York University (NYU) in the United States. Mr. Joseph E. KHARRAT Independent Director of BLOM BANK S.A.L. Born in 1941 Board Member of BLOMINVEST BANK S.A.L. Member of the Board Audit Committee at BLOM BANK S.A.L. Member of the Nomination and Remuneration Committee at BLOM BANK S.A.L. Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Mr. Joseph KHARRAT has been a non-executive Director of BLOM BANK S.A.L. since 1984 to date. He has been a Board Member of BLOMINVEST BANK S.A.L. since 1994 to date. Mr. Joseph KHARRAT is holder of a Bachelor degree in Economics from Reading University in the U.K. He is Chairman and General Manager of several textile and real estate companies of which: Kamaco S.A.L., Satexi (Abidjian) and Kharrat Immobilière (Abidjian). 22 BLOM BANK s.a.l. Annual Report 2012

24 Corporate Governance Mr. Marwan T. JAROUDI Independent Director of BLOM BANK S.A.L. Born in 1959 Board Member of BLOM BANK FRANCE Board Member of BLOMINVEST BANK S.A.L. Board Member of BLOMINVEST SAUDI ARABIA Board Member and Vice Chairman of BLOM BANK QATAR since 2008 Board Member of AROPE INSURANCE SAL Board Member of AROPE SYRIA Board Member of Banorabe S.A., SPF Board Member of BLOM DEVELOPMENT BANK Head of the Board Risk Management Committee at BLOM BANK S.A.L. Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Member of the Nomination and Remuneration Committee at BLOM BANK S.A.L. Member of the Board Audit Committee at BLOM BANK S.A.L. Member of the Board Audit Committee at BLOM BANK FRANCE Mr. Marwan JAROUDI currently sits on the Board of Directors of the following Companies: Industry Intelligence Inc., Los Angeles - USA, Forestweb, Inc., Los Angeles, United Shareholders. He has been a Board Member and Vice Chairman of BLOM BANK QATAR since He is Co-Founder, Director of Industry Intelligence Inc., Los Angeles California, since Since 1999, he occupies the position of Co-Founder, Director of Forestweb, Inc., Los Angeles. From 1996 until 1999, he was Co-Founder, Managing Director of Pulptrade - Choueifat, Lebanon. From 1985 until 1995, Mr. JAROUDI occupied a number of managerial positions at Saudi Hollandi Bank in Jeddah. From 1989 until 1991, he was Co-Founder and Finance Director at Gulf Medical Co ltd. Mr. JAROUDI is holder of a Master of Arts degree in Economics from Syracuse University in New York and has a BA in Economics from the American University of Beirut. 3.3 Board Meetings Held in 2012 The following BLOM BANK S.A.L. board meetings were held during /1/ /3/ /4/ /7/ /10/ /12/

25 Corporate Governance 4. Information on Key Members of BLOM BANK S.A.L. Management Mr. Amr N. AZHARI General Manager of BLOM BANK S.A.L. Born in 1970 CEO of BANK OF SYRIA AND OVERSEAS Chairman and General Manager of BLOM DEVELOPMENT BANK S.A.L. Chairman of Syria International Insurance (AROPE SYRIA) Chairman of Syria and Overseas for Financial Services Chairman of Société Fonçière du Liban et D Outre-Mer S.A.L. Mr. Elias E. ARACTINGI Deputy General Manager of BLOM BANK S.A.L., in charge of Strategic Planning & Organization and Retail Banking Born in 1959 Member of the Board of BLOM BANK EGYPT Member of the Board Audit, Corporate Governance and Compensation Committees of BLOM BANK EGYPT Mr. Amr AZHARI started his banking experience in 1991 at Banque Banorabe Paris. From 1991 to 1992, he worked at Gestion Pictet and Pictet & Cie Montreal - Canada, and from 1995 to 1997, he occupied the position of Assistant Manager Banque Banorient, Geneva Switzerland. From 1997 to 1999, he was a General Management Executive at Banque Banorabe Paris. He moved on to become from 1999 to 2001, the Finance Manager of Banque Banorabe - Dubai UAE, followed by Manager of Banque Banorabe Paris France from 2001 to In 2004, he became Vice-Chairman of BANK OF SYRIA AND OVERSEAS and Assistant General Manager of BLOM BANK S.A.L. In 2006, in addition to the above, Mr. Azhari became Chairman of Syria International Insurance (AROPE SYRIA). In 2008, Mr. Azhari became General Manager of BLOM BANK S.A.L., Chairman & General Manager of BLOM DEVELOPMENT BANK S.A.L., Chairman of Societe Foncière du Liban et d Outre Mer S.A.L. Mr. Azhari served as a Board Member of the Damascus Stock Exchange from 2006 to In 2009, Mr. AZHARI was elected as Chairman of SYRIA AND OVERSEAS FOR FINANCIAL SERVICES, and in 2010, he also became CEO of BANK OF SYRIA AND OVERSEAS. Mr. Elias Aractingi started his banking career in 1983 at Bank Audi USA in New York where he was promoted several times until he reached the title of Vice President and Head of Operations. He joined BSI (Banca della Svizzera Italiana) s New York branch in 1988 as Vice President in the International Private Banking Group. In 1990, Mr. Aractingi joined Booz Allen and Hamilton based in Singapore as an Associate and was promoted to Senior Associate in 1993, then to manager of the Bangkok office in 1994 and finally Principal in At the end of 1995, he joined BLOM BANK S.A.L. in Beirut as Advisor to the Chairman, focusing on branch and head office reengineering. In 1997, he initiated BLOM BANK s Retail Banking activities. In addition to his duties at BLOM BANK S.A.L., Mr. ARACTINGI held twice the position of Managing Director/CEO of BLOM BANK Egypt, in 2006 and He was promoted to Deputy General Manager of BLOM BANK S.A.L. in Mr. Elias Aractingi holds a Bachelor Degree in Business Administration with distinction from the American University of Beirut and an MBA in Finance from Columbia University s Graduate School of Business. Mr. Amr AZHARI holds the following degrees from McGill University Montreal, Canada: Master of Business Administration, Bachelor of Civil Law and Bachelor of Arts, major in Economics. 24 BLOM BANK s.a.l. Annual Report 2012

26 Corporate Governance Dr. Pierre G. ABOU-EZZE Assistant General Manager Head of Human Resources at BLOM BANK S.A.L. Mr. Talal A. BABA Assistant General Manager Chief Financial Officer at BLOM BANK S.A.L. Born in 1955 Born in 1967 Dr. Pierre Abou-Ezze Assistant General Manager at BLOM BANK S.A.L., has 18 years of hands-on experience in Human Resources. He has been the Head of HR at BLOM BANK S.A.L. since 1998, and he served as Advisor to the Chairman on training issues from 1995 to Prior to joining BLOM BANK S.A.L., Dr. Abou-Ezze was in academia. He served as the Director of the Graduate School of Business and Management at the American University of Beirut from 1993 to 1996, and he has been Assistant Professor at the same school since Before moving back to Lebanon, Dr. Abou-Ezze started his career as an Assistant Professor of Economics at the University of Ottawa, Canada, and at the University of Kuwait. Mr. Talal BABA is the Chief Financial Officer. He was appointed as Assistant General Manager on July Mr. BABA is committed to maintaining the high level of integrity and transparency that BLOM BANK S.A.L. is known for. He joined BLOM BANK S.A.L. in 1991 where he started to excel and climb his career ladder. He has now over 21 years of banking experience acquired with major banking players on the Lebanese market. He also attended various training programs and workshops in Lebanon and abroad. Mr. BABA earned his Bachelor s degree in Accounting and his Master in Business Administration from the Lebanese American University Beirut. Dr. Abou-Ezze continues to lecture at various Universities in Lebanon, and to lead seminars and workshops in the field of Human Resources. He served as the Chairman of the Human Resources & Social Affairs Committee at the Association of Banks in Lebanon for 2 consecutive terms from 2005 to He also holds a Ph.D in Economics from McMaster University, Hamilton, Canada. 25

27 Corporate Governance Mrs. Jocelyne Y. CHAHWAN Assistant General Manager Deputy Head of Retail Banking at BLOM BANK S.A.L. Mr. Antoine N. LAWANDOS Assistant General Manager Chief Information Officer at BLOM BANK S.A.L. Born in 1965 Member of the Advisory Council for the Levant, VISA International Born in 1963 Mrs. Jocelyne Chahwan started her banking career in 1990 at the Bank of Montreal in Montreal where she was promoted several times until she reached the title of Manager/ Investment Services. In March 1996, she joined BLOM BANK S.A.L. in Beirut and became the Head of the Training & Development Department. In 1999, she moved to Retail Banking as Head of the Marketing Division. In 2009, she was promoted to the position Deputy Head of Retail Banking. In October 2011, she became the first Lebanese banker on VISA s advisory council for the Levant. In December 2011, she was promoted to Assistant General Manager. Mrs. Jocelyne CHAHWAN holds a Master of Business Administration from Ecole Supérieure des Affaires (ESA). Mr. Antoine LAWANDOS started his career in 1986 by joining ISTISHARAT, a leading software house, where he was quickly promoted to Head of Production Unit of Banking Software and where he acquired extensive experience in managing the development, implementation and integration of complex and mission-critical universal banking systems. Also, he was one of the main contributors in exporting a locally-developed core banking system to renowned banks in Europe and KSA, a pioneering step at that time. Before joining BLOM BANK S.A.L., Mr. LAWANDOS held the position of Systems Engineering Department Manager at IBM s representative bureau in Lebanon and that of Project Manager at MDSL, a well-known core banking solutions vendor, for the implementation of a reputable Irish core banking application in Lebanon. In 1993, Mr. LAWANDOS joined BLOM BANK S.A.L. as the Project Director for leading the Bank s core banking application change and soon after, he became the Senior Manager of the Information Technology & Systems Development Department in In 2006, Mr. LAWANDOS became BLOM BANK s Chief Information Officer and in 2008, he was appointed Assistant General Manager of BLOM BANK S.A.L. in addition to being the Bank s CIO. Mr. LAWANDOS holds a Master of Engineering degree in Electronics And Information Systems from Université Saint- Jospeh s School of Engineering ESIB and has over 27 years of experience in leading core banking systems transformation initiatives from a technology vendor side as well as from a banking institution perspective. 26 BLOM BANK s.a.l. Annual Report 2012

28 Corporate Governance 5. Blom bank S.A.L. Commercial Arrangements Any commercial arrangement between the Bank and any of its affiliates is pre-approved by the General Assembly of Shareholders of the Bank and of the concerned affiliate according to art. 158 of the Lebanese commerce law, when applicable. No change of control has occurred during General Management of BLOM BANK S.A.L. Chairman & General Manager Mr. Saad AZHARI Group Secretary General Mr. Samer AZHARI General Managers Mr. Habib RAHAL Mr. Amr AZHARI Mr. Elias ARACTINGI** Assistant General Managers (*) Dr. Pierre ABOU EZZE Mr. Talal BABA Mrs. Jocelyne CHAHWAN Mr. Antoine LAWANDOS Advisors (*) Mr. Michel AZZAM Sheikh Fahim MO DAD Mr. Georges SAYEGH Human Resources Finance Retail Banking Information Systems Formerly, Vice Governor of the Central Bank of Lebanon Divisions, Departments & Units Administration Back Office Operations Central Fund Transfers Communications Compliance Corporate Credit Relationship Credit & Facilities Finance Financial Institutions Group Inspection Hedging Advisory Human Resources Information Systems Internal Audit Legal Affairs Liability Product Management Marketing Overseas Marketing Overseas Gulf Region Procurement Recovery Retail Banking Risk Management SME Relationship Strategic Planning & Organization Syndications and Structured Finance Syrian Desk Trade Finance Treasury & Forex Mr. Mohammad MARRACH Ms. Wafa KISHLI Mrs. Rima HAJJAR (EL) Mrs. Isabelle NAOUM Mr. Malek COSTA Mr. Samir KASSIS Mr. Mounir TOUKAN Mr. Talal BABA Mr. Grégoire AZAR Mr. Naoum RAPHAEL Mr. Gladson DOUGLAS Dr. Pierre ABOU EZZE Mr. Antoine LAWANDOS Mrs. Rania KAISSI Me. Aimée SAYEGH Mr. Mohamad Mokhtar KASSEM Mr. Fouad SAID Mr. Marcel ABOU JAOUDE Mr. Mohammad MARRACH** Ms. Hiba CHERIF Mrs. Jocelyne CHAHWAN** Mr. Gérard RIZK Mr. Charles HADDAD Mr. Rabih HALABI Mr. Morris KAIROUZ Mr. Georges CHEDID Mr. Boutros KHOURY Mr. Jacques SABOUNJI Mr. Wassim KHODR (*) By Alphabetical Order (**) As of July

29 01 About BLOM Corporate Governance 28 BLOM BANK s.a.l. Annual Report 2012

30 Corporate Governance About BLOM 01 29

31 Management Discussion & Analysis Operating Environment 2. Overview 3. Evolution of Total Assets 4. Sources of Funds 4.1 Customers Deposits 4.2 Capitalization (Tier I & Tier II Capital) 5. Uses of Funds 5.1 Investment Securities Portfolio 5.2 Loans and Advances to Customers 6. Liquidity 7. Profitability 7.1 Net Interest Income 7.2 Non Interest Income 7.3 Staff and Operating Expenses 8. Dividend Distribution and Preferred Shares Revenue 9. Interest Rate Risk 10. Risk Management and Basel III Preparations 10.1 Risk Management 10.2 Internal Capital Adequacy Assessment Process (ICAAP) 10.3 Corporate Governance 11. Universal Banking Services 11.1 BLOMINVEST BANK Services 11.2 Commercial and Corporate Banking 11.3 Retail Banking 11.4 Islamic Banking 11.5 Insurance Products & Services 12. Information Systems and Technology 12.1 Leading-Edge Technology Deployment 12.2 Round-the-clock Banking Services 12.3 Advanced Electronic Payment Systems 12.4 Enterprise Application Integration (EAI) 12.5 Financial Reporting and Consolidation 12.6 Basel III and Regulatory Compliance 12.7 Systems Security and High Availability 13. People Development 13.1 General Overview 13.2 Policies and Procedures 14. Bank s Operational Efficiency

32 Management Discussion & Analysis Operating Environment A global view: Dichotomy between the US and Europe The world economy have not yet recovered from the financial crisis of and is not expected to fully do so this year. Global real GDP growth managed to reach 3% in 2012 however it remains half a percentage point lower than Developed countries continue to face many challenges and they grew only by 1% while emerging and developing economies grew by 5.5% last year. In 2013, the world economy is expected to grow by 3% with Europe s performance improving somewhat but the US and emerging markets will witness declining growth rates. The United States economy was growing well below its potential with a high risk of recession this year if the fiscal cliff had not been resolved by end The US grew by 1.5-2% last year but the fiscal cliff haunted the economy till the fourth quarter of 2012 when congressmen agreed on the tax increase with the spending side being dealt with early this year. The austerity measures adopted will amount to 1.5% of GDP rather than hitting 4.5% of GDP if no deal had been reached. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Consistent with the moderate pace of economic growth, conditions in the labor market have been improving gradually with unemployment reaching 7.8% by end 2012 compared to 8.5% in December On the monetary front, the Federal Reserve Bank is continuing with its quantitative-easing policy, buying USD 85 billion of bonds each month as long as unemployment stays well above normal level, which is set at 6.5%, and inflation is subdued. Europe seems to start seeing the light at the end of the tunnel. After a year that was characterized by weak economic activity, consensus is that growth will rebound in However this may not occur and the region will go through a new round of tensions, as budget deficits drift above target yet again and negative investors sentiment will weigh especially on peripheral countries. Both financial markets and fiscal performances improved throughout Spreads of peripheral countries bonds have gradually abated since the middle of last year and stock markets felt the positive vibes. On the fiscal side, the Euro Area primary fiscal balance is turning positive following four years of deficits in the aftermath of the global financial crisis. Further improvements are expected in when the average primary balance is expected to reach around 2% of potential output. However fiscal consolidation in 2012 has impacted negatively on the Euro Area economy, contributing to a 0.4%y-o-y contraction. The ECB is also expected to keep interest rates low during 2013 as economic activity in the Euro zone will continue to contract this year and only will start to grow next year. Inflation remains subdued and inflationary pressures do not seem to rise to worrying levels. The international equity markets recovered in 2012, boosted by unprecedented stimulus actions and monetary policies taken by Central banks. Strategies of quantitative easing, pumping money in bonds markets, and maintaining interest rates at near-record lows, have contributed into refreshing the markets across the world. The S&P 500 Index returned around 13% for the year, its best annual performance since 2009, and the MSCI rose about the same. Yet, elements from both sides of the Atlantic collided to scare investors away from the riskier assets and into the refuge of the fixed income instruments. The European leaders consented over the Greek debt only towards the end of 2012 and against most speculations in the markets, earning European equities their recovery during the second half of the year. In the United States, the biggest market moves followed official policy announcements, showing that investors remained jumpy over the mixed-colors picture of the economy. Speculations over President s Obama s re-election chances, divergent growth prospects and persistent bonds purchases by the FED have led investors to stick to bonds despite their record-low yields and inflationeroded returns. MENA region: Divergent economic performances The economies of oil-importing countries in the Middle East and North Africa (MENA) region remain entangled by political tensions and weakening fundamentals while oil-exporting countries are performing well and enjoying sound prospects. In the latter, oil GDP growth is falling but non-oil GDP growth remains healthy. Wage increases have weakened public finances and a scenario of sustained large drop in oil prices may constitute a key risk to fiscal sustainability. MENA oil importers growth stagnated at low levels, around 2% in Exogenous and endogenous factors coincided to further hamper economic activity in these countries. Among these factors a weakening global economy, high food and oil prices, and continued policy uncertainty. There is a need to restore macroeconomic 31

33 Management Discussion & Analysis 2012 sustainability while minimizing the impact of fiscal consolidation on growth and social welfare. Inflation remained stable in most countries, but concerns are rising regarding widening external deficits with reserve buffers diminishing. Exports of goods are down in most of oil importing countries and tourism arrivals are recovering in some of the countries albeit slowly, but they are still far below 2010 levels. However remittances have remained stable and the overall current account deficit is expected to improve slightly as a weak recovery gets underway in Europe. In contrast with oil importing countries, 2012 was characterized by a robust growth, which reached about 5.75% for oil exporters. This growth was mainly driven by strong expansions in the Gulf Cooperation Council countries in addition to the almost complete restoration of Libya s oil production. However economic growth is projected to fall to 3.25% in 2013 as oil production growth stagnates. Non-oil GDP will continue to record strong growth fueled by a sustained high government spending. On the capital markets, GCC and Egyptian stock markets had a good year in general, while the Levant bourses posted mixed results. The market cap of Levant bourses totaled USD billion while the market cap for Mena bourses totaled USD billion. Star performers were Egypt jumping by as much as 48.44%, with its market capitalization soaring to USD 60.2 billion towards the end of 2012 from USD 48.6 billion at the end of 2011, while in the GCC, UAE beat all other bourses with Dubai jumping 20.94% and Abu Dhabi climbing 9.76%. Saudi Arabia wasn t far behind increasing by 7.42%. Kuwait also returned 2.46% and Muscat up 1.05%. Only Qatar and Bahrain in the GCC backed, with Qatar dropping 4.86%, and Bahrain going down 6.4%. Outside the Gulf markets, Amman edged down 2.24% with its market cap shrinking to around USD 26.1 billion from USD 26.9 billion in Damascus plunged 13.31%. Tunis 3.75% down. Casablanca, the second largest market outside the Gulf, was down 14.67%. 2012: A difficult year for Lebanon The real sector In this still messy regional and global environment, Lebanon managed to keep its economy afloat although political tension and security skirmishes had their toll on the different economic sectors. Real GDP grew by 1-1.5% in 2012 driven by robust consumption and trade patterns with nominal GDP reaching USD 42 billion. Tourism tumbled due to security events and was aggravated by the decision of Arab countries to warn their citizen not to visit Lebanon. Foreign direct investment and portfolio investment deteriorated and exports went under pressure as transit routes through Syria closed down. These developments resulted in a negative balance of payments for a second year in a row. Demand continued to grow however at a decelerated rate. Uncertainty weighed on business environment and investment incentives, despite low market interest rates, leading credit to the resident private sector to decelerate reaching USD 39.6 billion by the end of 2012, growing by 10.2% compared to past rates of 13.25% and 24.40% in 2011 and 2010 respectively. Nevertheless, loans amounted to a considerable 95% of Lebanon s GDP, and further plans were put into effect by the Central bank to revive lending and support economic growth. Prices of consumer goods increased at the same rate of previous years, affected by the jump in education costs and fuel prices. Inflation recorded 4.7% in 2012 on a year-end basis with education sub-index soaring by 14.5% following government approval of wage increase related to living costs. Fuel consumption sub-index climbed 6.6%. A major challenge for 2013 is the stalemate in economic activity as a result of declining tourism and real estate, the two sectors that were the main drivers of economic growth during the past few years. The external factors are not helping in this regard as the unrest continues in Syria, and the whole region is going through major difficulties. Internally, the decision making process for any measure to promote economic growth or to implement any structural reform is complicated and extremely slow. The tourism sector was undoubtedly the largest loser in 2012 owing to its high sensitivity to the regional and domestic breakdowns, and the immediate translation of effects on collected revenues. A pillar sector for Lebanon, tourism directly contributed to 9.8% of Lebanon s GDP in 2011, or USD billion, noting that its total contribution goes up to 35.2% of GDP or USD 14.9 billion, when accounting for its effects on investment, supply chains, income and employment. This compares highly with the world s average of tourism direct and total contribution to GDP of 5.2% and 14% respectively. Despite the double digits declines registered throughout 2011 as the war in Syria was taking a severe downturn, 2012 continued to post even lower levels. Visitors to Lebanon totaled 1.36 million in 2012, down 17.51% from 2011 s when they recorded 1.65 million, and 37% from 2010 s 2.17 million visitors. The drop in tourism naturally resulted in lower tourist spending, which fell by 6% compared to According to World Travel Tourism Council BLOM BANK s.a.l. Annual Report 2012

34 Management Discussion & Analysis 2012 In conjunction with the tourism sector real estate activity delivered flimsy performance in Joining pressures from the break of war in Syria and the fragile domestic situation tuned down the sector s performance starting late 2011, just when it had already entered its normal slowing phase after the rush of Indicators of real estate activity are all revealing a slowdown in the sector. The number of issued construction permits during 2012, which reflects the real estate activity in the next 6 months, registered a slight decrease of 0.84% to 18,193 permits. However, the Construction area Authorized by Permit (CAP) plummeted by 10.85% to million sqm in 2012 following a 6.5% fall in This would imply the spreading of projects over lower-sized investments, and the shift of supply to serve a more selective demand. The number of real estate transactions also fell by 10.14% to record 74,569, but the total value of transactions was 3.8% higher reaching USD 9.17 billion. Moreover cement deliveries were down 4.35% after having recorded consecutive rises of 6.18%, 6.72% and 16.07% in 2011, 2010 and Total registries in 2012 were 5,308,550 tons compared to 5,549,769 tons in The external sector The slowdown in foreign direct investment in real estate and other economic activities had its toll on Lebanon s balance of payments that stayed in the red for the second consecutive year despite narrowing to USD 1.5 billion by end 2012 as compared to USD 2.68 billion in The decline in net foreign assets of the banking system resulted from foreign direct investment to Lebanon slashing to almost one-third of its 2011 s level, lower tourism revenues that provide the market with foreign currencies, and lower capital inflows for portfolio investments. Lebanon s trade deficit for 2012 contracted by 4.2% to USD 16 billion compared to expansions of 15.91% and 7.41% in 2011 and Adjusted imports declined by 2.28% in 2012 as they were hindered by the tempering local consumption, opposite to accelerating exports on the back of emergent demand from war-troubled Syria. The attractive exports rise of 5.13% compared to the mere 0.28% during 2011, becomes less impressive when looking exports individual growth and quantities, or compared to the 22% rise recorded in In fact, the 2012 increase appears to be almost solely attributed to the overwhelming positive performance of the precious metals industry, as well as to exports of necessity products and oil derivatives to ailing Syria, which together, compensated for the fallback of major industrial exports. The fiscal sector The slowdown of economic growth, high oil prices and the adjustment of public employees wages to the cost of living were the main reasons behind the deterioration in public finances for Hence, fiscal deficit ratio to GDP increased to 9.3% and the primary surplus shifted to a small deficit for the first time since 2006 standing at USD 110 million after having reached the largest surplus ever of 4.18% of GDP in The usual double-digits increases in revenues 2 slashed to a mere 0.66% in 2012 failing to even keep up with nominal GDP growth for the year which approached 5.7% 3. Meanwhile, unexpectedly large expenditures came forth on the back of higher transfers made to the Electricity Company (EDL) to finance its expensive oil imports, prompting a general increase in outlays of 14.1% to USD billion. Primary spending surged 23.9% to USD 9.51 billion against a 6.5% increase in 2011 to USD 7.67 billion. But it wasn t all dark in the public finance room; deliberate capital expenditures were mobilized in an effort to stimulate the slowing economy, where noticeable spending was recorded on the level of public works and infrastructure (telecom and electricity). The sluggish growth in public revenues was mainly the result of a decline in non-tax receipts. Revenues from taxes managed to end 2012 on a positive but slight change of 3.06% to USD 6.76 billion, due to mixed effects from the deteriorating situation in Syria and the slowdown witnessed in Lebanon. As for non-tax revenues which mainly consist of transfers from public institutions, they were negatively impacted by the decline of telecom transfers to the treasury. Hence they went down by 5.25% to USD 2.18 billion, noting that the government decided to shift some of the telecom proceeds during the year to municipalities to boost their capacities and efficacy. The spending spree was due to important increases in the largest two components, namely salaries and wages and transfers to the Electricity Company. The former rose 21.51% to USD 4.46 billion after accounting for the adjustments applied during 2012 consistent with the rise of cost of living. The latter took up about USD 2.26 billion of the government s outlays recording the steepest surge of 29.8% compared to Another account that registered a large increase is the transfers to municipalities that rose by 54.5% to USD 444 million from USD 244 million in Further increase to the budget deficit was deliberately made through the government upsizing of its capital expenditures by 12.5% to USD 504 million following a decline of 3.7% in the previous year. Special attention would be given to the CDR budget which rose to USD 132 million, up from USD 96 million in 2011, the ministry of public work and transport which reached USD 84 million from USD 61 million last year, and the Council of the South which received USD 41 million compared to USD 33 million in the previous year. Nonetheless, there was a substantial improvement made on the debt service level freeing up cash for the government and reducing the cost of debt. Average cost of debt for 2012 stood at 6.28% compared to 6.99% in 2011 and 7.43% in Under the umbrella of lower international interest rates, the debt replacing during 2012 which consisted of 2 Eurobonds rounds, brought the average cost of foreign currency debt to 5.78% 2. With the exception of year 2010 when both revenues and expenditures proportionally declined by 0.17% and 0.71% respectively. 3. Considering BLOMINVEST s adjusted inflation for the year, estimated at 4.7% instead of the official 10.1% 33

35 Management Discussion & Analysis 2012 from 6.66% and 6.86% in 2011 and 2010 respectively. As for the local currency debt, average cost in 2012 moved to 6.64% from 7.20% and 7.8% in 2011 and 2010 respectively. To note that during 2012, total public debt rose by 7.51% to USD billion, with its local currency part barely adding 1.74% against a 16.53% rise in its foreign currency section to USD billion. Consequently, debt to GDP ratio increased to 137% of GDP in 2012 compared to 135% in The management of the government s portfolio of treasury bills realized some wins, extending its maturity to 1,105 days from 955 days in 2011, while slightly pushing down the weighted average yield from 6.83% in December 2011 to 6.54% in December With an election looming and the recovery looking pallid, the government seems locked between controlling its budget deficit and promoting growth through expansionary policies. The government will face the difficult task of containing the budget deficit increase in order for the debt to GDP ratio to remain stable or even decline. However additional spending may have a positive impact on the economy if it is related to infrastructure such as roads, electricity, telecom, which will increase the country s potential output. Moreover the government has another challenge, which is to implement structural reforms that will help jump start the economy and attract foreign investors and capital. One of the main issues to tackle is the ongoing problem of the subsidies to the Electricity Company (EDL) as it is getting aggravated by the high oil prices and the cutoff of gas supply from Egypt. Subsidies to EDL are draining on government resources and constitute around 20% of total spending. Other structural reforms include the improvement of the business environment as Lebanon ranks low on the doing business indicator published by the World Bank. The monetary sector In contrast with fiscal policy, monetary policy witnessed few changes during the past few years, flowing steadily between the standard missions of boosting economic growth, reining in inflation, preserving the national currency, and maintaining the soundness of the financial system. Broad money supply M3 grew 7% in 2012 to reach USD billion following a lesser growth of 5.5% in 2011 when it stood at USD billion. Former to 2011, double digit growth rates were recorded such as 14.72%, 19.65% and 12.27% in 2008, 2009 and 2010 respectively. The dollarization rate of M3 decreased from 59.99% in 2011 to 58.5% at the end of This was the result of sight and term deposits in LBP rising by 19% and 10% respectively, while foreign currency deposits of the resident private sector added 4.3% only compared to 10.53% in In accordance, the average weighted yield of interest on deposits in dollar increased to 2.86% in 2012 from 2.83% in December 2011, while average weighted interest on LL deposits decreased to 5.41% in December compared to 5.63% in Money supply was also affected by the increasing government expenditures, which heightened the net claims on public sector by 7.2% or USD 2.44 billion. The banking sector continued to step in to finance government s expenditures through TBs subscriptions and roll over of maturities, with BDL occasionally covering for shortage in subscriptions. In fact, BDL securities portfolio rose from USD billion at end 2011 to USD billion, and commercial banks holding of government securities rose to USD billion from USD billion in December The banking sector maintained its strong performance despite the local and regional tensions. The consolidated balance sheet of commercial banks recorded an 8.04% growth in 2012 to stand at USD billion compared to a 9.04% growth in Resident and non-resident private sector deposits increased by 8.02% y-o-y to reach USD 125 billion by end As for the dollarization rate of deposits, it stood at 64.82% by the end of 2012, slightly lower than the 65.92% of the previous year. On the assets side, claims on resident and nonresident private sector rose by 10.35% y-o-y from USD billion to USD billion with their dollarization rate narrowing to 77.63% from 78.4% in The public sector claims witnessed a 6.53% growth by December 2012 as Treasury Bills in Lebanese Pounds held by commercial banks rose by 9.1% to USD billion. The central bank adopted a myriad of steps to retaliate against the shocks caused by the ongoing crisis in the region, starting by containing inflation in order to avoid value wipes of assets, to pushing credit to businesses and households through lower interest rates. BDL had launched stimulation packages for private lending, expected to boost economic growth by 1% to 2.5% in 2013, while inflation is assumed to remain within acceptable range of 6% given that it has toned down during the past two years to 4.13% and 4.73% respectively. As for the Lebanese pound, the peg against the dollar initiated in December 1997 remains strongly defended by BDL. Sitting over foreign reserves approximating USD billion, 10.86% higher than 2011 s, BDL holds enough reserves that cover more than 20 months of imports. The Eurobonds market On the Eurobond market, investors profited from the spread between the yields of the government Eurobonds 34 BLOM BANK s.a.l. Annual Report 2012

36 Management Discussion & Analysis 2012 and the US treasuries during the first half of the year, but the market failed to sustain international demand later as the country felt the repercussions of the war in Syria and went through domestic political and security skirmishes. During 2012, the Lebanese government issued Eurobonds for a total of USD billion, of which USD billion were tapped on the primary market over 2 rounds. The remaining USD 3 billion were issued in March and December as part of the debt replacement agreements between the BDL and the ministry of finance, by which the MOF is allowed to redeem Treasury Bills from BDL s portfolio against Eurobonds for the same amounts but at lower interest rates and longer maturities. The attractiveness of the Lebanese yields proved high during the first round conducted in April as the USD 950 million issuance was 3 times oversubscribed with a considerable international participation accounting for 33% of the issuance. However, the second round executed during November was received with mixed sentiments. Nonetheless the government managed to issue USD billion, part of which was a voluntary debt exchange on bonds maturing in Summing up the year, the BLOM Bond Index which tracks the Eurobonds denominated in dollars finished 2012 at points, down by 1.7% since year start as the slowing demand during the second half weighted on its level, and pushing the weighted average yield on holding the Eurobonds up by 14 basis points to 5.02%. The performance of the medium- and long-term bonds reflected the rather stable demand, peaking during March-April when the 5Y bond and the 10Y bond reached their lowest yields of 4.65% and 5.8% respectively, and fading in August when yields rose to 5.65% and 6.49% respectively. The two benchmark notes ended the year on a slight change, with the 5Y Lebanese Eurobond returning 4.83%, down by 2 basis points since year start and the 10Y bond maturing in 2022 yielding 5.95%, up by one basis point since end Eurobonds prices and their spread against the US treasuries reveal much less volatility than Credit Default Swaps spreads. This is mainly due to the stable and dedicated local investors with domestic banks constituting the core base of Eurobonds holders. While the US bond markets had a good year, with the US 5y and 10y treasuries yields each dropping by 11 bps to end at 0.72% and 1.78%, the spread between the Lebanese 5Y and 10Y bonds yields and their US comparable widened from 402 bps and 405 bps, to 411 bps and 417 bps respectively. As for the Lebanese CDS which reflect the perceived default risk of the government, they stood at 450 bps by end December 2012, narrowing from 472 bps in December While the stable political and security environment remains the main determinant of investors sentiments, the balance of payments results (surplus or deficit) will be essential during 2013 in setting the demand trend on the Eurobonds markets. The equities market Although much of 2012 was a struggle to Lebanese equities as it was to the Eurobonds, the twilight months were aggressive enough to reflect the appetite of investors and the deep rooted faith that Lebanese stocks remain undervalued. The BLOM Stock index (BSI) which tracks the market, lost 0.65% during 2012, however dipping by as much as 4%-5% in the 3rd quarter, and bottoming in October at 1,104 points. However the subsequent status quo restored faith in the possibility of containing the security skirmishes, allowing equities to breathe and ignore the recurring events north and east of the country. Equities surged again in December although from a low base with the BSI closing the year at 1,169 points, as investors took advantage of the undervalued listed companies. With the ongoing war in Syria, and Europe still trapped in its problems, internal and external difficulties will continue to weigh on the Lebanese economy. Therefore 2013 appear to be more challenging than 2012 especially when it comes to internal economic developments. Several issues remain to be addressed by the government starting from the control of the fiscal deficit in an election year and not ending with the wage increase. To end on a positive note, prospects of an improving economy benefiting from the oil discoveries as well as from the adjustment of economic policies to fit in the crisis, will definitely create a positive sentiment among local investors as well as internationals. In addition the resilience of the Lebanese economy and especially the Lebanese banking sector, with its assets exceeding 3 times the size of the economy, has been proved as it was tested several times in the past. Therefore, assuming that Lebanon reaches its own deal over the parliamentary election laws and successfully installs a new parliament, and absent any war surprises, the chances for a better economic performance and a correcting trend on the stock market appear to be strong. 35

37 Management Discussion & Analysis Overview In 2012, BLOM BANK witnessed another successful year marked by a solid financial position, a diversification of products and services, and a wider regional presence. BLOM BANK s strong position as the leading banking group in Lebanon was reflected by maintaining the status of the most awarded bank received in 2012 and 2013: The Banker Best Bank in Lebanon for 2012 Islamic Bank of the Year - Lebanon 2013 Euromoney Best Bank in Lebanon for 2013 from Euromoney Euromoney Private Banking and Wealth Management Survey 2013 Best Net-worth-specific services - High Net Worth I (USD 1 million to USD 10 million) Global Finance Best Bank in Syria for 2013 Best Foreign Exchange Bank Providers in Lebanon for 2013 Best Consumer Internet Bank in Lebanon for 2012 Banker Middle East Best Regional Retail Bank for 2013 Best Private Equity Fund for 2013 Best Car Loan in Lebanon for 2013 Best Bank in Lebanon for 2012 EMEA Finance Best Asset Manager in Lebanon for 2012 Best Local Investment Bank in Lebanon for 2012 GTR magazine Best Trade Finance Bank in Lebanon for 2012 The New Europe Fast 50 Best Bank in Lebanon for 2013 The New Europe Best Bank in the Middle East for 2012 The European Best Bank in Lebanon for 2013 Best Bank in the Middle East for 2013 First Protocol Youth orientation and development for 2012 MENA FM Performance Awards Best Levant Asset Manager for 2013 BLOM BANK also continued to maintain the highest financial ratings in Lebanon. As such, the Bank has been repeatedly rated by Capital Intelligence, a Middle Eastspecialized rating agency, BBB-, which is the highest financial strength rating in Lebanon. Moreover, Moody s maintained its foreign currency rating of B1, and S&P credit rating of B. In 2012, as one of the largest banks in the country, BLOM BANK net profits reached USD million even after providing additional collective provisions amounting to USD 32.8 million, while total assets attained USD 25,051 million and total customers deposits attained USD 21,791 million by the end of In terms of strategy, BLOM BANK continued to build on its geographic expansion and business services diversification. Foreign expansion not only spreads the risk of operating in Lebanon, but also diversifies the income base by taking advantage of the economic and business opportunities present in regional economies. In 2012, BLOM BANK Group was operational in 12 countries: Lebanon, Syria, Egypt, Jordan, Qatar, UAE, France, Switzerland, England, Cyprus, Kingdom of Saudi 36 BLOM BANK s.a.l. Annual Report 2012

38 Management Discussion & Analysis 2012 Arabia and Romania. In addition, the Bank has developed further its retail network by opening two new branches in Jordan located in Aqaba and Abdali, and launched two new branches in Lebanon, namely in Broumana and Jdeideh. The other component of the strategy is to diversify business activities towards a universal banking model. As a result, the bank has expanded the operations of its investment arm, BLOMINVEST BANK, by enhancing its private and investment banking and capital market activities, in addition to introducing asset and wealth management services. The latter aims at establishing funds and investment vehicles for retail and high networth investors diversified in their asset composition and geography. Following the success of the BLOM Cedars and Petra Balanced funds that received numerous awards from leading international agencies, BLOMINVEST launched several other successful funds to a total of eight and amounting to USD million in The aim of the new products is the diversification in the sources of income that gives increasing share for non-interest income. To conclude, BLOM BANK will continue to pursue its organic growth strategy in the coming years by capitalizing on its existing resources and capabilities. 3. Evolution of Total Assets BLOM BANK witnessed a 8.14% growth in assets by the end of This resulted from the bank s expansionary policy and the perceived confidence of expatriates in BLOM BANK Group as a trustworthy source of placing their deposits. Total assets of the bank grew by 8.14% to reach USD 25.1 billion, as compared to USD 23.2 billion recorded in On the other hand, the share of assets denominated in foreign currencies witnessed a slight decrease to 70.91% from 71.83% a year earlier. Evolution of Total Assets (in USD Million) ,051 23, ,344 20, ,898 16, ,212 11, ,835 years 0 5,000 10,000 15,000 20,000 25,000 37

39 Management Discussion & Analysis 2012 Total Assets by Region % % Lebanon MENA Gulf Europe Lebanon MENA Gulf Europe MENA includes Egypt, Syria and Jordan Gulf includes UAE, Qatar and KSA. Europe includes France, United Kingdom, Romania, Switzerland and Cyprus. 4. Sources of Funds Customers Deposits Total Capital Fund Banks & Financial Institutions Other Liabilities % Customers Deposits Total Capital Fund Banks & Financial Institutions Other Liabilities % BLOM BANK s main sources of funding include customers deposits and total capital funds (Tier I & Tier II). Customers deposits constituted the biggest share of sources of funds with 87.0% of total funding in Total capital funds constituted 8.7% of total funds in 2012, while the share of banks and financial institutions amounted to 2.0% in 2012 and other liabilities comprised 2.3%. 4.1 Customers Deposits Throughout 2012, deposits at BLOM BANK continued to rise compared to Customers deposits increased by 7.36%, up from USD 20,296 million in 2011 to reach USD 21,791 million in 2012 as BLOM BANK continued to attract depositors who opted for a safe and trustworthy haven for their funds. 38 BLOM BANK s.a.l. Annual Report 2012

40 Management Discussion & Analysis 2012 Customers Deposits (in USD Million) ,791 20, ,606 18, ,109 13, ,735 10, ,992 years 0 5,000 10,000 15,000 20,000 Total Deposits by Region A concentration analysis of consolidated deposits by region reveals that Lebanon maintained the lead share with 78.9%, the remaining 21.1% were distributed among regional and European countries. % % With regards to foreign currencies share of total deposits, they slightly decreased by the end of 2012 to 72.1% of total deposits, as compared to 73.2% in Lebanon MENA Gulf Europe Lebanon MENA Gulf Europe On the other hand, BLOM BANK s market share in terms of customers deposits within the Alpha Group (banks with deposits over USD 2 billion) accounted for 16.47% in

41 Management Discussion & Analysis 2012 Total Deposits by Type of Client Corporate Individuals High Net Worth individuals % Corporate Individuals High Net Worth individuals % A concentration analysis of consolidated deposits by type of client reveals that Individual customers deposits accounted to 84.6% as compared to 84.2% in 2011 and Corporate deposits accounted to 15.4% as compared to 15.8% in Capitalization (Tier I & Tier II Capital) Tier I & Tier II Capital (in USD Million) Total capital funds increased by 10.02% yearon-year to USD 2,182 million at the end of 2012, bringing its contribution of total funds to 8.71% from 8.56% in Tier I Capital alone increased by 10.03% to USD 2,172 million at the end of 2012 compared to an increase of 8.6% by the end of Tier I increase can be mainly attributed to retained profits of the year 2012 amounting to USD million after dividend distribution. This measure falls in line with the bank s strategy of growing organically and at a steady pace. 2,000 1,500 1,000 1,388 1, ,459 2,182 1,983 1,891 1, years Tier 1 Tier II 40 BLOM BANK s.a.l. Annual Report 2012

42 Management Discussion & Analysis 2012 Total Capital Funds by Region A concentration analysis of total capital funds by geography shows that Lebanon accounted for 64.2% at the end of 2012 (61.6% in 2011) and the remaining 35.8% were spread among countries in MENA, Gulf and Europe. Lebanon MENA Gulf Europe % Lebanon MENA Gulf Europe % Uses of Funds BLOM BANK s strategy stresses the maintenance of high asset quality and a strong portfolio of investments. The risk component, which has always been the Bank s primary consideration while assessing the uses of funds, is reflected in the return on assets ratio that has always been at the forefront of listed Lebanese banks. The 2012 return on assets ratio stood at 1.39%. Within the overall use of funds, the share of Lebanese Treasury Bills as well as other governmental debt securities to total assets increased to 18.2% in 2012, up from 17.8% in This was followed by an increase in the share of cash and deposits at the Central Bank to total assets to 36.0% in 2012 from 35.1% in The Bank s placements with other banks and financial institutions amounted to 13.7% of total assets in 2012 compared to 14.2% in On the other hand, the share of bonds and financial instruments with fixed income inched down to 5.6% in 2012, from 5.9% in % % Lebanese Treasury Bills and other governmental bonds 18.2 Lebanese Treasury Bills and other governmental bonds 17.8 Cash and Central banks 36.0 Cash and Central banks 35.1 Banks & Financial Institutions 13.7 Banks & Financial Institutions 14.2 Loans granted to customers constituted 24.1% of total assets in 2012 and Bonds and Financial Instruments with fixed Income Loans to Customers Others Bonds and Financial Instruments with fixed Income Loans to Customers Others

43 Management Discussion & Analysis Investment Securities Portfolio BLOM BANK s investment securities portfolio is predominantly made up of governmental debt securities (45% of total portfolio), central banks securities (40% of total portfolio), corporate debt securities, funds and equity instruments % in FC for the year As for the Central Bank of Lebanon certificates of deposits 58.32% were denominated in LL and 41.68% were in FC as compared to 58.6% in LL and 41.4% in FC for the year The currency composition of the Lebanese governmental debt securities for the year 2012 were 57.21% in LL and 42.79% in FC as compared to 56.26% in LL and Amortized Cost Fair Value Fair Value through through Other Profit and Loss Comprehensive Total USD Million Income Central Bank of Lebanon Certificates of Deposits 4, ,062 Lebanese Governmental Debt Securities 3, ,620 Other Governmental Debt Securities Corporate Debt Securities , Certificates of Deposits-Banks and Financial Institutions Funds Equity Securities , ,058 Amortized Cost Fair Value Fair Value through through Other Profit and Loss Comprehensive Total USD Million Income Central Bank of Lebanon Certificates of Deposits 4, ,097 Lebanese Governmental Debt Securities 3, ,400 Other Governmental Debt Securities Corporate Debt Securities , Certificates of Deposits-Banks and Financial Institutions Funds Equity Securities , , BLOM BANK s.a.l. Annual Report 2012

44 Management Discussion & Analysis Loans and Advances to Customers Following BLOM BANK s adoption of a conservative loan strategy in order to maintain a high asset quality, the ratio of net loans and advances to total deposits, which has been successfully maintained at relatively low levels, continued to increase in the past three years from 26.41% in 2010 to 27.54% in 2011 to 27.66% in This was driven by the bank s strategy to expand its loan book that was coupled by the easing of local reserve requirements of the Central Bank. Thus, outstanding loans reached USD 6,028 million at the end of 2012, still on the rise by 7.82% from the previous year. BLOM BANK s market share in terms of total loans and advances within the Alpha Group (banks with deposits over USD 2 billion) reached 13.17% in Evolution of Loans and Advances (in USD Million) ,028 5, ,178 4, ,474 2, ,988 1, ,352 years 0 1,000 2,000 3,000 4,000 5,000 6,000 Net Loans by Region A concentration analysis of the loan portfolio by region reveals that Lebanon maintained the lead share with 71.7% at the end of 2012 (67% in 2011), while the remaining loan portfolio were spread among the group entities mainly in the MENA region which accounted for 16.9% at the end of 2012 down from 21.0% in 2011 mainly due to the decrease in the loan portfolio in Syria. Europe held 6.4% of the loan portfolio (7.6% in 2011) and the Gulf region accounted for 5.0% (4.5% in 2011). Lebanon MENA Gulf Europe % Lebanon MENA Gulf Europe %

45 Management Discussion & Analysis 2012 BLOM BANK s commercial loan portfolio accounted for 65% from the total loan portfolio at the end of 2012 (67% in 2011) and the retail portfolio accounted for 34.8% at the end of 2012 (32.9% in 2011). The increase in the retail portfolio during 2012 by USD 258 million was mainly driven by the increase in the housing loans. BLOM BANK during 2012 continued to benefit from the Central Bank of Lebanon incentives to stimulate lending and economic growth by easing of reserve requirements of banks. Net Loans by Type USD Million % of Total USD Million % of Total Commercial Loans 3, % 3, % Corporate Loans 2, % 2, % Syndicated Loans % % Margin Lending % % SMEs % % Retail Loans 2, % 1, % Car Loans % % Credit Cards % % Housing Loans 1, % % Personal Loans % % Loans to Related Parties % % Total Net Loans 6, % 5, % Provisions and unrealized interest for impaired loans including collective provisions increased to reach USD 284 million at the end of 2012 compared to USD 198 million in 2011.The major driver of this increase was the collective provisions that the bank provided for during 2012 and 2011 against any potential deterioration of the loan portfolio especially in Syria. Collective provisions remained the same at a level of USD 68 million at the end of Gross doubtful loans to gross total loans increased to 5.44% compared to 3.20% in The increase was mainly driven by the doubtful loans in Syria. On the other front, the coverage ratio of doubtful accounts by monetary provisions (excluding collective provisions) decreased in 2012 to reach 61.62% from 68.54%, however it reaches 121% while accounting for the real guarantees. The ratio of foreign currency loans with respect to total loans in 2012 decreased from 84.46% to 83.32% and the ratio of foreign currency loans to foreign currency deposits slightly increased to 31.99% in 2012, from 31.76% in The breakdown of the loan portfolio by maturities shows that medium and long term loans with maturities exceeding one year constituted 26.7% of the bank s outstanding net loans in 2012 as compared to 28.3% in 2011, whereas short term loans, with maturities of less than one year, constituted 73.3% of the total net loans, compared to 71.7% in Gross Loans by Economic Sector BLOM BANK seeks diversification in its loan portfolio through lending to different economic sectors. Agriculture and Forestry Manufacturing Trade Services Construction (Developers) Construction (Project Financing) Freelance Professions Consumer Loans % Agriculture and Forestry Manufacturing Trade Services Construction (Developers) Construction (Project Financing) Freelance Professions Consumer Loans % The highest economic sector share is consumer activities (37%), followed by Services (20%), Construction (19%), Trade (14%) and Manufacturing and Agriculture (10%). 44 BLOM BANK s.a.l. Annual Report 2012

46 Management Discussion & Analysis 2012 Gross Loans by Type of Collateral BLOM BANK loan portfolio remains highly collaterized, where secured lending against mortgages and cash collateral represents 61% from total lending at the end of 2012 (same as year 2011). The analysis of the gross loan portfolio by type of collateral reveals that retail loans accounted for the largest share of the 2012 portfolio, rising from 32.37% in 2011 to 33.92% in Moreover, advances against personal guarantees decreased, representing 8.17% of the total gross loans portfolio in 2012, from 10.98% in Advances against cash collateral went up to 14.18% in 2012 from 13.60% in In the year 2012, secured loans accounted for 87% of total loan portfolio, whereas overdraft loans accounted for 13%. % % Commercial Loans Secured by Mortgages Advances Against Personal Guarantees LC Financing Advances Against Cash Collateral Commercial Loans Secured by Mortgages Advances Against Personal Guarantees LC Financing Advances Against Cash Collateral Syndicated Loans Retail Loans Advances against securities Syndicated Loans Retail Loans Advances against securities Advances against Bank guaratntees Overdraft Other Advances against Bank guaratntees Overdraft Other Liquidity BLOM BANK s ability to maintain high liquidity levels, minimize risks and ensure high quality of assets has been at the center of liquidity management and core objectives of the Group. The Bank has successfully maintained ample liquidity in 2012 where overall liquidity stood at 57.99%. As such, the Lebanese Pound liquidity ratio (including Lebanese government Treasury Bills) was 98.61% in 2012, reflecting high liquidity levels. Moreover, the immediate liquidity (cash & banks) in foreign currencies accounted for 52.53% of foreign currency deposits in 2012, as compared to 53.12% in The liquidity position is assessed and managed under a variety of scenarios, giving consideration to stress factors relating to both the market in general and specifically to the Group. BLOM BANK has arranged diversified lending sources in addition to its core deposits base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. Net Liquid assets (that mature within one month) to total customers deposits ratio at BLOM BANK stood at 45

47 Management Discussion & Analysis % at the end of 2012 compared to 18.57% in Net liquid assets (that mature within one month) consists of cash, short-term deposits and liquid debt securities available for immediate sale less deposits for banks and financial institutions due to mature within next month. noticeable in BLOM BANK accounts. In 2012, the gap was negative in the maturities from zero to three months, amounting to USD 12,538 million. After three months, the maturity gaps turn positive, reaching USD 6,098 million for maturities of two to five years. Maturity mismatch between assets and liabilities, which characterizes the Lebanese banking sector, was also 7. Profitability BLOM BANK preserved its position as one of the most profitable and the best performing bank in Lebanon for the year The bank recorded net profits of USD million, increasing by 1.32% compared to the year 2011 where net profits stood at USD million. BLOM BANK s Lebanese operations still constitute the lion s share with 85.05% of total net income. BLOM BANK s profits contributed to a considerable portion of the total banking sector profits as it accounted for a share of 19.93% of the Alpha Group (banks with deposits over USD 2 billion). BLOM BANK s performance was also reflected in attaining the highest profitability ratios. Return-onaverage common equity stood at 17.80% in 2012, compared to 19.20% a year earlier. Return-on-average assets for the year 2012 reached 1.39%. On the other hand, earnings per share increased to USD 1.53 in 2012 from USD 1.48 in Evolution of Net Income (in USD Million) years BLOM BANK s.a.l. Annual Report 2012

48 Management Discussion & Analysis Net Interest Income Net interest income registered a 1.16% increase in 2012 to USD million (including USD 15.1 million net interest income on financial assets and liabilities designated at fair value through profit and loss). The growth came as a result of a 5.03% increase in interest and similar income to USD 1,307.3 million in 2012, while interest charges reached USD million for 2012 compared to USD million for Interest and Similar Income The 5.03% increase in interest and similar income is attributed to the diversification of interest income generating instruments where the bank opted to make better use of resources by transferring into relatively safer and better yielding placements with the Central Bank of Lebanon, fixed income securities and by extending loans. The breakdown of interest and similar income reveals a decrease in the share of governmental debt securities to 24.82% in 2012 compared to 25.82% in On the other hand, the portion of income generated from deposits with banks and central banks increased to 14.59% from 9.62%. As a result, the contribution of bonds and other financial instruments with fixed income (including Central Bank of Lebanon certificates of deposit) stood at 28.10% in 2012, as compared to 31.46% a year earlier. Interest income generated from loans and advances including related parties represented 32.49% of the total in 2012, decreasing from 33.10% in 2011 due to the deterioration in the loan portfolio in Syria % % Lebanese TB s and Other Governmental Bills* Deposits with Banks and Central Banks Bonds & Other Financial Instruments with Fixed Income including CD s* Loans and Advances (including related parties) Lebanese TB s and Other Governmental Bills* Deposits with Banks and Central Banks Bonds & Other Financial Instruments with Fixed Income including CD s* Loans and Advances (including related parties) * Including net interest income on financial assets and liabilities designated at FVTPL

49 48 BLOM BANK s.a.l. Annual Report 2012

50 49

51 Management Discussion & Analysis Interest and Similar Charges % % Deposits from Customers Including Related Parties Deposits and Similar Accounts from Banks and Financial Institutions Deposits from Customers Including Related Parties Deposits and Similar Accounts from Banks and Financial Institutions Interest and similar charges increased by 7.9% to USD million in 2012 as compared to USD million in Average Balance Sheet and Interest Rates An analysis of average interest earning assets shows that governmental debt securities accounted for 19.80% of total average interest earning assets in 2012, decreasing from 20.30% in The average deposits with banks and central banks increased to 29.61% in 2012 as compared to 28.09% in The share of bonds and other financial instruments with fixed income, including Central Bank of Lebanon certificates of deposit, accounted for 24.50% compared to 25.36% a year earlier and the average loans and advances slightly decreased to 26.09% in 2012, compared to 26.25% in On the other hand, an analysis of average interest bearing liabilities reveals that average interest bearing liabilities went up by 4.38% to USD 20,961 million compared to USD 20,081 million a year earlier. Deposits from customers including related parties accounted for the largest share of the average interest bearing liabilities, amounting to 98.69% in 2012 while deposits from banks and financial institutions represented the remaining 1.31% Interest Interest Average Average Average Average Earned - Earned - Balance Rate Balance Rate USD Million (Paid) (Paid) Governmental Debt Securities 4, % 4, % Interest Earning Placements with Banks and Financial Institutions (Including Central Banks Placements) 6, % 5, % Bonds and Other Financial Assets with Fixed Income (Including Central Bank of Lebanon 5, % 5, % Certificates of Deposits) Loans and Advances to Customers 5, % 5, % Total Average Interest Earning Assets 21,809 1,307.3* 5.99% 20,993 1,244.7** 5.93% Customers Deposits 20,687 (762.3) 3.68% 19,853 (705.3) 3.55% Interest Bearing Deposits with Banks and Financial Institutions 274 (7.4) 2.70% 229 (7.8) 3.42% Total Average Interest Bearing Liabilities 20,961 (769.7) 3.67% 20,081 (713.1) 3.55% Interest Spread 2.32% 2.38% Net Interest Margin 2.24% 2.29% *Including USD million net interest income on financial assets and liabilities at FVTPL ** Including USD million net interest income on financial assets and liabilities at FVTPL 50 BLOM BANK s.a.l. Annual Report 2012

52 Management Discussion & Analysis 2012 Net Interest Margin % 2.03% 2.42% 2.18% 2.29% 2.29% 2.24% % 1.77% years 7.2 Non Interest Income Non-interest income increased by 29.3% year-on-year, amounting to USD million in 2012 compared to USD million in Constituents of Non-Interest Income Net Commissions Net Gain/Loss on Financial Assets and Liabilities designated at Fair Value through Profit and Loss Net Gain/Loss on Financial Operations Other Operating Income % Net Commissions Net Gain/Loss on Financial Assets and Liabilities designated at Fair Value through Profit and Loss Net Gain/Loss on Financial Operations Other Operating Income % Net commissions showed a decrease of 3.59% to USD million in 2012,and a share of 41.2% of non-interest income. The remaining 58.8% of noninterest income in 2012, mainly is attributable to net gain on financial assets and liabilities designated at fair value through Profit and Loss, accounted for 47.2% of total noninterest income in

53 Management Discussion & Analysis Staff and Operating Expenses Staff and operating expenses reached USD million in 2012, registering a year-on-year increase of 6.85%. Staff expenses (salaries and related benefits) increased by 4.23% in 2012 to USD million while operating expenses went up by 11.51% to reach USD million. Thus, staff expenses accounted for the largest share of staff and operating expenses with 62.40% while operating expenses stood at 37.60%. That said, BLOM BANK is still maintaining a relatively low cost-to-income ratio, reflecting the Bank s efficient cost-containment policy. The cost-to-income ratio slightly increased to % in 2012 compared to 36.21% in USD Million Staff Expenses Operating expenses Number of Employees* 4,414 4,357 Staff Expenses per employee (USD) 37,195 36,153 Operating expenses per employee (USD) 22,407 20,357 * For more details refer to 13.1 Cost to Income Ratio % % 37.99% % % 35.10% 34.63% 35.58% 35.04% years 8. Dividend Distribution and Preferred Shares Revenue During BLOM BANK s Annual General Assembly, on April , the distribution of dividends for the year 2012 was approved. Holders of preferred shares series 2011 received a USD 0.7 per share. As for holders of common stocks and Global Depositary Receipts (GDR), they received the equivalent of LL 675 per share. All distributed dividends are subject to a 5% tax. 52 BLOM BANK s.a.l. Annual Report 2012

54 Management Discussion & Analysis Interest Rate Risk Interest rate risk arises from adverse movements in interest rates, thus affecting the bank s interest earning assets and liabilities. Interest rate risk is well managed through the continuous re-pricing of assets and liabilities. Most assets and liabilities are re-priced within one year. Given that the majority of the bank s deposits are repriced within the three months interval, while most of the bank s treasury bills and government bonds portfolio are re-priced after the three months period, interest rate risk continues to remain within this period. 10. Risk Management and Basel III Preparations 10.1 Risk Management The consolidated Basel III Capital Adequacy ratio of the Group reached 13.65% by the end of 2012 against 12.9% in BLOM BANK Group (excluding Insurance Subsidiaries) Capital Adequacy Ratio / Tier I Ratio 14.00% 13.96% 13.81% 13.65% 13.50% 13.00% 12.50% 13.02% 12.94% 12.70% 12.75% 13.68% 13.59% 12.84% 12.91% 13.54% 12.00% years CAR Tier I Ratio The ratio calculation was based on the Banking Control Commission of Lebanon (BCCL) requirements amended following the Basel III directives on capital resilience issued by the Basel Committee on Banking Supervision (BCBS) in June Three capital adequacy ratios were introduced and Lebanese banks are required to abide by the minimum set limits by end of Net Common Equity Tier 1 / Total Risk Weighted Assets Tier 1 / Total Risk Weighted Assets Total Capital Funds / Total Risk Weighted Assets 53

55 Management Discussion & Analysis 2012 The BLOM consolidated CAR ratios are clearly above the regulatory requirements and exceed the 10.5% that would be required under Basel III once the capital conservation buffer element is fully implemented. Ratio BLOM Ratio BCCL Minimum Limit (by end of 2015) Basel III Minimum Limit (including capital conservation buffer of 2.5%) Net Common Equity Tier 1 / Total Risk Weighted Assets 12.06% 8% 7% Tier 1 / Total Risk Weighted Assets 13.54% 10% 8.5% Total Capital Funds / Total Risk Weighted Assets 13.65% 12% 10.5% Those ratios are calculated in accordance with the Standardized Approach for Credit Risk, the Basic Indicator Approach for Operational Risk and the Standardized Measurement for Market Risk. The BCCL has since made some amendments to its calculation requirements in a memo issued in April 2013 that would result in 2012 Capital Adequacy Ratio being re-stated as follows: BLOM Ratio Net Common Equity Tier 1 / Total Risk Weighted Assets 2012 (based on BCCL memo- April 2013) 12.06% 11.27% 12.44% Tier 1 / Total Risk Weighted Assets 13.54% 12.84% 13.89% Total Capital Funds / Total Risk Weighted Assets 13.65% 12.91% 13.99% Total Capital Funds as per Basel III increased by 11.95% in 2012, standing at LL 2,906,246 million at end of year, compared to LL 2,596,091 million at end of This increase is mainly attributed to the retained earnings as well as the increase in the Bank s reserves. Total Risk Weighted Assets went up from LL 20,109,108 million in 2011 to LL 21,284,482 million at end of The Credit RWAs represent 87.60% of the Bank s total RWAs and it increased by 4.57% from 2011 to This position is relatively affected by Lebanon s sovereign rating of B (by S&P scale) which impacts the Risk Weighting of Foreign Currency government securities holdings of the Bank. As for the Market RWAs and Operational RWAs, they increased correspondingly by 21.55% and 48% representing 3.84% and 8.56% of the Bank s total RWAs. The increase in Capital Funds offset the impact of RWAs growth, leaving the CAR at 13.65%. Capital Funds as per Basel III LL Million 2012 Common Equity Tier I Capital 2,805,989 Common Equity Tier I Capital Deductions (238,084) Net Common Equity Tier I Capital 2,567,904 Additional Tier I Capital 314,996 Tier I Capital 2,882,900 Tier II Capital 23,346 Total Capital Funds 2,906,246 For regulatory as well as internal purposes, the Bank calculates Basel Capital Adequacy Ratio on a group consolidated basis and by individual legal entity, allowing for close monitoring of the capital position of each banking subsidiary. In the latter case, every single entity achieved a Basel III Capital Adequacy Ratio above the minimum 8% international requirement. 54 BLOM BANK s.a.l. Annual Report 2012

56 Management Discussion & Analysis 2012 Two new minimum standards for funding liquidity have been developed by the BCBS: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The first being intended to promote short term resilience of a bank s liquidity risk profile, and the second to provide sustainable maturity structure of assets and liabilities. LCR has a time horizon for one month and the NSFR for one year. The BCBS also introduced a leverage ratio requirement that is intended to constrain leverage in the banking sector and bring in a simple, transparent and independent measure of risk. We have calculated a preliminary Tier 1 leverage ratio for the Bank and the results were clearly above the 3% minimum set by the committee. Certain aspects of the Basel III rules are subject to national discretion and interpretation, as such, the estimated impact on BLOM BANK is subject to change as the regulators develop their requirements around the practical implementation of the new rules. The Bank s capital position is closely monitored by General Management and Group Risk Management. The latter is delegated by the Board of Directors to ensure sound, comprehensive and effective Risk Management practices and processes are in place throughout the Group. BLOM BANK Group (excluding Insurance Subsidiaries) Risk Weighted Assets by Risk Type LL Million 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 13,846,230 14,919,262 15,760,657 17,813,871 20,109,108 21,284,482 Group Risk Management has implemented a Risk Management Structure within the Group whereby each country in which the Bank is present has its own Risk Manager that reports to the Group Chief Risk Officer. Currently, there are eight country Risk Managers. 0 years All areas of risk coverage by the Group underwent continued development during 2012: Under Credit Risk, the generation of Internal Ratings through the Moody s Risk Analyst system for the Bank s commercial, corporate and SMEs credit portfolios continued. Moreover, during 2012 the Bank developed scorecards for Project Finance, HNWI, Cash-Collateral & Kafalat loans enabling the Bank to internally rate mentioned loans. Application scorecards developed by Fair Isaac for Retail Banking products were implemented. The retail products covered include car loans, personal loans and credit cards. The Bank is putting in place an infrastructure that would enable it to meet requirements necessary to move eventually towards an Advanced IRB approach in Credit Risk under Pillar I of Basel II. For Market Risk, static ALM for BLOM BANK Lebanon, Cyprus, and BLOMINVEST BANK was implemented and dynamic ALM was also implemented for BLOM BANK Lebanon. Static ALM for Jordan Branches is in its final stages. Parameterization and testing is being undertaken in order to implement Funds Transfer Pricing (FTP); the Bank will be using Sungard Focus FTP in order to transfer price the Bank s positions and analyze net interest income Credit Risk Operational Risk Market Risk contribution based on various dimensions (Business lines, Branches, Regions, Products, etc.). Moreover, the Focus ALM system enables the Bank to closely monitor liquidity and interest rate risks by generating detailed Interest Rate Sensitivity Gaps, Earnings at Risk, Cashflow balance sheets, Interest Rate Shocks and Foreign Exchange fluctuation scenarios. Market Risk has automated the calculation of the market risk capital charges for BLOM BANK Lebanon, Foreign Branches, and BLOMINVEST BANK under the Bancware Capital Manager (BWCM) system. The Capital Manager and the ALM systems have analytic as well as scenario generating capabilities. These capabilities are thoroughly used to generate internal and regulatory reporting and meet pillar II requirements of Basel II. The Market Risk team closely monitors the Bank s funding and liquidity position and performs various stress tests to take into account changes in the operating environment in Lebanon and the region. The Bank places importance on maintaining high liquidity to meet short term needs, as well as sustaining a stable deposit base. 55

57 Management Discussion & Analysis 2012 The Operational Risk team of Group Risk Management ensures that all activities are covered by clear policies and procedures taking into account all relevant risk aspects which are highlighted through risk control self assessments of all business and operational activities. The Bank maintains detailed Loss Incidence Database reflecting Basel requirements whereby business lines and loss types are clearly highlighted. Moreover, the Operational Risk team prepared a new more comprehensive Business Continuity Plan that covers potential emergency scenarios and ensures that Business Continuity policies are in conformity with best practices. Policies and procedures covering all types of risks have been reviewed and updated to ensure they take full recognition of best practice, cover regulatory and internal guidelines and shield against new risks Internal Capital Adequacy Assessment Process (ICAAP) The Bank developed a comprehensive Internal Capital Adequacy Assessment Process (ICAAP) document concerned with managing and forecasting capital requirements across the Group that was submitted to the Banking Control Commission of Lebanon at end of June 2011, based on end-2010 balances. The ICAAP exercise is updated on a yearly basis and significant changes are reported to the Bank s General Management and Board Risk Management Committee. The ICAAP takes into account forward-looking factors such as the Bank s strategic plans and conceivable external changes. The Bank has put in place a strategic plan that clearly delineates its near-and-longer term capital needs, capital expenditures required for the foreseeable future, target capital levels, and external capital sources. It also performed rigorous and forward-looking stress tests that identify plausible severe events or adverse changes in market conditions, and assess their impact on the Bank s capital adequacy. To assess overall capital adequacy, the Bank considers not only quantitative techniques but also includes an element of qualitative assessment or management judgment of both capital model inputs and outputs. These other factors could be ratings, market reputation and strategy. The ICAAP considers all risks faced by the Bank, and mainly: Pillar I risks (credit risk, market risk, operational risk), risks not captured under Pillar I but elaborated under Pillar II (credit concentration risk, country risk, interest rate risk in the banking book, liquidity risk, reputation risk, strategic risk), risk factors external to the institution, non-banking risks (sovereign risk). The Bank has also documented its risk appetite statement, detailing the following aspects: key risks that the Bank is exposed to, basic principles encompassing risk management practices, definition of risk appetite, risk appetite objectives, risk appetite framework and Key Risk Indicators (KRIs) along with their thresholds. BLOM BANK risk appetite statement constitutes quantitative and qualitative parameters. It is elaborated at each entity level as well as on a consolidated basis. The ICAAP exercise showed that the Bank has an adequate capital base to support its operations and to finance its growth in line with its strategic objectives. Results have shown that the Bank holds sufficient capital to weather stressed situations Corporate Governance The Corporate Governance Code was approved at the end of 2007 by the Board of Directors at BLOM BANK and most recently updated in December The Code is also published on the Bank s website including details related to Board Committees meetings. The Board exercises its oversight function to a large degree through four dedicated Board Committees: the Board Audit Committee, the Board Risk Management Committee, the Consulting Strategy and Corporate Governance Committee and the Nomination and Remuneration Committee. The Board Audit Committee s responsibility is to monitor and assess the integrity of the Bank s financial accounting. The Audit Committee also assesses the competence of External Auditors as well as the Internal Audit Department, in addition to internal controls and compliance with the Bank s by-laws and internal regulations. The Board Risk Management Committee periodically reviews and evaluates the Risk Management function of the Group, and reports and drafts recommendations to the Board. The Consulting Strategy and Corporate Governance Committee oversees the development of the strategic plan and monitors its progress throughout the Group. It approves and monitors large projects, develops corporate governance policies and practices, and advises the Board on overall business development. The Nomination and Remuneration Committee provides assistance to the Board in identifying individuals qualified for directorship to sit on Board committees. Also, it plans the succession of executive and non-executive directors and evaluates the performance of top management, including Board members. The Bank in its Corporate Governance Code has established independence criteria for non- executive members of the Board who must constitute a majority of the Board. The Board Committees are fully functional and meet in accordance with their stipulated frequency. The Bank firmly believes in the basic principles of accountability, reporting and transparency throughout the organizational structure. Senior management exercises the authority delegated to it by the Board through clear and segregated reporting channels, including Management Committees covering all areas of operations. They also ensure that internal risk and control procedures and structures are overseen by respective departments, namely Internal Audit, Risk Management and Compliance. 56 BLOM BANK s.a.l. Annual Report 2012

58 Management Discussion & Analysis 2012 The Bank makes sure that all employees act professionally, ethically and with the utmost integrity in accordance with an established Code of Ethics and Conduct. Additionally, the Bank recognizes the value of its Human Resources as a prime stakeholder in the institution, endeavoring to treat all employees in the most equitable manner. As such, all employees are required to attend presentations on the Bank s Code of Conduct and Corporate Governance. The Bank will continue to develop its Corporate Governance practices while seeking to protect and enhance stakeholders interests from shareholders to employees. 11. Universal Banking Services In line with its aim of maximizing customer satisfaction and increasing shareholders value, BLOM BANK has adopted the policy of diversification of its products and services. BLOM BANK provides the following universal banking services that suit all customers needs: - BLOMINVEST BANK Services - Commercial and Corporate Banking - Retail Banking - Islamic Banking - Insurance Products and Services 11.1 BLOMINVEST BANK Services BLOM BANK through its investment banking arm, BLOMINVEST BANK, is one of few institutions within the greater Levant region that offer Private banking, Investment banking, Asset Management, Brokerage, and Research services under one roof. Based on its track record, BLOMINVEST BANK to date remains the most awarded local investment bank. Private Banking Services A dedicated team of private bankers optimize the wealth management and financial advisory experience of clients by offering them tailor-made investment instruments that are in line with their risk profile and across an open architecture platform of diverse asset classes. Investment Banking Services A team of investment banking experts offer equity and debt capital markets advisory services to the private and public sector in terms of capital raising, mergers and acquisitions advisory solutions and the initiation of carefully selected real estate projects. Asset Management Services An experienced team of asset managers oversee the entire value chain of fund management business by engineering sustainably performing funds that meet the low-medium risk profile of client demand, in addition to undertaking discretionary portfolio management. Brokerage Services A team of skilled traders extend competitive and around the clock execution on global capital markets from fixed income instruments to equities to derivatives to currencies and precious metals with active market making capabilities. Research Services A team of economists and analysts provide value added research and equity coverage across the MENA region by systematically publishing economic and financial information including indices as well as conducting equity analysis on leading regional institutions Commercial and Corporate Banking During 2012, BLOM BANK has continued to expand its credit portfolio benefiting from its high liquidity and availability of excess deposits. In this regard, 2012 witnessed a significant increase in the credit portfolio by 14.7% mainly due to the extension of new loans to SMEs as well as to Corporate clients, whilst, preserving the conservative credit practices of BLOM BANK. In addition to conventional banking loan services, BLOM BANK developed its products and services to meet market trends and requirements. Subsidized and Soft loans BLOM BANK continued to take advantage of BDL incentives related to extending credit against decrease in required reserves. The bank therefore developed its existing products and services to provide financing in compliance with BDL Circular #158 which enables the bank to provide soft and subsidized loans with appropriate tenors that meet the needs of our diversified clients in all sectors of the Lebanese economy. Arab Trade Finance Program (ATFP) In contributing to the development of the Lebanese and Arab economies, BLOM BANK increased its line of credit with the ATFP to USD 25 million. This enhances the trade of goods of Arab origin and associated services and encourages Lebanese exporters and importers to increase their business transactions with the Arab World. SME Relationship Unit BLOM BANK has initiated the SME Relationship Unit in The objective of this unit was to give support to BLOM branches located all over Lebanon to promote new loans, attract prospect clients and increase credit facilities to existing SME clients. As a result, its impact 57

59 Management Discussion & Analysis 2012 on the credit portfolio was remarkable in 2012 due to attracting new SME clients that enhanced our portfolio and our existence in the market. Corporate Financing BLOM BANK Corporate Department helps in extending credit to Corporate Clients especially in the fields of Project Finance, Real Estate Development and Trade Financing among other loans and credit facilities. During 2012 the unit was highly active in attracting new clients that contributed to the increase of the bank s credit portfolio. Syndicated Loans BLOM BANK mandated and participated in several syndicated loans to finance projects in Lebanon and other Arab countries. Islamic Financing BLOM BANK developed its existing products and services to provide financing in compliance with the Islamic Sharia through its subsidiary, BLOM DEVELOPMENT BANK. Overseas Financing BLOM BANK continues to expand its credit portfolio overseas in affiliation with the Group entities in the Middle East region, Europe and the GCC. BLOM BANK Qatar further strengthened its contributions by extending credit facilities to corporate clients in Qatar thus benefiting from the booming economy that is expected to continue its growth during the coming decade especially with Qatar hosting the 2022 Football World Cup Tournament. In conclusion, BLOM BANK strives to contribute fundamentally to the development of the Lebanese and Arab economies while maintaining a conservative and sound lending policy Retail Banking Products and Services In 2012, BLOM BANK introduced new retail products, and developed its portfolio of existing payment cards, loans, and services. Payment cards BLOM BANK offers a wide range of payment cards that target different customers, provide different methods of payments and meet different purposes. These cards vary in type and in currency. The segmentation of cards took into consideration the various types of customers and their card needs; debit, charge, credit, co-branded and prepaid. As such, BLOM cards are under both brands, Visa and MasterCard and range from Electronic, Classic, Gold, Titanium, Platinum, Black Platinum, and Corporate (Business Platinum, Platinum Corporate, and Classic Corporate cards). The Black Platinum card has been replaced by a much more prestigious card, which allows its cardholders to enjoy exclusive benefits and handpicked privileges worldwide. The BLOM Visa Infinite is only available upon request and reserved to the most discerning of customers tailored to suit the needs of an international and exclusive group of individuals wherever they may be. Moreover, the Bank has Internet cards dedicated for Internet users, a Platinum Euro card for those who visit Europe frequently, and prepaid cards mini for those wishing to have a card without opening an account. BLOM also has Watan, a card which was launched solely for the Lebanese army, internal security and national security forces. BLOM was the first bank in Lebanon to launch the Personalize your card service whereby cardholders can add on the front of their card a personal image from their own collection, or an image from BLOM s unique Image Library, which includes categories like sports, wildlife, love, pets, holidays and special occasions to name a few. BLOM exclusively offers the possibility of having this service online or physically through any branch. As part of its Corporate Social Responsibility activities, BLOM BANK launched two new programs in 2010 that were considered unique in Lebanon; the BLOM Shabeb and MasterCard Giving card. The BLOM shabeb Program targets the Youth who consist of middle and high school students, university students, and future professionals. The program offers the youth an array of banking services, especially catered to their lifestyles and needs. The retail department has introduced three types of cards to suit the needs of the youth: prepaid cards, debit cards, and preapproved credit cards for students of predetermined universities. On another front, BLOM BANK launched the MasterCard Giving card, first of its kind in the world, in collaboration with the Lebanese Mine Action Center (LMAC), a unit of the Lebanese Army. The program offers a Gold MasterCard or a Titanium MasterCard card, which combine the benefits of a credit card, with the ability to donate to the LMAC, which is in charge of demining the Lebanese territory, spreading awareness in the minefields surroundings and caring for those who are injured due to mines. Donations are made whenever BLOM MasterCard Giving Affinity cardholders pay the card s annual fee and whenever they use their cards for purchases or for cash withdrawals. In 2012, BLOM BANK added to this groundbreaking initiative a new mission which is planting trees in all the demined areas of Lebanon with over 1,000 olive and pine trees already planted in the villages of Houla and Souk El Ghareb. BLOM BANK introduced the Khoury Home Visa Platinum card, specially designed for the distinguished customers of Khoury Home, combining the benefits of holding a Visa credit card and the rewards for enrolling in Khoury Home loyalty program. The card offers a repayment method allowing cardholders to settle their purchased item in equal monthly installments. In 2012, BLOM BANK also partnered with the Association of Lebanese Industrialists offering their members special 58 BLOM BANK s.a.l. Annual Report 2012

60 Management Discussion & Analysis 2012 and exclusive deals ranging from POS machines, Business Loans with no file fees, as well as payment cards (BLOM- ALI Corporate Black Platinum) at competitive rate and featuring an array of complimentary benefits. POS Machines Merchants in Lebanon wishing to install BLOM POS machines have a choice between: GPRS machines Wireless and do not require any electricity or telephone cables, and do not even require any telephone line. With a SIM card provided by BLOM BANK, our GPRS machines are mobile, allowing merchants to move them anywhere they desire. They accept dual currencies (USD- LL) Hypercom POS machine Require electricity line and a fixed telephone line. They are a dual currency machines: USD and LL. Veriphone machines Require electricity line and a fixed telephone line. They are a single currency machine: USD or LL. The BLOM machines accept payment cards under the brands of Visa, Visa Electron, MasterCard, MasterCard Electronic, and Maestro. The machines are equipped with the latest EMV technology that allows acceptance of Chip cards. This technology provides ultimate security to both the cardholder and the merchant. BLOM BANK provides merchants with a next day settlement of the transaction amount, with a one day value date as of the settlement of the amounts. BLOM BANK also dedicates an account manager to handle all inquiries and suggestions concerning POS issues. In addition, BLOM BANK puts at its merchants disposal a 24 hour call center which is tailored to cater for all needs and to provide all the needed support. Reward Programs The BLOM Golden Points Loyalty program enables customers to accumulate Miles and Points with every USD they spend using their card. Cardholders may redeem their miles for airline tickets to the destination of their choice, and on the carrier they desire. Points are redeemable for valuable gifts such as free stays at the finest hotels, fragrances, electronics, and much more. The BLOM Gifts Loyalty program allows cardholder to win valuable gifts for purchases at certain merchants over a period of 6 months. The Shabeb Loyalty program is a recently launched program dedicated to the BLOM Shabeb cardholders that entitles them for discounts and special deals at reputable merchants across Lebanon. Our co-branded card Alfa BLOM MasterCard offers free talk time to cardholders on monthly basis and on card spending. Consumer loans BLOM BANK s customers can take advantage of a number of consumer loans to satisfy their various needs: KARDI For personal loans Consumer Loans In association with a number of leading retailers in Lebanon, winner of the Best Personal Loan in the Middle East for 2011, from The Banker Middle East. Student Loans In cooperation with the American University of Beirut and other institutions. SAYARATI For car loans (new or used vehicles), winner of the Best Car Loan in the Middle East for 2011, from The Banker Middle East. Housing Loans DARATI for housing loans (principal home, or nonprincipal home) Housing loans in Collaboration with the Institution for Public Housing (IPH) Housing Loan for projects under construction Housing Loans for the Military, Internal security Forces and Judges in collaboration with their administration. Solar Loans In association with numerous local companies that offer solar installations. SME loans Small and medium enterprises or even self-employed or business owners can benefit from a variety of loans tailored for their needs: Small Business Loan for SMEs Including a special program offered in coordination with the European Social Fund for Development. Business Loan For financing an office, a warehouse, a clinic, etc. KAFALAT It is a subsidized loan for small business owners. Bancassurance Services AROPE Insurance, BLOM BANK s subsidiary, offers all kinds of insurance services from personal accident, to health, to fire, to car insurance and so on. BLOM BANK also offers investment programs coupled with a life insurance policy in collaboration with Arope Insurance. A successful line of savings/insurance plans is also on offer; DAMANATI Plus, a retirement plan coupled with life insurance and WALADI Plus, a child s education program, coupled with life insurance. Investment Products BLOM BANK offers a collection of investment products to help manage one s finances in a better, safer and more profitable way. Accordingly, BLOM BANK, in collaboration with BLOMINVEST BANK, offers a collection of Mutual Fund programs. Special Accounts BLOM BANK offers a number of special accounts, catered for special needs. In addition to the traditional savings and current accounts, Maksabi a special savings account, utility bills account, Salary Domiciliation accounts, and 3 types of bundled accounts that offer 59

61 Management Discussion & Analysis 2012 the client current accounts with various services for a monthly fee: Account Plus Classic, Account Plus Gold and Account Plus Platinum. Clients opening a Wedding List Account benefit from personalized debit cards, a preapproved credit card, along with exclusive offers that are related to that Special Day, and created to save up on all your wedding expenses Customer Service The primary aim of BLOM BANK is to better service its customers by offering the best products and services. BLOM ecash The BLOM ecash service offers customers the possibility of making transfers to any person without the need for a bank account. The transfer is initiated by the customer through his PC or mobile and the funds are withdrawn by the recipient from any BLOM ATM without a card. Sales Force BLOM has more than one sales channel which range from Direct Sales, to indoor Sales, to telemarketing teams available to promote and sell each and every Retail product or service. Call Center BLOM customers can enjoy the convenience of a 24-hour call center, ready to cater for all their needs and inquiries. The retail department also has a telemarketing team to make outbound informative calls to existing clients. E-Banking BLOM BANK offers to its customers phone banking services such as Allô BLOM (a 24-hour customer service) as well as internet banking services such as e-blom. This service allows users to complete many of their routine banking transactions in the comfort of their home/office. The client may even apply for a card, issue a prepaid card, or even perform outgoing transfers. Mobile Banking The Mobile Banking service is a member of the eblom suite of electronic services and delivery channels and is a completely optimized service for mobile and devices which puts at the client s disposal a wide range of online banking services. Just by getting connected, BLOM customers can manage their accounts and cards on a real-time, fast and secure basis, along with access to unique features that are constantly updated. SMS Alert Service The Bank provides a convenient SMS ALERT service, enabling customers to receive alerts whenever the balance of accounts changes or whenever a transaction is being performed. Social Media The BLOM Retail page on Facebook features constant updates about the latest promotions and the various products and services launched by the bank. The page currently has more than 94,000 fans and is considered one of the most successful pages on Facebook- Lebanon. A new channel has also been established on YouTube featuring BLOM BANK s TVC s and TV releases. Public Website BLOM retail products and services enjoy an independent, user-friendly website where users can make use of simulators and of online applications through: BLOM BANK developed a friendly, easy-to-use mobile version of the public website compatible with all smartphones in the market Technology Call Center The Call Center s monitoring system has been upgraded for a better examination and control: Fraud Monitor System, ATM Monitor System. Workflow BLOM internally developed a workflow system to process most retail loans electronically, thus benefiting from Electronic Archiving, as well as speed in approval and response cycles (e.g.: 1 hour for car loans) Islamic Banking The year 2012 was associated with many political and economic challenges particularly the unstable and ambiguous local and regional environment, BLOM DEVELOPMENT BANK (BDB), in spite of all of this, succeeded to maintain a steady growth where its total deposits grew by 59% compared to last year and its total assets increased by 30%. Industry market share reached around 20% of the sector, which is considered an achievement knowing that BDB is the most recently established Islamic Bank in Lebanon (Feb 2006). BDB played a vital role in developing innovative new Shariaa-compliant products, where it has succeeded in coordination with Banque du Liban (BDL), to develop and implement a Shariaa compliant mechanism, enabling Islamic Banks to place its obligatory reserve requirements with profit, opening doors for any future short or long term investment opportunity with BDL. On the strategic front, after the success of its Tripoli branch, opened in 2010, BDB continued its local expansion plan by the soon-to-open a third branch in Saida during New SME department was setup during the year to extend its services to productive services in the market witnessed the establishment of Takaful insurance services, through an Islamic window operated by the sister company Arope insurance, where BDB provides Shariaa and investment advisory Insurance Products & Services Despite a difficult year, AROPE has strongly and worthily preserved its 4th place among 51 Insurance Companies operating in Lebanon, with a market share reaching 10% in Life Business and 6% in Non Life Business. In total, AROPE scored in 2012 USD million of Life and Non Life Premiums. As a leader in its field, AROPE Insurance constantly diversifies its Lines of Business and has introduced lately the new TAKAFUL Window to prove furthermore being a trendsetter and to better meet the Lebanese Market s insurance needs. Takaful Solutions are addressed to Customers wishing to have their insurance covers in compliance with the Islamic Shariah as a viable alternative to Conventional Insurance. 60 BLOM BANK s.a.l. Annual Report 2012

62 Management Discussion & Analysis 2012 With the unrest in Syria, the market conditions have drastically deteriorated during However, AROPE Syria achieved relatively acceptable results with a net profit of SYP million and shareholder s equity reaching SYP 1.28 billion. Despite the political situation in Egypt, 2012 performance was remarkable and the results came out fair and 12. Information Systems and Technology satisfying, thanks to our conservative strategy based primarily on maintaining a healthy and profitable portfolio. AROPE subsidiaries registered growth in Written Premiums reaching +200% for AROPE Life Insurance S.A.E, and +66% for AROPE Insurance for Properties and Liabilities S.A.E. In terms, of net profit, AROPE subsidiaries combined scored +164% in The rapid advancement in Information Systems and Technologies that we have been witnessing in our world has been changing the traditional banking industry. In fact, banks around the world are now adopting new strategies in the way they approach markets and customers as they seek competitive advantage by offering technologybased products and services. In its constant endeavor to be aligned with the globally changing banking industry, BLOM BANK has been proactively using powerful information technologies in order to introduce innovative products and services, thus enriching its portfolio of offerings and enhancing its customers experiences while achieving product differentiation, competitive advantage and institutional growth. In fact, in 2012, BLOM BANK continued to invest in state-of-the-art technologies in order to diversify the bank s delivery channels, enrich the products delivered through these channels, innovate in payments and cards technologies, enhance risk management and boost systems security while gaining more customer insights and developing business intelligence, and at the same time keeping in-line with national and international compliance and regulatory requirements Leading-Edge Technology Deployments Intelligent Deposit ATMs In 2012, we have continued to diversify our self-service delivery channels and to enrich the portfolio of services which are available through our large network of ATMs consisting of more than 100 ATMs scattered across Lebanon by introducing intelligent deposit ATM machines. These ATMs allow customers to deposit cash in multiple currencies directly into their accounts and the deposited money will be reflected in real-time onto the account s balance. Also, these ATMs provide the cardholder with the possibility to deposit cheques in a convenient way. The introduction of intelligent deposit ATMs will pave the way for introducing deposit-based transactions such as paying bills, settling loans and other fees while offloading our branch counters and will allow for larger deployments of such ATMs in Co-Branded Credit Cards In 2012, we have introduced new technological concepts into the way our payment cards are conceived in order to produce cards capable of functioning in different modes depending on the purpose for which they are used. In fact, these cards can behave as installment cards at specific merchants and as regular credit cards at other merchants and earn different types of rewards which are interchangeable, anytime and upon the customer s preference, between gifts and travel miles. This versatility was only made possible through a high degree of IT integration with third-parties and an advanced interoperability between our systems and external systems and has allowed us to enter into alliances with several prominent companies, retailers and service providers in Lebanon in order to develop cobranded credit cards thus creating marketing synergy and enlarging the reach of our target audience. Green IT With the growth of our business and the increase in our transactions volume, the demand for powerful, versatile and highly available IT systems has been escalating. This increase in the demand for ITrelated services has amplified the needed number of servers, storage and supporting infrastructures which enlarge the carbon footprint and increase the needs for space, lighting, power, and cooling. Therefore, and in order to meet the growing data volume and the increasing processing demand while managing escalating resource costs, we have completed, in 2012, the set-up of our green data center at our head office and branches by adopting server virtualization and consolidation (ratio 10:1) so that the resources of a single physical server can be shared among multiple instances of virtual servers hosted on it, thus maximizing hardware utilization and dramatically decreasing the power consumption, the space needed, the cabling required and the overall carbon footprint of our data center. It is also worth noting that BLOM BANK has been adopting a fit-for-purpose core banking infrastructure in order to be able to take advantage of a high degree of flexibility and quality of service at low costs. Moreover, by deploying core systems transaction engines on proven infrastructure that is massively scalable, BLOM BANK will be able to ensure continued high performance as front office volume grows while following the Green IT trend Round-the-clock Banking Services In 2012, BLOM BANK continued to enrich its eblom suite of on-line, real-time, round the clock banking services delivered through a multitude of electronic channels as follows: eblom Internet Banking BLOM BANK s classic online banking service, winner of the Best Consumer Internet Bank in Lebanon for 2012 award from Global Finance, that offers a wide array of services which are continuously expanded and enhanced. eblom Mobile Banking A service adapted to mobile phones, smart phones and tablets allowing customers to easily access their accounts and cards with few taps as well as to locate BLOM BANK s nearest ATMs along with maps and directions. The eblom Mobile Banking service offers almost the same services of our classic eblom Internet Banking service via an easy to use interface optimized for smart phones and tablets. 61

63 Management Discussion & Analysis 2012 BLOM ecash The first of its kind payment service in Lebanon and the region providing a Person-to-Person (P2P) service aimed at facilitating money exchange between individuals and which is based on card-less ATM transactions without any kind of involvement with BLOM BANK on the recipient s side. In fact, with BLOM s ecash personto-person payment service, customers can perform, using the classic Internet Banking or Mobile Banking services, real-time instant payments from anywhere in the world to any person in Lebanon. The real-time aspect of the service makes it more attractive than a traditional wiring that takes at least 24 hours to reach the intended recipient. Furthermore, the BLOM ecash was designed to be a cornerstone which paves the way to offering the public at large a more global P2P and ewallet services at a later stage. Allo BLOM BLOM BANK s phone banking service allowing customers to consult their accounts from any landline or mobile phone. Intelligent ATM Network Intelligent ATM machines deployed all over Lebanon through which users can withdraw money, deposit cash directly into their accounts in multi-currency, deposit checks, settle credit card bills, redeem BLOM ecash, recharge their mobile lines, etc. SMS Alerts A real-time alerting system based on delivering SMS to customers mobile phones to instantly inform them about movements on their accounts or cards and about selected debit transactions effected on their accounts. Call Center BLOM BANK s Call Center is available 24-hours a day all year long and is benefiting from continuous enhancements based on CTI and IP telephony to achieve seamless integration with the Bank s CRM application. Digital Signage Display A system that enables the bank to broadcast in real-time over large LCD screens deployed at the branches live and updated information covering stock quotes, foreign exchange quotes, news feed, marketing campaigns, new promotions, TV commercials etc. Lead Referral System A targeted campaign management and lead referral tool that allows the profiling of customers using a centralized knowledge base and to offer over-the-counter customers new products and services that are tailored to their needs. These custom offerings are presented to customers during their presence at the branch. In addition, and in order to provide an integrated banking website experience, BLOM BANK introduced the eblom Portal, which is a unified authentication platform for BLOM BANK and its sister or affiliated companies, in order to securely establish the identity of individuals accessing the various electronic services offered through the Internet and protect them against online identity theft. This authentication methodology is based on the widely recognized two-factors of authentication method and requires the customer to provide his username and password as well as an SMS-based One-Time- Password (OTP) that he would need to retrieve from his mobile phone Advanced Electronic Payment Systems In 2012, BLOM BANK kept on growing its Visa and MasterCard card offerings and enhancing the reliability and effectiveness of its payment systems. BLOM BANK also kept on delving into the point-of-sale acquiring business by expanding the presence of POS machines at merchants across Lebanon and by implementing the dynamic currency conversion functionality on BLOM BANK s POS machines which allows payments to be done in the cards native currency. Furthermore, BLOM BANK kept on reaping the benefits of its online card fraud monitoring system capable of sending real-time alerts to the bank s call center agents, thus enabling immediate action and insight as well as reporting and tracking should a fraud pattern be detected. This card fraud monitoring system drastically reduced fraud losses and incidents Enterprise Application Integration (EAI) During this year, BLOM BANK kept on developing its Service Oriented Architecture (SOA) framework to achieve the highest degree of integration between the different information systems thus enabling a 360 o view of clients activity. This framework was built around a powerful and flexible workflow engine which allows the bank to manage the complexity, control the quality and limit the cost of business processes throughout their lifecycle which involves both people and systems in addition to shortening the time to take business decisions and to deliver end products and services to customers. In addition, this EAI framework was applied to many processes, in particular, the consumer loans processing systems consisting of a loan origination system, a loan assessment system, and a loan granting system. This framework has allowed BLOM BANK to offer an instant loan granting system aimed at instantaneously granting walk-in customers a personal loan specially targeted to their needs. The EAI framework was also applied to many processes, in particular, to automate the processing of incoming checks from the national clearing house Financial Reporting and Consolidation During 2012, BLOM BANK completed the implementation of a comprehensive web-based solution that offers powerful financial consolidation and reporting built on an advanced data warehouse and which allows the consolidation of the financial statements across BLOM BANK Group. This solution also offers built-in financial intelligence and advanced analytics to provide timely and accurate information and improved decision support Basel III and Regulatory Compliance In 2012, BLOM BANK continued to address compliance requirements through the usage of state-of-the-art systems for Corporate and Commercial Credit Risk Rating, Assets & Liabilities Management, Funds Transfer Pricing and Capital Management based on specialized data marts aimed at fulfilling Basel III and other regulatory requirements. In addition, BLOM BANK kept on building credit scorecards by integrating to the loan origination workflow a credit scoring system for loans based on advanced scoring models. 62 BLOM BANK s.a.l. Annual Report 2012

64 Management Discussion & Analysis Systems Security and High Availability BLOM BANK kept on improving its IT Infrastructure reliability and high availability through servers virtualization and consolidation and enterprise storage consolidation while following the Green IT trend. Also, BLOM BANK continued investing in state-of-the-art data centers, disaster recovery sites and data protection technologies in order to keep on protecting the bank s assets to assure business continuity. In fact, these facilities would ensure higher availability and protect the bank s information systems from losses in case of an unforeseen disaster and it also accelerates the development of new services to meet the bank s future demands for expansion. BLOM BANK also kept on raising its employees awareness by adopting Information Security Policies and Procedures to address and prevent security threats and by pro-actively monitoring systems activity and implementing advanced preventive and detective controls. 13. People Development 13.1 General Overview BLOM BANK Management continues to stress the importance of human resources in keeping the bank on its path to become a major player in the regional financial markets. The human capital at BLOM is considered the most valuable resource, and the talents of employees are recognized as essential for the effective functioning of the Bank. People at BLOM BANK are managed in a fair, ethical, and transparent manner. A set of standards and procedures guide the treatment of employees in regard to hiring, advancement, compensation, training, and other terms and privileges of employment. BLOM BANK policies in this regard, prohibit discrimination of any type, and offer equal opportunities to all employees and applicants without regard to sex, religion, ethnical background or, age, and disability. Employees, on the other hand, are required to comply with a set of policies concerning safety, information security and a general code of conduct. They are expected to adhere to the highest standards of ethical behavior in what relates to confidentiality, professionalism, transparency, conflict of interest, and integrity. The most visible characteristic of BLOM BANK employees is their high level of education, in addition to their relatively young age. At the end of 2012 the majority of employees (77.91 percent) held a university level degree or higher, while the average age of employees was 33.7 years. The following table presents the structure and distribution of BLOM BANK employees across the various units of BLOM Group, and according to various criteria. Distribution of BLOM BANK Group Employees Across the Various Geographic Regions by Gender, Age, Level of Education and Functions as at December 2012 Banks & Financial Subsidiaries Lebanon MENA Gulf Europe Insurance Subsidiaries Gender Male 1,046 1, ,649 Female ,765 Total 1,978 1, ,414 Age < , , Total 1,978 1, ,414 Average Age Level of Education Graduate Degrees Professional Certificates Bachelor Degrees 983 1, ,729 Technical Certificates Others Total 1,978 1, ,414 Functions Managers and Deputies Assistants & Supervisors Employees 1,520 1, ,307 Total 1,978 1, ,414 Number of Branches Total 63

65 Management Discussion & Analysis Policies and Procedures BLOM BANK recognizes the importance of a talented labor force in keeping the bank highly competitive. Appropriate policies were implemented so that the creation and development of talent is maintained by attracting, developing, and retaining the best and the brightest employees Recruitment Providing the bank with the required human capital to meet its operational and strategic goals is a challenging task that we continuously strive to accomplish. To this end, we adopt a strategic approach for recruiting and selecting the right number of people with the right set of skills at the time they are needed. The recruitment and selection process ensures the recruitment of the best available and most appropriate staff in line with the principles of non-discrimination and equal opportunities for all. It commences upon complete evaluation of the need for new employees based on our geographical expansion and business needs. Unit managers identify open positions early enough to allow for timely recruitment, and applicants are interviewed by unit managers and recruitment officers, and for high level positions, by the General Manager. The final decision is made by the HR committee, and the accepted applicants are then reference checked and screened by the compliance department. To widen the candidate pool for each vacancy, different sources are exploited including current BLOM employees, internal candidate database, on-line recruitment systems, job fairs, university career service centers, interns and other external recruitment partners. During the year 2012, the various units of BLOM BANK group recruited a total of 495 new employees to support the expansion of the bank across the region and to replace departing and retiring employees (see table below). The majority of the new recruits were in Lebanon, (50.12%), followed by the MENA (41.61%), the Gulf (5.65%) and Europe (2.62%). New Recruits and Turnover Rates of BLOM BANK Group Units Operating in Various Geographic Regions in 2012 Banks & Financial Subsidiaries Insurance Total Lebanon MENA Gulf Europe Subsidiaries New Recruits Banks & Financial Subsidiaries Insurance Total Lebanon MENA Gulf Europe Subsidiaries Turnover Rate Training BLOM BANK considers continuous training as essential to ensure a competent workforce that is able to adapt to the constantly changing business environment. BLOM BANK invests in different types of in house and external trainings covering a wide range of topics among which are Banking Techniques, Management, Marketing & Sales, Information Technology and Languages. The HR department, in collaboration with line mangers, performs the Training Needs Assessment (TNA) during the last quarter of every year and the training plan for the coming year is set accordingly. Technical in-house seminars are usually developed and delivered by field experts from BLOM BANK, while soft skill development seminars are delivered by professional trainers from local and international training firms. BLOM Group delivered 135,493 training hours during 2012 amounting to an average of training hours per employee. 64 BLOM BANK s.a.l. Annual Report 2012

66 Management Discussion & Analysis 2012 Distribution of Training Activities of BLOM BANK Group Units Operating in Various Geographic Regions in 2012 Banks & Financial Subsidiaries Lebanon MENA Gulf Europe Insurance Subsidiaries Total Hours of training 64,940 41, , , Career development and promotion Career development at BLOM is considered a powerful employee motivator and retention tool, and gives the bank a competitive strength in attracting new talent. Career development is emphasized due to its importance in creating large pools of highly competitive and qualified people who have the necessary skills and competencies required for top-level performance. In addition to the individual training programs that are designed for high potential employees, two particular programs, the Management Training Program (MTP), and the Fast Track Program (FTP), were designed to provide the bank with the needed talent in the future. While the MTP gives participants the opportunity to branch out through serving on cross-functional teams and completing short-term assignments, the FTP allows the participants to gain in-depth knowledge in a particular area of expertise. The selection of candidates for these programs follows a very rigorous and transparent process where the immediate supervisors, the line managers and the HR department are all involved to ensure that the best performers with the highest potential are selected from the pool of young, ambitious and motivated employees. Because we strongly believe that the bank s value lies in its human capital, we try to keep our people on the frontiers of their professions to better serve our customers. 14. Bank s Operational Efficiency In 2012, although the group s operational efficiency decreased slightly, it remained nonetheless at a high level. Net profit per branch decreased by 1.2% to reach USD 1,630,720 at a time when the number of branches expanded by 2.5%. In addition, average assets per branch showed an increase by 5.5% to reach USD 121,607,569 at the end of year BLOM BANK Group s Operational Efficiency Indicators Number of Branches Average Assets per Branch (USD) 121,607, ,251,106 Net Profit per Branch (USD) 1,630,720 1,649,496 65

67 66 BLOM BANK s.a.l. Annual Report 2012

68 67

69 Consolidated Financial Statements 31 December BLOM BANK S.A.L. CONSOLIDATED FINANCIAL STATEMENTS 1. Auditors Report 2. Consolidated Income Statement for the year ended 31 December Consolidated Statement of Comprehensive Income for the year ended 31 December Consolidated Statement of Financial Position at 31 December Consolidated Statement of Changes in Equity for the year ended 31 December Consolidated Statement of Cash Flows for the year ended 31 December 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information 2. Accounting Policies 2.1 Basis of Preparation 2.2 Changes in Accounting Policies and Disclosures 2.3 Standards Issued but not yet Effective 2.4 Summary of Significant Accounting Policies 2.5 Significant Accounting Judgments and Estimates 3. Segmental Information 4. Interest and Similar Income 5. Interest and Similar Expense 6. Net Fee and Commission Income 7. Net Gain on Financial Assets and Liabilities Designated at Fair Value Through Profit or Loss 8. Net Gain from Derecognition of Financial Assets at Amortized Costs 9. Other Operating Income 10. Net Credit Losses 11. Personnel Expenses 12. Other Operating Expenses 13. Income Tax Expenses 14. Earnings Per Share 15. Cash and Balances with Central Banks 16. Due from Banks and Financial Institutions 17. Loans to Banks and Financial Institutions 18. Derivative Financial Instruments 19. Financial Assets at Fair Value Through Profit or Loss 20. Net Loans and Advances to Customers at Amortized Cost

70 Financial Assets at Amortized Cost 22. Financial Assets at Fair Value Through Other Comprehensive Income 23. Property and Equipment 24. Intangible Assets 25. Assets Obtained in Settlement of Debts 26. Other Assets 27. Goodwill 28. Due to Central Banks under Repurchase Agreements 29. Due to Banks and Financial Institutions 30. Financial Liabilities at Fair Value Through Profit or Loss 31. Customers Deposits at Amortized Cost 32. Other Liabilities 33. Provisions for Risks and Charges 34. Share Capital and Premiums 35. Non-Distributable Reserves 36. Distributable Reserves 37. Treasury Shares 38. Returned Earnings 39. Revaluation Reserve of Real Estate 40. Change in Fair Value of Financial Assets at Fair Value Through Other Comprehensive Income 41. Cash and Cash Equivalents 42. Dividends Declared and Paid 43. Related Party Transactions 44. Contingent Liabilities, Commitments and Leasing Arrangements 45. Fiduciary Deposits, Assets Under Management and Custody Accounts 46. Fair Value of the Financial Instruments 47. Maturity Analysis of Assets and Liabilities 48. Risk Management 48.1 Credit Risk 48.2 Liquidity Risk and Funding Management Analysis of Financial Assets and Liabilities by Remaining Contractual Maturities 48.3 Market Risk Interest Rate Risk Currency Risk Equity Price Risk Prepayment Risk 48.4 Operational Risk 49. Capital Management 50. Early Adoption of IFRS9 51. Comparative Information

71 Independent Auditors Report to the Shareholders of BLOM BANK SAL We have audited the accompanying consolidated financial statements of BLOM Bank SAL (the Bank ) and its subsidiaries (collectively the Group ), which comprise the consolidated statement of financial position as at 31 December 2012 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 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 judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2012, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 70 BLOM BANK s.a.l. Annual Report 2012

72 Consolidated Financial Statements 31 December 2012 Consolidated Income Statement For the year ended 31 December 2012 LL Million Notes Interest and similar income 4 1,946,653 1,850,916 Interest and similar expense 5 (1,158,894) (1,073,397) Net interest income 787, ,519 Fee and commission income 196, ,443 Fee and commission expense (26,909) (24,451) Net fee and commission income 6 169, ,992 Net gain from financial instruments at fair value through profit or loss 7 194,378 7,984 Net gain from derecogniton of financial assets at amortized cost 8 32, ,538 Revenue from financial assets at fair value through other comprehensive income Other operating income 9 12,916 14,807 Total operating income 1,197,489 1,096,057 Net credit losses 10 (158,382) (60,869) Net operating income 1,039,107 1,035,188 Personnel expenses 11 (247,498) (237,460) Other operating expenses 12 (149,101) (143,191) Depreciation of property and equipment 23 (30,957) (33,100) Amortization of intangible assets 24 (1,898) (2,620) Total operating expenses (429,454) (416,371) Operating profit 609, ,817 Net gain (loss) on disposal of other assets 1,863 (208) Profit before tax 611, ,609 Income tax expense 13 (105,104) (118,799) Profit for the year 506, ,810 Attributable to: Equity holders of the parent 501, ,878 Non-controlling interests 5,202 11, , ,810 Basic/diluted earnings per share attributable to equity holders of the parent for the year 14 LL 2,304 LL 2,233 The accompanying notes 1 to 51 form part of these consolidated financial statements. 71

73 Consolidated Financial Statements 31 December 2012 Consolidated Statement of Comprehensive Income For the year ended 31 December 2012 LL Million Profit for the year 506, ,810 Net gain on sale of financial assets at fair value through other comprehensive income Net unrealized gain (loss) from financial assets at fair value through other comprehensive income 544 (953) Exchange differences on translation of foreign operations (50,754) (55,528) Other comprehensive loss for the year (50,030) (56,336) Total comprehensive income for the year 456, ,474 Attributable to: Equity holders of the parent 478, ,960 Non-controlling interests (22,089) (8,486) 456, ,474 The accompanying notes 1 to 51 form part of these consolidated financial statements. 72 BLOM BANK s.a.l. Annual Report 2012

74 Consolidated Financial Statements 31 December 2012 Consolidated Statement of Financial Position At 31 December 2012 LL Million Notes Assets Cash and balances with central banks 15 7,458,577 6,062,381 Due from banks and financial institutions 16 5,070,495 4,845,533 Loans to banks and financial institutions , ,781 Derivative financial instruments 18 37,082 25,548 Financial assets at fair value through profit or loss , ,466 Net loans and advances to customers at amortized cost 20 9,070,287 8,409,450 Net loans and advances to related parties at amortized cost 43 16,197 18,270 Debtors by acceptances 104, ,277 Financial assets at amortized cost 21 14,308,536 13,648,659 Financial assets at fair value through other comprehensive income 22 5,958 6,645 Property and equipment , ,831 Intangible assets 24 3,865 4,278 Assets obtained in settlement of debt 25 27,467 27,966 Other assets , ,988 Goodwill 27 60,208 61,879 Total assets 37,764,622 34,921,952 Liabilities and equity Liabilities Due to Central banks under repurchase agreements ,499 - Due to banks and financial institutions , ,388 Derivative financial instruments 18 52,494 13,751 Financial liabilities at fair value through profit or loss 30 22,053 41,054 Customers' deposits at amortized cost 31 32,649,831 30,366,543 Deposits from related parties at amortized cost , ,721 Engagements by acceptances 104, ,277 Other liabilities , ,326 Provisions for risks and charges , ,509 Total liabilities 34,475,614 31,932,569 Equity Share capital - common shares , ,000 Share capital - preferred shares 34 24,000 24,000 Share premium on common shares , ,059 Share premium on preferred shares , ,500 Non distributable reserves , ,470 Distributable reserves , ,961 Treasury shares 37 (67,302) (83,162) Retained earnings , ,835 Revaluation reserve of real estate 39 14,727 14,727 Change in fair value of financial assets at fair value through other comprehensive income 40 (406) (950) Foreign currency translation reserve (36,597) (13,134) Profit for the year 501, ,878 Equity attributable to equity holders of parent 3,195,498 2,873,184 Non-controlling interests 93, ,199 Total equity 3,289,008 2,989,383 Total liabilities and equity 37,764,622 34,921,952 The consolidated financial statements were authorized for issue in accordance with a resolution of the board of directors on 21 March 2013 by: Saad Azhari Habib Rahal Talal Baba Chairman and General Manager General Manager Chief Financial Officer The accompanying notes 1 to 51 form part of these consolidated financial statements. 73

75 Consolidated Financial Statements 31 December 2012 Consolidated Statement of Changes in Equity For the year ended 31 December 2012 Attributable to equity holders of the parent LL Million Share capitalcommon shares Share capitalpreferred shares Share premium on common shares Share premium on preferred shares Non distributable reserves Distributable reserves Treasury shares Balance at 1 January ,000 24, , , , ,961 (83,162) Profit for the year Profit from sale of shares at fair value through other comprehensive income Other comprehensive income Total comprehensive income Appropriation of 2011 profits ,384 31,081 - Dividends distributions (note 42) Adjustments related to change in ownership in subsidiaries Purchase of treasury shares (note 37) (85,028) Sale of treasury shares (note 37) ,888 Net loss on sale of treasury shares (3,544) - - Non-controlling interest from dividends distributions in a subsidiary company Non-controlling interest share in capital increase of a subsidiary company Other adjustment related to a subsidiary Balance at 31 December ,000 24, , , , ,042 (67,302) The accompanying notes 1 to 51 form part of these consolidated financial statements. 74 BLOM BANK s.a.l. Annual Report 2012

76 Consolidated Financial Statements 31 December Retained earnings Revaluation reserves of real estate Availablefor-sale reserve Change in fair value of financial assets at fair value through other comprehensive income Foreign currency translation reserve Profit for the year Total Noncontrolling interests Total equity 557,835 14,727 - (950) (13,134) 487,878 2,873, ,199 2,989, , ,210 5, , (23,463) - (22,919) (27,291) (50,210) (23,463) 501, ,471 (22,089) 456, , (325,703) (162,175) (162,175) - (162,175) (54) (54) 51 (3) (85,028) (32) (85,060) , , (3,544) (37) (3,581) (670) (670) (6,244) (6,244) - (6,244) 745,955 14,727 - (406) (36,597) 501,210 3,195,498 93,510 3,289,008 75

77 Consolidated Financial Statements 31 December 2012 Consolidated Statement of Changes in Equity For the year ended 31 December 2012 Attributable to equity holders of the parent Share capitalcommon shares Share capitalpreferred shares Share premium on common shares Share premium on preferred shares Non distributable reserves Distributable reserves Treasury shares LL Million Balance at 1 January ,600 18, , , , ,385 (75,793) Effect of IFRS 9 early adoption (note 50) Adjusted balance at 1 January ,600 18, , , , ,385 (75,793) Profit for the year Profit from sale of shares at fair value through other comprehensive income Other comprehensive income Total comprehensive income Capital increase 34,400 24, ,500 (76) (34,400) - Redemption of preferred shares - (18,200) - (246,310) Appropriation of 2010 profits ,707 37,270 - Dividends distributions (note 42) Adjustments related to change in ownership in subsidiaries Purchase of treasury shares (note 37) (27,639) Sale of treasury shares (note 37) ,270 Net gain on sale of treasury shares , Non-controlling interest from dividends distributions in a subsidiary company Balance at 31 December ,000 24, , , , ,961 (83,162) The accompanying notes 1 to 51 form part of these consolidated financial statements. 76 BLOM BANK s.a.l. Annual Report 2012

78 Consolidated Financial Statements 31 December Retained earnings Revaluation reserve of real estate Availablefor-sale reserve Change in fair value of financial assets at fair value through other comprehensive income Foreign currency translation reserve Profit for the year Total Noncontrolling interests Total equity 444,115 14,727 96,221-21, ,376 2,724, ,470 2,850,582 (72,534) - (96,221) (168,755) (818) (169,573) 371,581 14, , ,376 2,555, ,652 2,681, , ,878 11, , (953) (35,110) - (36,063) (20,418) (56,481) (953) (35,110) 487, ,960 (8,486) 443,474 (1,160) ,264 (24) 300, (263,810) - (263,810) 187, (318,252) (165,124) (165,124) - (165,124) (6) (13) (27,639) (11) (27,650) , , ,890-1, (930) (930) 557,835 14,727 - (950) (13,134) 487,878 2,873, ,199 2,989,383 77

79 Consolidated Financial Statements 31 December 2012 Consolidated Statement of Cash Flows For the year ended 31 December 2012 LL Million Notes Operating Activities Profit for the year before income tax 611, ,609 Adjustments for: Depreciation of property and equipment 23 30,957 33,100 Amortization of intangible assets 24 1,898 2,620 (Gain) loss on disposal of property and equipment (1,863) 208 Provision for loans and advances to customers, net ,377 59,622 Provision for impairment of other financial assets Provision for placements with other banks ,689 Net provision for risks and charges 73,367 39,692 Gain on disposal of assets obtained in settlement of debt (421) (343) Gain from sale of financial assets at amortized cost 8 (32,501) (119,538) Unrealized fair value (gains) losses on financial assets at fair value through profit or loss 7 (94,371) 65,036 Adjustment related to a subsidiary company (6,244) - 741, ,632 Changes in operating assets and liabilities: Term deposits with central banks (891,745) (2,451,974) Due from banks and financial institutions (290,811) 678,980 Loans to banks and financial institutions 2,171 (13,761) Derivative financial instruments debit (11,534) 21,144 Financial assets at fair value through profit or loss 104, ,740 Net loans and advances to customers at amortized cost (819,214) (671,936) Net loans and advances to related parties at amortized cost 2,073 (8,872) Other assets 5,298 (24,710) Due to banks and financial institutions 37,347 (4,184) Derivative financial instruments credit 38,743 (22,714) Financial liabilities at fair value through profit or loss (19,001) (7,873) Customers' deposits at amortized cost 2,283,288 1,052,293 Deposits from related parties at amortized cost (11,345) (3,996) Other liabilities (17,944) 100,410 Cash from (used in) operations 1,153,214 (475,821) Taxes paid (128,283) (113,821) Provisions for risks and charges paid (59,111) (43,379) Net cash from (used in) operating activities 965,820 (633,021) Investing Activities Financial assets at amortized cost (627,376) (104,058) Financial assets at fair value through other comprehensive income 1, Assets obtained in settlement of debt 356 (417) Purchase of property and equipment 23 (104,357) (77,973) Purchase of intangible assets 24 (1,162) (1,688) Cash proceeds from the sale of property and equipment and intangible assets 7, Acquisition of a subsidiary - (5,821) Net cash used in investing activities (723,639) (189,231) Financing Activities Redemption of preferred shares - (263,810) Issuance of preferred shares - 301,500 Sale (purchase) of treasury shares, net 15,860 (7,369) Net (loss) gain on sale of treasury shares (3,544) 1,890 Non-controlling interests (27,945) (22,203) Dividends paid 42 (162,175) (165,124) Net cash used in financing activities (177,804) (155,116) Effect of exchange rate changes (9,616) (27,943) Increase (decrease) in cash and cash equivalents 54,761 (1,005,311) Cash and cash equivalents at 1 January 5,065,263 6,070,574 Cash and cash equivalents at 31 December 41 5,120,024 5,065,263 Operational cash flows from interest and dividends Interest paid 1,148,480 1,080,911 Interest received 1,933,400 1,920,182 Dividends received 1,458 1,465 The accompanying notes 1 to 51 form part of these consolidated financial statements. 78 BLOM BANK s.a.l. Annual Report 2012

80 Notes to the Consolidated Financial Statements 31 December Corporate Information BLOM BANK s.a.l. (the Bank ), a Lebanese joint stock company, was incorporated in 1951 and registered under No 2464 at the commercial registry of Beirut and under No 14 on the banks list published by the Central Bank of Lebanon. The Bank s head office is located in Verdun, Rashid Karameh Street, Beirut, Lebanon. The Bank s shares are listed on the Beirut Stock Exchange and Luxembourg Stock Exchange. The Bank, together with its affiliated banks and subsidiaries (collectively the Group ), provides a wide range of retail, commercial, investment and private banking activities, insurance and brokerage services through its headquarter as well as its branches in Lebanon and its presence in Europe, the Middle East and North Africa. 2. Accounting Policies 2.1 Basis of preparation The consolidated financial statements have been prepared on a historical cost basis except for: a) the restatement of certain tangible real estate properties in Lebanon according to the provisions of law No 282 dated 30 December 1993, and b) the measurement at fair value of derivative financial instruments, financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and financial liabilities at fair value through profit or loss. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwise carried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are being hedged. The consolidated financial statements are presented in Lebanese Pounds (LL) and all values are rounded to the nearest million, except when otherwise indicated. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by International Accounting Standards Board (IASB), and the regulations of the Central Bank of Lebanon and the Banking Control Commission. Presentation of the consolidated financial statements The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within one year after the statement of financial position date (current) and more than 1 year after the statement of financial position date (non-current) is presented in the risk management notes. Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore the related assets and liabilities are presented gross in the consolidated statement of financial position. Income and expense will not be offset in the consolidated income statement unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group. 79

81 Notes to the Consolidated Financial Statements 31 December 2012 Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at 31 December Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. Control is achieved where the Group 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 period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Non-controlling interests represent the portion of profit or loss and net assets of subsidiaries not owned, directly or indirectly by the Bank. Noncontrolling interests are presented separately in the consolidated income statement, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, but separate from parent shareholders equity. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: - Derecognizes the assets (including goodwill) and liabilities of the subsidiary - Derecognizes the carrying amount of any non-controlling interest - Derecognizes the cumulative translation differences, recorded in equity - Recognizes the fair value of the consideration received - Recognizes the fair value of any investment retained - Recognizes any surplus or deficit in profit or loss - Reclassifies the parent s share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate. Where the Group loses control of a subsidiary, such that the former subsidiary becomes an associate accounted for under the equity method, the effect is that the Group s interest in the former subsidiary (associate) is reported: - using the equity method from the date on which control is lost in the current reporting period; and - using full consolidation for any earlier part of the current reporting period, and of any earlier reporting period, during which the associate was controlled. 80 BLOM BANK s.a.l. Annual Report 2012

82 Notes to the Consolidated Financial Statements 31 December 2012 The consolidated financial statements include the financial statements of BLOM Bank SAL and the subsidiaries listed in the following table: Notes Country of incorporation Activities % effective equity interest 31 December 2012 % 31 December 2011 % BLOM Bank France SA France Banking activities BLOM Bank (Switzerland) SA Switzerland Banking activities BLOMInvest Bank SAL Lebanon Banking activities BLOM Development Bank SAL Lebanon Islamic banking activities Bank of Syria and Overseas SA a Syria Banking activities Arope Insurance SAL Lebanon Insurance activities Syria International Insurance (Arope Syria) SA b Syria Insurance activities BLOM Bank Egypt SAE Egypt Banking activities BLOM Egypt Securities SAE Egypt Brokerage activities BLOM Invest Saudi Arabia Saudi Arabia Banking activities BLOM Bank Qatar LLC Qatar Banking activities Arope Life Insurance Egypt SAE Egypt Insurance activities Arope Insurance of Properties and Responsibilities Egypt SAE Syria and Overseas Company for Financial Services Egypt Insurance activities a and c Syria Brokerage activities Experts Company for Financial Services d Jordan Brokerage activities (a) Effective 1 January 2004, the Group obtained control, by virtue of agreement with other investors, over Bank of Syria and Overseas SA, and consequently, the financial statements of Bank of Syria and Overseas SA have been consolidated with those of the Group. In its meeting held on 5 May 2010, the Bank s board of directors approved the increase of ownership in Bank of Syria and Overseas SA up to 60% as follows: At a first stage, increase the ownership from 39% to 49% by acquiring International Finance Corporation s (IFC) shares (720,000 shares) in Bank of Syria and Overseas SA. The remaining 11% increase to reach 60% will be performed at a later stage through acquisition from the market. (b) Effective 1 January 2006, the Group obtained control, by virtue of agreement with other investors, over Syria International Insurance (Arope Syria) SA, and consequently, the financial statements of Syria International Insurance (Arope Syria) SA have been consolidated with those of the Group. (c) Syria and Overseas Company for Financial Services is 52% owned by Bank of Syria and Overseas SA. Consequently, the financial statements of Syria and Overseas Company for Financial Services have been consolidated with those of the Group. (d) The ownership interests of this subsidiary were affected by the purchase of some non-controlling interest s shares. 81

83 Notes to the Consolidated Financial Statements 31 December Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS effective as of 1 January 2012: IFRS 7 Financial Instruments: Disclosures Enhanced Derecognition Disclosure Requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group s financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about the entity s continuing involvement in derecognised assets to enable the users to evaluate the nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning on or after 1 July The Group does not have any assets with these characteristics so there has been no effect on the presentation of its financial statements. 2.3 Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Group s financial statements are listed below. This listing of standards and interpretations issued are those that the Group reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Group intends to adopt these standards when they become effective. IAS 1 Financial Statement Presentation Presentation of Items of Other Comprehensive Income (OCI) The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example net gain on hedge of net investment, exchange differences on translation of foreign operations and net movement on cash flow hedges) would be presented separately from items that will never be reclassified (for example actuarial gains and losses on defined benefit plans, revaluation of land and buildings and net loss or gain on financial assets at fair value through OCI). The amendment affects presentation only and has no impact on the Group s financial position or performance. The amendment becomes effective for annual periods beginning on or after 1 July IAS 19 Employee Benefits (Revised) The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. These amendments are not expected to impact the Group s financial position or performance and become effective for annual periods beginning on or after 1 January IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The revised standard is not expected to impact the Group s financial position or performance and becomes effective for annual periods beginning on or after 1 January BLOM BANK s.a.l. Annual Report 2012

84 Notes to the Consolidated Financial Statements 31 December 2012 IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Group s financial position or performance and become effective for annual periods beginning on or after 1 January IFRS 7 Disclosures Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7 These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group s financial position or performance and become effective for annual periods beginning on or after 1 January IFRS 10 Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. The Group is currently assessing the impact that this standard will have on its financial position and performance. This standard becomes effective for annual periods beginning on or after 1 January IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly- Controlled Entities Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. IFRS 11 is not expected to impact the Group s financial position or performance and becomes effective for annual periods beginning on or after 1 January IFRS 12 Disclosure of Involvement with Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required, but has no impact on the Group s financial position or performance. This standard becomes effective for annual periods beginning on or after 1 January

85 Notes to the Consolidated Financial Statements 31 December 2012 IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard will require the Group to review its fair value measurement policies across all asset and liabilities classes. The Group is currently assessing the impact that this standard will have on its financial position and performance. This standard becomes effective for annual periods beginning on or after 1 January Annual Improvements May 2012 These improvements will not have an impact on the Group, but include: IAS 1 Presentation of Financial Statements This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period. IAS 32 Financial Instruments, Presentation This improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. IAS 34 Interim Financial Reporting The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures. These improvements are effective for annual periods beginning on or after 1 January Summary of significant accounting policies (1) Foreign currency translation The consolidated financial statements are presented in Lebanese Lira which is the Bank s presentation currency. Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. (i) Transactions and balances Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the date of the statement of financial position. All differences are taken to Net gain from financial instruments at fair value through profit or loss in the consolidated income statement. Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when 84 BLOM BANK s.a.l. Annual Report 2012

86 Notes to the Consolidated Financial Statements 31 December 2012 the fair value was determined. The gain or loss arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognized in other comprehensive income or profit or loss is also recognized in other comprehensive income or profit or loss respectively). Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. (ii) Group companies On consolidation, the assets and liabilities of subsidiaries and overseas branches are translated into the Bank s presentation currency at the rate of exchange as at the reporting date, and their income statements are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the consolidated income statement. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. (2) Financial instruments classification and measurement (i) Date of recognition All financial assets and liabilities are initially recognized on the trade date, i.e. the date that the Group becomes a party to the contractual provisions of the instrument. This includes regular way trades : purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (ii) Classification and measurement of financial investments a. Financial assets The classification of financial assets depends on the basis of the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, particular transaction costs. Assets are subsequently measured at amortized cost or fair value. An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases. An entity is required to disclose such financial assets separately from those mandatorily measured at fair value. 85

87 Notes to the Consolidated Financial Statements 31 December 2012 Financial assets at amortized cost Debt instruments are subsequently measured at amortized cost less any impairment loss (except for debt instruments that are designated at fair value through profit or loss upon initial recognition) if they meet the following two conditions: The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and The contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These financial assets are initially recognized at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributed to the acquisition are also included in the cost of investment. After initial measurement, these financial assets are measured at amortized cost using the effective interest rate method (EIR), less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortization is included in Interest and similar income in the consolidated income statement. The losses arising from impairment are recognized in the consolidated income statement in Net credit losses. Although the objective of an entity s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur. However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows. If the objective of the entity s business model for managing those financial assets changes, the entity is required to reclassify financial assets. Gains and losses arising from the derecognition of financial assets measured at amortized cost are reflected under Net gain from derecognition of financial assets at amortized cost in the consolidated income statement. Balances with central banks, due from banks and financial institutions, loans to banks and financial institutions and net loans and advances to customers and related parties at amortized cost After initial measurement, Balances with central banks, Due from banks and financial institutions, Loans to banks and financial institutions and Net loans and advances to customers and related parties are subsequently measured at amortized cost using the EIR method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in Interest and similar income in the consolidated income statement. The losses arising from impairment are recognized in the consolidated income statement in Net credit losses. Financial assets at fair value through profit or loss Included in this category are those debt instruments that do not meet the conditions in Financial assets at amortized cost above, debt instruments designated at fair value through profit or loss upon initial recognition and equity instruments at fair value through profit or loss. 86 BLOM BANK s.a.l. Annual Report 2012

88 Notes to the Consolidated Financial Statements 31 December 2012 i. Debt instruments at fair value through profit or loss These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in fair value and interest income are recorded under Net gain from financial instruments at fair value through profit or loss in the consolidated income statement showing separately, those related to financial assets designated at fair value upon initial recognition from those mandatorily measured at fair value. Gains and losses arising from the derecognition of debt instruments at fair value through profit or loss are also reflected under Net gain from financial instruments at fair value through profit or loss in the consolidated income statement showing separately, those related to financial assets designated at fair value upon initial recognition from those mandatorily measured at fair value. ii. Equity instruments at fair value through profit or loss Investments in equity instruments are classified at fair value through profit or loss, unless the Group designates at initial recognition an investment that is not held for trading as at fair value through other comprehensive income. These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in fair value and dividend income are recorded under Net gain from financial instruments at fair value through profit or loss in the consolidated income statement. Gains and losses arising from the derecognition of equity instruments at fair value through profit or loss are also reflected under Net gain from financial instruments at fair value through profit or loss in the consolidated income statement. Financial assets at fair value through other comprehensive income Investments in equity instruments designated at initial recognition as not held for trading are classified at fair value through other comprehensive income. These financial assets are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value, with gains and losses arising from changes in fair value recognized in other comprehensive income and accumulated under equity. The cumulative gain or loss will not be reclassified to the consolidated income statement on disposal of the investments. Dividends on these investments are recognized under Revenues from financial assets at fair value through other comprehensive income in the consolidated income statement when the entity s right to receive payment of dividend is established in accordance with IAS 18: Revenue, unless the dividends clearly represent a recovery of part of the cost of the investment. b. Financial liabilities Liabilities are initially measured at fair value plus, in the case of a financial liability not at fair value through profit or loss, particular transaction costs. Liabilities are subsequently measured at amortised cost or fair value. The Group classifies all financial liabilities as subsequently measured at amortised cost using the effective interest method, except for: - financial liabilities at fair value through profit or loss (including derivatives); - financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. - financial guarantee contracts and commitments to provide a loan at a below-market interest rate which after initial recognition are subsequently measured at the higher of the amount determined 87

89 Notes to the Consolidated Financial Statements 31 December 2012 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. Fair value option The Group may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when: - doing so results in more relevant information, because it either eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases; or - a group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity s key management personnel. The amount of changes in fair value of a financial liability designated at fair value through profit or loss at initial recognition that is attributable to changes in credit risk of that liability is recognized in other comprehensive income, unless such recognition would create an accounting mismatch in the consolidated income statement. Changes in fair value attributable to changes in credit risk are not reclassified to consolidated income statement. As at 31 December 2012, financial liabilities designated at fair value through profit or loss by the Group consist of certain customers deposits. Financial liabilities designated at amortized cost consist of Due to Central banks under repurchase agreements, due to banks and financial institutions, and customers and related parties deposits. Due to Central banks under repurchase agreements, due to banks and financial institutions, customers deposits and related parties deposits After initial measurement, Due to Central banks under repurchase agreements, due to banks and financial institutions, customers and related parties deposits are measured at amortised cost less amounts repaid using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate method. c. Derivatives recorded at fair value through profit or loss The Group uses derivatives such as interest rate swaps and futures, credit default swaps, cross currency swaps, forward foreign exchange contracts and options on interest rates, foreign currencies and equities. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised in Net gain from financial instruments at fair value through profit or loss in the consolidated income statement. An embedded derivative is separated from the host and accounted for as a derivative if, and only if: (a) the hybrid contract contains a host that is not an asset within the scope of IFRS 9 (b) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host (c) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (d) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss 88 BLOM BANK s.a.l. Annual Report 2012

90 Notes to the Consolidated Financial Statements 31 December 2012 (iii) Day 1 profit or loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Group immediately recognizes the difference between the transaction price and fair value (a Day 1 profit or loss) in the consolidated income statement. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated income statement when the inputs become observable, or when the instrument is derecognized. (iv) Reclassification of financial assets The Group reclassifies financial assets if the objective of the business model for managing those financial assets changes. Such changes are expected to be very infrequent. Such changes are determined by the Group s senior management as a result of external or internal changes when significant to the Group s operations and demonstrable to external parties. If financial assets are reclassified, the reclassification is applied prospectively from the reclassification date, which is the first day of the first reporting period following the change in business model that results in the reclassification of financial assets. Any previously recognised gains, losses or interest are not restated. If a financial asset is reclassified so that it is measured at fair value, its fair value is determined at the reclassification date. Any gain or loss arising from a difference between the previous carrying amount and fair value is recognised in profit or loss. If a financial asset is reclassified so that it is measured at amortised cost, its fair value at the reclassification date becomes its new carrying amount. (3) Derecognition of financial assets and financial liabilities (i) Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when: 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; and either: (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. 89

91 Notes to the Consolidated Financial Statements 31 December 2012 (ii) Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in the consolidated income statement. Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date are not derecognised from the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability within Due to Central banks under repurchase agreements, reflecting the transaction s economic substances as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the EIR. When the counterparty has the right to sell or repledge the securities, the Group reclassifies those securities in its consolidated statement of financial position to Financial assets given as collateral as appropriate. Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the consolidated statement of financial position. The consideration paid, including accrued interest is recorded in the consolidated statement of financial position within Cash collateral on securities borrowed and reverse purchase agreements, reflecting the transaction s economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in Net interest income and is accrued over the life of the agreement using the EIR. If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within Financial liabilities at fair value through profit or loss and measured at fair value with any gains or losses included in Net gain from financial instruments at fair value through profit or loss in the consolidated income statement. (4) Determination of fair value The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models. Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Group s best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models, credit models and other relevant valuation models. Also, profit or loss calculated when such financial instruments are first recorded ( Day 1 profit or loss) is 90 BLOM BANK s.a.l. Annual Report 2012

92 Notes to the Consolidated Financial Statements 31 December 2012 deferred and recognized only when the inputs become observable or on derecognition of the instrument. An analysis of fair values of financial instruments and further details as to how they are measured are provided in the notes. (5) Impairment of financial assets The Group assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganization, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (i) Financial assets carried at amortized cost For financial assets carried at amortised cost, the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated income statement. 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 recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the Net credit losses in the consolidated income statement. The present value of the estimated future cash flows 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 collateralized financial asset reflects the cash flows that may result from foreclosure less costs of obtaining and selling the collateral, whether or not the foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group s internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical 91

93 Notes to the Consolidated Financial Statements 31 December 2012 location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (ii) Renegotiated loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. (iii) Collateral repossessed The Group occasionally acquires properties in settlement of loans and advances. Upon initial recognition, those assets are measured at fair value as approved by the regulatory authorities. Subsequently these properties are measured at the lower of carrying value or net realizable value. Upon sale of repossessed assets, any gain or loss realized is recognized in the consolidated income statement under Other operating income or Other operating expenses. Gains resulting from the sale of repossessed assets are transferred to Reserves for capital increase in the following financial year. (6) Hedge accounting The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions and firm commitments. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. 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, the objective and strategy for undertaking the hedge and the method that will be used to assess the effectiveness of the hedging relationship. At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. 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, both at inception and at each quarter end on an ongoing basis. A hedge is expected to be 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 are expected to offset in a 92 BLOM BANK s.a.l. Annual Report 2012

94 Notes to the Consolidated Financial Statements 31 December 2012 range of 80% to 125% and are expected to achieve such offset in future periods. Hedge ineffectiveness is recognized in the consolidated income statement in Net gain from financial instruments at fair value through profit or loss. For situations where that hedged item is a forecast transaction, the Group also assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated income statement. (i) Fair value hedges For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognised in the consolidated income statement. Meanwhile, the change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in Net gain from financial instruments at fair value through profit or loss in the consolidated income statement. 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 face value is amortised over the remaining term of the original hedge using the effective interest rate. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated income statement. (ii) Cash flow hedges For designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging instrument is initially recognised directly in equity in the Cash flow hedge reserve. The ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the consolidated income statement. When the forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in the other comprehensive income are removed from the reserve and included in the initial cost of the asset or liability. When the hedged cash flow affects the consolidated income statement, the gain or loss on the hedging instrument is recorded in the corresponding income or expense line of the consolidated income statement. When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the hedged forecast transaction is ultimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated income statement. (iii) Hedge of a net investment Hedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the consolidated income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the consolidated income statement. (7) Leasing The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an 93

95 Notes to the Consolidated Financial Statements 31 December 2012 assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as a lessee Leases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight line basis over the lease term. Contingent rental payable are recognised as an expense in the period in which they are incurred. Group as a lessor Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned. (8) Recognition of income and expenses 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 and similar income and expense For all financial instruments measured at amortized cost, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in the carrying amount is recorded as Interest and similar income for financial assets and Interest and similar expense for financial liabilities. Once the recorded value of a financial asset on a group of similar financial assets has been reduced due to an impairment loss, interest income continue to be recognized using the rate of interest used to discount the future cash flows of the purpose of measuring the impairment loss. (ii) Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the EIR on the loan. When it is unlikely that a loan be drawn 94 BLOM BANK s.a.l. Annual Report 2012

96 Notes to the Consolidated Financial Statements 31 December 2012 down, the loan commitment fees are recognized over the commitment period on a straight line basis. Fee income from providing transaction services Fee arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognized on completion of the underlying transaction. Fee or components of fee that are linked to a certain performance are recognized after fulfilling the corresponding criteria. Fee and commission income from providing insurance services Insurance and investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognized as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognized over those future periods. (iii) Dividend income Dividend income is recognised when the right to receive the payment is established. (iv) Net gain from financial instruments at fair value through profit or loss Results arising from financial assets at fair value through profit or loss include all gains and losses from changes in fair value and related income or expense and dividends for financial assets at fair value through profit or loss. This includes any ineffectiveness recorded in hedging transactions. This caption also includes the results arising from trading activities including all gains and losses from changes in fair value and related income or expense and dividends for financial assets held for trading. (v) Insurance revenue For the insurance subsidiaries, net premiums and accessories (gross premiums) are taken to income over the terms of the policies to which they relate using the prorate temporise method for non-marine business and 25% of gross premiums for marine business. Unearned premiums reserve represents the portion of the gross premiums written relating to the unexpired period of coverage. If the unearned premiums reserve is not considered adequate to cover future claims arising on these premiums a premium deficiency reserve is created. (9) Cash and cash equivalents Cash and cash equivalents as referred to in the cash flow statement comprise balances with original maturities of a period of three months or less including: cash and balances with the central banks, deposits with banks and financial institutions, and deposits due to banks and financial institutions. (10) Property and equipment Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Such cost includes the cost of replacing part of the property and equipment. When significant parts of property and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the consolidated income statement as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. 95

97 Notes to the Consolidated Financial Statements 31 December 2012 Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate and treated as changes in accounting estimates. Depreciation is calculated using the straight line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: Buildings Furniture, office installations and computer equipment Vehicles 50 years ( ) years 6.67 years Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in Net gain (loss) on disposal of fixed assets in the year the asset is derecognized. The asset s residual lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively if applicable. (11) Assets obtained in settlement of debt Assets obtained in settlement of debt are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition, management has committed to the sale, and the sale is expected to have been completed within one year from the date of classification. (12) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any noncontrolling interest in the acquiree. For each business combination, the Group measures the non controlling interest in the acquiree at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income statement. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. 96 BLOM BANK s.a.l. Annual Report 2012

98 Notes to the Consolidated Financial Statements 31 December 2012 Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the gain is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. 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 that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. (13) Intangible assets An intangible asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Group. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite of indefinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows: Key money Software development cost lower of lease period or 5 years 2.5 years (14) Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual 97

99 Notes to the Consolidated Financial Statements 31 December 2012 impairment testing for an asset is required, the Group estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognized in the consolidated income statement. Impairment losses relating to goodwill cannot be reversed in future periods. (15) Provisions for risks and charges Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the consolidated income statement net of any reimbursement. (16) Employees end-of-service benefits For the Group and its subsidiaries operating in Lebanon, end-of-service benefit subscriptions paid and due to the National Social Security Fund (NSSF) are calculated on the basis of 8.5% of the staff salaries. The final endof-service benefits due to employees after completing 20 years of service, at the retirement age, or if the employee permanently leaves employment, are calculated based on the last salary multiplied by the number of years of service. The Group is liable to pay to the NSSF the difference between the subscriptions paid and the final end-of-service benefits due to employees. The Group provides for end-of-service benefits on that basis. 98 BLOM BANK s.a.l. Annual Report 2012

100 Notes to the Consolidated Financial Statements 31 December 2012 End-of-service benefits for employees at foreign branches and subsidiaries are accrued for in accordance with the laws and regulations of the respective countries in which the branches and subsidiaries are located. (17) Taxes Taxes are provided for in accordance with regulations and laws that are effective in the countries where the Group operates. (i) Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. (ii) Deferred tax Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. In respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except: Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. In respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. 99

101 Notes to the Consolidated Financial Statements 31 December 2012 The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Current tax and deferred tax relating to items recognized directly in equity are also recognized in equity and not in the consolidated income statement. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. (18) Assets under management and assets held in custody and under administration The Group provides custody and administration services that result in the holding or investing of assets on behalf of its clients. Assets held in trust, under management or under custody or under administration, are not treated as assets of the Group and accordingly are recorded as off balance sheet items. (19) Dividends on ordinary shares Dividends on ordinary shares are recognized as a liability and deducted from equity when they are approved by the Bank s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank. Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date. (20) Treasury shares Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity and accounted for at weighted average cost. Consideration paid or received on the purchase sale, issue or cancellation of the Group s own equity instruments is recognized directly in equity. No gain or loss is recognized in the consolidated income statement on the purchase, sale, issue or cancellation of the Group s own equity instruments. 100 BLOM BANK s.a.l. Annual Report 2012

102 Notes to the Consolidated Financial Statements 31 December 2012 When the Group holds own equity instruments on behalf of its clients, those holdings are not included in the Group s consolidated statement of financial position. Contracts on own shares that require physical settlement of a fixed number of own shares for a fixed consideration are classified as equity and added to or deducted from equity. Contracts on own shares that require net cash settlement or provide a choice of settlement are classified as trading instruments and changes in the fair value are reported in the consolidated income statement. (21) 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 financial statements (within Other liabilities ) at fair value, being the premium received. Subsequent to initial recognition, the Group s liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortization recognised in the consolidated income statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the consolidated income statement. The premium received is recognised in the consolidated income statement on a straight line basis over the life of the guarantee. (22) Customers acceptances Customers acceptances represent term documentary credits which the Group has committed to settle on behalf of its clients against commitments by those clients (acceptances). The commitments resulting from these acceptances are stated as a liability in the statement of financial position for the same amount. (23) Segment reporting The Group s segmental reporting is based on the following operating segments: retail banking; corporate banking; treasury, money and capital markets; and asset management and private banking. 2.5 Significant accounting judgments and estimates In the process of applying the Group s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect in the amounts recognised in the financial statements: 101

103 Notes to the Consolidated Financial Statements 31 December 2012 Going concern The Group s management has made an assessment of the Group s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset backed securities. Impairment losses on loans and advances The Group reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the consolidated income statement. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilization, loan to collateral ratios etc.), concentrations of risks and economic date (including levels of unemployment, real estate prices indices, country risk and the performance of different individual groups). 102 BLOM BANK s.a.l. Annual Report 2012

104 Notes to the Consolidated Financial Statements 31 December 2012 Deferred tax assets Deferred tax assets are recognized in respect to tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Judgment is required to determined the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits, together with future tax planning strategies. Business model In making an assessment whether a business model s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to management. However, in some circumstances it may not be clear whether a particular activity involves one business model with some infrequent asset sales or whether the anticipated sales indicate that there are two different business models. In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows the Group considers: - management s stated policies and objectives for the portfolio and the operation of those policies in practice; - how management evaluates the performance of the portfolio; - whether management s strategy focuses on earning contractual interest revenues; - the degree of frequency of any expected asset sales; - the reason for any asset sales; and - whether assets that are sold are held for an extended period of time relative to their contractual maturity. Contractual cash flows of financial assets The Group exercises judgment in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and interest on the principal outstanding and so may qualify for amortised cost measurement. In making the assessment the Group considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage. 103

105 Notes to the Consolidated Financial Statements 31 December Segmental Information The Group operates in four major business segments: retail; corporate; treasury, money and capital markets; and asset management and private banking. Retail Banking Retail Banking provides a diversified range of products and services to meet the personal banking and consumer finance needs of individuals. The range includes deposits, housing loans, consumer loans, credit cards, funds transfers, foreign exchange and other branch related services. Corporate Banking Corporate Banking provides a comprehensive product and service offering to corporate and institutional customers, including loans and other credit facilities, deposits and current accounts, trade finance and foreign exchange operations. Treasury, money and capital markets It is mostly responsible for the liquidity management and market risk of the Group as well as managing the Group s own portfolio of stocks, bonds and other financial instruments. In addition, this segment provides treasury and investments products and services to investors and other institutional customers. Asset management and private banking Asset management and private banking provides investment products and services to institutional investors and intermediaries. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects is measured differently from operating profit or loss in the consolidated financial statements. Income taxes, personnel expenses, other operating expenses and net gain (loss) on disposal of other assets are managed on a group basis and are not allocated to operating segments. Interest income is reported net since the majority of the segments revenues are from interest. Management primarily relies on net interest revenue as performance measure, not the gross revenue and expense amounts. Transfer prices between operating segments are on an arm s length basis in a manner similar to transactions with third parties. 104 BLOM BANK s.a.l. Annual Report 2012

106 Notes to the Consolidated Financial Statements 31 December 2012 The following table presents net operating income, profit and total assets and liabilities information in respect of the Group s operating segments: Profit for the year information 2012 LL Million Treasury, money and capital markets Corporate banking Retail banking Asset management and private banking Unallocated* Total Net interest income (**) 528, , ,738 3, ,759 Net fee and commission income 30,267 43,080 50,187 24,759 21, ,678 Net gain from financial instruments at fair value through profit or loss Net gain from derecognition of financial assets at amortized cost Revenue from financial assets at fair value through other comprehensive income 164,963-29, ,378 32, , Other operating income , ,916 Net credit losses - (129,285) (29,097) - - (158,382) Net operating income 756,664 59, ,159 28,267 21,385 1,039,107 Extracts of results Depreciation and amortization (32,855) Segment loss Unallocated expenses (394,736) Income tax expense (105,104) Profit for the year 506,412 (*) Unallocated include insurance premiums commissions from insurance subsidiaries. (**) Net interest income comprises of interest income allocated by operating segment and interest expense prorated according to interest income. 105

107 Notes to the Consolidated Financial Statements 31 December 2012 Treasury, money and capital Corporate banking Retail banking Asset management and private Unallocated* Total LL Million markets banking Net interest income (**) 516, , ,873 3, ,519 Net fee and commission income 36,885 49,585 23,671 26,980 38, , Net gain from financial instruments at fair value through profit or loss (23,744) - 31, ,984 Net gain from derecognition of financial assets at amortized cost 119, ,538 Revenue from financial assets at fair value through other comprehensive income Other operating income , ,807 Net credit losses (937) (45,555) (14,377) - - (60,869) Net operating income 648, , ,702 30,668 38,871 1,035,188 Extracts of results Depreciation and amortization (35,720) Segment loss Unallocated expenses (380,859) Income tax expense (118,799) Profit for the year 499,810 (*) Unallocated include insurance premiums commissions from insurance subsidiaries. (**) Net interest income comprises of interest income allocated by operating segment and interest expense prorated according to interest income. Financial position information LL Million Treasury, money and capital markets Corporate banking Retail banking 2012 Asset management and private banking Other*** Total assets 27,842,626 5,891,758 3,164, , ,322 37,764,622 Total liabilities 22,660,301 6,250,934 4,703, , ,390 34,475,614 Total LL Million Treasury, money and capital markets Corporate banking Retail banking 2011 Asset management and private banking Other*** Total assets 25,563,013 5,710,878 2,774, , ,942 34,921,952 Total liabilities 20,721,550 6,031,358 4,286, , ,835 31,932,569 Total (***) Other includes activities related to property and equipment, intangible assets, assets obtained in settlement of debt, other assets and goodwill. 106 BLOM BANK s.a.l. Annual Report 2012

108 Notes to the Consolidated Financial Statements 31 December 2012 Geographic information The Group operates in two geographic markets based on the location of its markets and customers. The local market represents the Lebanese market, and the international market represents markets outside Lebanon. The following table shows the distribution of the Group s external net operating income and non-current assets LL Million Domestic International Total Total operating income 831, ,107 1,197,489 Net credit losses (1,415) (156,967) (158,382) Net operating income 1 829, ,140 1,039,107 Non-current assets 2 292, , , LL Million Domestic International Total Total operating income 860, ,066 1,096,057 Net credit losses (559) (60,310) (60,869) Net operating income 1 860, ,756 1,035,188 Non-current assets 2 258, , ,954 1 Net operating income is attributed to the geographical segment on the basis of the location where the income is generated. 2 Non-current assets consist of property and equipment, intangible assets, assets obtained in settlement of debt and goodwill. 107

109 Notes to the Consolidated Financial Statements 31 December Interest and Similar Income LL Million Interest income on debt instruments at amortized cost 1,018,927 1,049,345 Deposits and similar accounts with banks and financial institutions 287, ,428 Loans and advances to customers at amortized cost 639, ,443 Loans and advances to related parties at amortized cost ,946,653 1,850, Interest and Similar Expense LL Million Deposits and similar accounts from banks and financial institutions 11,091 11,792 Deposits from customers and other credit balances 1,140,556 1,053,521 Deposits from related parties at amortized cost 7,247 8,084 1,158,894 1,073, Net Fee and Commission Income LL Million Fee and commission income Trade finance 26,537 32,507 Credit related fees and commissions 30,366 27,133 Asset management and private banking 26,112 26,980 Electronic banking 20,679 17,513 General banking income 34,842 36,885 Commission on insurance related activities 36,381 37,202 Trust and fiduciary activities 1,199 1,669 Other services 20,471 20, , ,443 Fee and commission expense Correspondents accounts (26,909) (24,451) 169, , BLOM BANK s.a.l. Annual Report 2012

110 Notes to the Consolidated Financial Statements 31 December Net Gain on Financial Assets and Liabilities Designated at Fair Value Through Profit or Loss LL Million Interest and similar income from debt instruments and other financial assets at fair value though profit or loss Governmental debt securities 4,647 3,393 Corporate debt securities 19,497 22,031 24,144 25,424 Interest expense on liabilities at fair value through profit or loss (1,334) (1,656) Gain from sale of debt instruments and other financial assets at fair value through profit or loss Governmental debt securities 13, Corporate debt securities 13,057 4,524 Funds (2) ,500 5,650 Unrealized (loss) gain from revaluation of debt instruments and other financial assets at fair value through profit or loss Government debt securities 10 (6,531) Corporate debt securities 88,095 (57,215) Funds 1,177 (962) 89,282 (64,708) Net (loss) gain from debt instruments and other financial assets at fair value through profit or loss 138,592 (35,290) Net gain from equity instruments at fair value through profit or loss Unrealized gian (loss) from revaluation 5,089 (328) Dividend income 1,201 1,126 Gain from sale 1, Net gain from equity instrument at fair value through profit & loss 7,910 1,072 Foreign exchange 47,876 42, ,378 7,984 Foreign exchange income includes gains and losses from spot and forward contracts, other currency derivatives and the revaluation of the daily open trading and structural positions. 8. Net Gain from Derecognition of Financial Assets at Amortized Cost Derecognition of financial assets at amortized cost were made during the year due to the following reasons: - Liquidity gap and yield management; - Swap of financial instruments by the Central Bank of Lebanon; and - Redemption of corporate debt securities. 109

111 Notes to the Consolidated Financial Statements 31 December 2012 The schedule below details the gains and losses arising from derecognition of these financial assets: LL Million Gains (Losses) Total Lebanese sovereign and Central Bank of Lebanon Certificates of deposit Treasury bills and bonds 15,286 (4,137) 11,149 16,250 (4,137) 12,113 Other sovereign Treasury bills and bonds Private Sector and other securities Corporate debt securities 19,649 (105) 19,544 36,743 (4,242) 32, LL Million Gains (Losses) Total Lebanese sovereign and Central Bank of Lebanon Certificates of deposit 92,327 (1,114) 91,213 Treasury bills and bonds 26,151 (141) 26, ,478 (1,255) 117,223 Other sovereign Treasury bills and bonds Private Sector and other securities Corporate debt securities 2,161-2, ,793 (1,255) 119, Other Operating Income LL Million Net gain from sale of assets obtained in settlement of debt Write back of provisions for risks and charges Others 12,133 14,436 12,916 14, Net Credit Losses LL Million Provision for sundry debtors (5) (177) Provision on financial assets at amortized cost (note 21) - (937) Provision for loans and advances Commercial loans (note 20) (143,002) (65,757) Consumer loans (note 20) (38,855) (16,489) Commitment by signature (note 33) - (133) (181,857) (82,379) Write-back of provisions for loans and advances Commercial loans (note 20) 2,755 5,086 Consumer loans (note 20) 9,757 2,112 Unrealized interest (note 20) 2,979 14,224 Recoveries from loans reflected as off-financial position (note 20) 7,693 1,202 Recoveries from sundry debtors (note 26) Recoveries from commitment by signature (note 33) 10-23,480 22,624 (158,382) (60,869) 110 BLOM BANK s.a.l. Annual Report 2012

112 Notes to the Consolidated Financial Statements 31 December Personnel Expenses LL Million Salaries and related charges 131, ,598 Social security contributions 22,241 23,028 Provisions for retirement benefits obligation (note 33) 8,417 7,323 Additional allowances 28,984 27,603 Bonus paid 55,887 51, , , Other Operating Expenses LL Million Marketing and advertising 14,339 11,789 Professional fees 14,234 12,791 Maintenance and repairs 13,630 13,742 Provision for guarantee of deposits 12,382 11,438 Postage and telecommunications 9,886 10,568 Rent and related charges 9,694 10,311 Stationary and printings 6,823 6,365 Fiscal stamps 6,223 10,306 Electricity and fuel 6,020 5,542 Taxes and fees 5,075 6,922 Provision for risks and charges (note 33 (i)) 4,690 9,483 Travel expenses 3,770 3,948 Board of directors attendance fees 1,755 1,488 Insurance 1,089 1,199 Others 39,491 27, , , Income Tax Expenses The tax rates applicable to the parent and subsidiaries vary from 0% to 40% in accordance with the income tax laws of the countries where the Group operates. For the purpose of determining the taxable results of the subsidiaries for the year, the accounting results have been adjusted for tax purposes. Such adjustments include items relating to both income and expense and are based on the current understanding of the existing tax laws and regulations and tax practices. 111

113 Notes to the Consolidated Financial Statements 31 December 2012 Reconciliation of total tax charge The relationship between taxable profit and accounting profit is as follow: LL Million Profit before income tax 611, ,609 Less: Results of the subsidiary insurance company located in Lebanon(*) (24,980) (20,533) Accounting profit before income tax 586, ,076 Add: Provisions non tax deductible 43,139 58,922 Unrealized losses from revaluation of debt instruments and other financial assets at fair value through profit or loss 64 47,080 Other non tax deductible charges 60,686 53,701 Unrealized loss on difference of exchange , ,181 Less: Unrealized gains from revaluation of debt instruments and other financial assets at fair value through profit or loss (74,283) - Dividends received and previously subject to income tax (670) (6,911) Remunerations already taxed (8,707) (7,223) 4% of a subsidiary s capital eligible to be tax deductible (400) (400) Unrealized gain on difference of exchange (17,037) (9,922) Write-back of provisions previously subject to income tax (43,721) (10,564) Non taxable income (50,498) (29,696) Others - (64) Taxable profit 495, ,401 Effective income tax rate 17.18% 19.20% Income tax expense in the consolidated income statement 105, ,799 (*) The insurance company in Lebanon is subject to income tax at the rate of 15% calculated based on gross insurance premiums weighted differently for each class of business. 14. Earnings Per Share Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the year. The following table shows the income and share data used in the basic earnings per share calculations: Net profit for the year LL Million 506, ,810 Less: Proposed dividends on preferred shares LL Million (21,105) (21,105) Non-controlling interests LL Million (5,202) (11,932) Net profit attributable to ordinary equity holders of the parent Weighted average number of ordinary shares for basic earnings per share LL Million 480, , ,366, ,009,890 Basic earnings per share LL 2,304 2, BLOM BANK s.a.l. Annual Report 2012

114 Notes to the Consolidated Financial Statements 31 December 2012 No figure for diluted earnings per share has been presented as the Bank has not issued any instruments which would have an impact on earnings per share when exercised. There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of approval of these consolidated financial statements. 15. Cash and Balances with Central Banks LL Million Cash on hand 186, ,023 Current accounts with Central Banks 1,692,117 1,189,584 Deposits with the Central Banks 5,580,003 4,691,774 7,458,577 6,062,381 Cash and balances with the Central Banks include non-interest bearing balances held by the Group at the Central Bank of Lebanon in coverage of the obligatory reserve requirements for all banks operating in Lebanon on deposits in Lebanese Lira as required by the Lebanese banking rules and regulations. This obligatory reserve is calculated on the basis of 25% of sight commitments and 15% of term commitments, after taking into account certain waivers relating to subsidized loans denominated in Lebanese Lira. Accordingly, the obligatory reserve amounted to LL 396,385 million at 31 December 2012 (2011: LL 369,136 million). In addition to the above, all banks operating in Lebanon are required to deposit with the Central Bank of Lebanon interest-bearing placements at the rate of 15% of total deposits in foreign currencies regardless of nature. These placements amounted to US$ 1,695,583 thousands (equivalent to LL 2,556,091 million) as at 31 December 2012 (2011: US$ 1,571,117 thousands equivalent to LL 2,368,458 million) Foreign subsidiaries are also subject to obligatory reserve requirements with varying percentages, according to the banking rules and regulations of the countries in which they are located. 16. Due from Banks and Financial Institutions LL Million Current accounts Current accounts 979, ,557 Time deposits Time deposits 4,090,755 4,127,976 Doubtful accounts with banks 20,980 20,277 Less: Impairment allowance for doubtful accounts with banks (17,473) (17,473) Less: Unrealized interest for doubtful accounts with banks (3,507) (2,804) 4,090,755 4,127,976 5,070,495 4,845,533 Movement of impairment allowance and unrealized interest for doubtful accounts with banks is as follows: LL Million Balance at 1 January 20,277 17,588 Provision for unrealized interest 703 2,689 Balance at 31 December 20,980 20,

115 Notes to the Consolidated Financial Statements 31 December Loans to Banks and Financial Institutions LL Million Loans to banks and financial institutions 113, ,966 Accrued interest receivable Balance at 31 December 114, , Derivative Financial Instruments The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year end and are indicative of neither the market risk nor the credit risk Assets Liabilities Total notional Assets Liabilities Total notional LL Million amount amount Derivatives held-for-trading Forward foreign exchange contracts 33,564 39,323 2,733,349 6,374 4,998 1,865,264 Equity swaps and options - 1,442 22, ,118 44,814 Futures on commodities 3,518 7, ,203 7,090 4, ,766 37,082 48,006 3,528,907 13,822 13,751 2,477,844 Derivatives used as fair value hedges Currency swaps , ,690 Hedge of net investment in foreign operations Forward foreign exchange contracts - 4, ,491 11, ,261 37,082 52,494 3,820,592 25,548 13,751 2,864,795 Derivatives often involve at their inception only a mutual exchange of promises with little or no transfer of consideration. However, these instruments frequently involve a high degree of leverage and are very volatile. A relatively small movement in the value of the asset, rate or index underlying a derivative contract may have a significant impact on the profit or loss of the Group. Over-the-counter derivatives may expose the Group to the risks associated with the absence of an exchange market on which to close out an open position. The Group s exposure under derivative contracts is closely monitored as part of the overall management of the Group s market risk. Options The Group purchases and sells options through regulated exchanges and in the over-the-counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. Derivative financial instruments held-for-trading purposes Most of the Group s derivative trading activities relate to deals with customers which are normally offset by transactions with other counterparties. The Group may also take positions with the expectation of profiting from favorable movements in prices, rates or indices. Also included under this heading are any derivatives entered into for hedging purposes which do not meet the IAS 39 hedge accounting criteria. 114 BLOM BANK s.a.l. Annual Report 2012

116 Notes to the Consolidated Financial Statements 31 December 2012 Derivative financial instruments held for hedging purposes As part of its asset and liability management, the Group uses derivatives for hedging purposes in order to reduce its exposure to currency risk. The Group uses forward foreign exchange contracts to hedge against specifically identified currency risks. Hedge of net investment in foreign operations Forward foreign exchange contracts (to sell Euros and buy US Dollars) designated as a hedge of the Group s net investment in its French subsidiary, and is being used to hedge the Group s investment exposure to foreign exchange risk on this investment amounting to Euro 107,904 thousand (2011: same). The notional amount of these contracts amounted to Euro 107,904 thousand (LL 214,491 million) as at 31 December 2012 (2011: LL 210,261 million). The forward foreign exchange contracts were revalued as of 31 December 2012 and resulted in unrealized loss of LL 4,488 million (2011: unrealized gain of LL 11,726 million). The contracts mature on 4 March 2013 at the latest. 19. Financial Assets at Fair Value through Profit or Loss LL Million Equity instruments at fair value through profit or loss 36,777 28,530 Debt and other instruments at fair value through profit or loss 810, , , ,466 Financial assets at fair value through profit or loss consist of the following: LL Million Quoted equity securities at fair value through profit or loss 25,359 17,796 Unquoted equity securities at fair value through profit or loss 11,418 10,734 Quoted government debt securities 46,584 21,852 Unquoted government debt securities 84,674 11,823 Quoted corporate debt securities 648, ,403 Funds 30,554 27,599 Investments related to unit-linked contracts - 36, , , Net Loans and Advances to Customers at Amortized Cost LL Million Commercial loans 6,271,667 5,884,115 Consumer loans (*) 3,227,208 2,824,597 9,498,875 8,708,712 Less: Individual impairment allowances (270,492) (154,645) Collective impairment allowances (**) (101,915) (102,697) Unrealized interest (56,181) (41,920) 9,070,287 8,409,450 (*) Included under consumer loans as at 31 December 2012, an amount of LL 1,603,659 million (31 December 2011: LL 1,321,600 million) representing housing loans. (**) Included under collective impairment allowances as at 31 December 2011, an amount of LL 39,298 million representing provision for certain clients which were allocated to individual impairment allowances during

117 Notes to the Consolidated Financial Statements 31 December 2012 Movement of unrealized interest on substandard, doubtful, and bad loans during the years ended 31 December was as follows: LL Million Commercial loans Commercial loans Balance at 1 January 41,920 45,886 Add: Unrealized interest for the year 48,826 52,761 Foreign exchange difference (1,270) 1,071 Transfer from provision 411 2,131 89, ,849 Less: Recoveries of unrealized interest (2,979) (14,224) Amounts written-off (22,638) (45,705) Transferred to off-financial position (8,089) - Balance at 31 December 56,181 41,920 Unrealized interest on substandard loans 7,954 5,239 Unrealized interest on doubtful loans 48,227 36,681 56,181 41,920 A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows: LL Million Commercial loans Consumer loans Total Commercial loans Consumer loans Balance at 1 January 207,162 50, , ,120 32, ,386 Add: Charge for the year 143,002 38, ,857 65,757 16,489 82,246 Foreign exchange difference (8,665) (2,463) (11,128) (4,603) (1,468) (6,071) Reclassification (5,060) 5,060 - Transfer to unrealized interest (411) - (411) (2,131) - (2,131) Transfer from provision for risks and charges (note 33) ,596-2, ,088 86, , ,679 52, ,026 Less: Provisions written-off (7,199) (5,724) (12,923) (2,431) (55) (2,486) Write-back of provisions (2,755) (9,757) (12,512) (5,086) (2,112) (7,198) Provision transferred to off financial position (21,617) (8,201) (29,818) (31,571) (23,682) (55,253) (7,517) (2,167) (9,684) Balance at 31 December 309,517 62, , ,162 50, ,342 Total Individual impairment 240,340 30, , ,909 35, ,645 Collective impairment 69,177 32, ,915 88,253 14, , ,517 62, , ,162 50, ,342 Gross amount of loans individually determined to be impaired 436,434 80, , ,454 69, , BLOM BANK s.a.l. Annual Report 2012

118 Notes to the Consolidated Financial Statements 31 December 2012 In accordance with the Banking Control Commission Circular No. 240, bad loans and related provisions and unrealized interest which fulfill certain requirements have been transferred to off financial position accounts. The gross balance of these loans amounted to LL 137,300 million as of 31 December 2012 (2011: LL 99,205 million). The fair value of collateral that the Group holds relating to loans and advances to corporate customers individually determined to be impaired amounts to LL 337,693 million as of 31 December 2012 (LL 247,207 million as of 31 December 2011). The collateral consists of cash, securities, letters of guarantee and properties. The movement of allowance for impairment losses and allowance for unrealized interest against fully impaired loans included in the off financial position accounts is as follows: LL Million Balance at 1 January 99,205 92,834 Add: Unrealized interest for the year 9,123 8,455 Provision and unrealized interest transferred from the statement of financial position 37, , ,289 Less: Recoveries / Provisions written-back (7,693) (1,202) Amounts written-off (1,269) (551) Foreign exchange difference 26 (331) (8,936) (2,084) Balance at 31 December 137,300 99, Financial Assets at Amortized Cost LL Million Quoted Government debt securities 2,427,884 2,606,333 Corporate debt securities 823, ,782 3,251,214 3,424,115 Unquoted Government debt securities 4,305,889 3,570,701 Corporate debt securities 78,531 77,934 Certificates of deposit Central Banks 6,123,551 6,176,147 Certificates of deposit Commercial banks and financial institutions 549, ,762 11,057,322 10,224,544 14,308,536 13,648,659 The movement in the impairment allowances during the year was as follows: LL Million Balance at 1 January (937) - Charge for the year (note 10) - (937) Balance at 31 December (937) (937) 117

119 Notes to the Consolidated Financial Statements 31 December Financial Assets at Fair Value Through Other Comprehensive Income LL Million Equity securities 3,108 2,445 Funds 2,850 4,200 5,958 6,645 The table below details the financial assets at fair value through other comprehensive income as at 31 December: LL Million Carrying amount Cumulative fair value changes Dividend income Carrying amount Cumulative fair value changes Dividend income Equity securities 3,108 (129) 257 2,445 (370) 217 Funds 2, , , ,645 (268) 217 Dividend income amounted to 257 million for the year ended 31 December 2012 (2011: LL 217 million) and resulted from equity instruments held at year end (2011: the same). 23. Property and Equipment Advances on Furniture, office acquisition Freehold land installations and Vehicles of fixed assets and buildings computer and construction equipment LL Million in progress Total Cost At 1 January ,470 6, ,830 75, ,264 Additions 43,190 1,000 15,893 44, ,357 Disposals (4,928) (597) (3,901) (5) (9,431) Transfers 28, ,174 (43,176) (922) Translation difference (15,150) (190) (10,591) (1,890) (27,821) At 31 December ,629 6, ,405 74, ,447 Depreciation At 1 January ,298 3, , ,433 Charge for the year 7,998 1,051 21,908-30,957 Relating to disposals (168) (553) (3,114) - (3,835) Translation difference (1,976) (160) (7,064) - (9,200) At 31 December ,152 3, , ,355 Net carrying value At 31 December ,477 2,583 96,087 74, , BLOM BANK s.a.l. Annual Report 2012

120 Notes to the Consolidated Financial Statements 31 December 2012 LL Million Freehold land and buildings Vehicles Furniture, office installations and computer equipment Advances on acquisition of fixed assets and construction in progress Cost At 1 January ,047 6, ,479 67, ,460 Additions 20,011 1,149 22,853 33,960 77,973 Disposals - (814) (6,256) (14) (7,084) Transfers 14, ,700 (23,422) (620) Translation difference (9,665) (298) (6,946) (2,556) (19,465) Total At 31 December ,470 6, ,830 75, ,264 Depreciation At 1 January ,628 3, , ,515 Charge for the year 7,072 1,075 24,953-33,100 Relating to disposals - (768) (6,007) - (6,775) Translation difference (1,402) (134) (4,871) - (6,407) At 31 December ,298 3, , ,433 Net carrying value At 31 December ,172 2,675 92,242 75, ,831 Certain freehold land and buildings purchased prior to 1 January 1999 were restated in previous years for the changes in the general purchasing power of the Lebanese Lira giving rise to a net surplus amounting to LL 14,727 million, which was credited to equity under reserves for revaluation variance real estate. 24. Intangible Assets Advances on Software Key money acquisition of development intangible assets Total LL Million Cost At 1 January ,783 5, ,838 Additions 1, ,162 Transfers Disposals (19) - (30) (49) Translation difference 6 (649) (78) (721) At 31 December ,779 5, ,119 Amortization At 1 January ,256 4,304-13,560 Charge for the year 1, ,898 Relating to disposals (19) - - (19) Translation difference 10 (195) - (185) At 31 December ,046 4,208-15,254 Net carrying value At 31 December ,733 1, ,

121 Notes to the Consolidated Financial Statements 31 December 2012 Advances on Software Key money acquisition of development intangible assets Total LL Million Cost At 1 January ,936 6, ,970 Additions 1, ,688 Transfers Disposals (3,602) (188) (283) (4,073) Translation difference (255) (517) (9) (781) At 31 December ,783 5, ,838 Amortization At 1 January ,140 4,549-14,689 Charge for the year 2, ,620 Related to disposals (3,551) (188) - (3,739) Translation difference 190 (200) - (10) At 31 December ,256 4,304-13,560 Net carrying value At 31 December ,527 1, , Assets Obtained in Settlement of Debts LL Million Cost At 1 January 30,751 30,847 Additions 1,747 2,076 Disposals (1,682) (1,316) Translation difference (564) (856) At 31 December 30,252 30,751 Impairment At 1 January and 31 December (2,785) (2,785) Net carrying value At 31 December 27,467 27, Other Assets LL Million Compulsory deposits (i) 15,584 17,307 Precious metals and stamps Customers transactions between head office and branches 14,879 12,726 Prepaid expenses 21,524 24,485 Sundry debtors (ii) 16,682 19,676 Other revenues to be collected 6,030 3,981 Reinsurer s share of technical reserves 40,605 37,595 Other assets 31,399 36, , , BLOM BANK s.a.l. Annual Report 2012

122 Notes to the Consolidated Financial Statements 31 December 2012 (i) Compulsory deposits represent amounts deposited with local authorities based on local regulations of the countries in which the subsidiaries are located, and are detailed as follows: LL Million BLOMInvest SAL 1,500 1,500 Bank of Syria and Overseas SA 9,475 11,107 BLOM Development Bank SAL 4,500 4,500 BLOM Bank France Experts Company for Financial Services ,584 17,307 (ii) Sundry debtors LL Million Sundry debtors 19,431 22,817 Less: Provision against sundry debtors (2,749) (3,141) 16,682 19,676 The movement of provision against sundry debtors is summarized as follows: LL Million Balance at 1 January 3,141 2,730 Charge for the year Translation difference (111) (4) Write-back of provisions (note 10) (286) - Balance at 31 December 2,749 3, Goodwill LL Million Cost At 1 January 61,879 63,145 Translation difference (1,671) (2,316) Goodwill from purchase of Experts Company for Financial Services - 1,050 At 31 December 60,208 61,879 Impairment testing of goodwill Goodwill acquired through business combinations has been allocated to groups of cash-generating units, which are also reportable segments, for impairment testing as follows: LL Million Corporate and retail banking (BLOM Bank Egypt SAE) 58,033 59,556 Asset management and private banking (BLOM Bank (Switzerland) SA) 1,308 1,273 Financial Services (Experts Company for Financial Services) 867 1,050 60,208 61,

123 Notes to the Consolidated Financial Statements 31 December 2012 Key assumptions used in value in use calculations The recoverable amount of BLOM Bank Egypt SAE has been determined based on a value in use calculation, using cash flow projections based on financial budgets approved by senior management covering a ten-year period. The following rates are used by the Group. % Discount rate Projected growth rate (average during the first 5 years) 5 5 Projected growth rate beyond the five year period 0 0 The calculation of value in use for BLOM Bank Egypt SAE is most sensitive to the following assumptions: Interest margins; Discount rates; Projected growth rates; Gross domestic product of the country where the subsidiary operates; Local inflation rates. Interest margins Interest margins are based on average values achieved in the 13 months proceeding of the budget period. These are increased over the budget period for anticipated market conditions. Discount rates Discount rates reflect management s estimate of return on capital employed. Discount rates are calculated by using the cost of equity. Projected growth rates, GDP and local inflation rates Assumptions are based on management analysis and published industry research. Sensitivity to changes in assumptions Management believes that no reasonable possible change in any of the above key assumptions would cause the carrying value of the units to exceed their recoverable amount. 28. Due to Central Banks Under Repurchase Agreements LL Million Jordan Egypt Total Central Banks 117,846 22, ,499 Carrying value of collateral 117,873 22, ,526 Interest expense Annual interest rate 4.25% 9.75% Maturity date 2 January January Due to Banks and Financial Institutions LL Million Current accounts 228, ,739 Time deposits 389, , , , BLOM BANK s.a.l. Annual Report 2012

124 Notes to the Consolidated Financial Statements 31 December Financial Liabilities at Fair Value through Profit or Loss LL Million Customers time deposits 22,053 41,054 At 31 December 2012, the derivative contracts fair value related to customers deposits at fair value through profit or loss amounted to a net liability of LL million 1,443 (2011: net liability of LL million 3,760). 31. Customers Deposits at Amortized Cost LL Million Customers deposits at amortized cost Sight deposits 4,771,806 4,192,070 Time deposits 14,902,872 13,906,752 Saving accounts 11,234,871 10,770,447 Credit accounts and deposits against debit accounts 1,677,432 1,409,796 Margins on letters of credit 62,850 87,478 32,649,831 30,366,543 Customers deposits include coded deposit accounts in BLOM Bank SAL and BLOMInvest Bank SAL amounting to LL 125,848 million as of 31 December 2012 (2011: LL 129,495 million). 32. Other Liabilities LL Million Current tax liabilities 46,096 72,496 Sundry creditors 113, ,136 Dividends payable Accrued expenses 49,629 59,589 Transactions pending between branches 55,086 66,397 Unearned premiums and liability related to insurance contracts 275, ,478 Complementary taxes due related to a subsidiary bank (i) 30,270 20,901 Other taxes due 14,047 14,599 Other liabilities 6,507 15, , ,326 (i) Complementary taxes due related to BLOM Bank Egypt SAE represent mainly accruals for additional complementary taxes resulting from inspection by tax authorities. 123

125 Notes to the Consolidated Financial Statements 31 December Provisions for Risks and Charges LL Million Provision for risks and charges (i) 22,812 19,597 Provision for outstanding claims and IBNR reserves related to subsidiary- insurance companies 42,414 39,775 Retirement benefits obligation (ii) 52,997 48,948 Provision on commitment by signature (iii) - 10 Other provisions 1,185 1, , ,509 (i) Provisions for risks and charges LL Million Balance at 1 January 19,597 13,036 Charge for the year (note 12) 4,690 9,483 Provisions paid during the year (108) (1,862) Provisions written-back during the year (185) (28) Provisions written-off (1,041) - Transfer to commitment by signature - (10) Exchange difference (141) (1,022) Balance at 31 December 22,812 19,597 (ii) Retirement benefits obligation LL Million Balance at 1 January 48,948 45,075 Charge for the year (note 11) 8,417 7,323 Benefits paid (4,135) (3,029) Exchange difference (233) (421) Balance at 31 December 52,997 48,948 (iii) Provision on commitment by signature LL Million Balance at 1 January 10 2,463 Charge for the year (note 10) Provisions written-back during the year (10) - Transfer to collective provision on commercial loans (note 20) - (2,596) Transfer from provision for risks and charges - 10 Balance at 31 December BLOM BANK s.a.l. Annual Report 2012

126 Notes to the Consolidated Financial Statements 31 December Share Capital and Premiums LL Million Common shares Authorized, issued and fully paid 215,000,000 shares at LL 1,200 per share as of 31 December 2012 (31 December 2011: the same) Share capital Share premium Share capital Share premium 258, , , , LL Million Share capital Share premium Share capital Share premium Preferred shares Authorized, issued and fully paid 20,000,000 preferred shares (2011 issue) at LL 1,200 per share as of 31 December 2012 (31 December 2011: the same) 24, ,500 24, ,500 a- Preferred shares outstanding as of 31 December 2012 and 31 December 2011 consist of: According to the provisions of Law no 308 dated 3 April 2001, the Extraordinary General Assembly Meeting of Shareholders held on 4 April 2011, resolved to issue preferred shares at the following conditions: 2011 issue Number of shares 20,000,000 Par value of issued shares (LL 1,200 share) Premium (denominated in USD) Non cumulative benefits LL 24,000 million LL 277,500 million (USD 184,080 thousands) 2011 distributions to be based on a fixed amount of USD 0.7 per share (subject to the approval of the Shareholders General Assembly Meeting and the availability of a nonconsolidated distributable net income for the year). These preferred shares are redeemable 60 days after the annual general assembly dealing with the accounts for the year 2016 at the discretion of the Bank at the issue price. All of the Bank s common and preferred shares are listed in the Beirut Stock Exchange starting 20 June Out of the total common shares, 73,896,010 shares are listed as Global Depository Receipts (GDRs) in the Luxembourg Stock Exchange. 125

127 Notes to the Consolidated Financial Statements 31 December Non Distributable Reserves LL Million Reserve for general banking risks Legal reserve Reserve for increase of share capital Other reserves At 1 January , ,824 58,643 57, ,936 Appropriation of 2010 profits 45,750 47, ,707 Capital increase - (76) - - (76) Adjustments related to change in ownership in subsidiaries Net gain on sale of treasury shares - - 1,890-1,890 Transfer to reserve for increase in share capital (102) - At 31 December , ,382 60,638 57, ,470 Appropriation of 2011 profits 49,915 48,812 1, ,384 Net loss on sale of treasury shares - - (3,544) - (3,544) At 31 December , ,194 58,324 58, ,310 Total Reserves for general banking risks According to the Central Bank of Lebanon regulations, banks in Lebanon are required to appropriate from their annual net profit a minimum of 0.2 percent and a maximum of 0.3 percent of total risk weighted assets and off statement of financial position items based on rates specified by the Central Bank of Lebanon to cover general banking risks. The consolidated ratio should not be less than 1.25 percent of these risks at the end of year ten (2017) and 2 percent at the end of year twenty (2027). This reserve is part of the Group s equity and cannot be distributed as dividends. The appropriation in 2012 from the profits of the year 2011 amounted to LL 49,915 million (2011: LL 45,750 million). Legal reserve According to the Lebanese Code of Commerce and to the Money and Credit Act, banks and companies operating in Lebanon have to transfer 10% of their annual net profit to a legal reserve. In addition, subsidiaries and branches are also subject to legal reserve requirements based on the rules and regulations of the countries in which they operate. This reserve cannot be distributed as dividends. During 2012, the Group appropriated LL 48,812 million from 2011 profits to the legal reserve in accordance with the General Assembly of Shareholders resolution (2011: LL 47,627 million). Reserve for increase of share capital The balance amounting to LL 58,324 million (2011: LL 60,638 million) represents a regulatory reserve pursuant to circular no. 167, dated 24 January 1994, issued by the Banking Control Commission. This reserve cannot be distributed as dividends. Details of the reserve for increase of share capital are as follows: LL Million Recoveries of provisions for doubtful debts 40,712 39,482 Revaluation reserves for fixed assets sold Gain on sale of treasury shares 16,842 20,386 Transfer from other reserves ,324 60, BLOM BANK s.a.l. Annual Report 2012

128 Notes to the Consolidated Financial Statements 31 December 2012 Other reserves Other reserves consist of non-distributable reserves of subsidiaries appropriated from retained earnings as required by the laws applicable in the countries in which they operate. During 2012, the Group transferred an amount of LL 427 million from retained earnings to other reserves (2011: LL 330 million). 36. Distributable Reserves LL Million General reserves 395, ,961 General reserves The Group appropriates general reserves from its retained earnings to strengthen its equity. This reserve amounting to LL 395,042 million (2011: LL 363,961 million) is available for dividend distribution. 37. Treasury Shares Movement of treasury shares recognized in the consolidated statement of financial position is as follows: 2012 No. of common shares Amount LL Million At 1 January 6,698,360 83,162 Purchase of treasury shares 7,686,271 85,060 Sale of treasury shares (8,737,714) (100,920) At 31 December 5,646,917 67, No. of common shares Amount LL Million At 1 January 6,104,211 75,793 Purchase of treasury shares 2,154,425 27,650 Sale of treasury shares (1,560,276) (20,281) At 31 December 6,698,360 83,162 The treasury shares represent Global Depository Receipts (GDR) purchased by the Bank. The market value of one GDR was USD 7.95 as of 31 December 2012 (2011: US$ 7.45). The Group realized a loss of LL 3,544 million from the sale of treasury shares during the year 2012 (2011: a gain of LL 1,890 million). Gains and losses are reflected in the Non distributable reserves. 127

129 Notes to the Consolidated Financial Statements 31 December Retained Earnings As of 31 December, retained earnings include the following non distributable amounts: LL Million Group s share of accumulated unrealized gain on revaluation of structural position of subsidiary bank 2,957 - Unrealized gain on financial assets at fair value through profit or loss 11,932 15,616 14,889 15,616 Appropriation of profit during the year attributable to equity holders of the parent includes non-distributable amounts of LL 14,889 million (2011: LL 15,616 million). In accordance with decision 362 of the Council of Money and Credit of Syria, unrealized accumulated foreign exchange profits from the revaluation of the structural position in foreign currency maintained by the subsidiary bank in Syria are non-distributable. These are classified as non- distributable amounts in retained earnings after the closing of each financial year ending 31 December, upon transfer of the profit for the period to retained earnings. 39. Revaluation Reserve of Real Estate LL Million Revaluation reserve accepted in Tier II capital 14,727 14, Change in Fair Value of Financial Assets at Fair Value Through Other Comprehensive Income Movement of the change in fair value of financial assets at fair value through other comprehensive income during the year was as follows: LL Million At 1 January (950) - Net changes in fair values during the year 544 (953) Adjustments related to change in ownership in subsidiaries - 3 Balance at 31 December (406) (950) 128 BLOM BANK s.a.l. Annual Report 2012

130 Notes to the Consolidated Financial Statements 31 December Cash and Cash Equivalents LL Million Cash and balances with central banks 2,077,323 1,572,872 Deposits with banks and financial institutions (whose original maturities are less than 3 months) 3,692,468 3,757,614 5,769,791 5,330,486 Less: Due to Central banks under repurchase agreements (140,499) - Due to banks and financial institutions (whose original maturities are less than 3 months) (509,268) (265,223) 5,120,024 5,065,263 Non cash transactions due to the early adoption of IFRS 9 included in the consolidated statement of cash flows for the year ended 31 December 2011 are as follows: LL Million 2011 Operating activities Decrease in retained earnings (72,534) Decrease in financial assets held-for-trading 54,816 Increase in debt instruments at fair value through profit or loss (888,567) Increase in funds at fair value through profit or loss (25,969) Increase in equity instruments at fair value through profit or loss (22,181) (954,435) LL Million 2011 Investing activities Decrease in available-for-sale reserve (96,221) Decrease in financial investments available-for-sale 4,116,261 Decrease in other financial assets classified as loans and receivables 9,455,986 Decrease in financial investments held-to-maturity 912,295 Increase in financial assets at amortized cost (13,426,000) Increase in equity instruments at fair value through other comprehensive income (7,886) 954, Dividends Declared and Paid According to the resolution of the General Assembly meeting held on 19 May 2012, the following dividends were declared and paid, from the 2011 profits Number of shares Dividends per share in LL Total LL Million Dividends on preferred shares 2011 issue 20,000,000 1, ,105 Dividends on common shares 208,992, , ,

131 Notes to the Consolidated Financial Statements 31 December 2012 The dividends on common shares, declared on 19 May 2012, were paid net of the treasury shares as of that date. According to the resolution of the General Assembly meeting held on 8 April 2011, the following dividends were declared and paid, from the 2010 profits Number of shares Dividends per share in LL Total LL Million Dividends for preferred shares 2004 issue 7,500,000 1, ,611 Dividends for preferred shares 2005 issue 10,000,000 1, ,322 Dividends for common shares 209,170, , ,124 The dividends on common shares, declared on 8 April 2011, were paid net of the treasury shares as of that date. 43. Related Party Transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operation decisions, or one other party controls both. The definition includes subsidiaries, key management personnel and their close family members, as well as entities controlled or jointly controlled by them. A list of the Group s principal subsidiaries is shown in note 2. Transactions between the Bank and its subsidiaries meet the definition of related party transactions. However, where these are eliminated on consolidation, they are not disclosed in the Group s financial statements. Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. Loans to related parties, (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with others and (c) did not involve more than a normal risk of collectability or present other unfavorable features. Related party balances included in the Group s Statement of Financial Position are as follows as of 31 December: 2012 Key management Personnel Other related parties Total LL Million Outstanding balance Outstanding balance Outstanding balance Deposits 79,548 97, ,376 Net loans and advances 9,998 6,199 16,197 Guarantees given BLOM BANK s.a.l. Annual Report 2012

132 Notes to the Consolidated Financial Statements 31 December Key management Personnel Other related parties Total LL Million Outstanding balance Outstanding balance Outstanding balance Deposits 80, , ,721 Net loans and advances 9,903 8,367 18,270 Guarantees given Related party transactions included in the Group s Income Statement are as follows for the year ended 31 December: LL Million Key management Personnel 2012 Other related parties Interest received from net loans and advances Interest paid on deposits 1,901 5,346 7,247 Accounting services revenues Total LL Million Key management Personnel 2011 Other related parties Interest received from net loans and advances Interest paid on deposits 2,031 6,053 8,084 Accounting services revenues Total Key Management Personnel Total remuneration awarded to key management personnel represents the awards made to individuals that have been approved by the Board Remuneration Committee as part of the latest pay round decisions. Figures are provided for the period that individuals met the definition of key management personnel. LL Million Short-term benefits 43,361 35,434 Post-employment benefits (charge for the year) 2,424 1,993 Short-term benefits comprise of salaries, bonuses, profit-sharing, attendance fees and other benefits. 131

133 Notes to the Consolidated Financial Statements 31 December 2012 Credit related commitments and contingent liabilities To meet the financial needs of customers, the Group enters into various commitments, guarantees and other contingent liabilities, which are mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Even though these obligations may not be recognized on the consolidated statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group. The table below discloses the nominal principal amounts of credit-related commitments and contingent liabilities. Nominal principal amounts represent the amount at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without being withdrawn, the total of the nominal principal amount is not indicative of future liquidity requirements. 44. Contingent Liabilities, Commitments and Leasing Arrangements 2012 Banks Customers Total LL Million Guarantees issued 107, , ,955 Commitments Documentary credits 170, ,642 Undrawn credit lines - 1,814,219 1,814,219 Other commitments 814, , ,551 1,092,554 2,696,813 3,789, Banks Customers Total LL Million Guarantees issued 143, , ,417 Commitments Documentary credits 231, ,288 Undrawn credit lines - 2,355,288 2,355,288 Other commitments 622, , , ,175 3,287,311 4,284,486 Guarantees issued Guarantees are given as security to support the performance of a customer to third parties. The main types of guarantees provided are: Financial guarantees given to banks and financial institutions on behalf of customers to secure loans, overdrafts, and other banking facilities; and Other guarantees are contracts that have similar factures to the financial guarantee contracts but fail to meet the strict definition of a financial guarantee contract under IFRS. These include mainly performance and tender guarantees. Documentary credits Documentary credits commit the Group to make payments to third parties, on production of documents, which are usually reimbursed immediately by customers. Undrawn credit lines Undrawn credit lines and other commitments to lend are agreements to lend a customer in the future, including revocable agreements, subject to certain conditions. Such commitments are either made for a fixed period, or have no specific maturity but are cancelable by the lender subject to notice requirements. 132 BLOM BANK s.a.l. Annual Report 2012

134 Notes to the Consolidated Financial Statements 31 December 2012 Legal claims Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Group has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Group makes adjustments to account for any adverse effects which the claims may have on its financial standing. At year end, the Group had several unresolved legal claims. Based on advice from legal counsel, management believes that legal claims will not result in any material financial loss to the Group. Capital and operating lease commitments Capital expenditures and lease payments that were not provided for as of the consolidated statement of financial position date are as follows: LL Million Capital commitments Property and equipment 25,603 24,665 Operatisng lease commitments Group as lessee Future minimum lease payments under operating leases: During one year 2,357 2,581 More than 1 year and less than five years 7,016 7,497 More than five years 7,923 8,245 Total operating lease commitments at the statement of financial position date 17,296 18,323 Other commitments and contingencies Financial assets at amortized cost include Jordanian and Egyptian treasury bills amounting to LL 140,499 million pledged against Due to Central banks under repurchase agreements (note 28). The Bank s books in Lebanon were reviewed by the tax authorities for the years 2006 and 2007 inclusive. The outcome of this review resulted in additional taxes and penalties amounting to LL 3,038 million which were paid in The Bank s books in Lebanon have not been reviewed by the tax authorities for the years 2008 to The Bank s books in Lebanon remain subject to the review of the National Social Security Fund (NSSF) for the period from 1 January 1998 to 31 December In addition, the subsidiaries books and records are subject to review by the tax and social security authorities in the countries in which they operate. Management believes that adequate provisions were recorded against possible review results to the extent that they can be reliably estimated. Contingent liabilities During 2011 and 2012, Syria, one of the significant credit markets of the Group, witnessed a period of political and civil unrest together with adverse events which can affect the economic environment of future periods. As part of its collective provisioning process, management performed a stress test on the loan portfolio exposed to the Syrian market risks and, as a result, the necessary provisions were booked. The Group s management continues to monitor its loan portfolio and evaluate the impact of these events during

135 Notes to the Consolidated Financial Statements 31 December Fiduciary Deposits, Assets Under Management and Custody Accounts LL Million Fiduciary deposits 388, ,549 Financial assets under management and custody accounts 7,458,223 7,475,946 7,846,875 8,392,495 The Group provides safekeeping of securities and other financial assets on behalf of clients, in addition to various support functions including the valuation of portfolios of securities and other financial assets, which complements the custody business. 46. Fair Value of the Financial Instruments Financial instruments recorded at fair value The following is a description of how fair values are determined for financial instruments that are recorded at fair value using valuation techniques. These incorporate the Group s estimate of assumptions that a market participant would make when valuing the instruments. Derivatives Derivative products valued using a valuation technique with market observable inputs are mainly currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves. Financial assets at fair value through other comprehensive income These assets are valued using models that use both observable and unobservable data. The unobservable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss valued using a valuation technique consists of certain debt securities. The Group values the securities using discounted cash flow valuation models which incorporate observable and unobservable data. Observable inputs include assumptions regarding current rates of interest and broker statements. Unobservable inputs include assumptions regarding expected future default rates, prepayment rates and market liquidity discounts. A. Determination of fair value and fair value hierarchy 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; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. 134 BLOM BANK s.a.l. Annual Report 2012

136 Notes to the Consolidated Financial Statements 31 December 2012 The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: LL Million 2012 Level 1 Level 2 Total Financial assets Derivative financial instruments: Forward foreign exchange contracts - 33,564 33,564 Futures on commodities 3,518-3,518 3,518 33,564 37,082 Financial assets at fair value through profit or loss: Unquoted equity securities - 11,418 11,418 Quoted equity securities 25,359-25,359 Quoted government debt securities 46,584-46,584 Unquoted government debt securities - 84,674 84,674 Quoted corporate debt securities 648, ,778 Funds - 30,554 30, , , ,367 Financial assets at fair value through other comprehensive income Equity securities - 3,108 3,108 Funds - 2,850 2,850-5,958 5,958 Financial liabilities Derivative financial instruments Forward foreign exchange contracts - 43,811 43,811 Equity swaps and options - 1,442 1,442 Futures on commodities 7,241-7,241 7,241 45,253 52,494 Financial liabilities at fair value through profit or loss 22,053-22,

137 Notes to the Consolidated Financial Statements 31 December LL Million Level 1 Level 2 Total Financial assets Derivative financial instruments: Forward foreign exchange contracts - 18,100 18,100 Equity swaps and options Futures on commodities 7,090-7,090 3,518 18,458 25,548 Financial assets at fair value through profit or loss: Unquoted equity securities - 10,734 10,734 Quoted equity securities 17,796-17,796 Quoted government debt securities 21,852-21,852 Investments related to unit-linked contracts - 36,259 36,259 Unquoted government debt securities - 11,823 11,823 Quoted corporate debt securities 731, ,403 Funds - 27,599 27, ,051 86, ,466 Financial assets at fair value through other comprehensive income Equity securities - 2,445 2,445 Funds - 4,200 4,200-6,645 6,645 Financial liabilities Derivative financial instruments Forward foreign exchange contracts - 4,998 4,998 Equity swaps and options - 4,118 4,118 Futures on commodities 4,635-4,635 4,635 9,116 13,751 Financial liabilities at fair value through profit or loss 41,054-41, BLOM BANK s.a.l. Annual Report 2012

138 Notes to the Consolidated Financial Statements 31 December 2012 Set out below is a comparison, by class, of the carrying amounts and fair values of the Group s financial instruments that are not carried at fair value in the consolidated financial statements. This table does not include the fair value of non-financial assets and non-financial liabilities. LL Million Carrying value Fair value Carrying value Fair value Financial assets Cash and balances with central banks 7,458,577 7,584,684 6,062,381 6,131,421 Due from banks and financial institutions 5,070,495 5,070,368 4,845,533 4,845,049 Loans to banks and financial institutions 114, , , ,311 Net loans and advances to customers at amortized cost 9,070,287 9,190,768 8,409,450 8,536,658 Debtors by acceptances 104, , , ,277 Net loans and advances to related parties at amortized cost 16,197 16,315 18,270 18,380 Financial assets at amortized cost 14,308,536 14,622,486 13,648,659 14,187,730 Government debt securities 6,733,773 6,779,910 6,177,034 6,200,682 Certificates of deposit Central Banks 6,123,551 6,349,260 6,176,147 6,710,737 Corporate debt securities 901, , , ,329 Certificates of deposit Commercial banks and financial institutions 549, , , ,982 Financial liabilities Due to Central banks under repurchase agreements 140, , Due to banks and financial institutions 618, , , ,396 Customers' deposits at amortized cost 32,649,831 32,737,842 30,366,543 30,402,077 Deposits from related parties at amortized cost 177, , , ,742 Engagements by acceptances 104, , , ,277 Fair value of financial assets and liabilities not carried at fair value The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the consolidated financial statements: Assets for which fair value approximates carrying value For financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, and savings accounts without a specific maturity. Fixed rate financial instruments The fair value of fixed rate financial assets and liabilities carried at amortized cost are estimated by comparing market interest rates when they were first recognized with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing moneymarket interest rates for debts with similar credit risk and maturity. For quoted debt issued, the fair values are determined based on quoted market prices. For those notes issued where quoted market prices are not available, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity and credit spreads. For other variable rate instruments, an adjustment is also made to reflect the change in required credit spread since the instrument was first recognized. 137

139 Notes to the Consolidated Financial Statements 31 December 2012 Fair value of loans and advances In order to compute the fair value of loans and advances to customers, the Group considers that these loans will mature in principal and interest at the first day in which interest is repriced. These future cash flows have been discounted using the appropriate benchmark rate at the statement of financial position date for the remaining term to maturity plus the appropriate risk premium of the customer. 47. Maturity Analysis of Assets and Liabilities The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recovered or settled. The maturity profile of the Group s assets and liabilities as at 31 December is as follows: LL Million Less than one year 2012 More than one year Assets Cash and balances with central banks 2,327,182 5,131,395 7,458,577 Due from banks and financial institutions 5,004,316 66,179 5,070,495 Loans to banks and financial institutions 54,808 59, ,610 Derivative financial instruments 37,082-37,082 Financial assets at fair value through profit or loss 31, , ,367 Net loans and advances to customers at amortized cost 6,650,695 2,419,592 9,070,287 Net loans and advances to related parties at amortized cost 13,353 2,844 16,197 Debtors by acceptances 102,206 1, ,191 Financial assets at amortized cost 1,906,451 12,402,085 14,308,536 Financial assets at fair value through other comprehensive income - 5,958 5,958 Property and equipment - 492, ,092 Intangible assets - 3,865 3,865 Assets obtained in settlement of debt - 27,467 27,467 Other assets 136,210 11, ,690 Goodwill - 60,208 60,208 Total Assets 16,263,494 21,501,128 37,764,622 Total Liabilities Due to Central banks under repurchase agreements 140, ,499 Due to banks and financial institutions 618, ,780 Derivative financial instruments 52,494-52,494 Financial liabilities at fair value through profit or loss 22,053-22,053 Customers' deposits at amortized cost 31,689, ,412 32,649,831 Deposits from related parties at amortized cost 177, ,376 Engagements by acceptances 102,206 1, ,191 Other liabilities 588,457 2, ,982 Provisions for risks and charges 47,223 72, ,408 Total Liabilities 33,438,507 1,037,107 34,475,614 Net (17,175,013) 20,464,021 3,289, BLOM BANK s.a.l. Annual Report 2012

140 Notes to the Consolidated Financial Statements 31 December 2012 LL Million Less than one year 2011 More than one year Assets Cash and balances with central banks 2,646,664 3,415,717 6,062,381 Due from banks and financial institutions 4,463, ,196 4,845,533 Loans to banks and financial institutions 48,465 68, ,781 Derivative financial instruments 25,548-25,548 Financial assets at fair value through profit or loss 111, , ,466 Net loans and advances to customers at amortized cost 6,025,234 2,384,216 8,409,450 Net loans and advances to related parties at amortized cost 17, ,270 Debtors by acceptances 240, ,277 Financial assets at amortized cost 2,370,664 11,277,995 13,648,659 Financial assets at fair value through other comprehensive income 2,445 4,200 6,645 Property and equipment - 443, ,831 Intangible assets - 4,278 4,278 Assets obtained in settlement of debt - 27,966 27,966 Other assets 138,921 14, ,988 Goodwill - 61,879 61,879 Total Assets 16,091,284 18,830,668 34,921,952 Total Liabilities Due to banks and financial institutions 319,298 18, ,388 Derivative financial instruments 13,751-13,751 Financial liabilities at fair value through profit or loss 41,054-41,054 Customers' deposits at amortized cost 29,609, ,971 30,366,543 Deposits from related parties at amortized cost 188, ,721 Engagements by acceptances 240, ,277 Other liabilities 613,720 21, ,326 Provisions for risks and charges 22,807 86, ,509 Total Liabilities 31,049, ,369 31,932,569 Net (14,957,916) 17,947,299 2,989, Risk Management The Group manages its business activities within risk management guidelines as set by the Group s Risk Management Policy approved by the Board of Directors. The Group recognizes the role of the Board of Directors and executive management in the risk management process as set out in the Banking Control Commission circular 242. In particular, it is recognized that ultimate responsibility for establishment of effective risk management practices and culture lies with the Board of Directors as does the establishing of the Group s risk appetite and tolerance levels. The Board of Directors delegates through its Risk Management Committee the day to day responsibility for establishment and monitoring of risk management process across the Group to the Chief Risk Officer, who is directly appointed by the Board of Directors, in coordination with executive management at BLOM Bank SAL. The Group is mainly exposed to credit risk, liquidity risk, market risk and operational risk. 139

141 Notes to the Consolidated Financial Statements 31 December 2012 The Board s Risk Management Committee has the mission to periodically (1) review and assess the risk management function of the Group, (2) review the adequacy of the Group s capital and its allocation within the Group, and (3) review risk limits and reports and make recommendations to the Board. The Chief Risk Officer undertakes his responsibilities through the Risk Management Department in Beirut which also acts as Group Risk Management, overseeing and monitoring risk management activities throughout the Group. The Chief Risk Officer is responsible for establishing the function of Risk Management and its employees across the Group. BLOM Bank s Group Risk Management aids executive management in monitoring, controlling and actively managing and mitigating the Group s overall risk. The department mainly ensures that: Risk policies and methodologies are consistent with the Group s risk appetite. Limits and risk across banking activities are monitored throughout the Group. Through a comprehensive risk management framework, transactions and outstanding risk exposures are quantified and compared against authorized limits, whereas non-quantifiable risks are monitored against policy guidelines as set by the Group s Risk Management Policy. Any discrepancies, breaches or deviations are escalated to executive senior management in a timely manner for appropriate action. In addition to the Group s Risk Management in Lebanon, risk managers and / or risk officers were assigned within the Group s foreign subsidiaries or branches to report to the Group Risk Management and executive senior management in a manner that ensures: Standardization of risk management functions and systems developed across the Group. Regional consistency of conducted business in line with the Board s approved risk appetite. The major objective of risk management is the implementation of sound risk management practices and the Basel II framework as well as all related regulatory requirements within the Group. The Group is setting appropriate infrastructure for the anticipated Basel III implementation. Pillar I capital adequacy calculations have been generated since December 2004, while preparations for moving on to the more advanced approaches of pillar I have been initiated. Group Risk Management is progressively complying with the requirements of pillars II and has submitted its first Internal Capital Adequacy Assessment Process (ICAAP) for BLOM Bank on an individual and consolidated basis and is awaiting the regulatory Supervisory Review Process by the Banking Control Commission. The Group has documented a Board approved Disclosure Policy taking into account the requirements of pillar III of the Basel framework. Excessive risk concentration Concentrations arise when the Group has significant exposure to one borrower or a group of related borrowers or to a number of counter parties engaging 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 indicate the relative sensitivity of the Group s performance developments affecting a particular industry or geographic location. In order to avoid excessive concentrations of risk, the Group s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. Selective hedging is used within the Group to manage risk concentrations at both the relationship and industry levels. The Group applies stress testing on its concentrations in order to assess their effect on the Group financial standing and capital adequacy in a stressed situation. 140 BLOM BANK s.a.l. Annual Report 2012

142 Notes to the Consolidated Financial Statements 31 December Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counter parties, and continuously assessing the creditworthiness of counter parties. The Group manages credit risk in line with the guidelines set by the Basel Framework and regulatory guidance. The Group has set a credit risk policy which lays down norms for credit risk governance, methodologies and procedures for credit risk management and measurement. It consists of the following: The permissible activities, segments, programs and services that the Group intends to deliver and the acceptable limits; The mechanism of the approval on credit-facilities; The mechanism for managing and following up credit-facilities; and The required actions for analyzing and organizing credit files. The debt securities included in investments are mainly sovereign risk and standard grade securities. For details of the composition of the net loans and advances refer to note 20. Information on credit risk relating to derivative instruments is provided in note 18 and for commitments and contingencies in note 44. The information on the Group s net maximum exposure by economic sectors is given in note (A) below. The Group s Risk Management is designed to identify and to set appropriate risk limits and to monitor the risk adherence to limits. Actual exposures against limits are monitored daily, monthly and periodically. Group Risk Management is responsible for monitoring the risk profile of the Group s loan portfolio by producing internal reports highlighting any exposure of concern in corporate, commercial and consumer lending. The Group examines the level of concentration whether by credit quality, client groupings or economic sector and collateral coverage. Further, the Group monitors non-performing loans and takes the required provisions for these loans. The Group in the ordinary course of lending activities holds collaterals and guarantees as security to mitigate credit risk in the net loans and advances. Collaterals and guarantees are continuously monitored and revaluated. These collaterals mostly include cash collateral, quoted shares and debt securities, real estate mortgages, personal guarantees and others. In addition, the Recovery Unit in the Group dynamically manages and takes remedial actions for non-performing loans. The Group uses an internal classification system based on risk ratings for its corporate and middle market customers. The risk rating system, which is managed by an independent unit, provides a rating based on client and transaction level. The classification system includes six grades, of which three grades relate to the performing portfolio (regular credit facilities: risk ratings 1 and 2 and special mention watch list: risk rating 3 ), one grade relates to substandard loans (risk rating 4 ) and two grades relate to non-performing loans (risk ratings 5 and 6 ). Credit cards, personal loans, car loans, housing loans and other loans related to these loans are classified as regular as they are performing and have timely repayment with no past dues; except for those loans that have unsettled payments due for more than 90 days. Each individual borrower is rated based on an internally developed debt rating model that evaluates risk based on financial as well as qualitative inputs. The associated loss estimate norms for each grade have been calculated based on the Group s historical default rates for each rating. These risk ratings are reviewed on a regular basis. Introduction of the Moody s Risk Analyst credit analysis and internal ratings system in the domestic market has provided the Group with an additional tool to enhance risk measurement and assessment of the corporate and commercial loan portfolios. This system will be gradually extended to all group entities over time. At the same time, implementation of consumer loan application and behavioral scorecards will aid significantly in meeting Basel II requirements for the retail portfolio as well as making available new quality management resources. 141

143 Notes to the Consolidated Financial Statements 31 December 2012 Non-performing loans are closely monitored and well provisioned as required with remedial actions taken and managed proactively by a dedicated Recovery Unit. In line with Basel II, the Group considers payments that are past due for more than 90 days as being non-performing. The Group uses its internal grading system and Moody s for the classification of the financial assets portfolio. A- Analysis of risk concentration The Group concentrations of risk are managed by client/counterparty, by geographical region. The maximum credit exposure to any client or counterparty as at 31 December 2012 was LL 447,930 million (2011: LL 280,608 million). The collateral s fair value as at 31 December 2012 amounted to LL 518,681 million (2011: LL 287,253 million). The following table shows the maximum exposure to credit risk for the components of the consolidated statement of financial position, including derivatives, by geography of counterparty before the effect of mitigation through the use of master netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown 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 LL Million Domestic International Total Financial assets Balances with central banks 5,953,148 1,318,972 7,272,120 Due from banks and financial institutions 453,411 4,617,084 5,070,495 Loans to banks and financial institutions 60,477 54, ,610 Derivative financial instruments 4,605 32,477 37,082 Financial assets at fair value through profit or loss 94, , ,367 Government debt securities 59,009 72, ,258 Corporate debt securities , ,778 Funds 19,417 11,137 30,554 Shares 15,503 21,274 36,777 Net loans and advances to customers at amortized cost 6,175,350 2,894,937 9,070,287 Commercial loans 3,796,973 2,108,995 5,905,968 Consumer loans 2,378, ,942 3,164,319 Net loans and advances to related parties at amortized cost 6,143 10,054 16,197 Debtors by acceptances 66,683 37, ,191 Financial assets at amortized cost 11,894,199 2,414,337 14,308,536 Government debt securities 5,391,559 1,342,214 6,733,773 Corporate debt securities 37, , ,861 Certificates of deposit Central Banks 6,123,551-6,123,551 Certificates of deposit Commercial banks and financial institutions 341, , ,351 Financial assets at fair value through other comprehensive income - 5,958 5,958 Total credit exposure 24,708,224 12,138,619 36,846, BLOM BANK s.a.l. Annual Report 2012

144 Notes to the Consolidated Financial Statements 31 December 2012 LL Million Domestic International Total Financial assets Balances with central banks 5,040, ,531 5,881,358 Due from banks and financial institutions 735,092 4,110,441 4,845,533 Loans to banks and financial institutions 69,079 47, ,781 Derivative financial instruments 13,601 11,947 25,548 Financial assets at fair value through profit or loss 165, , ,466 Government debt securities 28,928 4,747 33,675 Corporate debt securities 109, , ,662 Funds 16,314 11,285 27,599 Shares 11,026 17,504 28,530 Net loans and advances to customers at amortized cost 5,139,055 3,270,395 8,409,450 Commercial loans 3,061,058 2,573,976 5,635,034 Consumer loans 2,077, ,419 2,774,416 Net loans and advances to related parties at amortized cost 10,629 7,641 18,270 Debtors by acceptances 148,820 91, ,277 Financial assets at amortized cost 11,382,646 2,266,013 13,648,659 Government debt securities 5,103,225 1,073,809 6,177,034 Corporate debt securities 42, , ,716 Certificates of deposit Central Banks 6,176,147-6,176,147 Certificates of deposit Commercial banks and financial institutions 61, , ,762 Financial assets at fair value through other comprehensive income 1,778 4,867 6,645 Total credit exposure 22,707,099 11,342,888 34,049, Analysis to maximum exposure to credit risk and collateral and other credit enhancements The following table shows the maximum exposure to the credit risk by class of financial asset. It further shows the total fair value of collateral, capped to the maximum exposure to which it relates and the net exposure to credit risk Letters of Maximum Cash Securities credit / Real estate Net credit exposure Other LL Million guarantees exposure Balances with central banks 7,272, ,272,120 Due from banks and financial institutions 5,070, ,070,495 Loans to banks and financial institutions 114, ,477-54,133 Derivative financial instruments 37, ,082 Financial assets at fair value through profit or loss 847, ,367 Net loans and advances to customers at amortized cost: 9,070,287 1,317, ,114 88,204 3,591,782 2,092,486 1,761,204 Commercial loans 5,905,968 1,317, ,114 88,204 1,900, ,235 1,655,429 Consumer loans 3,164, ,691,293 1,367, ,775 22,411,961 1,317, ,114 88,204 3,652,259 2,092,486 15,042,401 Net loans and advances to related parties at amortized cost 16, ,400-2,788 Debtors by acceptances 104, ,191 Financial assets at amortized cost 14,308, ,308,536 36,840,885 1,317, ,114 88,204 3,665,659 2,092,486 29,457,916 Financial guarantees 2,773,535 Non financial guarantees 12,933,601 Documentary credits 140,635 15,847,

145 Notes to the Consolidated Financial Statements 31 December 2012 LL Million Maximum exposure Cash Securities 2011 Letters of credit / guarantees Real estate Other Net credit exposure Balances with central banks 5,881, ,881,358 Due from banks and financial institutions 4,845, ,845,533 Loans to banks and financial institutions 116, ,079-47,702 Derivative financial instruments 25, ,548 Financial assets at fair value through profit or loss 857, ,466 Net loans and advances to customers at amortized cost: 8,409,450 1,139, ,284 62,469 2,862,468 2,198,721 1,857,646 Commercial loans 5,635,034 1,139, ,284 62,469 1,524, ,771 1,734,726 Consumer loans 2,774, ,337,546 1,313, ,920 20,136,136 1,139, ,284 62,469 2,931,547 2,198,721 13,515,253 Net loans and advances to related parties at amortized cost 18, , ,775 Debtors by acceptances 240, ,277 Financial assets at amortized cost 13,648, ,648,659 34,043,342 1,139, ,284 62,469 2,946,985 2,198,747 27,406,964 Financial guarantees 2,533,895 Non financial guarantees 12,321,241 Documentary credits 84,803 14,939,939 The schedules shown above exclude the undrawn commitments to lend of LL 1,814,219 million and of LL 2,355,288 million for the year ended 31 December 2012 and 2011 respectively. Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The main types of collateral obtained are as follows: Securities: The balances shown above represent the fair value of the securities and are net of any surplus collateral. Letters of credit / guarantees: The Group holds in some cases guarantees, letters of credit and similar instruments from banks and financial institutions which enable it to claim settlement in the event of default on the part of the counterparty. The balances shown represent the notional amount of these types of guarantees held by the Group and are net of any surplus collateral. Real estate (commercial and residential): The Group holds in some cases a first degree mortgage over residential property (for housing loans) and commercial property (for commercial loans). The value shown above reflects the fair value of the property limited to the related mortgaged amount and are net of any surplus collateral. 144 BLOM BANK s.a.l. Annual Report 2012

146 Notes to the Consolidated Financial Statements 31 December 2012 Other: The Group also obtains guarantees from parent companies for loans to their subsidiaries, personal guarantees for loans to companies owned by individuals and assignments of insurance proceeds and revenues. The balances shown above represent the notional amount of these types of guarantees held by the Group and are net of any surplus collateral. B- Credit quality by class of financial assets The credit quality of financial assets is managed by the Group using external credit ratings. The credit quality of loans and advances is managed using the internal credit ratings as well as Supervisory ratings in accordance with Central Bank of Lebanon main circular 58. The table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based on the Group s credit rating system. The amounts presented are gross of impairment allowances Sovereign Non-Sovereign LL Million Neither past due nor impaired Regular and special mention Neither past due nor impaired Regular and special mention Past due but not impaired Regular and special mention Sub-standard Individually impaired Non performing Balances with central banks 7,272, ,272,120 Due from banks and financial institutions - 5,070, ,980 5,091,475 Loans to banks and financial institutions - 114, ,610 Derivative financial instruments - 37, ,082 Total Financial assets at fair value through profit or loss 131, , ,590 Government debt securities 131, ,258 Corporate debt securities - 648, ,778 Fund - 30, ,554 Net loans and advances to customers at amortized cost - 8,364, ,160 75, ,248 9,498,875 Commercial loans - 5,469, ,768 75, ,434 6,271,667 Consumer loans - 2,895, ,392-80,814 3,227,208 Net loans and advances to related parties at amortized cost - 16, ,197 Financial assets at amortized cost 12,857,324 1,451, ,308,536 Government debt securities 6,733, ,733,773 Corporate debt securities - 901, ,861 Certificates of deposit Central Banks 6,123, ,123,551 Certificates of deposit Commercial banks and financial institutions - 549, ,351 Total 20,260,702 15,733, ,160 75, ,228 37,149,

147 Notes to the Consolidated Financial Statements 31 December Sovereign Non-Sovereign LL Million Neither past due nor impaired Regular and special mention Neither past due nor impaired Regular and special mention Past due but not impaired Regular and special mention Sub-standard Individually impaired Non performing Balances with central banks 5,881, ,881,358 Due from banks and financial institutions - 4,845, ,277 4,865,810 Loans to banks and financial institutions - 116, ,781 Derivative financial instruments - 25, ,548 Financial assets at fair value through profit or loss 69, , ,936 Government debt securities 33, ,675 Corporate debt securities - 731, ,403 Fund - 27, ,599 Investments related to credit linked contracts 36, ,259 Net loans and advances to customers at amortized cost - 7,858, ,072 68, ,137 8,708,712 Commercial loans - 5,340, ,530 66, ,454 5,884,115 Consumer loans - 2,517, ,542 1,791 69,683 2,824,597 Net loans and advances to related parties at amortized cost - 18, ,270 Financial assets at amortized cost 12,353,181 1,295, ,648,659 Government debt securities 6,177, ,177,034 Corporate debt securities - 895, ,716 Certificates of deposit Central Banks 6,176, ,176,147 Certificates of deposit Commercial banks and financial - 399, ,762 institutions Total 18,304,473 14,918, ,072 68, ,414 34,094,074 Total C- Aging analysis of past due but not impaired financial assets, by class LL Million Less than 30 days to 60 days 61 to 90 days More than 90 days Commercial loans 172,303 38,495 41,336 37, ,768 Consumer loans 175,172 53,867 12,231 10, ,392 Total 347,475 92,362 53,567 47, ,160 LL Million Less than 30 days to 60 days 61 to 90 days More than 90 days Commercial loans 164,868 54,065 42,465 6, ,530 Consumer loans 165,180 54,325 16, ,542 Total 330, ,390 58,473 6, , BLOM BANK s.a.l. Annual Report 2012

148 Notes to the Consolidated Financial Statements 31 December 2012 See note 20 for more detailed information with respect to the allowance for impairment losses on net loans and advances to customers. Renegotiated Loans Restructuring activity aims to manage customer relationships, maximize collection opportunities and, if possible, avoid foreclosure or repossession. Such activities include extended payment arrangements, deferring foreclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that repayment will probably continue. The application of these policies varies according to the nature of the market and the type of the facility. LL Million Commercial loans 16,584 7, Liquidity Risk and Funding Management Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Group might be unable to meet its payment obligations when they fall due under both normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. The Group has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. In addition, the Group maintains statutory deposits with Central Banks. As per Lebanese banking regulations, the Bank must retain obligatory reserves with the Central Bank of Lebanon calculated on the basis of 25% of the sight deposits and 15% of term deposits denominated in Lebanese Pounds, in addition to interest bearing placements equivalent to 15% of all deposits in foreign currencies regardless of their nature. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. The Group maintains a solid ratio of highly liquid net assets in foreign currencies to deposits and commitments in foreign currencies taking market conditions into consideration. Regulatory ratios and limits In accordance with the Central Bank of Lebanon circulars, the ratio of net liquid assets to deposits in foreign currencies should not be less than 10%. The net liquid assets consist of cash and all balances with the Central Bank of Lebanon (excluding reserve requirements), certificates of deposit issued by the Central Bank of Lebanon irrespective of their maturities and deposits due from other banks that mature within one year, less deposits due to the Central Bank of Lebanon and deposits due to banks that mature within one year. Deposits are composed of total customer deposits (excluding blocked accounts) and due from financial institutions irrespective of their maturities and all certificates of deposits and acceptances and other debt instruments issued by the Group and loans from the public sector that mature within one year. 147

149 Notes to the Consolidated Financial Statements 31 December 2012 Besides the regulatory requirements, the liquidity position is also monitored through internal limits, such as the loans-to-deposits ratio, the core funding ratio and the liquidity tolerance level of the Group, also referred to as Liquidity Coverage Ratio. Liquidity ratios Loans to deposit ratios (%) Year-end Maximum Minimum Average Analysis of financial assets and liabilities by remaining contractual maturities The table below summarizes the maturity profile of the Group s financial assets and liabilities as of 31 December based on contractual undiscounted cash flows. The contractual maturities have been determined based on the period remaining to reach maturity as per the statement of financial position actual commitments. Repayments which are subject to notice are treated as if notice were to be given immediately. Concerning deposits, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay. Up to Less than 3 to 12 1 to 5 Over 5 LL Million 1 month 3 months months years years Total Financial assets Cash and balances with central banks 2,262, , ,412 4,130,518 2,332,867 9,009,967 Due from banks and financial institutions 3,986, , ,337 65, ,073,236 Loans to banks and financial institutions 11, ,332 14,835 63, ,167 Derivative financial instruments 29,369 7, ,082 Financial assets at fair value through profit or loss 8,045 4,464 35, , , ,533 Net loans and advances to customers at amortized cost 2,848,059 1,250,600 2,841,835 2,281, ,358 9,889,069 Net loans and advances to related parties at amortized cost 13, ,175-16,660 Debtors by acceptances 32,191 61,125 8,890 1, ,191 Financial assets at amortized cost 345, ,679 1,851,235 9,795,895 4,890,406 17,488,892 Financial assets at fair value through other comprehensive ,535 5,957 income Total undiscounted financial assets 9,536,691 2,574,510 5,444,357 16,995,759 8,135,437 42,686, Financial liabilities Due to Central banks under repurchase agreements 140, ,499 Due to banks and financial institutions 531,873 51,701 35, ,118 Derivative financial instruments 34,382 18, ,495 Financial liabilities at fair value through profit or loss 20, ,069 Customers' deposits at amortized cost 19,944,592 9,299,497 2,613,080 1,041,000 12,616 32,910,785 Deposits from related parties at amortized cost 174,016 3, ,683 Engagements by acceptances 32,191 61,125 8,890 1, ,191 Total undiscounted financial liabilities 20,878,467 9,433,741 2,658,985 1,043,031 12,616 34,026,840 Net undiscounted financial assets / (liabilities) (11,341,776) (6,859,231) 2,785,372 15,952,728 8,122,821 8,659, BLOM BANK s.a.l. Annual Report 2012

150 Notes to the Consolidated Financial Statements 31 December 2012 Up to 1 month Less than 3 months 3 to 12 months to 5 years Over 5 years LL Million Total Financial assets Cash and balances with central banks 1,877, , ,944 2,970,562 1,410,738 7,183,795 Due from banks and financial institutions 3,814, , , ,697-4,876,548 Loans to banks and financial institutions ,246 35,961 17,453 76, ,462 Derivative financial instruments 7,324 18, ,548 Financial assets at fair value through profit or loss 41,161 4,439 82, , , ,702 Net loans and advances to customers at amortized cost 2,711, ,795 2,732,900 2,316, ,786 9,204,981 Net loans and advances to related parties at amortized cost 14, ,473 20,380 Debtors by acceptances 66, ,955 47, ,277 Financial assets at amortized cost 336, ,523 2,631,843 9,683,325 4,219,319 17,197,902 Financial assets at fair value through other comprehensive 1, ,199 6,644 income Total undiscounted financial assets 8,873,229 2,131,130 6,348,582 15,802,207 6,667,091 39,822,239 Financial liabilities Due to banks and financial institutions 287,279 4,053 31,110 18, ,287 Derivative financial instruments 8,853 4, ,751 Financial liabilities at fair value through profit or loss 41, ,054 Customers' deposits at amortized cost 22,287,797 5,742,071 1,697, ,852 26,177 30,554,368 Deposits from related parties at amortized cost 182,710 3,196 2, ,882 Engagements by acceptances 66, ,955 47, ,277 Total undiscounted financial liabilities 22,874,202 5,880,173 1,779, ,697 26,177 31,379,619 Net undiscounted financial assets / (liabilities) (14,000,973) (3,749,043) 4,569,212 14,982,510 6,640,914 8,442,620 The table below shows the contractual expiry by maturity of the Group s contingent liabilities and commitments. Each undrawn loan commitment is included in the time band containing the earliest date it can be drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. LL Million On demand Less than 3 months 3 to 12 months The Group expects that not all of the contingent liabilities or commitments will be demanded before maturity to 5 years Over 5 years Guarantees issued 819, ,955 Documentary credits - 170, ,642 Other commitments - 984, ,551 Total 819,955 1,155, ,975,148 LL Million On demand Less than 3 months 3 to 12 months to 5 years Over 5 years Guarantees issued 914, ,417 Documentary credits - 231, ,288 Other commitments - 783, ,493 Total 914,417 1,014, ,929,198 Total Total 149

151 Notes to the Consolidated Financial Statements 31 December Market Risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market prices. Market risks arise from open positions in interest rate and currency rate as well as equity positions, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates and foreign exchange rates. Group Risk Management is responsible for generating internal reports quantifying the Group s earnings at risk due to extreme movements in interest rates, while daily monitoring the sensitivity of the Group s trading portfolio of fixed income securities to changes in market prices and / or market parameters. Interest rate sensitivity gaps are reported to executive management and to the Banking Control Commission unconsolidated on a monthly basis and consolidated (Group level) on a semi- annual basis. The Group s Asset and Liability Management (ALM) policy assigns authority for its formulation, revision and administration to the Asset / Liability Management Committee (ALCO) of BLOM Bank SAL. Group Risk Management is responsible for monitoring compliance with all limits set in the ALM policy ranging from core foreign currency liquidity to liquidity mismatch limits to interest sensitivity gap limits. The Group is implementing an Asset and Liability Management system Focus ALM in the process of automating the risk measurement of the Group s assets and liabilities from static and dynamic perspectives including stress testing and extensive scenario analysis Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate repricing of assets and liabilities and off-financial position items that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies. Positions are monitored on a daily basis by management and, whenever possible, hedging strategies are used to ensure positions are maintained within established limits. Interest rate sensitivity The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group s income statement. The sensitivity of the consolidated income statement is the effect of the assumed changes in interest rates on the profit or loss for one year, based on the floating rate financial assets and financial liabilities and due to the reinvestment or refunding of fixed rated financial assets and liabilities at the assumed rate, including the effect of hedging instruments. Increase in basis points 2012 Sensitivity of net interest income LL Million Currency Lebanese Lira +0.5% (15,786) United States Dollar +0.5% 3,322 Euro +0.25% 1,320 Others +0.25% 1,606 Increase in basis points 2011 Sensitivity of net interest income LL Million Currency Lebanese Lira +0.5% (13,650) United States Dollar +0.5% 5,190 Euro +0.25% 1,331 Others +0.25% 1,560 An equivalent decrease would have resulted in an equivalent but opposite impact for the years ended 31 December 2012 and 31 December BLOM BANK s.a.l. Annual Report 2012

152 Notes to the Consolidated Financial Statements 31 December 2012 Interest rate sensitivity gap The Group s interest sensitivity position based on the earlier of contractual re-pricing or maturity date at 31 December was as follows: LL Million Assets Cash and balances with central banks Due from banks and financial institutions Loans to banks and financial institutions Derivative financial instruments Financial assets at fair value through profit or loss Net loans and advances to customers at amortized cost Net loans and advances to related parties at amortized cost Debtors by acceptances Financial assets at amortized cost Financial assets at fair value through other comprehensive income Up to 1 month 1 to 3 months 3 months to 1 year (1 2) years 2012 (2 5) years More than 5 years Non interest sensitive 1,300,159 1,107, ,840-1,170,853 1,720,967 1,970,292 7,458,577 3,107, , ,649 39,664 25, ,535 5,070,495 10,567 13,600 89, ,610 Total ,082 37, ,325 96,024 59,298 1, ,985 82,391 73, ,367 2,713,616 2,089,845 1,947, , , , ,479 9,070,287 11, ,760 2,054-16, , , , ,707 1,053,989 3,349,784 4,416,654 4,430, ,249 14,308, ,958 5,958 Total Assets 7,657,072 4,383,943 3,948,283 4,256,005 6,937,581 6,413,570 3,436,846 37,033,300 Liabilities Due to Central banks under repurchase 140, ,499 agreements Due to banks and financial institutions 313,052 41,425 32, , ,780 Derivative financial instruments ,494 52,494 Financial liabilities at fair value through profit or loss 11,884 9, ,053 Customers' deposits at amortized cost Deposits from related parties at amortized cost Engagements by acceptances 21,881,305 2,867,523 2,069, , ,364 11,055 4,593,074 32,649, ,244 3, , , , ,191 Other liabilities , ,982 Total liabilities 22,480,786 2,921,283 2,103, , ,364 11,055 5,611,874 34,356,206 Total interest rate sensitivity gap (14,823,714) 1,462,660 1,844,725 3,440,719 6,525,217 6,402,515 (2,175,028) 2,677,

153 Notes to the Consolidated Financial Statements 31 December 2012 LL Million Assets Cash and balances with central banks Due from banks and financial institutions Loans to banks and financial institutions Derivative financial instruments Financial assets at fair value through profit or loss Net loans and advances to customers at amortized cost Net loans and advances to related parties at amortized cost Debtors by acceptances Financial assets at amortized cost Financial assets at fair value through other comprehensive income Up to 1 month 1 to 3 months 3 months to 1 year (1 2) years 2011 (2 5) years More than 5 years Non interest sensitive 1,364,944 1,020,108 24,900 15,617 2,227,917-1,408,895 6,062,381 3,155, , , , ,360 4,845,533 Total - 24,078 85,488 6, , ,548 25, , ,991 65,074 42, , ,272 10, ,466 3,291,998 1,335,818 1,858, , , ,534 (95,081) 8,409,450 14, , , , , , ,201 1,590,222 1,256,872 6,035,398 3,787, ,146 13,648, ,645 6,645 Total Assets 8,365,939 3,494,662 3,800,180 2,318,640 9,441,427 4,377,504 2,432,658 34,231,010 Liabilities Due to banks and financial institutions Derivative financial instruments Financial liabilities at fair value through profit or loss Customers' deposits at amortized cost Deposits from related parties at amortized cost Engagements by acceptances 111,180 3,361 25, , , ,751 13,751 41, ,054 15,217,277 8,440,722 2,114, , ,870 23,359 3,955,452 30,366, ,772 1,923 1, , , , ,277 Other liabilities 32, , ,326 Total liabilities 15,547,867 8,446,006 2,141, , ,870 23,359 5,049,227 31,823,060 Total interest rate sensitivity gap (7,181,928) (4,951,344) 1,658,804 2,047,285 9,097,557 4,354,145 (2,616,569) 2,407, BLOM BANK s.a.l. Annual Report 2012

154 Notes to the Consolidated Financial Statements 31 December Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group protects its capital and reserves by holding a foreign currency position in US Dollars representing 60% of its shareholders equity after adjustment according to specific requirements set by the Central Bank of Lebanon. The Group is also allowed to hold a net trading position not exceeding 1 percent of its net shareholders equity, as long as the global foreign position does not exceed, at the same time, 40 percent of its net shareholders equity (Central Bank of Lebanon circular number 32). In addition to regulatory limits, the Group has set limits on positions by currency. In accordance with the Group s policy positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within regulatory and established limits The following consolidated statement of financial position as of 31 December 2012, is detailed in Lebanese Lira (LL) and foreign currencies, translated into LL Foreign currencies in Lebanese Lira Lebanese US Dollar Euro Other foreign Total foreign LL Million Lira currencies currencies Total Assets Cash and balances with central banks 2,322,682 3,145, ,628 1,080,491 5,135,895 7,458,577 Due from banks and financial institutions 41,904 2,498,378 1,519,264 1,010,949 5,028,591 5,070,495 Loans to banks and financial institutions 60,477 27,590 26,543-54, ,610 Derivative financial instruments 4,605 30,603 1, ,477 37,082 Financial assets at fair value through profit or loss 22, ,998 22, , , ,367 Net loans and advances to customers at amortized cost 1,512,537 5,217, ,488 2,016,473 7,557,750 9,070,287 Net loans and advances to related parties at amortized cost 2,770 3, ,460 13,427 16,197 Debtors by acceptances - 64,778 20,244 19, , ,191 Financial assets at amortized cost 6,679,806 6,215, ,661 1,287,766 7,628,730 14,308,536 Financial assets at fair value through other comprehensive ,512 5,958 5,958 income Property and equipment 288,939 2,880 1, , , ,092 Intangible assets 1, ,455 2,750 3,865 Assets obtained in settlement of debt (1,898) 4,742-24,623 29,365 27,467 Other assets 50,422 51,571 7,315 38,382 97, ,690 Goodwill ,208 60,208 60,208 Total Assets 10,985,397 17,900,143 2,958,031 5,921,051 26,779,225 37,764,622 Liabilities Due to Central banks under repurchase agreements , , ,499 Due to banks and financial institutions 3, , , , , ,780 Derivative financial instruments 15,007 9, ,441 37,487 52,494 Financial liabilities at fair value through profit or loss - 21, ,053 22,053 Customers' deposits at amortized cost 9,090,158 17,204,070 2,458,204 3,897,399 23,559,673 32,649,831 Deposits from related parties at amortized cost 90,869 49,245 6,916 30,346 86, ,376 Engagements by acceptances - 64,778 20,244 19, , ,191 Other liabilities 198, ,884 19, , , ,982 Provisions for risks and charges 71,007 7, ,490 48, ,408 Total Liabilities 9,468,944 17,910,799 2,620,781 4,475,090 25,006,670 34,475,614 Net Exposure 1,516,453 (10,656) 337,250 1,445,961 1,772,555 3,289,

155 Notes to the Consolidated Financial Statements 31 December 2012 The following consolidated statement of financial position as of 31 December 2011, is detailed in Lebanese Lira (LL) and foreign currencies, translated into LL Foreign currencies in Lebanese Lira LL Million Lebanese Lira US Dollar Euro Other foreign currencies Total foreign currencies Total Assets Cash and balances with central banks Due from banks and financial institutions Loans to banks and financial institutions 1,575,897 3,676,422 86, ,558 4,486,484 6,062,381 35,338 1,785,172 1,474,649 1,550,374 4,810,195 4,845,533 69,079 30,204 17,498-47, ,781 Derivative financial instruments 13,601 10, ,821 11,947 25,548 Financial assets at fair value through profit or loss Net loans and advances to customers at amortized cost Net loans and advances to related parties at amortized cost 20, ,369 24,471 78, , ,466 1,302,738 4,663, ,253 2,186,338 7,106,712 8,409,450 7,103 5, ,405 11,167 18,270 Debtors by acceptances - 100,818 61,072 78, , ,277 Financial assets at amortized cost 6,491,196 5,974, ,393 1,051,459 7,157,463 13,648,659 Financial assets at fair value through other comprehensive - 2, ,431 6,645 6,645 income Property and equipment 254, , , , ,831 Intangible assets ,214 3,585 4,278 Assets obtained in settlement of debt (2,291) 5,358-24,899 30,257 27,966 Other assets 67,975 31,963 12,902 40,148 85, ,988 Goodwill ,879 61,879 61,879 Total Assets 9,836,643 17,019,969 2,067,467 5,997,873 25,085,309 34,921,952 Liabilities Due to banks and financial institutions 4, ,757 19,142 83, , ,388 Derivative financial instruments , ,875 13,156 13,751 Financial liabilities at fair value through profit or loss - 41, ,054 41,054 Customers' deposits at amortized cost 8,090,404 16,180,085 1,954,297 4,141,757 22,276,139 30,366,543 Deposits from related parties at amortized cost 95,663 71,168 8,597 13,293 93, ,721 Engagements by acceptances - 100,818 61,072 78, , ,277 Other liabilities 234, ,109 27, , , ,326 Provisions for risks and charges 67,234 5, ,953 42, ,509 Total Liabilities 8,493,287 16,887,258 2,071,217 4,480,807 23,439,282 31,932,569 Net Exposure 1,343, ,711 (3,750) 1,517,066 1,646,027 2,989, BLOM BANK s.a.l. Annual Report 2012

156 Notes to the Consolidated Financial Statements 31 December 2012 Group s sensitivity to currency exchange rates The table below shows the currencies to which the Group had significant exposure at 31 December on its monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the Lebanese Lira, with all other variables held constant, on the income statement (due to the potential change in fair value of currency sensitive monetary assets and liabilities). A negative amount reflects a potential net reduction in income while a positive amount reflects a net potential increase Currency Change in currency rate % Effect on profit before tax LL Million Change in currency rate % Effect on profit before tax LL Million USD ± 1% 3,580 ± 1% ± 2,427 EUR ± 3% 449 ± 3% ± 1, Equity Price risk Equity price risk is the risk that the fair value of equities decreases as the result of changes in the level of equity indices and individual stocks. Equity price risk exposure arises from equity securities classified at fair value through profit or loss and at fair value through other comprehensive income. A 5 percent increase in the value of the Group s equities at 31 December 2012 would have increased other comprehensive income by LL 298 million and net income by LL 1,839 million (2011: LL 332 million and LL 1,427 million respectively). An equivalent decrease would have resulted in an equivalent but opposite impact Prepayment Risk Prepayment risk is the risk that the Group incurs a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate housing loans when interest rates fall. Market risks that lead to prepayments are not material with respect to the markets where the Group operates. Accordingly, the Group considers prepayment risk on net profits as not material after considering any penalties arising from prepayments Operational Risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Group is able to manage the risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit. 155

157 Notes to the Consolidated Financial Statements 31 December Capital Management The Bank maintains an actively managed capital base to cover risks, inherent in the business. The adequacy of the Bank s capital is monitored using, among other measures, the rules and ratios established by the Central Bank of Lebanon and the Banking Control Commission. The primary objectives of the Bank s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. In accordance with the Central Bank of Lebanon Main Circular 44, the Group should maintain the minimum required capital adequacy ratio for the years ending 31 December 2012 and thereafter as follows: Tier 1 Capital Ratio Total Capital Ratio Year ended 31 December % 10.0 % Year ended 31 December % 10.5 % Year ended 31 December % 11.5 % Year ended 31 December % 12.0 % The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years; however, it is under constant scrutiny of the Board. Regulatory capital At 31 December 2012 and 2011, the capital consists of the following: LL Million Tier 1 capital 2,882,900 2,581,364 Tier 2 capital 23,346 14,727 Total capital 2,906,246 2,596,091 Risk weighted assets Credit risk 18,645,292 17,831,152 Market risk 816, ,900 Operational risk 1,822,481 1,606,056 Total risk weighted assets 21,284,482 20,109,108 The capital adequacy ratio as of 31 December (including profit for the year less proposed dividends) is as follows: Tier 1 capital ratio 13.54% 12.84% Total capital ratio 13.65% 12.91% Tier 1 capital consists of share capital, share premium, reserves, retained earnings including current year profit less proposed dividends, foreign currency translation losses, gross unrealized losses from financial instruments at fair value through other comprehensive income and corresponding amounts of non-controlling interest. Tier 2 capital consists of revaluation variance recognized in the complementary equity, preferred shares, a percentage of foreign currency translation gains, a percentage of gross unrealized gains from financial instruments at fair value through other comprehensive income and corresponding amounts of non-controlling interest. Certain adjustments are made to IFRS based results, reserves, retained earnings, preferred shares and non-controlling interests as prescribed by the Central Bank of Lebanon and the Banking Control Commission. 156 BLOM BANK s.a.l. Annual Report 2012

158 Notes to the Consolidated Financial Statements 31 December Early Adoption of IFRS 9 In compliance with Circular 265 of the Lebanese Banking Control Commission issued on 23 September 2010, the Group adopted, effective 1 January 2011, Phase I of IFRS 9 as issued in November 2009 and reissued in October 2010 and related consequential amendments to other International Financial Reporting Standards. The effective application date stipulated by the standard is annual periods beginning on or after 1 January The initial application date of this standard with respect to the Group is 1 January 2011 in accordance with the transitional provisions of the standard. The Group did not restate comparative information as permitted by the transitional provisions of IFRS 9 and has recognized impact of early adoption of IFRS 9 as at 1 January 2011, in the opening retained earnings and other components of equity as of that date. The schedule below summarizes the new classification and amendments to the Group financial instruments as at 1 January 2011 following the early adoption of IFRS 9 which resulted in adjustment to the opening retained earnings and cumulative changes in fair value of financial instruments designated at fair value through other comprehensive income as at 1 January Financial assets held-for-trading Financial investments available-forsale Other financial assets classified as loans and receivables Financial investments held-to maturity LL Million Carrying value as at 31 December 2010 according to IAS 39 54,816 4,116,261 9,455, ,295 14,539,358 Reclassification following the early adoption of IFRS 9: Financial assets reclassified at fair value through profit or loss: Government debt securities 17,011-15,507-32,518 Corporate debt securities 1,527 74, , , ,049 Funds 22,398 3, ,969 Equity securities 13,880 8, ,181 Financial assets reclassified at amortized cost: Government debt securities - 3,479,088 2,736, ,283 6,566,795 Corporate debt securities - 163, , , ,318 Certificates of deposit Central Banks - - 5,978,685-5,978,685 Certificates of deposit Commercial banks and financial institutions - 262,572 74,340 72, ,202 Financial assets reclassified at fair value through other comprehensive income: Equity securities - 3, ,415 Funds - 1,853-2,618 4,471 Carrying value as at 1 January 2011 following early adoption of IFRS 9 54,816 3,997,209 9,425, ,747 14,370,603 Effect on opening cumulative change in fair values of financial instruments designated at fair value through other - (117,141) 19,435 1,485 (96,221) comprehensive income Effect on opening balance of retained earnings - (1,911) (49,590) (21,033) (72,534) Total 51. Comparative Information Loans and advances to related parties were reclassified from Net loans and advances to related parties at amortized cost to Net loans and advances to customers at amortized cost. Comparative figures amounting to LL million 20,766 were reclassified accordingly. Deposits from related parties were reclassified from Deposits from related parties at amortized cost to Customers deposits at amortized cost. Comparative figures amounting to LL million 24,730 were reclassified accordingly. These changes have been made to improve the quality of information presented. 157

159 158 BLOM BANK s.a.l. Annual Report 2012

160 159