The Custodian of the Two Holy Mosques King Salman Bin Abdulaziz Al Saud

Transcription

1 Annual Report 2017

2

3

4

5 His Royal Highness Crown Prince Mohammad Bin Salman Bin Abdulaziz Al Saud The Deputy Premier and Minister of Defense The Custodian of the Two Holy Mosques King Salman Bin Abdulaziz Al Saud

6

7 Content Page Board of Directors Report 941 Summary of Activity 4357 Independent Auditors Report 5967 Consolidated Financial Statements 6873 Notes To Consolidated Financial Statements Basel III Pillar 3 Qualitative disclosures (Remuneration)

8

9 Board of Directors Report

10 Board of Directors Report Distinguished Shareholders: May peace be upon you, The Board of Directors is pleased to share with you this annual report, which highlights the activities of the Bank for the fiscal year ended December 31, The Bank has achieved good results during the Fiscal Year 2017, through growth in key financial indicators resulting from the Bank s business expansion, increase of customers, thereby maintaining its market leadership, especially in the Retail Sector. In 2017, the Bank has recorded SAR 9,121 million in net profits with an increase of 12% compared to 2016; and equity has increased to SR 56 billion with an increase of 7.3% compared to Moreover, total assets has increased to SR 343 billion with an increase of 1%. In addition, total financing assets has increased to SR 234 billion with an increase of 3.8%, and customers balances have increased to SR 273 billion with an increase of 0.2%. Further, ROA and ROE have reached 2.7% and 16.9% respectively and share profit has reached SR 5.61 in We are proud of being one of the largest Islamic Banks in the Kingdom of Saudi Arabia and Middle East. The bank s activity represented in banking and investment business for itself or others inside and outside the Kingdom based on Banks Control Law and all other applicable laws in KSA. The Bank is characterized by offering a wide range of banking products and services which are appropriate to retail and corporate sectors and compliant to Islamic Sharia principals. Locally, Al Rajhi Bank has the biggest network of branches totaling 700 branches across the kingdom, backed by the biggest ATM network totaling 4,803 machines. Furthermore, the Bank has a large customer base inside and outside KSA. The Bank has affiliates inside KSA, namely: Al Rajhi Capital, Al Rajhi Takaful, Al Rajhi Services and Al Rajhi Real Estate Development Company. Globally, the Bank operates in three countries, recording a pioneering experience for the Saudi Banking Sector, where it owns an affiliate named Al Rajhi Bank Malaysia with 18 branches, in addition to 7 branches in Jordan and 2 branches in Kuwait. The Bank continues focusing on enhancing its pioneering position in the banking sector locally and internationally through providing the best banking services and products that comply with the Islamic Sharia and meet the expectations of all customers. The Bank also continues in its efforts of developing and updating the Information and communication systems with a view to reach the best bank in electronic services in order to provide the best services for all customers of the Bank. 10

11 Board of Directors Report 1) Description of main activities of Al Rajhi Bank and its subsidiaries: Description of main activities of Al Rajhi Bank: (in thousand SAR) Type of Activity Activity Revenues Percentage Retail Retail sector includes deposits of retail customers, credit facilities, debit current account (overdraft), and banking services and remittances fees % Corporate Corporate sector includes deposits of corporate, major customers, and corporate credit facilities and debit current accounts (overdraft) % Treasury Treasury sector includes treasury services and Murabaha with SAMA and international trading portfolio % Other % Total % Description of main activities of Al Rajhi Bank s subsidiaries: (in thousand SAR) Type of Activity Activity Revenues Percentage Al Rajhi Bank Malaysia An Islamic Bank licensed under Islamic Financial Services Law issued in 2013, incorporated and practices its business in Malaysia % Al Rajhi Capital A closed jointstock company, registered in KSA to work as a main agent and/ or provide financial brokerage services, insurance, management, consultancy, arrangements, and keeping % Al Rajhi Takaful Agency A limited liability company, registered in KSA to work as an agent to practice insurance brokerage activities according to agency agreement with Al Rajhi Cooperative Insurance Company % Al Rajhi Development Co. Ltd. A limited liability company registered in KSA to support real estate finance programs of Al Rajhi Bank by transferring and keeping real estate ownership documents in its name on behalf of the bank, collect revenues of selling some properties sold by the bank, provide consultancies in real estate and engineering field, register real estate contracts, and supervising real estate valuation % Al Rajhi Services Co. A limited liability company registered in KSA to provide recruitment services % Board of Directors Report / Al Rajhi Bank Annual Report

12 2) Summary for Al Rajhi Bank s assets and liabilities and business results during the last five financial years. Financial Results Comparison: (in thousand SAR) Description Revenues 15,904,854 15,341,380 13,745,775 13,666,974 13,845,037 Revenues Costs )551,587( )528,357( )299,438( )395,198( )465,633( Total Profit 15,353,267 14,813,023 13,446,337 13,271,776 13,379,404 Net Profit 9,120,726 8,125,960 7,130,075 6,836,172 7,437,987 Assets and Liabilities Comparison: Description Current Assets 31,418,263 42,505,953 46,699,326 52,098,399 29,970,266 Noncurrent Assets 311,698, ,205, ,920, ,613, ,900,419 Total Assets 343,116, ,711, ,619, ,711, ,870,685 Current Liabilities 8,786,598 6,254,840 6,600,729 7,603,077 6,144,148 Noncurrent Liabilities 278,579, ,510, ,379, ,212, ,228,822 Total Liabilities 287,365, ,764, ,980, ,815, ,372,970 3) Discrepancies in operational results for the previous year results: (in thousand SAR) Description Changes (+) or () Change % Sales / Revenues 15,904,854 15,341, , % Sales / Revenues Cost )551,587( )528,357( 23, % Total Profit 15,353,267 14,813, , % Operational Revenues Other 0.00% Operational Expenses Other )5,236,551( )5,007,255( 299, % Operational (Loss) Profit 10,116,716 9,805, , % 4) Geographical analysis for total revenues of Al Rajhi Bank and its subsidiaries: Geographical Analysis for Total Revenues of Al Rajhi Bank (in thousand SAR) Year Kingdom of Saudi Arabia Kuwait Jordan Total ,889,415 59, ,687 15,065,227 Geographical Analysis for Total Revenues of Al Rajhi Bank s Subsidiaries Year Kingdom of Saudi Arabia East Asia Total , , ,628 There are no loans on the Bank or its subsidiaries (whether payable on demand or others) 12

13 Board of Directors Report 5) Comparison of SME Financial Results: Financial data of SME During the current year: (in million SAR) Data (as of 31 December 2017) Micro Small Medium Total Finances awarded to small, medium, and micro enterprises 1,104 4,125 5,228 Finances awarded to small, medium, and micro enterprises as a percentage of total finance 0.46% 1.73% 2.19% Finances number 1,915 5,971 7,886 Finance request number 443 1,959 2,402 Finances number guaranteed by Kafala program Finances Total guaranteed by Kafala program The competent team of SME has a portfolio with a total amount of SAR 2.7 Bn (share of micro, emerging, and small enterprises are 1 Bn Saudi Riyal, while medium enterprises share is SAR 1.7 Bn) and medium enterprises teams, affiliated to CBG, handle other transactions of portfolio. Financial data of SME during the previous year: Data (as of 31 December 2016) Micro Small Medium Total Finances awarded to small, medium, and micro enterprises 1,512 3,379 4,819 Finances awarded to small, medium, and micro enterprises as a percentage of total finance 0.68% 1.52% 2.20% Finances number 1,501 2,277 3,778 Finance requests number Finances number guaranteed by Kafala program Finances Total guaranteed by Kafala program ) Applicable Accounting Standards: The Bank prepares its attached unified financial statements in accordance with international accounting standards based on circular of CMA no. (2978/4) regarding applying international accounting standards. In addition, the Bank prepares its financial statements in compliance with Banks Control Law, Corporate Act in KSA, and the Bank s Articles of Association. Board of Directors Report / Al Rajhi Bank Annual Report

14 7) ARB Subsidiaries: Subsidiary Name Al Rajhi Bank Malaysia Al Rajhi Capital Al Rajhi Takaful Agency Capital Ownership % 1,051,714, % 500,000, % 2,000,000 99% Al Rajhi Development Company Ltd. 1,000, % Type of Activity An Islamic Bank licensed under Islamic Financial Services Law issued in 2013, incorporated and practices it s business in Malaysia. A limited liability company, registered in KSA to work as a main agent and/ or provide financial brokerage services, insurance, management, consultancy, arrangements, and keeping. A limited liability company, registered in KSA to work as an agent to practice insurance brokerage activities according to agency agreement with Al Rajhi Cooperative Insurance Company. A limited liability company registered in KSA to support real estate finance programs of ARB by transferring and keeping real estate ownership documents in its name on behalf of the bank, collect revenues of selling some properties sold by the bank, provide consultancies in real estate and engineering field, register real estate contracts, and supervising real estate valuation. Country (place of operation) Malaysia KSA KSA KSA Country (place of foundation) Malaysia KSA KSA KSA Al Rajhi Services Co. 500, % A limited liability company registered in KSA to provide recruitment services. KSA KSA 8) Al Rajhi Bank s Policy in Distribution of Shares Dividend: The Bank distributes the specified annual net profits, after deduction of all general expenses and other costs and arranging the necessary reserves to confront doubtful debts, investment losses and urgent commitments for which the Board of Directors evaluates the risk level under the Banking Control Law and Saudi Arabian Monetary Authority (SAMA) directions as follows: a. The due zakat amounts scheduled to be paid by shareholders are calculated and the bank pays such amounts to competent parties. b. The Bank transfers not less than 25% of the remaining net profits to the following year after deducting the zakat of the regular reserves to ensure that the mentioned reserves become equal at least to the paid capital. c. It allocates not less than 5% of the paid capital to next year s transferred amount of profits after deducting the regular reserves and zakat to be distributed to shareholders according to proposals of the Board of Directors and decisions of the General Assembly. If the percentage left from the profits due to shareholders are insufficient to pay the abovementioned percentage, the shareholders may not claim to pay it during the next year(s) and the General Assembly may not decide to distribute a percentage of profit greater than the one proposed by the Board of Directors. d. After allocating the amounts mentioned in items (a), (b) and (c); the remaining amount will be used according to the proposal of the Board of Directors and the decision of the General Assembly. Profits Distributed During the Year 12/07/2017 Percentage 15% Total 2,437,500 Percentage of Profits to be Distributed at the End f the Year 25% 4,062,500 Total Profits 40% 6,500,000 14

15 Board of Directors Report 9) Board of Directors Members: # Name 1 Abdullah bin Sulaiman Al Rajhi Committees membership ExCom Current Positions Previous Positions Qualifications Experiences Chairman of the Board and Chairman of ExCom Al Rajhi Bank Chairman of the Board Al Rajhi Company for Cooperative Insurance Chairman of the Board Farabi Petrochemicals Company Chairman of the Board Al Rajhi Holding Group Chairman of the Board Al Rajhi Capital Company Chairman of the Board Fursan Travel & Tourism Company Since 1979 at Al Rajhi Bank: Deputy GM of Financial Affairs. Deputy GM of Investment and Foreign Relations Senior Deputy GM. GM Chief Executive Officer Managing Director + Chief Executive Officer Board Member + ExCom Member Vice Chairman of the Board + ExCom Member Bachelor of Business Administration King Abdulaziz University 1979 Contributed to the conversion of Al Rajhi Exchange and Trade Company into a Public joint stock Company and held many leading positions in ARB for more than 35 years until he currently becomes the Chairman of BoD. 2 Salah bin Ali Aba Alkhail ExCom Governance Committee Board Member, ExCom Member and Chairman of Governance Committee Al Rajhi Bank Board Member Al Rajhi Capital Company Partner and Chairman of the Board National Veterinary Company Chairman & Office owner Salah Abalkhail Consulting Engineers Chairman of the Board Salah Abalkhail & Co. Information Technology Since 1972 at Norconsult Telematics Company: Project Engineer Assistant Project Engineer Project Manager Associate Consultant for the Company s projects. Member of Engineering Committee Ministry of Commerce Bachelor of Electrical Engineering University of Arizona 1972 Working in the field of advisory and investment for more than forty years. He assumed the position of Board member of Al Rajhi Bank, since the first tenure, and served as a member of many Board committees. 3 Abdulaziz bin Khaled Al Ghefaily ExCom Nominations and Compensations Committee Board Member ExCom Member Member of Nominations and Compensations Committee Al Rajhi Bank Board Member Al Rajhi Capital Company Board Member Savola Group Board Member Herfy Food Services Worked since 1981 until 2016 at General Organization for Social Insurance GOSI Board Member Industrialization & Energy Services Company Board Member Riyadh Hotels and Entertainment Co. Board Member Saudi Industries Development Company Bachelor of Economics Master s Degree in Economics from Western Illinois University USA 1990 Working in the field of financial investment for more than twenty five years. Board Member Panda Retail Company Board Member Tabuk Agriculture Development Company (TADCO) Board Member National Medical Care Company. Board of Directors Report / Al Rajhi Bank Annual Report

16 4 Bader Bin Mohamed Al Rajhi Board member Al Rajhi Bank Managing Director and Vice Chairman Mohammed Abdulaziz Al Rajhi & Sons Investment Company (MARS) Chairman of Rajhi Steel Industries Co. Ltd. (Rajhi Steel) Chairman of the Board Global Beverage Company Chairman of the Board AlJazirah Home Appliance Co. Ltd. Chairman of the Board Falcon Plastic Products Company. Held several leading positions in areas of management, industry and real estate investment. He has served as a member of board of directors of jointstock companies. High School Has an experience for more than twentyfive years, Mr. Bader has held several leading positions in areas of management, industry and real estate investment and served as a member of board of directors of many jointstock companies. 5 Khaled bin Abdulrahman Al Qwaiz Nominations and Compensations Committee BRMC Board Member Member of Nominations and Compensations Committee Chairman of BRMC Al Rajhi Bank Board and ExCom Member ACWA Holding Company Board Member, Audit Committee member and Chairman of the Nominations and Compensations Committee Swicorp Company Board Member and Chairman of Audit Committee Riyadh Cables Group Company Board Member and Chairman of Nominations and Compensations Committee Saudi Tabreed Company Board Member EMCOR Facilities Services Managing Director ACWA Holding Company Chief Executive Officer Astra Industrial Group GM Corporate Banking Group in the Central Region SAMBA Group. GM Credit Group Arab National Bank Manager of Financial and Administrative Affairs Sector National Cooperative Insurance Company Head of Loan Team Saudi Industrial Development Fund Bachelor of Urban Planning University of Washington USA Has more than 30 years of experience in the banking, financial, and industrial field, during which he held many banking leading positions in many local banks, in the field of retail, wholesale sector, risk, and insurance. ExCom Board Member SIMAH 6 Alaa bin Shakib Al Jabri BRMC Nominations and Compensations Committee Board Member, ExCom Member and Member of BRMC and Chairman of Nominations and Compensations Committee Al Rajhi Bank Board Member Construction Products Holding Company Board Member Rolaco Group Board Member + Chief Executive Officer Medical and Pharmaceutical Services Company Board Member Higher Education Fund Board Member Saudi Travelers Cheques Company Board Member Arab International Bank Tunisia Head of Risk Group SABB GM of Western Region SABB GM Gulf International Bank Director of International Business National Commercial Bank Bachelor of BA American University in Beirut Master of BA Enseed, France Has a professional experience of more than 30 years, in the banking and financial areas, during which he held many leading positions in many local and international banks. Deputy CEO Gulf International Bank Corporate Banking Manager Saudi Investment Bank 16

17 Board of Directors Report 7 Ibrahim bin Fahad Ghofally Governance Committee Board Member and Member of Governance Committee Al Rajhi Bank Board Member Jiwar Real Estate Management, Marketing and Development Company Head of Arriyada Financial Consulting Center. Board Member Alinma Bank Deputy General Manager of Banking and Development Al Rajhi Bank Associate Professor at Faculty of Economics, King Abdulaziz University Vice Dean of Faculty of Economics, King Abdulaziz University Assistant Professor, Faculty of Economics, King Abdulaziz University Vice Dean of Faculty of Economics, King Abdulaziz University Member of the Graduate Studies Committee, Faculty of Economics, King Abdulaziz University Financial Advisor of King Abdulaziz Endowment Project in Makkah Bachelor of Public Administration King Abdulaziz University Master of Public Administration California State University 1978 Ph.D in Philosophy Florida State University 1981 Practiced academic work for 10 years and has experience in banking sector for 10 years. In 2002, he established Arriyada Financial Consulting Center and performed several studies and Islamic Financing Structuring for projects, the most prominent one is Abraj AlBait in Makkah. He has participated and presided various Islamic Financing conferences inside and outside the Kingdom. 8 Amin bin Fahad Al Shiddi Audit and Compliance Committee Board Member and Chairman of Audit and Compliance Committee Al Rajhi Bank. Board Member VIVA Kuwait Telecom Company. Board Member Deutsche Gulf Finance. Board Member Oger Telecom Company. Board Member Solutions Company Board Member Advanced Sale Limited Company Board Member Arab Submarine Cables Company Board Member Aqalat Company Board Member Viva Bahrain Company Bachelor of Accounting, King Saud University Master Degree in Accounting, University of Missouri, USA CMA, SOCPA, CPA Has more than 25 years of experience in the fields of financial, investment, consulting and supervisory fields. He has served as a board member for many local and international companies in various sectors and has membership in several professional, Commercial and consulting committees. 9 Hamza bin Othman Khushaim ExCom BRMC Board Member Member of ExCom and Risk Committee Al Rajhi Bank Board Member and Member of Remuneration and Compensations Committee Dallah Healthcare Holding Company Director of International Investment Department Hassana Investment Company Member of the Saudi Investor Association Hedge Fund Portfolio Manager KAUST Endowment. Hedge Fund Manager Portfolio Investment Management Treasury Saudi Aramco Co. Financial Analyst Investment Management Treasury Saudi Aramco Co. Bachelor of Finance, Michigan State University Master Degree in Business Administration University of Michigan in Ann Arbor CFA Has 12 years of experience in investment. Certified member of the Association of Financial Analysts USA Board of Directors Report / Al Rajhi Bank Annual Report

18 10 11 Raid bin Abdullah Al Tamimi Abdullatif bin Ali Al Seif Governance Committee Nominations and Compensations Committee Audit and Compliance Committee Board Member Member of Governance Committee Member of Nomination and Compensations Committee Al Rajhi Bank Board Member Al Rajhi Company for Cooperative Insurance Board Member Waseel Electronic Information Transfer Board Member Najm for Insurance Services Board Member Member of Audit and Compliance Committee Al Rajhi Bank Board Member HSBC Saudi Arabia Board Member Arabian Cement Executive Director Vision Combined Limited Company Portfolios Advisor for Investment Affairs Public Pension Agency Since 2005 in Cooperative Insurance Company: Chief Executive Officer Senior Deputy CEO Technical Affairs Deputy CEO Medical Insurance and Takaful Insurance GM of Human Resources and Administration Affairs Deputy Head and Head of Investment King Abdullah Foundation Director of Portfolio Management Masik Head of Portfolio Management, Investment Management Division Saudi Aramco Co. Portfolio Manager KAUST Investment Management Company Financial Analyst Saudi Aramco Co. Bachelor of Medical Science, University of Wales, UK Has many training courses from international leading institutes such as Enseed, IBD, LBS, etc. Bachelor of Business Administration Boston University Master Degree in Business Administration Boston University Master of Economics Boston University CPA, CFA Has management experience for more than 20 years. Last leading position was the CEO of Tawuniya the Largest Insurance Company in MENA area. He currently serves as Board member and Board committee member in many listed and unlisted companies. Has more than 16 years of experience in investment. He serves on several boards and committees in many companies. 10) BoD Meetings: Number of Meetings: (7) Member Name First Meeting 12/2/2017 Second Meeting 19/3/2017 Third Meeting 15/5/2017 Fourth Meeting 21/8/2017 Fifth meeting 22/10/2017 Sixth Meeting 21/11/2017 Seventh Meeting 18/12/ Abdullah bin Sulaiman Al Rajhi 2 Salah bin Ali Aba Alkhail 3 Abdulaziz bin Khaled Al Ghefaily 4 Bader bin Mohamed Al Rajhi 5 Khaled bin Abdulrahman Al Qwaiz 6 Alaa bin Shakib Al Jabri 7 Mohamed bin Abdullah Al Rajhi 8 Sulaiman bin Saleh Al Rajhi Their membership ended at the end of 9 Saeed bin Omar Al Essaie the ninth session on 10 Ali bin Saleh Al Barrak November 13, Moaid bin Issa Al Qurtas 12 Ibrahim Fahad AlGhefaily 13 Amin bin Fahad Al Shiddi Their membership started with the tenth session on 14 Hamza bin Othman Khushaim November 14, Raid bin Abdullah AlTamimi 16 Abdullatif bin Ali Al Seif 18

19 Board of Directors Report 11) Board Committees Members (NonBoard Member): # Name Committees memberships Current Positions Previous Positions Qualifications Chief Executive Officer Al Muneef Financial and Management Consultancy Office Advisor National Guard 1 Abdullah bin Ali Al Maneef Audit and Compliance Committee Member of Audit Committee Al Rajhi Bank Member of Shura Council Member of the Arab Parliament Director General of Finance and Administration Affairs National Guard Head of Accounting Department, King Saud University Associate Professor of Accounting Department, King Saud University Executive Director of Financial and Administrative Affairs King Faisal Specialist Hospital Head of Accounting Association, King Saud University Bachelor of Accounting King Saud University Master Degree in Accounting University of Southern California, USA PhD in Accounting University of South Carolina, USA Held many academic, leading and advisory positions in financial and management fields. Assistant Professor of Accounting Department, King Saud University Assistant Professor of Accounting Department, King Saud University 2 Farraj Bin Mansour Abuthnain Audit and Compliance Committee Member of Audit Committee Al Rajhi Bank Board Member Astra Industrial Group Board Member of Petrochem Director of Loan Department Industrial Development Fund Member of the Project Loan Committee Industrial Development Fund Member of the Industrial Projects Performance Audit Committee Industrial Development Fund Bachelor of Industrial Management University of Wisconsin Milwaukee Held many leading positions in the Saudi Industrial Development Fund. Member of Audit Committee Almarai Company Senior Vice President of Finance and Investment National Industrialization Company (Tasnee) Member of Audit Committee Al Rajhi Bank 3 Walid bin Abdullah Tmairak Audit and Compliance Committee Member of Audit Committee Ewaan Global Residential Company Member of Advisory Committee of College of Management and Economics King Abdulaziz University Arthur Andersen & Co Ernst & Young Bachelor of Accounting King Abdulaziz University Fellowship of SOCPA Has more than 25 years of experience in accounting, auditing and economy. Tmairak is a Chartered Accountant Board of Directors Report / Al Rajhi Bank Annual Report

20 12) Executive Management: No. Name Current Positions Previous Positions 1 Stefano Paolo Bertamini CEO CEO (Standard Chartered Bank) Qualifications Master Degree Finance and International Banking Business Experiences 31 years 2 Abdullah Ali Alkhalifa CFO CFO (ARB) Master Degree Accounting 27 years 3 Christopher Mark Maclean GM RCG CRO (West Bank) Master Degree Accounting 34 years 4 Waleed Abdullah Ali AlMogbel COO CFO (ARB) PhD Accounting & Auditing 20 years 5 Saleh Abdullah Alzumaie GM RBG GM RBG (Acting) (ARB) Bachelor Degree English Language 27 years 6 Majid Abdulrahman Abdullah Algwaiz GM CBG GM CBS (SAAB) Bachelor Degree Finance Accounting 23 years 7 Abdulrahman Abdullah Alfadda GM Treasury GM Treasury & Investment (SAIB) Bachelor Degree Electrical Engineering 21 years 8 Abdullah Sulaiman Alnami CCO Deputy CORO (Riyad Bank) 9 Khalid Fahad Huzaim CHRO GM HR (Acting) (ARB) 10 Omar Abdullah Saad Alsaab CGLO Legal Advisor (Alfaisliah Holding Group) Master Degree Management and Business Bachelor Degree Computer Engineering Master Degree Corporate Laws and Finance 23 years 18 years 16 years 11 Mohamad Ali Mahmoud Yousef Hawash CIAO CIAO (Investment Bank Jordan) Bachelor Degree Accounting 23 years 12 Hisham Ahmed Alabdali Executive Director SME Deputy CCBSO (Riyad Bank) Bachelor Degree Management Sciences 29 years 13 Ahmed Mohammed Anwar Mohammed CITO Deputy CITO (ARB) Bachelor Degree Economy 29 years 14 Majed Saleh Al Rajhi Head of Private Banking & Affluent Regional Manager Medium Enterprises Central Region Bachelor Degree Finance 15 Waleed Mohammed Almouh CISO CSSIBO (ARB) Master Degree Computer 12 years 17 years 20

21 Board of Directors Report 13) Names of companies inside/outside the Kingdom, where the Board Member is a member of its current and previous boards or one of its directors: Member Name Abdullah bin Sulaiman Al Rajhi Salah bin Ali Aba Alkhail Names of companies where the Board member is a member of its current and Inside/ previous boards or one of its outside directors. Kingdom Al Rajhi Bank Al Rajhi Company for Cooperative Insurance Farabi Petrochemicals Company Al Rajhi Holding Group Rajhi Capital Fursan Travel & Tourism Company Al Rajhi Bank Al Rajhi Capital National Veterinary Company Abalkhail Consulting Engineers Inside the Kingdom Inside the Kingdom Legal Entity (Listed Joint Stock Company/ Unlisted Joint Stock Company/ Limited Liability) Listed joint stock company Listed joint stock company Unlisted company Unlisted company Unlisted company Limited liability company Listed joint stock company Unlisted company Unlisted company Limited liability company Names of companies, in which the Board member is a member of its current and previous boards or one of its directors. Al Rajhi Bank (CEO) Inside/ outside Kingdom Inside the Kingdom Legal Entity (Listed Joint Stock Company/ Unlisted joint Stock Company/ Limited Liability) Listed joint stock company Salah Aba Alkhail & Co. Information Technology Limited liability company Al Rajhi Bank Listed joint stock company Industrialization & Energy Services Company (TAQA) Dur Hospitality Unlisted company Unlisted company Abdulaziz bin Khaled Al Ghefaily Al Rajhi Capital Savola Group Hadaf Food Panda Retail Company Inside the Kingdom Unlisted company Listed joint stock company Unlisted company Unlisted company Saudi Industries Development Company Tabuk Agriculture Development Company National Medical Care Company Inside the Kingdom Unlisted company Listed joint stock company Listed joint stock company Al Rajhi Bank Bader Bin Mohamed Al Rajhi Mohammed Abdulaziz AlRajhi & Sons Investment Company Rajhi Steel Industries Limited Global Beverage Company AlJazirah Home Appliance Company, Ltd. Inside the Kingdom Listed joint stock company Limited liability company Limited liability company Limited liability company Limited liability company Falcon Plastic Products Company. Board of Directors Report / Al Rajhi Bank Annual Report

22 Khaled bin Abdulrahman Al Qwaiz Alaa bin Shakib Al Jabri Ibrahim Fahad Al Ghefaily Al Rajhi Bank ACWA Holding Company Swicorp Company Riyadh Cables Group Company Al Rajhi Bank Construction Products Holding Company Rolaco Group Medical and Pharmaceutical Services Company Al Rajhi Bank Jiwar Real Estate Management, Marketing and Development Company Inside the Kingdom Inside the Kingdom Inside the Kingdom Listed joint stock company Unlisted company Unlisted company Unlisted company Listed joint stock company Unlisted company Unlisted company Unlisted company Listed joint stock company Unlisted company ACWA Holding Company ASTRA Industrial Group Samba Financial Group Arab National Bank SABB SABB Gulf International Bank Alinma Bank Al Rajhi Bank STC Solutions Inside the Kingdom Inside and outside the Kingdom Inside the Kingdom Unlisted company Listed joint stock company Listed joint stock company Listed joint stock company Listed joint stock company Listed joint stock company Unlisted company Listed Joint stock company Listed Joint stock company Unlisted company Amin bin Fahad Al Shiddi Al Rajhi Bank VIVA Kuwait Telecom Company. Deutsche Gulf Finance. Oger Telecom Company. Inside and outside the Kingdom Listed joint stock company Unlisted company Unlisted company Unlisted company Advanced Sale Limited Company Arab Submarine Cables Company Aqalat Company Viva Bahrain Company Inside and outside the Kingdom Unlisted company Unlisted company Unlisted company Unlisted company Hamza bin Othman Khushaim Al Rajhi Bank Dallah Healthcare Holding Company Hassana Investment Company Inside the Kingdom Listed joint stock company Listed joint stock company Unlisted company Raid bin Abdullah Al Tamimi Al Rajhi Bank Al Rajhi Company for Cooperative Insurance Waseel Electronic Information Transfer Najm for Insurance Services Inside the Kingdom Listed joint stock company Listed joint stock company Unlisted company Unlisted company Company For Cooperative Insurance Tawuniya Inside the Kingdom Listed joint stock company Abdullatif bin Ali Al Seif Al Rajhi Bank HSBC Saudi Arabia Arabian Cement Vision Combined Limited Company Inside the Kingdom Listed joint stock company Unlisted company Listed joint stock company Limited liability company MASIK KAUST Investment Management Co. Inside and outside the Kingdom Unlisted company Unlisted company 22

23 Board of Directors Report 14) Composition of the Board of Directors and classification of its members as follows: Executive Board Member NonExecutive Board Member Independent Board Member: Sr. Member Name Membership Classification (Executive/ NonExecutive/ Independent) 1 Abdullah bin Sulaiman Al Rajhi NonExecutive 2 Salah bin Ali Aba Alkhail NonExecutive 3 Abdulaziz bin Khaled Al Ghefaily NonExecutive 4 Bader bin Mohamed Al Rajhi NonExecutive 5 Khaled bin Abdulrahman Al Qwaiz NonExecutive 6 Alaa bin Shakib Al Jabiri Independent 7 Ibrahim bin Fahad Al Ghofaily Independent 8 Amin bin Fahad Al Shiddi NonExecutive 9 Hamza bin Othman Khushaim NonExecutive 10 Raid bin Abdullah Al Tamimi Independent 11 Abdullatif bin Ali Al Seif Independent 15) Actions taken by BoD to provide its members with suggestions and remarks of shareholders on the Bank and its performance: ARB registers shareholders suggestions provided through General Assembly and notify Chairman of any suggestions to be presented at the next Board meeting. In addition, there is an published on the bank and Tadawul websites dedicated to receiving comments and suggestions of shareholders which are delivered directly to Board Secretary which present the same to Board. 16) A brief description of ARB Committees competences and functions: A Executive Committee: The Executive Committee, headed by Chairman of the Board of Directors, carries out all the functions and authorities the Bank entrusts it with, including: assuming the responsibility for all businesses of Al Rajhi Bank, taking the quick decisions with respect to urgent matters and issues related to the business of the Bank. Also, ExCom will be responsible for approving all credit facilities exceeding the authorities of High Credit Committee, approving the real estate guarantees documented for default facilities, approving the contracts exceeding the powers of the committees operating in the Bank and CEO within limits of the approved budget and within powers determined by Board of Directors. The Committee held 14 sessions in 2017 as follows: Board of Directors Report / Al Rajhi Bank Annual Report

24 Member Name Abdullah Salah bin Abdulaziz Alaa bin Moaid bin Issa bin Sulaiman Al Rajhi Alkhail Ghefaily Jabri Ali Aba bin Khaled Al Shakib Al AlQurtas Meeting No. Date Member Chairman Member Member Member 1 11/1/ /2/ /3/ /4/ /5/ /6/ /6/ /7/ /8/ /10/2017 Hamza bin Othman Khushaim Member His membership started with the tenth session on November 14, /10/ /12/2017 His membership 13 18/12/2017 ended at the end of the ninth session on 14 26/12/2017 November 13, 2017 B Nominations and Compensations Committee: The main purpose of Nominations and Compensations Committee include recommending the selection of Board Members, Committees members, and senior executives to Board of Directors, preparing description of abilities and qualifications required for BoD membership, assessing the effectiveness and efficiency of BoD and High Management, ensuring the independence of the Independent members, compliance of the Bank with the internal incentives schemes, and rules of incentives practices issued by SAMA, principles and criteria of compensations, in the way best achieves the interests of depositors, shareholders and Bank s strategic objectives. The Committee held two sessions during 2017 as follows: Member Name Meeting No. Date Ali bin Saleh Al Barrak Chairman Abdulaziz bin Khaled Al Ghefaily Member Khaled bin Abdulrahman Al Qwaiz Member Saeed bin Omar Al Issaie Member 1 20/8/ /12/2017 His membership ended at the end of the ninth session on November, His membership ended at the end of the ninth session on November, Alaa bin Shakib Al Jabri Chairman His membership started with the tenth session on November, Raid bin Abdullah Al Tamimi Member His membership started with the tenth session on November 14,

25 Board of Directors Report C Governance Committee: The main purpose of Governance Committee includes the annual review of Board of Directors structure and Board committees, and governance framework in the Bank, updating policies related to BoD and Board members, Bank s governance and conflict of interests, supporting and maintaining the application of the highest standards of corporate governance issued by SAMA and Corporate Governance Regulations issued by CMA, in addition to following up the application of Governance manual and its appendixes, Bank s matrix of authorities, and following up the works of management committees. The Committee held two sessions during 2017 as follows: Member Name Salah bin Ali bin Saleh Al Ali Aba Barrak Date Alkhail Chairman Member Member 1 7/2/ /8/2017 Meeting no. His membership ended at the end of the ninth session on November 13, 2017 Alaa bin Shakib Al Jabri His membership in the committee ended at the end of the ninth session on November 13, 2017 Ibrahim Fahad Al Ghefaily Member His membership started with the tenth session on November 14, 2017 Raid bin Abdullah Al Tamimi Member His membership started with the tenth session on November 14, 2017 D Audit and Compliance Committee: Audit and Compliance Committee plays a key role in supporting Board of Directors in having effective oversight on the operational activities of financial reports, adequacy and efficiency of the Internal Control environment, supervising the operational activities of Internal Audit Group. Additionally, it recommends for the selection of external auditors. Also, the Committee ensures the independence and effectiveness of Internal Audit Group, approves the internal audit annual plan, reviews issued Internal Audit reports including ARB management level of implementation of audit recommendations. In addition, The Committee ensures the adequacy and effectiveness of the operational activities of Compliance Group including level of compliance with its policy and manual, approves compliance annual program, reviews Compliance Group periodical and annual reports, ensures implementation of weaknesses identified by Compliance Group. Furthermore, the Committee reviews periodical minutes of meetings related to Compliance Committee and reports issued by regulators. The Committee held six sessions during 2017 as follows: Board of Directors Report / Al Rajhi Bank Annual Report

26 Member Name Meeting No. Date Moaid bin Issa Al Qurtas Chairman Mohamed bin Abdullah Al Rajhi Member Sultan bin Mohammed Sultan Member Farraj bin Mansour Abuthnin Member Walid bin Abdullah Tmairak Member Amin bin Fahad Al Shiddi Chairman Abdullatif bin Ali Al Seif Member Abdullah bin Ali Almaneef Member 1 5/2/ /2/ /3/ /4/ /7/ /10/2017 His membership ended at the end of the ninth session on November 13, 2017 His membership ended at the end of the ninth session on November 13, 2017 His membership ended at the end of the ninth session on November 13, 2017 His membership started with the tenth session on November, His membership started with the tenth session on November 14, 2017 His membership started with the tenth session on November 14, 2017 E Risk Committee: This committee was formed after the election of BoD in the current tenure. The purpose of BRMC is to assist Board of Directors in maintaining oversight responsibility for activities and resolutions related to management of risks in credit, operational risks, business, market, investment and financial businesses and reputation. Additionally, it includes the provision of consultation to BoD with respect to the risk appetite and risk strategy, Internal Capital Adequacy Assessment Process (ICAAP), credit & provisions policy, liquidity policy framework, dealing with finance and liquidity limits. The committee is also responsible for approving losses arising out of (banking operations, fraud, system errors and compensation of customers) that falls beyond the powers of Risk Management Committee. The Committee held five sessions during 2017 as follows: Member Name Meeting No. Date Alaa bin Shakib Al Jabri Chairman / Member Ali Bin Saleh Al Barrak Member Bader Bin Mohamed Al Rajhi Member Khaled bin Abdulrahman Al Qwaiz Chairman Hamza bin Othman Khushaim Member 1 13/2/ /3/ /6/ /10/2017 His committee membership started as chairman with the tenth session on November 14, 2017 His membership started with the tenth session on November 14, /12/2017 His membership ended at the end of the ninth session on November 13, 2017 His committee membership ended at the end of the ninth session on November 13,

27 Board of Directors Report 17) The methods approved by Board to assess BoD, Board Committees and their members performance: Governance Committee assesses the performance of Board, Board Committees and Board members via special surveys in 3 levels. Assessment is conducted based on its rules of work specified in ARB s Governance Manual. Assessment of Board committees and Audit committee is conducted based on its approved work charters. Assessment of Board and Board committee member is conducted by the member himself. After that, Governance Committee raise the annual assessment report to Board of Directors to be approved. Finally, a copy of the final report is sent to Nominations and Compensations Committee. 18) The remunerations of BoD, Board Committees and Executive Management members: A) Summary of significant items of Policy for remunerations of BoD and Board Committees and Executive Management members. 1 Board of Directors Remunerations and Compensations: ARB s Board members will receive a fixed annual remuneration of SAR 400,000 for their membership in ARB s Board of Directors and their participation in its activities. Board member will receive an attendance fee of SAR 5,000 for his attendance of each Board meeting either personally or through electronic remote channels. ARB shall compensate Board members for their actual expenses paid to attend the Board meetings including travelling and accommodation expenses. 2 Remunerations and Compensations of BoD Members for their Membership in Board Committees: ARB s Board members will not receive an additional remuneration for their membership in ARB s Board committees as the annual remuneration will include any other remuneration paid for the director for his participation in any Board Committee. Board member will receive an attendance fee of SAR 5,000 for his attendance of each Board Committee either personally or through electronic remote channels. ARB shall compensate Board members for their actual expenses paid to attend the Committees meetings including travelling and accommodation expenses. 3 Remunerations and Compensations of Audit and Compliance Committee Members: ARB s Audit and Compliance committee members, either from inside or outside the Board, will receive a fixed annual remuneration of SAR 150,000 for their membership in the Committee and his participation in its activities provided that annual remuneration for Audit and Compliance Committee member from inside the Board shall not exceed the annual limits set by Policy for Remuneration and Compensation approved by ARB s General Assembly. Audit and Compliance Committee members will receive an attendance fee of SAR 5,000 for his attendance of each Committee meeting either personally or through electronic remote channels. ARB shall compensate Committee members for their actual expenses paid to attend the Board meetings including travelling and accommodation expenses. Board of Directors Report / Al Rajhi Bank Annual Report

28 4 Granting shares: ARB does not grant shares as a remunerations for any Board, Board Committee and Audit Compliance Committee members 5 Allocation and Payment Mechanisms for Remunerations and Compensations: Remuneration and compensations for Board members and NonBoard members will be allocated annually based on recommendation from Nomination and Compensation Committee and approval of Board, amounts will then be presented to the next General Assembly meeting for ratification. Remuneration can vary to reflect the Director s experience, independence and number of attended meetings among other criteria. Attendance fees are paid annually to directors based on their attendance sheets for Board, Board Committees, and Audit and Compliance Committee meetings. Payments are done through bank transfers, cheques, or any other methods, and Directors are informed of details through relevant departments. Remuneration and Compensations paid to directors should not exceed SAR 500,000 annually, payment of any additional due amounts will be stopped, total amounts paid to directors should not exceed 5% of total net profits. 6 Remunerations and Compensations of Senior Executives: The role of the Board of Directors includes, but not limited to, the following: The Board of Directors is responsible for approving the overall design and oversight of all aspects of the Remuneration system and shall not delegate this responsibility to management. Despite the establishment of the Board Nomination & Compensation Committee, the Board of Directors shall be ultimately responsible for promoting effective governance and sound Remuneration practices. The Board of Directors shall review and, if satisfied, approve the Remuneration Policy and any of its subsequent revision/ updates, on the recommendation of the Nomination & Compensation Committee, taking into account, interalia, the Rules on Compensation Practices of May 2010 and any future updates or revisions, issued by Saudi Arabian Monetary Agency (SAMA). The Board of Directors shall review and, if satisfied, approve the recommendations of the Nomination & Compensation Committee regarding the level of remuneration of the key executives. The Key executives for this purpose will include senior managers and all those executives whose appointments is subject to no objection by SAMA or other regulators. The Board of Directors shall ensure that the management has put in place elaborate systems and procedures and an effective oversight mechanism to ensure compliance with the SAMA Rules on Compensation Practices and the FSB Principles and Standards. 7 Structure of remunerations and compensations granted to senior executives: The Remuneration structures for various levels of employee s should be designed to promote effective risk management and achieve Remuneration and Compensation objectives. The mix of forms of Remuneration should vary depending on the employees position and role, and may include cash, equity and other forms of compensation. 28

29 Board of Directors Report The proportion of fixed and variable components of Remuneration for different business lines may be determined taking into account the nature and level of responsibilities of an employee, business area in which he/she is working, and the overall philosophy of the Remuneration Policy of the bank. The bank should ensure that the total variable remuneration does not limit its ability to strengthen the capital base. The Remuneration structure of employees working in control functions such as risk management, compliance, internal control, etc. should be designed to ensure objectivity and independence of these functions. In this regard, it should be ensured that performance management and determination of remuneration of such employees are not dealt with by any person working in/ associated with the business areas monitored by them. The determination of the bonus pool should take into account the overall performance of the bank whereas its distribution to individual employees should be based on performance of the employees as well as that of the business unit or division in which he/ she is working. There should, however, be no guaranteed minimum bonuses and similar other payments, other than an employee s salary, that are not based on performance. The bank may as part of the Remuneration Policy, provide deferment of a reasonable proportion of performance bonus with a minimum vesting period of not less than three (3) years. The proportion of the bonus to be deferred and the vesting period should be determined based on the nature of the business, its risks and the activities of the concerned employee. Where the Remuneration Policy provides for payment of a part of the compensation in shares, it should also lay down the criteria to be used for determining the value for allocation of shares. Furthermore, the payouts in shares should be subject to an appropriate share retention policy. Joining bonuses are not permitted, unless clearly aligned with longterm value creation and prudent risk taking. Any such payments should be related to performance achieved over time and designed in a way that does not reward failure. Joining bonuses should be at least linked to successful completion of probation period and where possible, deferring the joining bonuses, on terms similar to the deferred bonuses foregone from the previous company. The Bank should demand from their employees that they commit themselves not to use personal hedging strategies or remunerations and liabilityrelated insurance to undermine the risk alignment effects embedded in their remuneration and compensation arrangements. The Bank assures that there are no essential deviations between granted remunerations value and applicable remunerations policy. B) Remunerations and Compensations paid to members of BoD, Board committees, BACC in 2017: Board of Directors Report / Al Rajhi Bank Annual Report

30 Total after applying the policy Total Annual Remuneration Risk Committee No.Amount Governance Committee No. Amount NCC No. Amount ExCom No. Amount ACC No. Amount BoD No. Amount Name # 1 Mohammed bin Abdullah Al Rajhi (exmember) 2 10, , , , ,000 2 Sulaiman bin Saleh Al Rajhi (exmember) 4 20, , , ,397 3 Saeed bin Omar Alessaie (exmember) 4 20, , , ,397 4 Moaid Essa Alqurtas (exmember) 5 25, , , , , ,000 5 Ali bin Saleh Albarrak (exmember) 5 25, , , ,397 6 Sultan bin Mohammed Alsultan (exmember) 6 30, , , ,274 7 Abdullah bin Sulaiman Al Rajhi 7 35, , , , ,000 8 Saleh bin Ali Aba Alkhail 7 35, , , , ,000 9 Abdulaziz bin Khalid Alghefaily 7 35, , , , , Khalid bin Abdulrahman Alqwaiz 6 30, , , , Bader bin Mohammed Al Rajhi 6 30, , , , Alaa bin Shaikab Aljabri 7 35, , , , , Ibrahim bin Fahad Alghefaily (new member) 2 10,000 51,507 61,507 61, Raid bin Abdullah Al Tamimi (New member) 2 10, ,507 66,507 66, Hamza bin Othman Khoshaim (New member) 2 10, , ,507 81,507 81, Amin bin Fahad Al Sheddi (New member) 2 10, ,000 70,822 85,822 85, Abdullatif bin Ali Al Seif (New member) 2 10, ,000 70,822 85,822 85, Abdullah bin Ali Almaneef (New member) 1 5,000 19,315 24,315 24, Waleed bin Abdullah Tmairak 5 25, , , ,000 Farraj bin 20 Mansour Abuthnain 7 35, , , ,000 Total , , , ,143,288 6,123,288 5,962,945 30

31 Board of Directors Report Description Salaries and Compensations Allowances Periodic and Annual Rewards Incentives Schemes Any other inkind compensations or benefits paid annually or monthly Total Five senior executives (CEO & CFO included) 8,819,666 4,718,404 30,571,632 44,109,702 C) Remunerations and compensations paid to five senior executives who have received highest remunerations from the Company including CEO and CFO in ) Any penalty or punishment, precautionary measure, or precautionary attachment imposed on the Company by CMA or any other supervisory, regulatory, judicial authority. There is no fine imposed by CMA. Fines imposed by SAMA. Fiscal Year 2017 Violation Violation of SAMA supervisory instructions Violation of SAMA instructions related to customer protection Violation of SAMA instructions related to duediligence Violation of SAMA instructions related to service level of ATMs and POSs Violation of SAMA instructions related to due diligence in AML and TF Fines imposed by Ministry of Municipal and Rural Affairs. Resolutions number Total Amount of Fines in Saudi Riyal 15,864,000 10, , ,000 Violation Increase of building percentage for ATMs, lack of setbacks, lack of advertising posters on branches facades and ATMs, and nonexistence of licenses for some bank s locations. Fiscal Year 2017 Total Amount of Fines in Saudi Riyal 2,044,500 Board of Directors Report / Al Rajhi Bank Annual Report

32 20) Results of annual audit for internal control procedures in the Bank, in addition to feedback of Audit and Compliance on adequacy of internal control system: Internal Audit: The Bank s management is responsible for developing and maintaining an adequate internal audit system supervised directly by Board. The system has been developed to efficiently handle risks which may obstacle achieving the Bank s strategic targets. ARB s Management has adopted an integrated and adequate internal audit system meeting SAMA requirements. Adequacy of ARB s internal audit system are represented in the following: The bank has set up a general framework of governance, through which, the appropriate control can be imposed at the level of the bank. This framework determines the roles and responsibilities entrusted to all levels, including the Board of Directors and committees thereof and other management committees. The bank has a series of policies and procedures that govern its business which are subject to regular updates and reviews to verify their sufficiency and adequacy. Most of the Bank s operations are executed automatically through a sophisticated electronic system, which minimize errors and mitigate fraud opportunities. All work in general and major important decisions are supervised through committees created for this purpose and to ensure the sound conduct of business and protect the safety and quality of the Bank s assets. The bank has departments specialized in evaluating/monitoring controls, including the internal audit, compliance control, antifraud and various risks management. Existence of the effective Audit and Compliance Committee supervising the internal and external auditors, thereby enhancing their independence. This Committee receives regular and periodic reports about the activities of the units and activities subject to auditing. Regular supervision of the efficiency and adequacy of the Internal Control System based on an annual plan approved by the Audit and Compliance Committee. Aspects of Internal Control are regularly supervised by the external auditors and tested by SAMA. Annual Review of Adequacy of Internal Audit Procedures: in 2017, ARB exerted its best efforts to ensure adequacy of internal audit system procedures to comply with requirements of internal audit issued by SAMA. in addition, reviews of internal audit system efficiency in 2017 have reasonably assured adequacy of internal audit process and existence of necessary procedures to determine and handle high risks in ARB as well as its proper application which resulted in nonexistence of essential weaknesses affecting adequacy of internal audit environment. Based on the assessment of the general framework of the internal controls, the bank, in general, has an adequate internal control system which is supervised periodically. Based on the results of internal audit procedures adequacy assessment and continuous assessment of control processes applied by the management during the year, Audit and Compliance Committee concludes that the current internal audit system in ARB is sufficient and adequate and working properly under regular control. In addition, the management is continuously keen to enhance internal audit system. There is no conflict between recommendations of Audit and Compliance Committee and BoD regarding appointment, termination, determination of fees and assessment of ARB auditors. 32

33 Board of Directors Report 21) Details of ARB s social responsibility contributions: During 2017, the bank has executed many social initiatives, all of it depended on volunteering of employees. 101 initiative were executed in 21 cities and provinces in the Kingdom of Saudi Arabia (Riyadh, Qassim, Dammam, Makkah, Jeddah, Almadinah, Khobar, Tabuk, Abha, Jazan, Taif, Akihsa a, Hail, Yanbu, Jubail, Aljouf, Albaha, Alhoutah, Kharj, Hafr Albatin, and Majmaah) of employees have participated in execution of such initiatives (1269 male employees 365 female employees). Volunteering hours have reached 5753 hours in Total amounts paid to social and volunteering activity is SAR 15,121,040. The bank has provided such programs to diverse beneficiaries including disabled, orphans, poor people, special needs, and supporting antismoking fighting and financial awareness programs in high schools in Riyadh and attending many of international days to participate in educating society. 22) Historical information of General Assembly meetings during the fiscal year: Attendance Record Name Extraordinary AGM # 12 on Ordinary AGM # 28 on 19/03/ /10/ Abdullah bin Sulaiman Al Rajhi 2 Sulaiman bin Saleh Al Rajhi 3 Salah bin Ali Aba Alkhail 4 Mohammed bin Abdullah Al Rajhi 5 Abdulaziz bin Khalid Alghefaily (Representative of GOSI) 6 Bader bin Mohammed Al Rajhi (Representative of Mohammed Abdulaziz Al Rajhi & Sons Investment Co.) 7 Saeed bin Omar Alessaie 8 Ali bin Saleh Albarrak 9 Moaid bin Essa Alqurtas 10 Alaa bin Shakib Aljabri 11 Khaled bin Abdulrahman Alqwaiz 23) Description of ARB s important plans and resolutions and future forecasting for its business: ARB maintains its leading positon in retail as its share represents 36% of total granted loans to retails in Q The Bank intends to enhance its leadership in this sector by increasing finance portfolio in general and real estate finance in particular. The Bank intends to initiate investment in the latest technology to ensure providing the best banking services and products as well as expanding customers base by expanding branches network and electronic banking channels. Board of Directors Report / Al Rajhi Bank Annual Report

34 24) Information of any risks in the company (operational, finance, or markets risks) and management and monitoring policy for such risks: The most important types of financial risks identified by the Group are credit risk, liquidity risk, market risk, and operational risk. Credit risk is the risk that the counterparty to a financial transaction will fail to discharge an obligation causing the Group to incur a financial loss. Liquidity risk is about the Group being unable to meet its payment obligations associated with its financial liabilities when they fall due. Market risk includes currency risk, profit rate risk, and price risk. Market risk arises when the fair value or future cash flows of a financial instrument fluctuates due to changes in market prices. It arises on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events. Operational risk is inherent in most of the Bank s activities, this necessitates an integrated approach to the identification, measurement and monitoring of operational risk. The Credit & Risk Group headed by the Chief Risk Officer, is an independent function that is considered strategic to the Bank s objective of achieving prudent and effective risk management across the Bank. The function includes Credit Risk Management, Operational Risk Management and Enterprise Risk Management. The responsibilities and activities of this function are performed within the risk frameworks and policies approved by the Board of Directors. The Credit & Risk Group provides periodic reports to the Board of Directors and its related committees across a diverse spectrum of risks, the coverage of which includes credit risks and portfolio asset quality, internal controls and operational risks, liquidity risks, market risks, reputational risks, legal risks, etc. Adverse business or economic conditions may result in failure by counterparties and customers to meet their obligations in accordance with agreed terms. Therefore, AlRajhi Bank aims to balance its potential risks and returns by setting policies and procedures that help to identify and analyze risks faced by the Bank. This process essentially involves agreeing on various risk thresholds based on the Bank s risk appetite. These risk management practices are key to the Bank s ability to manage its capital effectively and in providing strong and sustainable return to shareholders. The Board Risk Management Committee supervises the Bank s risk management framework and monitors the Bank s performance within the boundaries established by its risk appetite and advises the Board on all risk management matters. It is chaired by an independent director. The risk management function operates within the regulatory framework for risk management set out by the Saudi Arabian Monetary Authority (SAMA). The Bank s Internal Capital Adequacy Assessment Process (ICAAP) encapsulates the Bank s risk management framework and sets out the Bank s risk appetite, risk management approach and primary risk controls. The ICAAP is an ongoing process and is reviewed and approved by the Board and submitted to SAMA on an annual basis. The Board Risk Management Committee reviews and recommends for the Board s approval the credit and provisioning policy, Operational Risk policies, Risk Appetite & Pillar III (Basel III) disclosure Policy, Market & Liquidity Risk, Information Security Policy. Our branch network engenders a loyal customer base, which generates a high level of stable demand deposits, with positive effects on the Bank s liquidity. Our Bank s retail customeroriented business model provides a diverse risk profile that underpins the Bank s financial performance and this is further supplemented by the Bank s strong and reliable corporate banking customerbase. 34

35 Board of Directors Report Going forward our Bank will retain focus on increasing its customer base by promoting its products for Retail, Small and Medium size enterprises (SME) and Corporate Banking sectors while ensuring that risk management practices continue to adhere with regulatory requirements, international standards and best practices. The risk management practices regulate the process of onboarding customers, issuance of credit and providing of a range of product and services to our customers. These characteristics enable the Bank to take a long term view and have confidence in lending through the business cycle. Credit Rating: Rating Agency Long Term Short Term S&P BBB+ A2 Fitch A F1 Moody s A1 P1 Capital Intelligence AA A1 25) Description for any interest of the Board Members and their families (wives & children) in securities of the Bank or any of its subsidiaries: Description of any interest, contractual papers and subscription rights of Board members and their relatives in Bank s shares or debit instruments. No Name of beneficiary No. of shares at beginning of year 2017 Ownership % No. of shares at end of year 2017 Ownership % Net Change % of change 1 Abdullah bin Sulaiman Al Rajhi 35,221, % 35,221, % 0.000% 2 Salah bin Ali Aba Alkhail 1,350, % 1,460, % 110, % 3 GOSI 165,667, % 165,667, % 0.000% Abdulaziz bin Khalid A. Alghefaily (Representative of GOSI until 13/11/2017) Mohammed Abdulaziz Al Rajhi & Sons Investment Co. Baser bin Mohammed Al Rajhi (Representative of Mohammed Abdulaziz Al Rajhi & Sons Investment Co.) Khaled bin Abdulrahman Al Qwaiz 0.000% 0.000% 0.000% 33,343, % 33,343, % 0.000% 14, % 11, % 3, % 1, % 1, % 0.000% 8 Alaa bin Shakib Al Jabri 6, % 6, % 0.000% 9 Mohammed bin Abdullah Al Rajhi 1, % Representation ended on 13/11/2017 Board of Directors Report / Al Rajhi Bank Annual Report

36 10 Sulaiman bin Saleh Al Rajhi 3,519, % Representation ended on 13/11/ Saeed bin Omar Alessaie 2,115, % 12 Maoid bin Essa Alqurtas 1, % Representation ended on 13/11/2017 Representation ended on 13/11/ Ali Saleh Albarrak 10, % Representation ended on 13/11/ Ibrahim bin Fahad Alghefaily Representation starts on 14/11/ , % 15 Raid bin Abdullah Al Tamimi Representation starts on 14/11/2017 1, % 16 Public Pension Agency Representation starts on 14/11/ ,295, % 17 Abdullatif bin Ali Alseif (Representative of Public Pension Agency since 14/11/2017 Representation starts on 14/11/ , % 18 Hamza bin Othman Khushaim Representative of )GOSI since 14/11/2017 Representation starts on 14/11/ % 19 Amin bin Fahad Alshiddi Representation starts on 14/11/ % Description of any interest, contractual papers and subscription rights of Senior Executives and their relatives in Bank s shares or debit instruments. No Name of beneficiary No. of shares at beginning of year 2017 Ownership % No. of shares at end of year 2017 Ownership % N e t Change % of change 1 2 Abdullah bin Ali Alkhalifa Christopher Mark Macleen 0.000% % % 0.000% % % 36

37 Board of Directors Report 26) Bank Requests for Shareholders: Sr. Request Date Request Reasons /01/01 Updating shareholders records /02/01 Updating shareholders records /03/01 Updating shareholders records /03/16 Preparing to Extraordinary General Assembly /03/19 Preparing to Extraordinary General Assembly /03/20 Dividend distribution /04/02 Updating shareholders records /05/03 Updating shareholders records /06/12 Updating shareholders records /07/03 Updating shareholders records /07/19 Preparing a file for shareholders eligible for dividend of H /09/11 Updating shareholders records /10/01 Updating shareholders records /10/18 Preparing to Ordinary General Assembly /12/04 Updating shareholders records 27) Transactions with Related Parties: The Bank has transactions with related parties which subject to controls of Banks Control Law and instructions issued by SAMA. Nature and balances of related parties transactions for the year ended December 31, 2017 are as follows (all amounts are in thousand Saudi Riyal): Related Party Trading Potential Obligations Current Accounts Other Liabilities Contributions Receivable Debtors vs Liabilities Banks Balances Board Members 39, Companies and establishments guaranteed by Board members Other main shareholders 1,585,464 16,334 3,308,232 26,067 Associates 121, , ,236 Board of Directors Report / Al Rajhi Bank Annual Report

38 Revenues and expenses related to related parties transactions for the year ended December 31, 2017 (all amounts are in thousand Saudi Riyal): Item Income from Finance & Other Income Mudaraba Fees Buildings Rents & Expenses Air Tickets Contributions Policies Written Incurred and Reported Claims Paid Claims Board members Remunerations Amount 194,190 49,860 4,253 1,131 1,339,545 1,139,983 1,023,048 5,418 Information of 2017 transactions and contracts in which the Bank is a party and any of Board members or senior executives, or any of their relatives has an interest (all amounts are in thousand Saudi Riyal): 1 Commercial Contracts # Related Party 1 Fursan Travel & Tourism Co. Party with direct/indirect interest Abdullah bin Sulaiman Al Rajhi 2 STC Amin bin Fahad Alshiddi 3 STC Amin bin Fahad Alshiddi 4 STC Amin bin Fahad Alshiddi 5 Arabian Internet and Telecom Services Amin bin Fahad Alshiddi Position in ARB Board member Board member Board member Board member Board member Type of Relation with related party Owned by Board member Senior Executive in the company Senior Executive in the company Senior Executive in the company He has an influence on company s decisions as he is a senior executive in parent company (STC) Travel tickets for employees contract Integrated communications services & solutions contract SMS services Integrated communications services & solutions contract rented lines PoSs devices connection to network Contract Internet Services Contract Pricing contract and annually renewable Pricing contract for two years Pricing contract for three years Pricing contract and annually renewable Annual contract Standard conditions without preferences Standard conditions without preferences Standard conditions without preferences Standard conditions without preferences Standard conditions without preferences Relation Type Period Conditions Transactions/ Contracts Amount 4,253 52,660 58,392 20,000 1,080 38

39 Board of Directors Report 2 Rental Contracts # Related Party Party with direct/indirect interest 1 Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily Position in ARB Board member Type of Relation with related party A Board member in the company Relation Type Period Conditions ATM site rent contract 5 years annually renewable for similar period Rent contract 45 Transactions/ Contracts Amount 2 Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily 3 Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily 4 Panda Retail Co. Abdulaziz bin Khaled Ali Alghefaily 5 Mohammed Abdulaziz Al Rajhi & Sons Investment Co. 6 Mohammed Abdulaziz Al Rajhi & Sons Investment Co. 7 Mohammed Abdulaziz Al Rajhi & Sons Investment Co. 8 Abdullah bin Sulaiman Al Rajhi 9 Abdullah bin Sulaiman Al Rajhi 10 Al Rajhi Real Estate Development Co. Bader bin Mohammed Abdulaziz Al Rajhi Bader bin Mohammed Abdulaziz Al Rajhi Bader bin Mohammed Abdulaziz Al Rajhi Abdullah bin Sulaiman Al Rajhi Abdullah bin Sulaiman Al Rajhi Waleed Abdullah Almoqbil 11 STC Amin bin Fahad Alshiddi 12 STC Amin bin Fahad Alshiddi Board member Board member Board member Board member Board member Board member Board member Board member Senior executive Board member Board member A Board member in the company A Board member in the company A Board member in the company A Board member in the company A Board member in the company A Board member in the company Direct contract Direct contract A Board member in the company A senior executive in the company A senior executive in the company ATM site rent contract ATM site rent contract ATM site rent contract Southern Region Management Building rent contract Contract for renting Direct Sales Office in Abha ATM site rent contract ATM site rent contract Albatha a Exchange & remittance Center lease ATM site rent contract ATM site rent contract ATM site rent contract 5 years annually renewable for similar period 5 years annually renewable for similar period 5 years annually renewable for similar period 10 years annually renewable for similar period 9 years annually renewable for similar period 5 years annually renewable for similar period 3 years annually renewable for similar period 3 years annually renewable for similar period 10 years annually renewable for similar period 2 years annually renewable for similar period 3 years annually renewable for similar period Rent contract 25 Rent contract 35 Rent contract 40 Rent contract Rent contract Rent contract Rent contract 90 Rent contract Rent contract Rent contract 30 Rent contract 30 Board of Directors Report / Al Rajhi Bank Annual Report

40 3 Insurance Contracts # Related Party Party with direct/ indirect interest Position in ARB Type of Relation with related party Relation Type Period Conditions Transactions/ Contracts Amount 1 Al Rajhi Co. for Cooperative Insurance Abdullah bin Sulaiman Abdulaziz Al Rajhi Board member A Board member in the company Comprehensive insurance for banks, properties, work disruption, managers and executives Annual contracts Standard conditions without preferences 6,701 2 Al Rajhi Co. for Cooperative Insurance Abdullah bin Sulaiman Abdulaziz Al Rajhi Board member A Board member in the company Comprehensive insurance for cars Annual contracts Standard conditions without preferences 1,173,479 28) Statement of paid and payable regular payments for Zakat, taxes, fees, or any other dues and not paid until the end of the financial period along with brief description and reasons: 2017 Reasons Description Paid Payable until the end of the financial period (not paid) Brief Description Zakat 155,000,000 Paid Tax 10,531,587 Paid GOSI 251,739,062 Paid Visa and Passports Costs Ministry of Labor Fees 858, ,562 Paid Paid 40

41 Board of Directors Report 29) Application and nonapplication of Corporate Governance Regulations with reasons of nonapplication: The Bank applies all provisions of Corporate Governance Regulations issued by CMA, excepting the following provisions: Article Requirements Reasons of not applying Article (41) Clause E Article (54) Clause B Article (87) The Board shall carry out the necessary arrangements to obtain an assessment of its performance from a competent third party every three years. (Guiding Paragraph) The chairman of the audit committee shall be an Independent Director. (Guiding Paragraph) The Ordinary General Assembly, based on the Board recommendation, shall establish a policy that guarantees a balance between its objectives and those of the community for purposes of developing the social and economic conditions of the community. (Guiding Article) The assessment is conducted internally on annual basis. A NonExecutive Board Member in ARB presides Audit Committee and he has been selected based on his qualifications which are found appropriate to the position. ARB has a Social Responsibility Policy approved by BoD. 30) Acknowledgements of Board of Directors: According to the available information, auditor s report, and current market data, the Board of Directors acknowledge the following: Accounts record have been prepared properly. Internal control system has been prepared based on proper fundamentals and executed efficiently. There is no doubt about the Bank s ability to continue its business. 31) Conclusion: The Board of Directors is pleased to express their pride in the positive results achieved by the Bank in On this occasion, the Board would like to convey its appreciation to the Custodian of the Two Holy Mosques, Crown Prince, and our wise Government. The Board would also like to express its sincere appreciation to the Ministry of Finance, Ministry of Commerce & Investment, Saudi Arabian Monetary Authority (SAMA) and the Capital Market Authority (CMA) for their consistent cooperation and support in developing the banking sector, which manifests itself in the reinforcement and growth of the national economy. The Board would also like to seize this opportunity to express its gratitude and appreciation to the honorable shareholders, customers and correspondents for their support, trust and cooperation, which has led to the achievement of further advancement and prosperity for the Bank. Last but not least, the Board would like to present its sincere appreciation to all the Bank employees for their loyal efforts and devotion in accomplishing their obligations and tasks. In addition, the Bank thanks Sharia Board members for their loyal efforts and effective contributions to the Bank s business. Board of Directors Report / Al Rajhi Bank Annual Report

42

43 Summary of Activity

44 Activity Summary Strategic direction: As one of the most important Islamic banks in the world, Al Rajhi Bank focuses on sustainable growth. Sharia Group: An Independent Sharia board was established in the Bank since it launched, with a membership of a number of Sharia scholars. The Sharia board is established and its regulations were approved by the General Assembly to ensure the subordination all banks act for the approval of the board. The Sharia board aims to achieve the commitment of the Bank to the provisions of Islamic sharia law in all of its business and activities. In 2017, the Sharia board held (47) meetings, and issued (42) decisions and (260) guidelines. In order for the Sharia board to achieve its objectives, the Sharia Group was established, consisting of two departments: 1. Sharia Board Secretariat Department: This Department prepares and studies the products, agreements and contracts received from various groups and departments in the Bank, and it submits the Sharia research and studies required for submission to the Sharia Board. It prepared more than 270 subjects in Sharia Supervisory Department: This Department supervises the Bank s business regarding applying the decisions and instructions of the Sharia Board and committing to them. By Sharia auditing through automated systems and field visits in accordance with the professional custom. It prepares the annual plan and operational quarterly plans, and identifies goals, tools and methods of auditing, and updates the Auditing Forms by Sharia standards and controls issued by the Sharia Board on a regular basis. The number of auditing standards is (570). Sharia Group adopted the preparation of an educational site for the employees, which aims at clarifying the Sharia aspects of the ARB products and services. Furthermore, the Sharia Group received (209) phone inquiries, and (325) mail inquiries. In Addition, the Sharia Group prepared a number of educational manuals, provided, in collaboration with the training center, (4) Sharia courses dedicated for the new employees, and held (60) workshops for branch managers. Retail Banking Group: Retail Banking Group offers a full range of financial products and banking services to individuals, such as current accounts, personal finance, and housing and auto loans. These products are available in bank branches across the Kingdom. Because The Bank is proud of its Private customers, thus its focus on developing the finance solutions to meet our customers Aspirations through its various service centers in Riyadh, Jeddah, Dammam, and Makkah with extended working hours until 9 pm. In addition to a dedicated Ladies Private Center at Riyadh. 44

45 Summary of Activity Besides, with stable steps, the Bank increased & developed number of Affluent lounges with contemporary design that fit the expectations of our valued customers. There are now more than 300 Affluent lounges all across the Kingdom. We have also increase the number of relationship managers for Affluent ladies through our 60 dedicated Affluent Ladies sections ready to serve them. As a part of the expansion of its network, the Bank launched 14 new branches 8 Silah branches and 18 ladies branches/sections. The branches network expansion is part of the Bank s strategy to expand locally in order to reach customers in all regions and areas of the Kingdom. It also aims to keep up with the development in the Banking sector in the Kingdom through designing the standard branches which meet all clientele needs. Tahweel Al Rajhi is an important element of the Retail Banking Group, through which the Bank provides money transfer services, whether at the local or global level, exchanges currencies and issues cheques. In addition to many other premium services which keep pace with our passion to meet all our customers needs and provide services which exceed their expectations. Moreover, Tahweel Al Rajhi has developed new electronic channels making its services more convenient to the customers and to raise the level of service quality like ERemittance card and Tahweel Mobile application which was launched in 2017 Tahweel Al Rajhi is proud to be the most important and largest leading organization in financial transfers in Saudi Arabia. By dominating the largest market share in the Saudi market as the best choice of customers from different segments, where all nationalities in the Kingdom were served in more than 30 currencies via more than 120 partners and more than (400,000) delivery points around the world to ensure the delivery of money quickly and with complete safety. Tahweel Al Rajhi network was developed to cover most parts of the Kingdom as the largest money transfer network in Saudi Arabia with over 233 centers offering many competitive banking services in distinctive contemporary style matching modern technology as service is nonstop around the clock. The Bank maintained its leadership position in terms of ATMs network size, diversity and spread and the number of transactions carried out where the number of ATMs is around 4,803 to meet customer needs for cash withdrawals, cash deposits, transfers, bill payment, governments payments and other transactions. Number of Cash Deposit ATM exceeded 1000 and value of deposits reached an average monthly of 13 Billion SR, the bank is continuing the task of replacing old ATM with new ATM that have the latest technology in this field. The bank is expanding in availing to customers more than 160 selfservice machines Assra aa in the branches, this number of selfservice machines is considered to be recorded at global level, these machines are available to customer on 24 hours basis to pint ATM cards and checque books and statements, and IBAN inquiry and updating ID expiry date without the need to visit the branch. The bank has launched foreign currency exchange ATMs, which uses the latest technology and use a large number of currencies uses and the use of fingerprint technology for transit passengers. It allows the withdrawal of cash in six different currencies using various bank cards. and the cash deposit for Al Rajhi customer account in 8 different currencies. And for transit passengers they can use fingerprint technology exchange eight different currencies. This service will improve customer satisfaction levels and contribute to higher migration of currency exchange transactions to electronic channels and less queues on currency exchange counters. Summary of Activity / Al Rajhi Bank Annual Report

46 The bank has installed 125 metal coins deposit machines where customer can directly deposit metal coins to their banking accounts. The number of POS reached more than 74,612 devices and this year recorded transactions worth more than SR 67 billion. The Bank is still the market leader taking over 34% share of the POS market in the Kingdom. Corporate Banking Group: The Corporate Banking Group continued to build on its foundations to prepare for the future growth through various strategic initiatives which resulted in positive asset growth as opposed to negative growth in the market. During the year, group s net income growth registered the highest ever in the recent past, which aided in increasing its share of contribution to the net income of the Bank. The group won some key mandates and in addition to closing a few high value bilateral and syndicated deals. The Banks leadership position in both Payroll cards and Cash Deposit Machines was further strengthened by adding more during In order to cater to the sophisticated needs of clients, especially Large Corporates, new product and services offerings were launched, which included Securitization and Corporate Liquidity Management solutions. The Bank s talent pool were further augmented by making key hiring s in both product and segment lines. The group improved its Governance standards and Compliance culture through a series of measures, remediation exercises, process changes which led to increased efficiencies and enhanced controls. With an aim to enhance customer experience, first time in the group, an NPS framework was developed and rolled out to measure the satisfaction levels and to identify areas for improvement of its clients. Small and Medium Enterprises: We have made significant progress in 2017 in developing and executing our SME strategy strongly aligned with the government 2030 vision. Our strategy leverages on ARB s core strengths as a leader in Islamic banking with an extensive branch network and broad client base, allied with a focus on providing clients high quality products and services through the most efficient channels. This includes the establishment of a flagship SME center`s cross the regions which we plan to complement by dedicated SME representation at conveniently located branches across our network. Our clients will also benefit from a dedicated SME call center and apply online function which has been launched early Recognizing that our clients are increasingly sophisticated we are developing an SME specific internet channel to further simplify the basic daily transaction needs to enable our clients to focus on their core business. Our commitment to the segment is further reflected in our investment in the best local talent, more than doubling our front line sales and launching a comprehensive graduate development program for future growth. During this critical phase, we have remained focused on supporting our clients in increasingly tough market conditions as demonstrated by the record growth achieved in our financing portfolio. It is our ambition to be the SME bank of choice for our clients and in 2018 we will build on the strong foundations established to hone and broaden our product base, expand our presence, improve our channel delivery and develop our talent to exceed our client expectations. 46

47 Summary of Activity Treasury & Financial Institutions Group: Al Rajhi Bank s Treasury and Financial Institutions Group is responsible for managing the bank s financial position, including assets, liabilities and equity in the light of board of directors approved plan, to accomplish a successful structuring of maturities and liquidity, investment efficiency, exchange rates and financial hedging and protection solutions. On the other hand, the Financial Institutions management is building and managing effective relationships with other financial institutions around the world, and contributing to the bank s competitive presence locally and internationally, and providing our clients with the best banking services from the Saudi leading bank in Islamic banking sector. Treasury and Financial Institutions Group works perseverance to create innovative solutions meeting our client satisfaction, and achieving top service levels to increase our clients profits and add value to their business. Treasury and Financial Institution Group s business keeps growing to contribute and enhance the bank s position as one of the top participants to Shariahcomplaint assets investments both locally and internationally. This position and leadership contributed to enabling the Group to develop relationships with more than 220 financial institutions around the world. Treasury and Financial Institutions Group s services are provided by a professional teamwork of high professional experience and skills. Treasury and Financial Institutions Group always strive on developing its business and continues to create new prospects by offering Shariahcomplaint innovative financial products and services, in order to play a greater role in enhancing growth and meeting clients needs. International Business Group: As a leading bank in Saudi Arabia and one of the pioneers of Islamic Banking, Al Rajhi Bank has an international presence comparable to other major international leading banks all over the world. The goal of our international work is to contribute as an Islamic Bank to the promotion and development of Islamic banking in countries we are present by offering innovative banking products. Al Rajhi Bank Malaysia In 2017, as an extension of the balanced performance policy, Al Rajhi Bank achieved good growth in its financial portfolio. The bank also launched several products to serve customers through a network of branches and ATMs covering most major areas. Al Rajhi Bank Kuwait Branch Al Rajhi Bank in Kuwait achieved excellent growth in its transactions in The Bank s assets in the sectors of retail and corporate had steady growth. The Branch has launched several new products to meet the Bank s customer needs and is looking forward in 2017 to strengthen its position in the Kuwaiti highly competitive market. Al Rajhi Bank Jordan Outstanding performance continued during 2015, and Al Rajhi Bank in Jordan continued its previous success by offering all banking services and innovative products to customers that Summary of Activity / Al Rajhi Bank Annual Report

48 are compatible with the provisions of Islamic Sharia law. The financing portfolio has made excellent growth in 2017 and our branch network in Jordan has expanded to reach six branches. Governance and Legal Group: The Governance and Legal Group provides its services in four main areas which are Governance, Legal Affairs, Board Secretariat and Shareholders Assembly. The group has worked to provide the expected added value to the Bank s business, it has developed numerous procedures aimed to enhance the control environment, reduce errors and risks, protect the Bank s rights, and develop policies and procedures to abide by applicable laws and regulations related to business, taking into consideration best global practices. In Governance area, the Group has developed a number of policies, practices and procedures related to governance framework within the Bank, it has updated the Bank s Corporate Governance Manual and developed the Delegation of Authorities (DoA) matrix for board and management levels in an effort to comply with the requirements of different regulators, it has also monitored the performance of different Management Committees and ensured having an approved charter for each of them, It has also monitored the mechanism of writing and approving group wide policies and procedures adopted by the Bank and its international branches, and ensuring they are updated continuously and are in line with their preparation requirements. In Board Secretariat area, the Group has developed work mechanisms and processes through utilizing Board Portal for BoD and BoD committees meetings and taking into consideration the regulations and laws applicable in this regard. In addition, BoD Secretariat continuously archives all documents related to BoD electronically and schedules its meetings. The Group has continued to provide its services through Legal Affairs by providing legal and advisory services as an internal consultant to the Bank s groups to enhance the products and services legal aspects. In addition to representing the Bank before courts and judicial committees to defend its rights to the best optimum possible. In Shareholder Assembly area, the Group has continued to maintain its performance and professional communication while implementing formal regulations and abiding by their rules. In addition to the disclosure of mandatory requirements and distributing reports and declarations which enable the investors to review the bank s performance on a regular basis. Human Resource Group: During 2017, Human Resources Group successfully implemented the approved People Agenda and HR KPIs aligned to the Bank s overall strategy and HR goal to Become an Employer of Choice. Key achievements in 2017 included: The hiring of 671 male and female new employees using enhanced selection tools and methods Launched 2 new Graduate Development programs and continued to participate in Career Days at Universities and Institutes to attract young Saudi Talent Continued efforts to strengthen Saudization initiatives to achieve 91.8% We invested heavily enhancing the Bank s female workforce and achieved a 10% increase on female to male ratio compared to last year 48

49 Summary of Activity Designed and launched structured Career Development Paths (CDPs) to provide development and career growth guidance to employees Delivered Learning and Development initiatives that are aligned with Al Rajhi Bank Academy and Career Development Paths; covering Control & Governance, Retail Banking, Soft Skills and Leadership development and Technical skills development to reach 65,000 training days The successful launch of these initiatives resulted in maintaining employee attrition rate and the high performer resignations within set targets The employee engagement score also recorded a significant increase in the second half of the year thereby reassuring employees confidence and acceptance of the initiatives implemented by HR We also received recognition as a GCC Best Employer Brand Awards for 2017 for the 2nd consecutive year and Best Graduate Program in KSA Banks The overall Human Resources proposition and the People Agenda is designed, developed and implemented with the key aim of achieving the critical goal of building an engaged and committed workforce for Al Rajhi Bank in support of driving the aspired results, thereby Becoming an Employer of Choice. Shared Services Group: The Shared Services Group at Al Rajhi Bank consists of several key departments that work together in a professional, coordinated and flexible manner through employment placement and various operational mechanisms, in order to develop, maintain and operate the Bank assets and services provided to the customers and employees by the highest degree of efficiency and quality. Information Technology (IT) Department: A department that is responsible for all Bank technical assets of all types, whereas its top responsibility is the establishment and implementation of policies and technical measures; as well as manage, support and control all the infrastructure components and data in a secure way. It is also responsible for the developing, testing, issuing, maintaining and supporting of more than seventy systems to serve customers and employees. During the year the Information Technology applied more than forty initiatives between issuing and updating software: Payment Service Hub ( PSH ) Call Center CRM Customer onboarding process OFSAA Hyperion JP Morgan requirements Deployed new Mobile Banking application Blockchain for Jordan Changed Data Analytic Tool and Process It contributed directly to increased profitability; improve customer expectations; ensure compliance with the regulations and instructions of the local and international lawmakers. It also worked on applying the best international standards relating to the transactions and technical programs to improve the internal control environment. Summary of Activity / Al Rajhi Bank Annual Report

50 Operations Excellence & Governance: In accordance to the Bank s vision of Digital Leadership and Excellence, a new department Operations Excellence has been formed in FY From January2018, another units Governance and Quality has been teamup with Operations Excellence Department to be called as Operations Excellence and Governance. The department has a welldefined objective to improve operational efficiency, Reduce Error Rate, Reducing Operations Cost, Process ReEngineering, Process Automation and Optimization & Manage Services. In align to the objectives and vision, the department has started with: Robotics Process Automation: Improve operational efficiency by automating the existing processes in the bank Reduce TAT for the processes and offer a 24X7 customer experience Improve customer satisfaction by on time response with reduced errors Better utilization of bank employees repetitive tasks to more creative tasks Cost Reduction Manage Services: Aligning to the bank strategy of associating with more global organizations to support business Reduce cost by managing the team instead of owning a team Better control and reduced risk of implementing new technologies in the bank Empowering resources with new disruptive skills leading to innovation Process ReEngineering: Reduce the number of redundant processes in the bank Make processes more efficient and effective for the bank Align processes with the best practices and global standards Feminization of the workplace with more opportunities for women employees Governance: Handling the Governance, Risk and Compliance requirements across the Share Service Group. Implementing the Bank Committees Action across the Share Service Group. In 2018 we will focus on Reducing the Share Service Group Audit Issue by establishing compensation force team work from SSG and IA as a transformation project. Enhance the SSG Governance Champions process. Enhancing the GRC Tracker and Monitoring process across the Share Service Group by centralizing and align the governance reports. Quality: To assess the effectiveness/compliance of define policies/processes within credit underwriting, loan administration and operations. To Address system gaps, by recommending enhanced controls within the Loan Origination system. 50

51 Summary of Activity To Coordinate with Business and IT for ensuring the product pricing strategy is compiled to as per approved product policy. To address all customer complaints in CRM, related to Credit Operations. Contact Center Department: Contact Center is responsible for answering customer inquiries, requests and resolving complaints received through customer communication channels, also responsible for the IVR service of retail, corporate and point of sale. Moreover Contact Center aims to improve and enhance after sale services and customer experience by providing the service to customers through electronic channels and enabling additional services to them, also to rate customer satisfaction score and respond to their needs and suggestions. In 2017 more than 72 million calls were received with customer Net Promoter Score (NPS) of 34% and service requests were done of which 97% of the service requests were completed within SLA. Moreover, over 150 thousand complaints resolved of which 93% of these complaints were resolved within SLA was a year overflowing with accomplishments by delivering multiple new projects and services through latest improved technology and the necessary trained human resources, such as: Introducing Tahweel customers phone banking service for Tahweel Center customers, Eremittance card customers and Payroll cards Launched phone banking service for Small & Medium Enterprises and to provide point of sale services Enabled beneficiary activation service through (Call Back) Provided the service of transferring between a credit card and current account Partial advance payment for finance Cheque book issue service Business Operations and Support Department: Business Operations and Support ensure the smooth delivery of banking services not only to our Bank s customers but all society in general. It is mainly responsible for undertaking operational activities of all the business lines within Al Rajhi Bank. Nature of department is quite diverse and following are some of the key activities undertaken: Managing operations for ATM, Self Service Kiosks, Cash Deposit Machines and Point of Sale (POS) Cash collections and dispatch to Branches, Tahweel Center & Retailers Handling domestic and international payments Back office for Treasury activities Processing of trade transactions Executing lending deals for Corporate, Mid Corporate and SME customers Support all consumer products operations e.g. Watani, Car Lease Credit Cards and Real Estate Archiving Documents and ensure their authenticity and quality and compliance with the regulators instructions Cheques clearing and cheques collection Summary of Activity / Al Rajhi Bank Annual Report

52 Our department focus is on improving process efficiency and improving control environment. During the year, Business Operations and Support have succeeded in optimizing the cash management across all channels, improved the ATM Availability to meet and exceed SAMA service levels, reduced turnaround for products credit approvals and further enhanced payments sanction screening processes. As part of strategic initiatives department has undertaken automation of various processes and now we use robotics for various repetitive processes. Specialized vendors services are being utilized to undertake noncore activities e.g. ATM Monitoring, Reconciliation, Document scanning and archiving. All these strategies have not only improved services delivery and but also enhanced customer experience. New payments system has been implemented. Cash Management solution is in the process of being implemented which will help our Bank better manage the cash within the Bank. Administration Service Management It is a department that is responsible for all the Suppliers management who provides Services for Al Rajhi Bank, in respect of Bidding, Contracting, Bills, and the Purchase Order as well. Moreover, the Administration Services Management have applied the best known systems last year. Also, the Administration Services Management provides all the safety and security for all the Al Rajhi Bank properties by applying the great technology and policies to secure the work continuity. Compliance Group: Al Rajhi Bank s compliance group continues to enhance the Bank s reputation and maintain its leadership position in the banking sector both locally and internationally. In the interests of shareholders and depositors, and by keeping pace with the increasing and accelerating regulatory requirements of local and international legislators and regulators, the compliance department uses stateoftheart technical systems at international standards to implement guidelines to maintain a high level of compliance with these regulations and instructions in pursuit of our mission to adhere to global standards. This adherence is carried out through four key elements: First: Governance Governance is emphasized within the department and its role is activated through the development of the department s organizational structure in line with international standards, enabling it to reach all Bank departments and adopting master policies between the General Administration and the international branches (Jordan and Kuwait). Second: Mechanisms of Action Establish and develop a monitoring program and risk assessment plans to determine the level of compliance in all sectors of the bank and to develop the management of women s compliance to fulfill all compliance department and unit requirements including branches and women s departments. This is in terms of: promoting cooperation culture and awareness with the training department, field visits and inspections, handling suspicious money laundering cases and terrorist financing at these women s branches, and the development of the mechanism to control international branches, which include the application of the compliance department requirements and the implementation of legislators requirements. Third: Systems To update, develop and establish programs and systems for controlling money laundering 52

53 Summary of Activity and terrorist financing, supervising the work of Bank s departments responsible for embargoes and customers evaluation to cover all sectors of the bank in line with the global developments in this field. In addition to using the latest automated systems to monitor the bank s compliance level and to provide a broader and comprehensive database of business sectors. Fourth: Human Cadres As part of the compliance department strategy, which includes providing the department with the best qualified cadres within the national local market in the areas of compliance and AML / CFT. The current strategy also aims to build and develop the existing department staff and to provide them with the latest training courses on an ongoing basis to improve efficiency and readiness around Issues of compliance and combating money laundering and the financing of terrorism and all their developments. Also, in cooperation with the training department at the bank, the department is committed to provide the bank with qualified trainers to conduct several workshops, according to specialization, which aims to promote a culture of compliance to everyone. On the other hand, the Compliance Department s annual program of 2018, is committed to develop its operations according to the latest local and international standards, in line with the bank s strategies for the coming period. Internal Audit Group: The primary objective of the Internal Audit Group (IAG) is to provide an independent and objective assurance to the Board of Directors and senior management on the quality and effectiveness of bank s internal control, risk management, business process and governance culture. The IAG also reviews the reliability of information, compliance with policies and regulations, safeguarding of assets, best utilization of resources, established operational goals and objectives. To effectively carry out their duties, IAG staff has unrestricted access to all records and premises. To ensure independence, the Bank has a Group Chief Internal Auditor (GCIA) who reports administratively to the CEO and functionally to the Board Audit & Compliance Committee (BACC). IAG scope of work includes KSA and an oversight responsibilities on the Bank s local and overseas subsidiaries and branches. To effectively achieve its objectives, IAG develops annual and strategic audit plan based on the outcome of the risk assessment covering the auditable functions and products. The annual audit plan is approved by BACC who monitors level of implementation of such a plan throughout the year. Al Rajhi Bank s 2016 Social Responsibility Activities In 2017, Al Rajhi Bank initiated several social responsibility programs that included a series of volunteer work in participation with Bank employees. The Bank initiated 101 social responsibility programs in 21 cities (Riyadh, Qassim, Dammam, Makkah, Jeddah, Madinah, Khobar, Tabuk, Abha, Jizan, Taif, Al Hasa, Hail, Yanbu, Jubail, Al Jawf, Al Baha, Al Houta, Kharj, Hafr Al Baten and Majmaa). These programs were carried out by 1634 employees (1269 males, 365 females) who covered 5753 hours of work, while the total payments for social responsibility programs and volunteer work amounted to SR 15,121,040. The bank was keen to diversify those who benefited from these programs such as the disabled, the orphans, the unfortunate, and those with special needs. In addition to supporting antismoking programs and raising financial awareness in secondary schools in Riyadh. The Bank was also keen to be present and participate in international days to raise awareness and spread knowledge within the community. Summary of Activity / Al Rajhi Bank Annual Report

54 List of Social Responsibility Activities: Activities Region Month 1 World Cancer Day Program for kids Riyadh February 2 World Cancer Day Program for kids Dammam February 3 World Cancer Day Program for kids Qassim February 4 Anaiza Foresting Program Qassim February 5 Exhibition of charities at the ladies branch in Buraidah Qassim February 6 Sponsorship of productive families Madina March 7 Young ladies Businessmen Forum Qassim March 8 Down s syndrome Program Riyadh March 9 Down s syndrome Program Jeddah March 10 Down s syndrome Program Madina March 11 Down s syndrome Program Ehsa March 12 Young Reader Program Riyadh March 13 Volunteer visit to the Association of People with Disabilities Qassim Rass March 14 Kids coloring Booklet Annula Report Riyadh March 15 World Oral Health Day Riyadh March 16 Blood Donation Campaign Riyadh April 17 Sponsorship of the care for the diabetes awareness camp for children Riyadh April 18 Repaint houses president and general managers Riyadh April 19 Arab Week of the Deaf Abha April 20 Arab Week of the Deaf Madina April 21 Arab Week of the Deaf Riyadh April 22 Rehabilitation of disabled families Riyadh April 23 Rehabilitation of disabled families Dammam April 24 Rehabilitation of disabled families Mecca April 25 Young Readers Jeddah April 26 Young Readers Dammam April 27 Launching responsibility programs with Qassim University Qassim April 28 Mass marriage Society of motor disabilities Riyadh May 29 Young Reader Taief May 54

55 Summary of Activity 30 Young Reader Ehsa May 31 Green Future Taief May 32 Green Future Jubail May 33 Supporting the food basket for the Association of righteousness in Mastora Mastura May 34 Supporting of the Kafel foundation in the holy land Mecca May 35 Supporting of the Kafel Orphanage Foundation Mecca May 36 Support the poorest families in Shuroorah Chroura May 37 Supporting the Association of Ikhaa Marriage of orphans Riyadh May 38 Supporting the association of Nikaa with 1000 treatment student cards Riyadh May 39 Supporting Binaa Association Reconstruction of orphanage homes Khobar May 40 Supporting Binaa Association Home furnishing program Khobar May 41 Payment of home rents for the prisoner s family Dammam May 42 Developing and training Quran teachers Qonfuda May 43 Sponsorship of the ceremony of orphans graduates Hafr Battain May 44 Awareness Campaign World Day of NonSmoking Riyadh May 45 Ramadan Activity Iftar Program Riyadh June 46 Ramadan Activity Iftar Program Mecca June 47 Ramadan Activity Iftar Program Dammam June 48 Ramadan Activity Sponsoring Iftar program for Kafel orphanage Mecca June 49 Ramadan Activity Sponsorship of iftar program at Prince Sultan humanitarian city Riyadh June 50 Young Reader Riyadh August 51 Distribution of Wheelchairs Hail August 52 Distribution of Wheelchairs Jouf August 53 Distribution of Wheelchairs Tabuk August 54 Distribution of Wheelchairs Baha August 55 Financial leadership program for the young Madina August 56 Green Future program Riyadh August 57 Training Course for Orphans Abha September 58 Training Course for Orphans Ladies Abha September 59 Training Course for Orphans Khobar September 60 Training Course for Orphans Ladies Khobar September Summary of Activity / Al Rajhi Bank Annual Report

56 61 Training Course for the disabled Special abilities Khobar September 62 Training Course for the disabled Ladies Khobar September 63 Training Course for Orphans Qassim Buraida September 64 Training Course for Orphans Ladies Qassim Buraida September 65 Training Course for the disabled Qassim Buraida September 66 Training Course for the disabled Ladies Qassim Buraida September 67 Training Course for the disabled Jeddah September 68 Training Course for the disabled ladies Jeddah September 69 Financial leadership program for the young Ladies Riyadh September 70 Back to School Exhibition ladies Qassim Onaiza September 71 Elderly world day Ladies Qassim Rass October 72 Elderly World day Riyadh October 73 Elderly world day Eastern Province October 74 Elderly world day Qassim Onaiza October 75 Elderly world day Jizan October 76 ADHD world day Riyadh October 77 Financial Leadership program Ladies Riyadh October 78 Financial Leadership Program Riyadh October 79 Orphanage open day Tabuk November 80 Orphanage Open Day Ladies Tabuk November 81 Orphanage Open Day Mecca November 82 Orphanage Open Day Ladies Mecca November 83 Orphanage Open Day yanbua November 84 Orphanage Open Day Ladies Yanbua November 85 Young Readers Program Ladies Huta November 86 Financial Leadership program Ladies Mujmaa November 87 Blood Donation Campaign Qassim November 88 Blood Donation Campaign Jeddah November 89 Financial Literacy and Antifraud Program Riyadh November 90 Integrity Workshop for ladies Madina November 91 Supporting Harakiah Association for the disabled Riyadh November 92 Cooperative Funds for needy Soldiers at Saudi Air Defense Riyadh November 56

57 Summary of Activity 93 Supporting Basaer Association Najran November 94 Supporting ilisten Association Riyadh November 95 Supporting Albur Association for the Productive Families Eastern Province November 96 Supporting Albur Association for the Poor Families Eastern Province November 97 Disabled World Day Participation Riyadh December 98 Disabled World Day Participation Ladies Madina December 99 Disabled World Day Participation Kharj December 100 Disabled World Day Participation Jizan December 101 Green Future Program Riyadh December Summary of Activity / Al Rajhi Bank Annual Report

58

59 Independent Auditors Report with Consolidated Financial Statements

60 60 Independent Auditors Report

61 Independent Auditors Report Independent Auditors Report Independent Auditors Report / Al Rajhi Bank Annual Report

62 62

63 Independent Auditors Report Independent Auditors Report / Al Rajhi Bank Annual Report

64 64

65 Independent Auditors Report Independent Auditors Report / Al Rajhi Bank Annual Report

66 66

67 Independent Auditors Report Independent Auditors Report / Al Rajhi Bank Annual Report

68 Consolidated Statement Of Financial Position As at 31 December 2017 and 2016 ASSETS Cash and balances with Saudi Arabian Monetary Authority ( SAMA ) and other central banks (SR 000) Notes ٢٠١٧ ٢٠١٦ 4 48,282,471 42,149,905 Due from banks and other financial institutions 5 10,709,795 26,578,525 Investments, net 6 36,401,092 34,032,879 Financing, net 7 233,535, ,994,124 Property and equipment, net 8 7,858,127 6,485,162 Investment properties, net 9 1,314,006 1,330,868 Other assets, net 10 5,015,464 4,140,354 TOTAL ASSETS 343,116, ,711,817 LIABILITIES AND SHAREHOLDERS EQUITY Liabilities Due to banks and other financial institutions 11 5,522,567 8,916,970 Customers deposits ,056, ,593,136 Other liabilities 13 8,786,598 6,254,839 Total liabilities 287,365, ,764,945 Shareholders equity Share capital 14 16,250,000 16,250,000 Statutory reserve 15 16,250,000 16,250,000 Other reserves 15 5,281,682 4,773,362 Retained earnings 23 13,906,736 12,236,010 Proposed gross dividends and Zakat 4,062,500 2,437,500 Total shareholders equity 55,750,918 51,946,872 8TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 343,116, ,711,817 The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements. 68

69 Consolidated Financial Statements Consolidated Statement Of Income For the years ended 31 December ٢٠١٧ and ٢٠١٦ (SR 000) Notes ٢٠١٧ ٢٠١٦ INCOME Gross financing and investment income 17 12,581,004 11,751,445 Return on customers, banks and financial institutions time investments 17 (551,587) (528,358) Net financing and investment income 17 12,029,417 11,223,087 Fee from banking services, net 18 2,697,208 2,949,963 Exchange income, net 841, ,286 Other operating income, net , ,044 Total operating income 15,904,854 15,341,380 EXPENSES Salaries and employees related benefits 20 2,813,918 2,873,687 Rent and premises related expenses 311, ,179 Depreciation 8 440, ,595 Other general and administrative expenses 21 1,671,052 1,440,794 Impairment charge for financing, net 7 3 1,547,577 2,142,242 Impairment charge for availableforsale investments 65,923 Total operating expenses 6,784,128 7,215,420 NET INCOME FOR THE YEAR 9,120,726 8,125,960 Weighted average number of shares outstanding 14 & 22 1,625 million 1,625 million Basic and diluted earnings per share (in SAR) The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements. Consolidated Financial Statements / Al Rajhi Bank Annual Report

70 Consolidated Statement Of Comprehensive Income Notes ٢٠١٧ SR 000 ٢٠١٦ SR 000 Net income for the year 9,120,726 8,125,960 Other comprehensive income Items that cannot be reclassified to consolidated statement of income in subsequent periods Remeasurement of employees (End of Service Benefits) EOSB ٢٥ (29,521) Items that are or may be reclassified to consolidated statement of income in subsequent periods Availableforsale investments Net change in fair value ,825 33,327 Net amounts transferred to consolidated statement of income on disposal 15 )340,134( 137,299 Impairment transferred to consolidated statement of income )65,923( Exchange differences on translation of foreign operations 15 73,624 )10,784( Total comprehensive income for the year 9,026,520 8,219,879 The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements. 70

71 Consolidated Financial Statements Consolidated Statement Of Changes In Shareholders Equity for the years ended 31 December 2017 and 2016 (SR 000) Notes Share capital Statutory Reserve Other reserves Retained earnings Proposed gross dividends and Zakat Total 2017 Balance at 1 January ,250,000 16,250, ,236,010 2,437,500 51,946,872 Transfer to other reserves for zakat ) ( Dividends for the second half of 2016 ) ( ) ( Interim dividends for the first half of ) ( ) ( Net change in fair value of availableforsale investments Net amounts transferred to consolidated statement of income 15 ) ( ) ( Net movement in foreign currency translation reserve Net income recognized directly in equity )64.685( )64.685( Net income for the year Remeasurement of employee EOSB )29.521( )29.521( Total comprehensive income for the year )94.206( Employees shares plan 15 Zakat paid 23 ) ( ) ( Zakat Payable transferred to other liability ) ( ) ( Proposed final dividends for ) ( Balance at 31 December ,250,000 16,250, The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements. Consolidated Financial Statements / Al Rajhi Bank Annual Report

72 consolidated statement of changes in shareholders equite 2016 Balance at 1 January ,250,000 16,250,000 2,997,754 8,666,300 2,475,000 46,639,054 Transfer to other reserves for zakat 23 1,750,000 )900,000( )850,000( Dividends for the second half of 2016 )1,625,000( )1,625,000( Interim dividends for the first half of )1,218,750( )1,218,750( Net change in fair value of availableforsale investments 15 33,327 33,327 Net amounts transferred to consolidated statement of income 15 71,376 71,376 Net movement in foreign currency translation reserve 15 )10,784( )10,784( Net income recognized directly in equity 93,919 93,919 Net income for the year 8,125,960 8,125,960 Total comprehensive income for the year 93,919 8,125,960 8,219,879 Employees shares plan 9,274 9,274 Zakat paid 15 )77,585( )77,585( Proposed final dividends for )2,437,500( 2,437,500 Balance at 31 December ,250,000 16,250,000 4,773,362 12,236,010 2,437,500 51,946,872 The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements. 72

73 Consolidated Financial Statements Consolidated Statement Of Cash Flows (SR 000) Notes CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year 9,120,726 8,125,960 Adjustments to reconcile net income to net cash from/ (used in) operating activities: (Gain) / loss on investments held at fair value through statement of income (FVSI) 19 )12,635( )9,382( Depreciation on property and equipment 8 440, ,595 Depreciation on investment properties 16,862 19,132 Gain on sale of property and equipment, net 19 )594( Foreign currency translation reserve 15 73,624 )10,784( Impairment charge for financing, net 7 1,547,577 2,142,242 Impairment charge for availableforsale investments 65,923 Share in earnings of associate 19 )35,545( )13,762( Expenses of employees share plan 15 9,274 (Increase) / decrease in operating assets Statutory deposit with SAMA and central banks 191,193 )711,153( Due from banks and other financial institutions 8,083,181 6,249,000 Financing )10,089,026( )17,065,604( Investments held as FVSI )261,286( 1,015,228 Other assets, net )875,110( 637,965 Increase/ (decrease) in operating liabilities Due to banks and other financial institutions )3,394,403( 4,358,746 Customers deposits 463,309 14,771,495 Other liabilities 2,293,735 )362,960( Net cash from operating activities 7,562,174 19,636,915 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment 8 )1,813,962( )1,321,826( Availableforsale investments )691,160( )509,772( Proceeds from maturities of investments recorded at amortized cost 111,048, ,001,671 Purchase of investments recorded at amortized cost )112,554,297( )115,601,218( Proceeds from sale of property and equipment 1,025 Net cash (used in) / from investing activities )4,009,993( 3,568,855 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid )4,858,497( )2,826,680( Zakat paid )155,474( )77,585( Net cash used in financing activities )5,013,971( )2,904,265( NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS )1,461,790( 20,301,505 Cash and cash equivalents at the beginning of the year 32,683,985 12,382,480 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 24 31,222,195 32,683,985 Gross financing and investment income received during the year 12,639,813 11,369,076 Return on customers, banks and financial institutions time investments paid during the year )542,644( )495,713( 12,097,169 10,873,363 Noncash transactions: Other real estate 147, ,106 Net change in fair value and gain/(loss) transferred to consolidated statement of income on availableforsale investments )138,309( 104,703 The accompanying notes from 1 to 38 form an integral part of these consolidated financial statements. Consolidated Financial Statements / Al Rajhi Bank Annual Report

74 1. GENERAL a) Incorporation and operation Al Rajhi Banking and Investment Corporation, a Saudi Joint Stock Company, (the Bank ), was formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (corresponding to June 29, 1987) and in accordance with Article 6 of the Council of Ministers Resolution No. 245, dated 26 Shawal 1407H (corresponding to June 23, 1987). The Bank operates under Commercial Registration No and its Head Office is located at the following address: Al Rajhi Bank Olaya Street P.O. Box 28 Riyadh Kingdom of Saudi Arabia The objectives of the Bank are to carry out banking and investment activities in accordance with its Articles of Association and ByLaws, the Banking Control Law and the Council of Ministers Resolution referred to above. The Bank is engaged in banking and investment activities inside and outside the Kingdom of Saudi Arabia through 599 branches (2016: 584) including the branches outside the Kingdom and 13,077 employees (2016: 13,546 employees). The Bank has established certain subsidiary companies (together with the Bank hereinafter referred to as the Group ) in which it owns all or majority of their shares as set out below (Also see note 3(b)): 74

75 Notes To Consolidated Financial Statements Name of subsidiaries Al Rajhi Development Company KSA Shareholding % % 100% A limited liability company registered in the Kingdom of Saudi Arabia to support the mortgage programs of the Bank through transferring and holding the title deeds of real estate properties under its name on behalf of the Bank, collection of revenue of certain properties sold by the Bank, provide real estate and engineering consulting services, provide documentation service to register the real estate properties and overseeing the evaluation of real estate properties. Al Rajhi Corporation Limited Malaysia Al Rajhi Capital Company KSA 100% 100% A licensed Islamic Bank under the Islamic Financial Services Act 2013, incorporated and domiciled in Malaysia. 100% 100% A limited liability company registered in the Kingdom of Saudi Arabia to act as principal agent and/or to provide brokerage, underwriting, managing, advisory, arranging and custodial services. Al Rajhi Bank Kuwait 100% 100% A foreign branch registered with the Central Bank of Kuwait. Al Rajhi Bank Jordan 100% 100% A foreign branch operating in Hashimi Kingdom of Jordan, providing all financial, banking, and investments services and importing and trading in precious metals and stones in accordance with Islamic Sharia a rules and under the applicable banking law. Al Rajhi Takaful Agency Company KSA Al Rajhi Company for management services KSA 99% 99% A limited liability company registered in the Kingdom of Saudi Arabia to act as an agent for insurance brokerage activities per the agency agreement with Al Rajhi Cooperative Insurance Company. 100% 100% A limited liability company registered in Kingdom of Saudi Arabia to provide recruitment services. The subsidiaries are wholly or substantially owned by the Bank and therefore, the noncontrolling interest which is insignificant is not disclosed. All the abovementioned subsidiaries have been consolidated. As of 31 December 2017 and 2016, interests in subsidiaries not directly owned by the Bank are owned by representative shareholders for the beneficial interest of the Bank. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

76 b) Shari a Authority As a commitment from the Bank for its activities to be in compliance with Islamic Shari a legislations, since its inception, the Bank has established a Shari a Authority to ascertain that the Bank s activities are subject to its approval and control. The Shari a Authority had reviewed several of the Bank s activities and issued the required decisions thereon. 2. BASIS OF PREPARATION a) Statement of compliance The (consolidated) financial statements of the Bank (Group) have been prepared; In accordance with International Financial Reporting Standards (IFRS) as modified by SAMA for the accounting of zakat and income tax, which requires, adoption of all IFRSs as issued by the International Accounting Standards Board ( IASB ) except for the application of International Accounting Standard (IAS) 12 Income Taxes and IFRIC 21 Levies so far as these relate to zakat and income tax. As per the SAMA Circular no dated April 11, 2017 and subsequent amendments through certain clarifications relating to the accounting for zakat and income tax ( SAMA Circular ), the Zakat and Income tax are to be accrued on a quarterly basis through shareholders equity under retained earnings. In compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and the Article of Association of the Bank Further, the above SAMA Circular has also repealed the existing Accounting Standards for Commercial Banks, as promulgated by SAMA, and are no longer applicable from January 1, Refer note 3(l) for the accounting policy of zakat and income tax and note 3(a) for the impact of change in the accounting policy resulting from the SAMA Circular. b) Basis of measurement and preparation The consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of investments held as fair value through income statement ( FVSI ) and availableforsale investments. The Bank presents its statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non current) is presented in note 262. c) Functional and presentation currency The consolidated financial statements are presented in Saudi Arabian Riyals ( SAR ), which is the Bank s functional currency and are rounded off to the nearest thousand except otherwise indicated. d) Critical accounting judgments, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgments 76

77 Notes To Consolidated Financial Statements in the process of applying the Bank s accounting policies. Such estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal to related actual results. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Bank based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Bank. Such changes are reflected in the assumptions when they occur. Significant areas where management has used estimates, assumptions or exercised judgments is as follows: i) Impairment on financing The Bank reviews its financing portfolios to assess specific and collective impairment on a quarterly basis. The specific impairment applies to financing evaluated individually for impairment and is based on management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgments about a customer s financial situation and the net realisable value of any underlying collateral. This evidence may include observable data indicating that there has been an adverse change in the payment status of clients in a group. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Each impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. A collective component of the total allowance is established for groups of homogeneous financing that are not considered individually significant and is established using statistical methods such as roll rate methodology and internal loss estimates. The methodology uses statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at on the basis of historical information is appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates are regularly benchmarked against actual loss experience. In assessing the need for collective loss allowance, management considers factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depends on the model assumptions and parameters used in determining the collective allowance. (Also see note 3(i), 7 and 26). Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

78 ii) Impairment of available forsale and sukuk investments The Bank exercises judgement to consider impairment on the availableforsale equity investments at each reporting date. This includes determination of a significant or prolonged decline in the fair value below its cost. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. The determination of what is significant or prolonged requires judgement. In making this judgement, the Bank evaluates among other factors, the normal volatility in share price, deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The Bank reviews its investments in sukuks at each reporting date to assess whether they are impaired. This requires similar judgement as applied to individual assessment of financing. In addition, the Bank considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. (Also see note 3(i) and 6). iii) Fair value of financial instruments The Group measures financial instruments at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a nonfinancial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: 78

79 Notes To Consolidated Financial Statements Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. (Also see note 28). iv) Classification of investments held at amortised cost The Bank follows the guidance of IAS 39 on classifying nonderivative financial assets with fixed or determinable payments and fixed maturity as Investments held at amortised cost. v) Determination of control over investees The control indicators set out in note 3 (b) are subject to management s judgements that can have a significant effect in the case of the Bank s interests in investments funds. Investment funds The Group acts as Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of its aggregate economic interests of the Group in the Fund (comprising any carried profits and expected management fees) and the investor s rights to remove the Fund Manager. As a result the Group has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated these funds. vi) Provisions for liabilities and charges The Bank receives legal claims against it in the normal course of business. Management has made judgments as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and` cost ultimately depends on the due process being followed as per the Law. vii) Fees from Banking Services The management has established a threshold for the purpose of recording documentation / loan processing charges as an adjustment to effective yield. The amount below this threshold are not capitalise and the impact is considered as immaterial. viii) Going concern The consolidated financial statements have been prepared on a going concern basis. The Bank s management has made an assessment of the Bank s ability to continue as Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

80 a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank s ability to continue as a going concern. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Change in accounting policies The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December 2016 except for the change in accounting policies of zakat, tax and loans writeoff as mentioned below and adoption of the following amendments to existing standards. The following changes have no material impact on the consolidated financial statements of the Bank: i. Zakat and income tax The Bank amended its accounting policy relating to zakat and now recognize a liability for zakat on a quarterly basis. Previously, zakat was deducted from dividends upon payment to the shareholders and was recognized as a liability at that time. Where no dividends were paid, zakat was accounted for on a payment basis. Consistent with previous periods, zakat and income tax continues to be charged to retained earnings. The above change in accounting policy did not have material impact on consolidated financial statements for any of the years presented and therefore, corresponding figures have not been restated. Zakat is calculated based on the Zakat rules and regulations in the Kingdom of Saudi Arabia. Zakat is computed based on equity or net income using the basis defined under the Zakat regulations. ii. Writeoff policy for retail loans The Bank amended its accounting policy relating to writeoff of retail obligor loans from 360 Days Past Due (DPD) to 180 DPD except for real estate loans. Previously, the writeoff process was followed for these loans when Obligors in default and 360 DPD on their contracted obligations. iii. Amendments to existing standards Amendments to IAS 7, Statement of cash flows on disclosure initiative: Applicable for annual periods beginning on or after 1 January 2017 These amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. This amendment is part of the IASB s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. 80

81 Notes To Consolidated Financial Statements These adoptions have no material impact on the consolidated financial statements. The Bank has chosen not to early adopt the amendments and revisions to the International Financial Reporting Standards which have been published and are mandatory for compliance by the banks for the accounting years beginning on or after January 1, 2018 (please refer note 34) b) Basis of consolidation These consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as set out in note 1 to these financial statements (collectively referred to as the Group ). The financial statements of subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. The consolidated financial statements have been prepared using uniform accounting policies and valuation methods for like transactions and other events in similar circumstances. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) ; Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect amount of its returns. When the Group has less than majority of the voting or similar rights of an investee entity, the Bank considers all relevant facts and circumstances in assessing whether it has power over the entity, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Bank s voting rights and potential voting rights granted by equity instruments such as shares The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Bank loses control over a subsidiary, it: Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

82 Derecognises the assets and liabilities of the subsidiary Derecognises the cumulative translation differences recorded in shareholder s equity Recognises the fair value of the consideration received Recognises the fair value of any investment retained Recognises any surplus or deficit in profit or loss Reclassifies the parent s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate would be required if the Bank had directly disposed of the related assets or liabilities. Intra group balances and any income and expenses arising from intragroup transactions, are eliminated in preparing these consolidated financial statements. Investment in associate Associates are enterprises over which the Bank exercises significant influence (but not control), over financial and operating policies and which is neither a subsidiary nor a joint arrangement. Investments in associates are initially recognized at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at the lower of the equityaccounted or the recoverable amount. Equityaccounted value represents the cost plus postacquisition changes in the Bank s share of net assets of the associate (share of the results, reserves and accumulated gains/losses based on latest available financial statements) less impairment, if any. The previously recognized impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of the investment in the statement of financial position remains at the lower of the equityaccounted (before provision for impairment) or the recoverable amount. On derecognition the difference between the carrying amount of investment in the associate and the fair value of the consideration received is recognized in the consolidated statement of income. c) Trade date All regular way purchases and sales of financial assets are recognized and derecognized on the trade date (i.e. the date on which the Bank commits to purchase or sell the assets). Regular way purchases or sales of financial assets require delivery of those assets within the time frame generally established by regulation or convention in the market place. All other financial assets and financial liabilities (including assets and liabilities designated at fair value through statement of income) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. d) Foreign currencies The consolidated financial statements are presented in Saudi Arabian Riyals ( SAR ), which is also the Bank s functional currency. Each entity determines its own functional currency and items included in the financial statements of each entity are measured using 82

83 Notes To Consolidated Financial Statements that functional currency. Transactions in foreign currencies are translated into SAR at exchange rates prevailing on the dates of the transactions. Monetary assets and liabilities at the yearend (other than monetary items that form part of the net investment in foreign operations are translated into SAR at exchange rates prevailing on the reporting date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for the effective profits rate and payments during the year and the amortised cost in foreign currency translated at exchange rate at the end of the year. Foreign exchange gains or losses from settlement of transactions and translation of period end monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income. Nonmonetary 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. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. As at the reporting date, the assets and liabilities of foreign operations are translated into SAR at the rate of exchange as at the statement of financial position date, and their statement of incomes are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are recognized in the statements of other comprehensive income. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the statement of income as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to noncontrolling interests. e) Offsetting financial instruments Financial assets and financial liabilities are offset and are reported net in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts, and when the Group intends to settle on a net basis, or to realize the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. f) Revenue recognition Revenue is recognized 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 recognized. Income from Mutajara, Murabaha, investments held at amortized cost, installment sale, Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

84 Istisna a financing and credit cards services is recognized based on effective yield basis on the outstanding balances. The effective yield is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective yield, the Group estimates future cash flows considering all contractual terms of the financial instrument but excluding future credit losses.fees and commissions are recognized when the service has been provided. Financing commitment fees that are likely to be drawn down and other credit related fees are deferred (above certain threshold) and, together with the related direct cost, are recognized as an adjustment to the effective yield on the financing. When a financing commitment is not expected to result in the drawdown of a financing, financing commitment fees are recognised on a straightline basis over the commitment period. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, on a timeproportionate basis. Fees received for asset management, wealth management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognized over the period when the service is being provided. Asset management fees related to investment funds are recognized over the period the service is being provided. The same principle applies to Wealth management and Custody Services that are continuously recognized over a period of time. Dividend income is recognised when the right to receive income is established which is generally when the shareholders approve the dividend. Dividends are reflected as a component of net trading income, net income from FVSI financial instruments or other operating income based on the underlying classification of the equity instrument. Foreign currency exchange income / loss is recognized when earned / incurred. Net trading income results from trading activities and include all realised and unrealised gains and losses from changes in fair value and related gross investment income or expense, dividends for financial assets and financial liabilities held for trading and foreign exchange differences. Net income from FVSI financial instruments relates to financial assets and liabilities designated as FVSI and include all realised and unrealised fair value changes, investment income, dividends and foreign exchange differences. g) Financing and investment The Bank offers nonprofit based products including Mutajara, installment sales, Murabaha and Istisnaa to its customers in compliance with Shari a rules. The Bank classifies its principal financing and investment as follows: 84

85 Notes To Consolidated Financial Statements i. Held at amortized cost such financing and certain investments which meets the definition of loans and receivables under IAS 39, are classified as held at amortized cost, and comprise Mutajara, installment sale, Istisnaa, Murabaha and credit cards operations accounts balances. Investments held at amortized cost are initially recognized at fair value and subsequently measured at amortized cost (using effective yield basis) less any amounts written off, and allowance for impairment. Financing are nonderivative financial assets originated or acquired by the Bank with fixed or determinable payments. Financing are recognised when cash is advanced to borrowers. They are derecognized when either borrower repays their obligations, or the financings are sold or written off, or substantially all the risks and rewards of ownership are transferred. All financings are initially measured at fair value, plus incremental direct transaction costs (above certain threshold) and are subsequently measured at amortised cost using effective yield basis. Following the initial recognition, subsequent transfers between the various classes of financings is not ordinarily permissible. The subsequent periodend reporting values for various classes of financings are determined on the basis as set out in the following paragraphs. ii. Held to Maturity Investments having fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognized at fair value including direct and incremental transaction costs and subsequently measured at amortized cost, less provision for impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition using an effective yield basis. Any gain or loss on such investments is recognized in the consolidated statement of income when the investment is derecognized or impaired. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Group s ability to use this classification. However, sales and reclassifications in any of the following circumstances would not impact the Group s ability to use this classification. Sales or reclassifications that are so close to maturity that the changes in market rate of commission would not have a significant effect on the fair value. Sales or reclassifications after the Group has collected substantially all the assets original principal. Sales or reclassifications attributable to nonrecurring isolated events beyond the Group s control that could not have been reasonably anticipated iii. Held as FVSI Investments in this category are classified as either investment held for trading or those designated as FVSI on initial recognition. Investments classified as trading are acquired principally for the purpose of selling or repurchasing in the short term. These investments comprise mutual funds and equity investments. Such investments are measured at fair value and any changes in the fair values are Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

86 charged to the consolidated statement of income. Transaction costs, if any, are not added to the fair value measurement at initial recognition of FVSI investments and are expensed in the consolidated financial statements. Investment income and dividend income on financial assets held as FVSI are reflected under other operating income in the consolidated statement of income. Investments at FVSI are not reclassified subsequent to their initial recognition, except that nonderivative FVSI instruments, other than those designated as FVSI upon initial recognition, may be reclassified out of the FVSI (i.e. trading) category if they are no longer held for the purpose of being sold or repurchased in the near term, and the following conditions are met: If the financial asset would have met the definition of financing and receivables, if the financial asset had not been required to be classified as held for trading at initial recognition, then it may be reclassified if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of financing and receivables, and then it may be reclassified out of the trading category only in rare circumstances. iv. Availableforsale Availableforsale investments are those nonderivative equity securities which are neither classified as Held to maturity investments, financing nor designated as FVSI, that are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as availableforsale are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Unrealized gains or losses arising from changes in fair value are recognised in other comprehensive income until the investment is derecognised or impaired whereupon any cumulative gain or loss previously recognized in other comprehensive income are reclassified to consolidated statement of income. A security held as availableforsale may be reclassified to Other investments held at amortized cost if it otherwise would have met the definition of Other investments held at amortized cost and if the Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. h) Impairment of financial assets Held at amortised cost An assessment is made at the date of each consolidated statement of financial position to determine whether there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset or a group of financial assets and that a loss event(s) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the difference between the assets carrying amount and the present 86

87 Notes To Consolidated Financial Statements value of estimated future cash flows is calculated and any impairment loss, is recognized for changes in the asset s carrying amount. The carrying amount of the financial assets held at amortized cost, is adjusted either directly or through the use of an allowance for impairment account, and the amount of the adjustment is included in the consolidated statement of income. A specific provision for credit losses due to impairment of a financing or any other financial asset held at amortised cost is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective yield rate. Considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required. Such estimates are essentially based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such allowance for impairment. In addition to the specific allowance for impairment described above, the Bank also makes collective impairment allowance for impairment, which are evaluated on a group basis and are created for losses, where there is objective evidence that unidentified losses exist at the reporting date. The amount of the provision is estimated based on the historical default patterns of the investment and financing counterparties as well as their credit ratings, taking into account the current economic climate. In assessing collective impairment, the Bank also uses internal loss estimates and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Loss rates are regularly benchmarked against actual outcomes to ensure that they remain appropriate. The criteria that the Bank uses to determine that there is an objective evidence of impairment loss include: Delinquency in contractual payments of principal or profit. Cash flow difficulties experienced by the customer. Breach of repayment covenants or conditions. Initiation of bankruptcy proceedings against the customer. Deterioration of the customer s competitive position. Deterioration in the value of collateral. When financing amount is uncollectible, it is writtenoff against the related allowance for impairment. Such financing is writtenoff after all necessary procedures have been completed and the amount of the loss has been determined. Financing whose terms have been renegotiated are no longer considered to be past Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

88 due but are treated as new financing. Restructuring policies and practices are based on indicators or criteria which, indicate that payment will most likely continue. The financing continue is to be subject to an individual or collective impairment assessment, calculated using the financing s original effective yield rate. Financing are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a revised rate of commission to genuinely distressed borrowers. This results in the asset continuing to be overdue and individually impaired as the renegotiated payments of commission and principal do not recover the original carrying amount of the financing. In other cases, renegotiation lead to a new agreement, this is treated as a new financing. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the customer s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance for impairment account. The amount of the reversal is recognized in the statement of income as impairment charge. Financial assets are writtenoff only in circumstances where effectively all possible means of recovery have been exhausted. Available forsale equity investments For equity investments held as availableforsale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through the statement of income as long as the asset continues to be recognized i.e. any increase in fair value after impairment has been recorded can only be recognized in equity. On derecognition, any cumulative gain or loss previously recognized in equity is included in the consolidated statement of income for the year. I) Other real estate The Bank, in the ordinary course of business, acquires certain real estate against settlement of financing. Such real estate are considered as assets held for sale and are initially stated at the lower of net realisable value of due financing and the current fair value of the related properties, less any costs to sell (if material). No depreciation is charged on such real estate. Rental income from other real estate is recognised in the consolidated statement of income. Subsequent to initial recognition, any subsequent write down to fair value, less costs to sell, are charged to the consolidated statement of income. Any subsequent revaluation gain in the fair value less costs to sell of these assets to the extent this does not exceed the cumulative write down previously recognised, in the consolidated statement of income. Gains or losses on disposal are recognised in the consolidated statement of income. J) Derecognition of financial assets and financial liabilities A financial asset (or a part of a financial asset, or a part of a group of similar financial 88

89 Notes To Consolidated Financial Statements assets) is derecognized when the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for derecognition. A financial liability (or a part of a financial liability) can only be derecognized when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expired. K) Investment properties Investment properties are held for longterm rental yield and are not occupied by the Group. They are carried at cost and depreciation is charged to the consolidated statement of income. The cost of investment properties is depreciated using the straightline method over the estimated useful life of the assets. L) Property and equipment Property and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Land is not depreciated. The cost of other property and equipment is depreciated using the straightline method over the estimated useful life of the assets, as follows: Leasehold land improvements Buildings Leasehold building improvements Equipment and furniture over the lesser of the period of the lease or the useful life 33 years over the lease period or 3 years, whichever is shorter 3 to 10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the date of each statement of financial position. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in consolidated statement of income. All assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. m) Customers deposits Customer deposits are financial liabilities that are initially recognized at fair value less transaction cost, being the fair value of the consideration received, and are subsequently measured at amortized cost. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

90 n) Guarantees In the ordinary course of business the Bank gives guarantees which include letters of credit, letters of guarantee, acceptances and standby letters of credit. Initially, the received margins are recognized as liabilities at fair value, being the value of the premium received and included in customers deposits in the consolidated financial statements. Subsequent to the initial recognition, the Bank s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligations arising as a result of guarantees. Any increase in the liability relating to the financial guarantee is taken to the consolidated statement of income in impairment charge for credit losses, net. The premium received is recognised in the consolidated statement of income under Fees from banking services, net on a straight line basis over the life of the guarantee. o) Provisions Provisions are recognized when the Bank has present legal, or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. p) Accounting for leases 1. Where the Group is the lessee Leases that do not transfer to the Group substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Consequently, all of the leases entered into by the Bank are all operating leases. Payments made under operating leases are charged to the consolidated statement of income on a straightline basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty, net of anticipated rental income (if any), is recognised as an expense in the period in which termination takes place. The Group evaluates nonlease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately. When assets are transferred under a finance lease, including assets under Islamic lease arrangements (e.g. Ijara Muntahia Bittamleek or Ijara with ownership promise) (if applicable) the present value of the lease payments is recognised as a receivable and disclosed under Financing. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. q) Cash and cash equivalents For the purposes of the consolidated statement of cash flows, cash and cash equivalents include notes and coins on hand, balances with SAMA (excluding statutory deposits) and due from banks and other financial institutions with original maturity of 90 days or less from 90

91 Notes To Consolidated Financial Statements the date of acquisition which are subject to insignificant risk of changes in their fair value. r) Shortterm employee benefits Shortterm employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. s) Special commission excluded from the consolidated statement of income In accordance with the Shari a Authority s resolutions, special commission income (non Shari a compliant income) received by the Bank, is excluded from the determination of financing and investment income of the Bank, and is transferred to other liabilities in the consolidated statement of financial position and is subsequently paidoff as charities. t) Provisions for employees end of service benefits The provision for employees end of service benefits is accrued using actuarial valuation according to the regulations of Saudi labor law and local regulatory requirements. u) Sharebased payments The Bank s founders had established a sharebased compensation plan under which the entity receives services from the eligible employees as consideration for equity instruments of the Bank which are granted by the fund to the employees. v) Mudaraba funds The Group carries out Mudaraba transactions on behalf of its customers, and are treated by the Group as being restricted investments. These are included as off balance sheet items. The Group s share of profits from managing such funds is included in the Group s consolidated statement of income. w) Investment management services The Bank provides investment management services to its customers, through its subsidiary which include management of certain mutual funds. Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the Group s consolidated financial statements. The Group s share of these funds is included under FVSI investments. Fees earned are disclosed in the consolidated statement of income. z) Bank s products definition The Bank provides its customers with banking products based on interest avoidance concept and in accordance with Shari a regulations. The following is a description of some of the financing products: Mutajara financing: It is financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, accordingly the client becomes debtor to the Bank with the sale amount and for the period agreed in the contract. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

92 Installment sales financing: It is financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, accordingly the client becomes debtor to the Bank with the sale amount to be paid through installments as agreed in the contract. Istisnaa financing: It is a financing agreement whereby the Bank contracts to manufacture a commodity with certain known and accurate specifications according to the client s request. The client becomes a debtor to the Bank for the manufacturing price which includes cost plus profit. Murabaha financing: It is a financing agreement whereby the Bank purchases a commodity or asset and sells it to the client with a price representing the purchase price plus a profit known and agreed by the client which means that the client is aware of the cost and profit separately. 4. CASH AND BALANCES WITH SAMA AND OTHER CENTRAL BANKS Cash and balances with SAMA and central banks as of 31 December comprise of the following: )SR 000( ٢٠١٧ ٢٠١٦ Cash in hand 8,595,037 8,335,452 Statutory deposit 17,952,252 18,143,445 Current account with SAMA 425, ,957 Mutajara with SAMA 21,310,111 15,181,051 Total 48,282,471 42,149,905 In accordance with the Banking Control Law and regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA and central banks at stipulated percentages of its customers demand deposits, customers time investment and other customers account calculated at the end of each Gregorian month. The above statutory deposits are not available to finance the Bank s daytoday operations and therefore are not considered as part of cash and cash equivalents (note 24), when preparing consolidated statement of cash flows. 92

93 Notes To Consolidated Financial Statements 5. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Due from banks and other financial institutions as of 31 December comprise the following: )SR 000( ٢٠١٧ ٢٠١٦ Current accounts 825, ,592 Mutajara 9,883,887 25,724,933 Total 10,709,795 26,578,525 The tables below depict the quality of due from banks and other financial institutions as at 31 December: )SR 000( ٢٠١٧ ٢٠١٦ Investment grade (credit rating (AAA to BBB)) 10,142,259 26,059,374 Noninvestment grade (credit rating (BB+ to B)) 436, ,203 Unrated 131, ,948 Total 10,709,795 26,578,525 The credit quality of due from banks and other financial institutions is managed using external credit rating agencies. The above due from banks and other financial institutions balances are neither past due nor impaired. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

94 6. INVESTMENTS, NET a) Investments comprise the following as of 31 December: )SR 000( ٢٠١٧ ٢٠١٦ Investment in an associate* 124,825 89,280 Investments held at amortized cost Murabaha with SAMA 23,452,869 30,451,217 Sukuk 10,605,139 2,100,895 Total investments held at amortized cost 34,058,008 32,552,112 Investments held as FVSI Equity investments 23,487 23,437 Mutual funds 389, ,272 Total investments held as FVSI 412, ,709 Availableforsale investments Equity investments 771, ,732 Mutual funds 1,034, ,046 Total availableforsale investments 1,805,579 1,252,778 Investments 36,401,092 34,032,879 The designated FVSI investments included above are designated upon initial recognition as FVSI and are in accordance with the documented risk management strategy of the Bank. All investments held at amortized costs are neither past due nor impaired as of 31 December * Investment in an associate The Bank owns 22.5% (31 December 2016: 22.5%) shares of Al Rajhi Company for Cooperative Insurance, a Saudi Joint Stock Company. 94

95 Notes To Consolidated Financial Statements b) The analysis of the composition of investments is as follows: (SAR 000) 2017 Quoted Unquoted Total Murabaha with SAMA 23,452,869 23,452,869 Sukuk 10,605,139 10,605,139 Equities 896,118 23, ,605 Mutual funds 1,423,479 1,423,479 Total 896,118 35,504,974 36,401, Quoted Unquoted Total Murabaha with SAMA 30,451,217 30,451,217 Sukuk 2,100,895 2,100,895 Equities 917,012 23, ,449 Mutual funds 540, ,318 Total 917,012 33,115,867 34,032,879 c) The analysis of unrecognized gains and losses and fair values of investments are as follows: 2017 (SAR 000) Carrying value Gross unrecognized gains Gross unrecognized losses Fair value Murabaha with SAMA 23,452,869 6,984 6,984 23,459,853 Sukuk 10,605,139 10,559,636 Equities 919, ,605 Mutual funds 1,423,479 1,423,479 Total 36,401,092 6,984 6,984 36,362,573 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

96 2016 (SAR 000) Carrying value Gross unrecognized gains Gross unrecognized losses Fair value Murabaha with SAMA 30,451,217 41,880 30,493,097 Sukuk 2,100,895 14,162 2,115,057 Equities 940, ,449 Mutual funds 540, ,318 Total 34,032,879 56,042 34,088,921 d) Credit quality of investments (SAR 000) Murabaha with SAMA 23,452,869 30,451,217 Investment grade 10,605,139 2,100,895 Total 34,058,008 32,552,112 Investment Grade includes those investments having credit exposure equivalent to Standard and Poor s rating of AAA to BBB. The unrated category only comprise of unquoted sukuks. Fitch has assigned A+ rating to KSA as a country, as at 22 March, e) The following is an analysis of foreign investments according to investment categories as at 31 December: (SAR 000) Investments held at amortized cost Sukuk 1,545,059 1,300,895 Investments held as FVSI Equity investments 21,300 21,249 Mutual funds 347, ,604 Total 1,913,539 1,554,748 96

97 Notes To Consolidated Financial Statements f) The following is an analysis of investments according to counterparties as at 31 December: (SAR 000) Government and quasi government 24,820,739 31,683,532 Companies 971, ,749 Banks and other financial institutions 9,184, ,280 Mutual funds 1,423, ,318 Net investments 36,401,092 34,032,879 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

98 7. FINANCING, NET 7 1 Financing a. Net financing as of 31 December comprises the following: Performing Nonperforming (SR 000) 2017 Allowance for impairment Net financing Mutajara 48,729,890 1,222,313 (3,585,237) 46,366,966 Installment sale 172,631, ,289 (1,938,279) 171,214,272 Murabaha 15,058,355 5,417 (24,170) 15,039,602 Credit cards 901,097 21,160 (7,524) 914,733 Total 237,320,604 1,770,179 (5,555,210) 233,535, (SR 000) Performing Nonperforming Allowance for impairment Net financing Mutajara 44,884,996 1,494,925 (3,511,098) 42,868,823 Installment sale 168,105,163 1,338,577 (3,044,834) 166,398,906 Murabaha 15,294,878 15,016 (32,912) 15,276,982 Credit cards 474,187 19,083 (43,857) 449,413 Total 228,759,224 2,867,601 (6,632,701) 224,994,124 98

99 Notes To Consolidated Financial Statements b. The net financing by location, inside and outside the Kingdom, as of 31 December is as follows: (SAR 000) 2017 Description Mutajara Installment sale Murabaha Credit cards Total Inside the Kingdom 49,952, ,822,412 10,022, , ,714,498 Outside the Kingdom 4,330,139 5,040,992 5,154 9,376,285 Gross financing 49,952, ,152,551 15,063, , ,090,783 Allowance for impairment (3,585,237) (1,938,279) (24,170) (7,524) (5,555,210) Net financing 46,366, ,214,272 15,039, , ,535,573 (SAR 000) 2016 Description Mutajara Installment sale Murabaha Credit cards Total Inside the Kingdom 46,379, ,490,407 10,775, , ,137,164 Outside the Kingdom 3,953,333 4,534,846 1,482 8,489,661 Gross financing 46,379, ,443,740 15,309, , ,626,825 Allowance for impairment (3,511,098) (3,044,834) (32,912) (43,857) (6,632,701) Net financing 42,868, ,398,906 15,276, , ,994,124 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

100 c. The net financing concentration risks and the related provision, by major economic sectors at 31 December are as follows: 2017 (SAR 000) Description Performing Non Performing Allowance for impairment Net financing Commercial 26,967, ,822 (263,818) 27,217,703 Industrial 19,443, ,975 (518,704) 19,490,126 Building and construction 3,504, ,193 (178,804) 3,432,406 Personal 165,819, ,448 (641,327) 165,720,730 Services 20,099,055 41,741 (25,689) 20,115,107 Agriculture and fishing 1,464,247 1,464,247 Others 22,122 22,122 Total 237,320,604 1,770,179 (1,628,342) 237,462,441 Collective allowance for impairment (3,926,868) (3,926,868) Balance (5,555,210) 233,535, (SAR 000) Description Performing Non Performing Allowance for impairment Net financing Commercial 27,331, ,695 (558,190) 27,412,300 Industrial 11,852,377 34,653 (15,049) 11,871,981 Building and construction 9,229, ,399 (620,132) 9,269,387 Personal 161,111,331 1,357,660 (1,671,423) 160,797,568 Services 15,983, ,646 (69,346) 16,075,564 Agriculture and fishing 613, ,499 Others 2,637,838 14,548 (14,032) 2,638,354 Total 228,759,224 2,867,601 (2,948,172) 228,678,653 Collective allowance for impairment (3,684,529) (3,684,529) Balance (6,632,701) 224,994,

101 Notes To Consolidated Financial Statements d. The table below depicts the categories of financing as per main business segments at 31 December: 2017 (SAR 000) Retail Corporate Total Mutajara 132,645 49,819,558 49,952,203 Installment sale 164,893,047 8,259, ,152,551 Murabaha 414,109 14,649,663 15,063,772 Credit cards 922, ,257 Financing, gross 166,362,058 72,728, ,090,783 Less: Allowance for impairment (2,023,434) (3,531,776) (5,555,210) Financing, net 164,338,624 69,196, ,535, (SAR 000) Retail Corporate Total Mutajara 8,145 46,371,776 46,379,921 Installment sale 161,593,899 7,849, ,443,740 Murabaha 373,677 14,936,217 15,309,894 Credit cards 493, ,270 Financing, gross 162,468,991 69,157, ,626,825 Less: Allowance for impairment (3,088,691) (3,544,010) (6,632,701) Financing, net 159,380,300 65,613, ,994,124 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

102 e. The table below summarizes financing balances at 31 December that are neither past due nor impaired, past due but not impaired and impaired, as per the main business segments of the Group: 2017 (SAR 000) Neither past due nor impaired Past due but not impaired Impaired Total Allowance for impairment Net financing Retail 165,405, , , ,362,058 (2,023,434) 164,338,624 Corporate 67,503,558 3,997,436 1,227,731 72,728,725 (3,531,776) 69,196,949 Total 232,909,150 4,411,454 1,770, ,090,783 (5,555,210) 233,535, (SAR 000) Neither past due nor impaired Past due but not impaired Impaired Total Allowance for impairment Net financing Retail 160,745, ,727 1,357, ,468,991 (3,088,691) 159,380,300 Corporate 64,263,237 3,384,656 1,509,941 69,157,834 (3,544,010) 65,613,824 Total 225,008,841 3,750,383 2,867, ,626,825 (6,632,701) 224,994,124 Financing past due for less than 90 days is not treated as impaired, unless other available information proves otherwise. Neither past due nor impaired and past due but not impaired comprise the total performing financing. 102

103 Notes To Consolidated Financial Statements f. The tables below depicts the quality of financing past due (up to 90 days) but not impaired at 31 December: 2017 (SAR 000) Retail Corporate Total Performing financing Standard 349,876 3,083,247 3,433,123 Performing financing Special mention 64, , ,331 Total 414,018 3,997,436 4,411, )SAR 000( Retail Corporate Total Performing financing Standard 318,551 3,012, ,504 Performing financing Special mention 47, , ,916 Total 365,727 3,384, ,420 Financing under the standard category are performing, have sound fundamental characteristics and include those that exhibit neither actual nor potential weaknesses. The special mention category includes financing that is also performing, current and up to date in terms of principal and profit payments. However, they require close management attention as they may have potential weaknesses both financial and nonfinancial that may, at some future date, result in the deterioration of the repayment prospects of either the principal or the profit payments. The special mention financing is not exposed the Group to sufficient risk to warrant a worse classification. g. The tables below set out the aging of financing past due but not impaired as of 31 December: 2017 (SAR 000) Age Mutajara Installment sale Credit cards Total up to 30 days 2,645, ,582 2,902, days 437,734 82,667 10, , days 914,189 51,569 12, ,331 Total 3,997, ,818 23,200 4,411,454 Fair value of collateral 3,323,103 3,323,103 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

104 2016 (SAR 000) Age Mutajara Installment sale Credit cards Total up to 30 days 2,331, ,071 15,123 2,568, days 680,349 82, , days 372,438 47, ,614 Total 3,384, ,604 15,123 3,750,383 Fair value of collateral 8,771,194 8,771,194 The Bank in the ordinary course of financing activities holds collateral as security to mitigate credit risk in financing. These collaterals mostly include project receivables customer deposits and other cash deposits, financial guarantees, local and international equity securities, real estate and other property and equipment. The collateral is held mainly against commercial and consumer financing and managed against relevant exposures related to financing. The fair value of collateral is based on valuation performed by the independent experts, quoted prices (wherever available) and the valuation techniques. Experts have used various approaches in determining the fair value of real estate collateral including market comparable approach based on recent actual sales or discounted cash flow approach taking into account risk adjusted discount rates, rental yields and terminal values. The Bank held collateral of SR 26,522 million (2016: 25,923 million) against its secured corporate financing. h. The table below sets out gross balances of individually impaired financing, together with the fair value of related collateral held by the Group as at 31 December: 2017 (SAR 000) Retail Corporate Total Individually impaired financing 542,448 1,227,731 1,770,179 Fair value of collateral 594, , (SAR 000) Retail Corporate Total Individually impaired financing 1,357,660 1,509,941 1,911,594 Fair value of collateral 1,446,712 1,891,

105 Notes To Consolidated Financial Statements i. The tables below depict the quality of neither past due nor impaired financing as at 31 December: (SAR 000) 2017 Funded Exposure Nonfunded Exposure Total Exposure Corporate Low risk(13) 9,535,260 17,415 9,552,675 Acceptable risk(46) 51,779,295 5,187,353 56,966,648 Watch list (7) 6,189, ,683 6,381,686 67,503,558 5,397,451 72,901,009 Retail (unrated) 165,405, ,405,592 Total 232,909,150 5,397, ,306,601 (SAR 000) 2016 Funded Exposure Nonfunded Exposure Total Exposure Corporate Low risk(13) 6,910, ,690 7,172,370 Acceptable risk(46) 49,171,992 4,781,932 53,953,924 Watch list (7) 8,180,565 1,132,616 9,313,181 64,263,237 6,176,238 70,439,475 Retail (unrated) 160,745, ,745,604 Total 225,008,841 6,176, ,185,079 The unrated retail financing balances that are neither past due nor impaired are classified as standard category. Those balances are performing and have strong fundamental characteristics of credit history, cash flows and timely repayment, and regular monitoring is being carried out. Those balances amounted to SAR 165,406 million as at 31 December 2017 (31 December 2016: SAR 160,746 million). Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

106 j. The tables below depict the quality of performing financing as at 31 December: (SAR 000) 2017 Funded Exposure Nonfunded Exposure Total Low risk(13) 9,535,260 17,415 9,552,675 Acceptable risk(46) 53,889,363 5,516,716 59,406,079 Watch list (7) 8,076, ,649 8,430,020 71,500,994 5,887,780 77,388,774 Retail (unrated) 165,819, ,819,610 Total 237,320,604 5,887, ,208,384 (SAR 000) 2016 Funded Exposure Nonfunded Exposure Total Exposure Low risk(13) 6,910, ,689 7,172,369 Acceptable risk(46) 50,978,127 5,621,932 56,600,059 Watch list (7) 9,759,086 1,132,616 10,891,702 67,647,893 7,016,237 74,664,130 Retail (unrated) 161,111, ,111,331 Total 228,759,224 7,016, ,775,

107 Notes To Consolidated Financial Statements k. The tables below depict the quality of watch list & corporate nonperforming financing and impaired retail financing as at 31 December: (SAR 000) Corporate Watch List 8,076,371 9,759,086 Nonperforming: Risk Rating 8 958, ,111 Risk Rating 9 6, ,773 Risk Rating , ,057 9,304,102 11,269,027 Retail (unrated) 542,448 1,357,660 Total 9,846,550 12,626,687 l. The table below stratify credit exposures from corporate financing by ranges of loantovalue (LTV) ratio. LTV is calculated as the ratio of the gross amount of the financing or the amount committed for loan commitments to the value of the collateral. The gross amounts exclude any impairment allowance. )SAR 000( Less than 50% 2,965,647 1,928, % 5,490,525 5,697, % 8,113,447 6,412, % 35,060,621 29,366,953 More than 100% 986, ,212 Total exposure 52,616,505 43,848,354 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

108 m. The tables below depict the quality of neither past due nor impaired financing as at 31 December: 2017 )SAR 000( Low risk (13) Acceptable risk (46) Watch list (7) Total Retail except credit cards (unrated) 164,502, ,502,503 Corporate 9,535,260 51,779,295 6,189,003 67,503,558 Credit cards 903, ,089 Total 174,940,852 51,779,295 6,189, ,909, )SAR 000( Low Risk(13) Acceptable Risk(46) Watch list (7) Total Retail except credit cards (unrated) 160,278, ,278,998 Corporate 6,910,680 49,171,992 8,180,565 64,263,237 Credit cards 466, ,606 Total 167,656,284 49,171,992 8,180, ,008,841 Risk Rating 1 Exceptional Obligors of unquestioned credit standing at the pinnacle of credit quality. Risk Rating 2 Excellent Obligors of the highest quality, presently and prospectively. Virtually no risk in lending to this class, Cash flows reflect exceptionally large and stable margins of protection. Projected cash flows including anticipated credit extensions indicate strong liquidity levels and debt service coverage. Balance Sheet parameters are strong, with excellent asset quality in terms of value and liquidity. Risk Rating 3 Superior Typically obligors at the lower end of the high quality range with excellent prospects. Very good asset quality and liquidity. Consistently strong debt capacity and coverage. There could however be some elements, which with a low likelihood might impair performance in the future. 108

109 Notes To Consolidated Financial Statements Risk Rating 4 Good Typically obligors in the high end of the medium range who are definitely sound with minor risk characteristics. Elements of strength are present in such areas as liquidity, stability of margins, cash flows, diversity of assets, and lack of dependence on one type of business. Risk Rating 5 Satisfactory These are obligors with smaller margins of debt service coverage and with some elements of reduced strength. Satisfactory asset quality, liquidity, and good debt capacity and coverage. A loss year or declining earnings trend may occur, but the borrowers have sufficient strength and financial flexibility to offset these issues. Risk Rating 6 Adequate Obligors with declining earnings, strained cash flow, increasing leverage and/ or weakening market fundamentals that indicate above average risk, such borrowers have limited additional debt capacity, modest coverage, average or below average asset quality and market share. Present borrower performance is satisfactory, but could be adversely affected by developing collateral quality/ adequacy etc. Risk Rating 7 Very high risk Generally undesirable business constituting an undue and unwarranted credit risk but not to the point of justifying a substandard classification. No loss of principal or profit has taken place. Potential weakness might include a weakening financial condition, an unrealistic repayment program, inadequate sources of funds, or a lack of adequate collateral, credit information or documentation. The entity is undistinguished and mediocre. No new or incremental credits will generally be considered for this category. Risk Rating 8 Substandard Obligors in default and 90 Days Past Due on repayment of their obligations. Unacceptable business credit. Normal repayment is in jeopardy, and there exists well defined weakness in support of the same. The asset is inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral. Specific provision raised as an estimate of potential loss. Risk Rating 9 Doubtful Obligors in default and 180 Days Past Due (DPD) on their contracted obligations, however in the opinion of the management recovery/ salvage value against corporate and real estate obligors is a possibility, and hence writeoff should be deferred. Full repayment questionable. Serious problems exist to the point where a partial loss of principle is likely. Weaknesses are so pronounced that on the basis of current information, conditions and values, collection in full is highly improbable. Specific provision raised as an estimate Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

110 of potential loss. However, for retail obligors (except real estate) and credit cards, total loss is expected. A 100% Specific Provisioning must be triggered followed by the writeoff process should be effected as per Al Rajhi Bank writeoff policy. Risk Rating 10 Loss Obligors in default and 360 Days Past Due (DPD) on their obligations. Total loss is expected. An uncollectible assets which does not warrant classification as an active asset. A 100% Specific Provisioning must be triggered followed by the writeoff process should be effected as per Al Rajhi Bank writeoff policy. 7 2 Allowance for impairment of financing: The movement in the allowance for impairment of financing for the years ended 31 December is as follows: 2017 (SAR 000) Retail Corporate Total Balance at beginning of the year 2,194,641 3,544,010 6,632,701 Charge for the year, net 2,140,930 1,063,367 2,638,991 Bad debts written off against provision (1,246,880) (1,075,601) (3,716,482) Balance at the end of the year 3,088,691 3,531,776 5,555, (SAR 000) Retail Corporate Total Balance at beginning of the year 2,194,641 3,578,758 5,773,399 Charge for the year, net 2,140, ,633 2,581,563 Bad debts written off against provision )1,246,880( )475,381( )1,722,261( Balance at the end of the year 3,088,691 3,544,010 6,632,

111 Notes To Consolidated Financial Statements 73 Impairment charge movement: The details of the impairment charge on financing for the year recorded in the consolidated statement of income is as follows: (SAR 000) Charge for the year 2,638,991 2,581,563 Recovery of written off financing, net (1,091,414) (541,268) Bad debts written off directly 101,947 Allowance for impairment, net 1,547,577 2,142, Financing include finance lease receivables, which are as follows: Gross receivables from finance lease 33,802,769 31,796,685 Less than 1 year 1,234,258 4,127,907 1 to 5 years 24,357,231 22,786,487 Over 5 years 8,211,280 4,882,291 33,802,769 31,796,685 Unearned future finance income on finance lease (4,903,943) )4,334,825( Net receivables from finance lease 28,898,826 27,461,860 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

112 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net comprises the following as of 31 December: Land Buildings Leasehold land & buildings improvements (SAR 000) Equipment and furniture Total 2017 Total 2016 COST At January 1 2,009,863 3,219, ,383 4,533,276 10,694,787 9,372,961 Additions 310, ,651 9,288 1,034,027 1,813,962 1,321,826 Disposals ,284 39,976 At 31 December 2,320,596 3,678, ,671 5,528,019 12,468,773 10,694,787 ACCUMULATED DEPRECIATION At January 1 352, ,632 2,968,806 4,209,625 3,794,030 Charge for the year 58,684 14, , , ,595 Disposals ,115 39,545 At 31 December 410, ,035 3,297,170 4,610,646 4,209,625 NET BOOK VALUE At 31 December ,320,596 3,268,046 38,636 2,230,849 7,858,127 At 31 December ,009,863 2,867,078 43,751 1,564,470 6,485,162 Buildings include workinprogress amounting to SAR 1,803 million as at 31 December 2017 (31 December 2016: SAR 1,343 million). Equipment and furniture includes information technologyrelated assets having net book value of SAR 788 million as at 31 December 2017 (31 December 2016: SAR 944 million). 9. INVESTMENT PROPERTIES, NET Investment properties consist of properties acquired by the Group in the year The net book value of the investment properties approximates the fair value. 112

113 Notes To Consolidated Financial Statements 10. OTHER ASSETS, NET Other assets, net comprise the following as of 31 December: (SAR 000) Receivables, net 1,270,554 1,321,131 Prepaid expenses 714, ,264 Investment in cars, real estate and other nonfinancial assets 574, ,579 Cheques under collection 497, ,217 Advance payments 494, ,850 Accrued income 407, ,922 Other real estate* 147, ,106 Others, net 907, ,285 Total 5,015,464 4,140,354 * The Bank, in the ordinary course of business, acquires certain real estate against settlement of financing. Such real estate are considered as assets held for sale. 11. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions comprise the following as of 31 December: (SAR 000) Current accounts 1,066, ,208 Banks time investments 4,456,093 7,945,762 Total 5,522,567 8,916,970 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

114 12. CUSTOMERS DEPOSITS Customers deposits by type comprise the following as of 31 December: (SAR 000) Demand deposits 251,729, ,707,815 Customers time investments 15,917,263 21,645,586 Other customer accounts 5,409,414 5,239,735 Total 273,056, ,593,136 The balance of the other customers accounts includes margins on letters of credit and guarantees, checques under clearance and transfers. Customers deposits by currency comprise the following as of 31 December: (SAR 000) Saudi Arabian Riyals 260,388, ,725,459 Foreign currencies 12,668,205 12,867,677 Total 273,056, ,593,

115 Notes To Consolidated Financial Statements 13. OTHER LIABILITIES Other liabilities comprise the following as of 31 December: (SAR 000) Accounts payable 3,436,195 2,104,587 Provision for employees end of service benefits (see note 25) 848, ,671 Accrued expenses 16, ,699 Charities (see note 31) 3,647,530 23,785 Other 8,786,598 2,750,097 Total 6,254,839 6,254, SHARE CAPITAL The authorized, issued and fully paid share capital of the Bank consists of 1,625 million shares of SAR 10 each (2016: 1,625 million shares of SAR 10 each). 15. STATUTORY AND OTHER RESERVES The Banking Control Law in Saudi Arabia and the ByLaws of the Bank require a transfer to statutory reserve at a minimum of 25% of the annual net income for the year. Such transfers continue until the reserve equals the paid up share capital. This reserve is presently not available for distribution. In accordance with the Bank s revised accounting policy, during the current year an amount of SAR 192 million, accrued and transferred to other liabilities as zakat payable (to be deducted from final cash dividends for 2017), which will be paid in Previously, the Bank was recording the amount of Zakat it calculates in other reserves until the final amount of Zakat payable can be determined. During the year, the Bank transferred SAR million (2016: SAR million) to other liabilities as zakat payable in respect of final dividend for 2016, which was paid during the current year. In addition, other reserves includes availableforsale investments reserve, foreign currency translation reserve and employee share plan. The movements in availableforsale investments, foreign currency reserves, and employee share plan are summarized as follows: Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

116 (SAR 000) Availableforsale investments Foreign currency translation Employee share plan 2017 Total Balance at beginning of the year 58,179 (147,935) 37,110 (52,646) Net change in fair value 201, ,825 Net amount transferred to consolidated statement of income (340,134) (340,134) Exchange difference on translation of foreign operations 73,624 73,624 Employee share plan Balance at the end of the year (80,130) (74,311) 37,110 (117,331) (SAR 000) Availableforsale investments Foreign currency translation Employee share plan 2016 Total Balance at beginning of the year (46,524) (137,151) 27,836 (155,839) Net changes in fair value 33,327 33,327 Net amount transferred to consolidated statement of income Exchange difference on translation of foreign operations 71,376 71,376 (10,784) (10,784) Employee share plan 9,274 9,274 Balance at the end of the year 58,179 (147,935) 37,110 (52,646) The founders of the Bank had set up a separate employee plan (fund) for employees which is a separate legal entity. The employees who are entitled for bonuses get shares of the Bank from the fund. The shares of the Bank are in the name of that fund. The reserve represents the bonus liability to be transferred to the fund on account of the bonus entitlement of employees for the year. 116

117 Notes To Consolidated Financial Statements 16. COMMITMENTS AND CONTINGENCIES a) Legal proceedings As at 31 December 2017, there were certain legal proceedings outstanding against the Bank in the normal course of business including those relating to the extension of credit facilities. Such proceedings are being reviewed by the concerned parties. Provisions have been made for some of these legal cases based on the assessment of the Bank s legal advisors. b) Capital commitments As at 31 December 2017, the Bank had capital commitments of SAR 629 million (2016: SAR 455 million) relating to contracts for computer software update and development, and SAR 410 million (2016: SAR 596 million) relating to building new workstation, and development and improvement of new and existing branches. c) Credit related commitments and contingencies The primary purpose of these instruments is to ensure that funds are available to customers as required. Credit related commitments and contingencies mainly comprise letters of guarantee, standby letters of credit, acceptances and unused commitments to extend credit. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet his obligations to third parties, carry the same credit risk as financing. Letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate, and therefore, carry less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be presented before being reimbursed by the customers. Cash requirements under guarantees and letters of credit are considerably less than the amount of the commitment because the Bank does not expect the third party to draw funds under the agreement. Commitments to extend credit represent unused portions of authorization to extended credit, principally in the form of financing, guarantees and letters of credit. With respect to credit risk relating to commitments to extend unused credit, the Bank is potentially exposed to a loss in an amount which is equal to the total unused commitments. The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

118 contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire without being funded. 1. The contractual maturities of the Bank s commitments and contingent liabilities are as follows at 31 December: 2017 (SAR 000) Less than 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Letters of credit 1,027,240 82,382 68,626 1,178,248 Acceptances 313, , ,464 Letters of guarantee 1,790,856 1,986,680 1,183,423 8,396 4,969,355 Irrevocable commitments to extend credit 875,279 2,983,742 2,969, ,284 6,989,369 Total 4,006,512 5,170,131 4,221, ,680 13,567, (SAR 000) Less than 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Letters of credit 367, , ,096 3,166 1,042,924 Acceptances 253, , ,989 Letters of guarantee 3, ,067 2,607,797 2,374,504 5,264,324 Irrevocable commitments to extend credit 37,286 3,155,806 1,976, ,780 5,644,159 Total 662,702 4,378,064 4,767,180 2,852,450 12,660,

119 Notes To Consolidated Financial Statements 2. The analysis of commitments and contingencies by counterparty is as follows as at 31 December: (SAR 000) Corporates 10,728,656 10,766,791 Banks and other financial institutions 2,838,780 1,893,605 Total 13,567,436 12,660,396 d) Operating lease commitments The future minimum lease payments under noncancelable operating leases, where the Bank is the lessee, are as follows as at 31 December: (SAR 000) Less than 1 year 41,163 40,391 One 1 to 5 years 197, ,917 Over 5 years 56,362 50,141 Total 295, ,449 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

120 17. NET FINANCING AND INVESTMENT INCOME Net financing and investment income for the years ended 31 December comprises the following: (SAR 000) Financing Corporate Mutajara 2,049,915 1,680,957 Installment sale 8,533,438 8,287,559 Murabaha 691, ,583 Investments and other Murabaha with SAMA 673, ,176 Mutajara with banks 517, ,166 Income from sukuk 115,394 73,004 Gross financing and investment income 12,581,004 11,751,445 Return on customers time investments (360,084) (390,554) Return on due to banks and financial institutions time investments Return on customers, banks and financial institutions time investments (191,503) (137,804) (551,587) (528,358) Net financing and investment income 12,029,417 11,223,

121 Notes To Consolidated Financial Statements 18. FEE FROM BANKING SERVICES, NET Fee from banking services, net for the years ended 31 December comprise the following: (SAR 000) Fee income: Advance payments on contracts 1,052,875 1,255,929 Credit cards 568, ,527 Payment service systems 930, ,433 Share trading services 422, ,634 Remittance business 437, ,446 SADAD 164, ,798 Mudaraba 92, ,776 Other 364, ,306 Total fee income 4,033,262 4,078,849 Fee expenses: Payment service systems (1,157,215) (984,160) Share trading services (178,839) (144,726) Total fee expenses (1,336,054) (1,128,886) Fee from banking services, net 2,697,208 2,949,963 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

122 19. OTHER OPERATING INCOME Other operating income for the years ended 31 December comprises the following: (SAR 000) Dividend income 30,176 31,678 Gain on sale of property and equipment, net 594 Rental income from investment property 81,592 74,123 Share in earnings of associate 35,545 13,762 Gain / (loss) on investments held as FVSI 12,635 9,382 Income from sale of various investments 3,374 16,070 Other income, net 172,474 98,029 Total 336, , SALARIES AND EMPLOYEES RELATED BENEFITS The following tables provide an analysis of the salaries and employees related benefits for the years ended 31 December: 2017 Number of employees )SAR 000( Fixed Compensation Variable compensations paid Cash Shares Executives 54 53,215 29,024 11,074 Employees engaged in risk taking activities 1, ,212 63,815 17,155 Employees engaged in control functions ,956 27,097 12,221 Other employees 9,155 1,918, ,099 17,468 Total 11,058 2,525, ,035 57,918 Accrued variable compensations in ,000 Other employees costs 2, ,956 13,185 Gross total 13,077 2,813, ,220 57,

123 Notes To Consolidated Financial Statements 2016 Number of employees Fixed Compensation )SAR 000( Variable compensations paid Cash Shares Executives 75 76,374 14,301 1,554 Employees engaged in risk taking activities 1, ,787 75,581 1,878 Employees engaged in control functions ,857 20,094 1,223 Other employees 11,690 1,554, ,353 2,142 Total 13,684 2,131, ,329 6,797 Accrued variable compensations in ,845 Other employees costs 443,998 Gross total 13,684 2,873, ,329 6,797 Salaries and employees related benefits include end of services, General Organization for Social Insurance, business trips, training and other benefits. As the Kingdom of Saudi Arabia is part of the G20, instructions were given to all financial institutions in the Kingdom to comply with the standards and principles of Basel II and the Financial Stability Board. SAMA, as the regulatory for financial institutions in Saudi Arabia, issued regulations on compensations and bonus in accordance with the standards and principles of Basel II and the Financial Stability Board. In light of the above SAMA s regulation, the Bank issued compensation and bonuses policy which was implemented after the Board of Directors approval. The scope of this policy is extended to include the Bank and its subsidiary companies (local and international) that are operating in the financial service sector. Accordingly it includes all official employees, permanent and temporary contracted employees and service providers (contribution in risk position if SAMA allows the use of external resources). For consistency with other banking institutions in the Kingdom of Saudi Arabia, the Bank has used a combination of fixed and variable compensation to attract and maintain talent. The fixed compensation is assessed on a yearly basis by comparing it to other local banks in the Kingdom of Saudi Arabia including the basic salaries, allowance and benefits which is related to the employees ranks. The variable compensation is related to the employees performance and their compatibility to achieve the agreed on objectives. It includes incentives, performance bonus and other benefits. Incentives are mainly Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

124 paid to branches employees whereby the performance bonuses are paid to head office employees and others who do not qualify for incentives. These bonuses and compensation are approved by the Board of Directors as a percentage of the Bank s income. 21. OTHER GENERAL AND ADMINISTRATIVE EXPENSES Other general and administrative expenses for the years ended 31 December comprises the following: )SAR 000( Utilities 402, ,124 Software 407, ,891 Electricity & water 315, ,630 Consultancy 83,531 49,700 Government 51,389 35,254 Others 411, ,195 Total 1,671,052 1,440, EARNINGS PER SHARE Earnings per share for the years ended 31 December 2017 and 2016 have been calculated by dividing the net income for the year by the weighted average number of shares outstanding. The weighted average number of ordinary shares outstanding during the year is the number of ordinary shares outstanding at the beginning of the year, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a timeweighting factor, if any. The timeweighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the year. 23. PAID AND PROPOSED GROSS DIVIDENDS AND ZAKAT The Bank distributed dividends for the first half of 2017 amounting to SAR 2,437,500 thousand (i.e. SAR 1.5 per share) (2016: SAR 1,218,750 thousand (i.e. SAR 0.75 per share). Also the Bank proposed final dividends for the year 2017 amounting to SAR 4,062,500 thousand (i.e. SAR 2.5 per share) (2016: SAR 2,437,500 thousand i.e. SAR 1.5 per share). The Bank has filed its Zakat returns with the GAZT and paid Zakat for financial years 124

125 Notes To Consolidated Financial Statements up to and including the year The Zakat assessments for the years up to 2001 have been finalized with the GAZT. The Bank has received assessments for the years 2002 to 2009 in which the GAZT raised additional demands aggregating to SAR 723 million. These additional demands mainly came from the disallowance of longterm investments, statuary deposit and financing lease to the Zakat base by the GAZT. The basis for the additional Zakat liability is being contested by the Bank before the relevant legal courts. Management is confident of a favorable outcome on the aforementioned appeals. However, as a matter of abundant caution, the Bank has set aside amounts for the potential additional Zakat exposure in other reserves. The assessments for the years 2010 to 2015 are yet to be raised by the GAZT. However, if deducting longterm investments are disallowed and longterm financing is added to the Zakat base, in line with the assessments finalized by GAZT for the years referred to above, it would result in significant additional Zakat exposure to the Bank which remains an industry wide issue and disclosure of which might affect the Bank s position in this matter. 24. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: )SAR 000( Cash in hand 8,595,037 8,335,452 Due from banks and other financial institutions maturing within 90 days from the date of purchased 891,976 8,677,525 Balances with SAMA and other central banks (current accounts) 425, ,957 Mutajara with SAMA 21,310,111 15,181,051 Total 31,222,195 32,683,985 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

126 25. EMPLOYEE BENEFIT OBLIGATION 25.1 General description The Bank operates an End of Service Benefit Plan for its employees based on the prevailing Saudi Labor Laws. Accruals are made in accordance with the actuarial valuation under projected unit credit method while the benefit payments obligation is discharged as and when it falls due The amounts recognized in the statement of financial position and movement in the obligation during the year based on its present value are as follows: )SAR 000( Defined benefit obligation at the beginning of the year 761, ,345 Current service cost 97,475 94,171 Interest cost 34,579 30,256 Benefits paid (74,824) (35,101) Remeasurement loss / (gain) 29,521 Defined benefit obligation at the end of the year 848, , Charge /(reversal) for the year )SAR 000( Current service cost 97,475 94,171 Past service cost 97,475 94,

127 Notes To Consolidated Financial Statements 25.4 Remeasurement recognised in Other comprehensive income )SAR 000( (Gain)/loss from change in demographic assumptions 601 (Gain)/loss from change in experience assumptions 20,094 (Gain)/loss from change in financial assumptions 8,826 29, Principal actuarial assumptions (in respect of the employee benefit scheme) Discount rate 4.50% 4.30% Expected rate of salary increase 3.50% 1% for FY 2016 and 3.5% thereafter for future years Normal retirement age 60 years for male employees and 55 for female employees 60 years for male employees and 55 for female employees Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in the region. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

128 25.6 Sensitivity of actuarial assumptions The table below illustrates the sensitivity of the Defined Benefit Obligation valuation as at December 31, 2017 to the discount rate (4.50%), salary escalation rate (3.50%), withdrawal assumptions and mortality rates. SAR 000 Impact on defined benefit obligation Increase / (Decrease) Base Scenario Change in assumption Increase in assumption Decrease in assumption Discount rate +/ 100 basis points (84,916) 121,031 Expected rate of salary increase +/ 100 basis points 120,796 (86,419) Normal retirement age Increase or decrease by 20% 13,800 (3,252) The above sensitivity analyses are based on a change in an assumption holding all other assumptions constant Expected maturity Expected maturity analysis of undiscounted defined benefit obligation for the end of service plan is as follows: As at December 31, 2017 Less than a year 12 years 25 years Over 5 years Total 848,422 69,207 78, , , ,324 The weighted average duration of the defined benefit obligation is 15 years. 26. OPERATING SEGMENTS The Bank identifies operating segments on the basis of internal reports about the activities of the Bank that are regularly reviewed by the chief operating decision maker, principally the Chief Executive Officer, in order to allocate resources to the segments and to assess its performance. For management purposes, the Bank is organized into the following four main businesses segments: 128

129 Notes To Consolidated Financial Statements Retail segment: Corporate segment: Treasury segment: Investment services and brokerage segments: Includes individual customer deposits, credit facilities, customer debit current accounts (overdrafts), fees from banking services and remittance business. Incorporates deposits of VIP, corporate customers deposits, credit facilities, and debit current accounts (overdrafts). Incorporates treasury services, Murabaha with SAMA and international Mutajara portfolio. Incorporates investments of individuals and corporates in mutual funds, local and international share trading services and investment portfolios. Transactions between the above segments are on normal commercial terms and conditions. There are no material items of income or expenses between the above segments. Assets and liabilities for the segments comprise operating assets and liabilities, which represents the majority of the Bank s assets and liabilities. The Bank carries out its activities principally in the Kingdom of Saudi Arabia, and has five subsidiaries as of 31 December 2017 and 2016, as listed in Note 1a, of which one operate outside the Kingdom of Saudi Arabia, additional to overseas branches operating in Jordan and Kuwait. The total assets, liabilities, commitments, contingencies and results of operations of these subsidiaries are not material to the Bank s consolidated financial statements as a whole. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

130 a) The Bank s total assets and liabilities, together with its total operating income and expenses, and net income, as of and for the years ended 31 December for each segment are as follows: 2017 (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Total assets 183,538,671 63,535,244 93,114,778 2,927, ,116,528 Total liabilities 249,098,604 27,343,604 10,383, , ,365,610 Financing & investments income from external customers Intersegment operating income / (expense) Gross financing & investment income 8,230,257 2,862,192 1,466,239 22,316 12,581,004 1,769,837 (862,230) (907,607) 10,000,094 1,999, ,632 22,316 12,581,004 Return on customers, banks and financial institutions time investments Net financing & investment income Fees from banking services, net (75,531) (240,145) (235,911) (551,587) 9,924,563 1,759, ,721 22,316 12,029,417 1,695, ,669 37, ,943 2,697,208 Exchange income, net 841, ,839 Other operating income, net 218, ,063 12, ,390 Total operating income 11,838,379 2,309,486 1,306, ,252 15,904,854 Depreciation (425,086) (5,066) (4,505) (5,910) (440,566) Impairment charge for financing, net (1,198,494) (348,538) (545) (1,547,577) Impairment charge for availableforsale investments Other operating expenses (4,210,180) (368,416) (86,508) (130,880) (4,795,985) Total operating expenses (5,833,760) (722,020) (91,558) (136,790) (6,784,128) Net income for the year 6,004,619 1,587,466 1,215, ,462 9,120,

131 Notes To Consolidated Financial Statements 2016 (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Total assets 177,178,353 61,796,699 98,504,030 2,232, ,711,817 Total liabilities 243,517,074 33,307,549 10,805, , ,764,945 Financing & investments income from external customers 8,042,010 2,413,550 1,272,643 23,242 11,751,445 Intersegment operating income / (expense) Gross financing & investment income 913,203 (539,071) (374,132) 8,955,213 1,874, ,511 23,242 11,751,445 Return on customers, banks and financial institutions time investments Net financing & investment income Fees from banking services, net (8,484) (382,208) (137,666) (528,358) 8,946,729 1,492, ,845 23,242 11,223,087 1,952, ,517 38, ,813 2,949,963 Exchange income, net 925, ,286 Other operating income, net 118,332 34,820 89, ,044 Total operating income 11,018,057 1,994,788 1,759, ,947 15,341,380 Depreciation (402,251) (3,989) (3,746) (5,609) (415,595) Impairment charge for financing, net Impairment charge for availableforsale investments (1,300,166) (842,076) (2,142,242) (65,923) (65,923) Other operating expenses (4,011,825) (344,296) (80,683) (154,856) (4,591,660) Total operating expenses (5,714,242) (1,190,361) (150,352) (160,465) (7,215,420) Net income for the year 5,303, ,427 1,609, ,482 8,125,960 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

132 b) The Group s credit exposure by business segments as of 31 December is as follows: 2017 (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Consolidated balance sheet assets 164,609,073 62,660,677 62,522,406 2,927, ,924,748 Commitments and contingencies excluding irrevocable commitments to extend credit 6,776,468 6,776, (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Consolidated balance sheet assets 159,191,717 61,572,881 62,522, , ,124,761 Commitments and contingencies excluding irrevocable commitments to extend credit 1,548,060 5,468,177 7,016,237 Credit risks comprise the carrying value of the consolidated statement of financial position, except for cash and balances with SAMA, investment property, property and equipment and other assets. The credit equivalent value of commitments and contingencies are included in credit exposure. 27. FINANCIAL RISK MANAGEMENT The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an inevitable consequence of participating in financial markets. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The Bank s risk management policies, procedures and systems are designed to identify and analyze these risks and to set appropriate risk mitigants and controls. The Bank reviews its risk management policies and systems on an ongoing basis to reflect changes in markets, products and emerging best practices. 132

133 Notes To Consolidated Financial Statements Risk management is performed by the Credit and Risk Management Group ( CRMG ) under policies approved by the Board of Directors. The CRMG identifies and evaluates financial risks in close cooperation with the Bank s operating units. The most important types of risks identified by the Bank are credit risk, liquidity risk and market risk. Market risk includes currency risk, profit rate risk, operational risk and price risk. 271 Credit risk Credit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counterparty to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally from financing (credit facilities provided to customers) and from cash and deposits held with other banks. Further, there is credit risk in certain offbalance sheet financial instruments, including guarantees relating to purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the CRMG which sets parameters and thresholds for the Bank s financing activities. a. Credit risk measurement Financing The Bank has structured a number of financial products which are in accordance with Sharia law in order to meet the customers demand. These products are all classified as financing assets in the Bank s consolidated statement of financial position. In measuring credit risk of financing at a counterparty level, the Bank considers the overall credit worthiness of the customer based on a proprietary risk methodology. This risk rating methodology utilizes a 10 point scale based on quantitative and qualitative factors with seven performing categories (rated 1 to 7) and three nonperforming categories (rated 810). The risk rating process is intended to advise the various independent approval authorities of the inherent risks associated with the counterparty and assist in determining suitable pricing commensurate with the associated risk. This process also enables the Bank to detect any weakness in the portfolio quality and make appropriate adjustments to credit risk allowances, where credit quality has deteriorated and where losses are likely to arise. The Bank evaluates individual corporate customer balances which are past due to make appropriate allowances against financings. For the remaining (performing) corporate portfolio, the Bank applies a loss rate to determine an appropriate collective impairments allowance. The loss rate is determined based on historical experience of credit losses. Settlement risk The Bank is also exposed to settlement risk in its dealings with other financial institutions. This risk arises when the Bank pays its side of the transaction to the other bank or counterparty before receiving payment from the third party. The risk is that the third Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

134 party may not pay its obligation. While these exposures are short in duration but they can be significant. The risk is mitigated by dealing with highly rated counterparties, holding collateral and limiting the size of the exposures according to the risk rating of the counterparty. b. Risk limit control and mitigation policies The responsibility for credit risk management is enterprisewide in scope. Strong risk management is integrated into daily processes, decision making and strategy setting, thereby making the understanding and management of credit risk the responsibility of every business segment. The following business units within the Bank assist in the credit control process: Corporate Credit Unit. Credit Administration, Monitoring and Control Unit. Remedial Unit. Credit Policy Unit. Retail Credit Unit. The monitoring and management of credit risk associated with these financing are made by setting approved credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified in particular, to individual customers and groups, and to industries and countries. Concentrations of credit risks arise when a number of customers are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risks indicate the relative sensitivity of the Bank s performance to developments affecting a particular industry or geographical location. The Bank seeks to manage its credit risk exposure through diversification of its financing to ensure there is no undue concentration of risks with to individuals or groups of customers in specific geographical locations or economic sectors. The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually by the executive committee. 134

135 Notes To Consolidated Financial Statements Exposure to credit risk is also managed through regular analysis on the ability of customers and potential customers to meet financial and contractual repayment obligations and by revising credit limits where appropriate. Some other specific control and mitigation measures are outlined below: b1) Collateral The Bank implements guidelines on the level and quality of specific classes of collateral, The principal collateral types are: Mortgages over residential and commercial properties. Cash, shares, and general assets for customer. Shares for Murabaha (collateralized share trading) transactions. b2) Collateralized Credit related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as traditional banking products of the Bank. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying goods to which they relate, and therefore, risk is partially mitigated. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of further financing products, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. c. Impairment and provisioning policies Allowance for impairment is recognized for financial reporting purposes only for losses that have been incurred at the statement of financial position date based on objective evidence of impairment, and management judgment. Management determines whether objective evidence of impairment exists under IAS 39, based on the following criteria as defined by the Bank: Delinquency in contractual payments of principal or profit. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

136 Cash flow difficulties experienced by the customer. Breach of repayment covenants or conditions. Initiation of bankruptcy proceedings against the customer. Deterioration of the customer s competitive position. Deterioration in the value of collateral. The Bank s policy requires the review of each individual corporate customer at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of incurred losses at the statement of financial position date on a casebycase basis, and by using management judgment. The assessment normally encompasses collateral held (including reconfirmation of its enforceability) and the anticipated receipts for that individual account. Collectively assessed impairment allowances are provided for: Portfolios of homogenous assets mainly relating to the retail financing portfolio that are individually not significant. On the corporate portfolio for financing where losses have been incurred but not yet identified, by using historical experience, judgment and statistical techniques. 136

137 Notes To Consolidated Financial Statements The table below sets out the maximum exposure to credit risk at the reporting date without considering collateral or other credit enhancements and includes the offbalance sheet financial instruments involving credit risks as at 31 December: )SAR 000( Onbalance sheet items Investments Murabaha with SAMA 23,452,869 30,451,217 Sukuk 10,605,139 2,100,895 Due from banks and other financial institutions 10,709,795 26,578,525 Financing, net Corporate 69,196,949 65,613,824 Retail 164,338, ,380,300 Total onbalance sheet items 278,303, ,124,761 Offbalance sheet items: Letters of credit and acceptances 1,608,712 1,751,913 Letters of guarantee 4,969,355 5,264,324 Irrevocable commitments to extend credit 6,989,368 5,644,159 Total offbalance sheet items 13,567,435 12,660,396 Maximum exposure to credit risk 291,870, ,785,157 The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2016 and 2015, without taking account of any collateral held or other credit enhancements attached. For onbalancesheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position. 272 Liquidity risks Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay deposits and financing parties and fulfill financing commitments. Liquidity risk can be caused by Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

138 market disruptions or by credit downgrades, which may cause certain sources of funding to become unavailable immediately. Diverse funding sources available to the Bank help mitigate this risk. Assets are managed with liquidity in mind, maintaining a conservative balance of cash and cash equivalents. Liquidity risk management process The Bank s liquidity management process is as monitored by the Bank s Asset and Liabilities Committee (ALCO), includes: Daytoday funding, managed by Treasury to ensure that requirements can be met and this includes replenishment of funds as they mature or are invested; Monitoring balance sheet liquidity ratios against internal and regulatory requirements; Managing the concentration and profile of debt maturities; Maintain diversified funding sources; and Liquidity management and asset and liability mismatching. Monitoring and reporting take the form of analyzing cash flows of items with both contractual and noncontractual maturities. The net cash flows are measured and ensured that they are within acceptable ranges. The Treasury / ALCO also monitors, the level and type of undrawn lending commitments, usage of overdraft facilities and the potential impact of contingent liabilities such as standby letters of credit and guarantees may have on the Bank s liquidity position. The tables below summarize the maturity profile of the Bank s assets and liabilities, on the basis of the remaining maturity as of the consolidated statement of financial position date to the contractual maturity date. Management monitors the maturity profile to ensure that adequate liquidity is maintained, Assets available to meet all of the liabilities and to cover outstanding financing commitments include cash, balances with SAMA and due from banks. Further, in accordance with the Banking Control Law and Regulations issued by SAMA, the Bank maintains a statutory deposit equal to a sum not less than 7% of total customers deposits, and 4% of total other customers accounts. In addition to the statutory deposit, the Bank maintains a liquid reserve of not less than 20% of the deposit liabilities, in the form of cash, gold or assets which can be converted into cash within a period not exceeding 30 days. Also, the Bank has the ability to raise additional funds through special financing arrangements with SAMA including deferred sales transactions. The contractual maturities of financial assets and liabilities as of 31 December based on discounted cash flows are as follows. The table below reflect the expected cash flows indicated by the deposit retention history of the Group. Management monitors rolling 138

139 Notes To Consolidated Financial Statements forecast of the Group s liquidity position and cash and cash equivalents on the basis of expected cash flows. This is carried out in accordance with practice and limits set by the Group and based on the pattern of historical deposit movement. In addition, the Group s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Total Assets Cash and balance with SAMA and central banks 48,282,471 48,282,471 Due from banks and other financial institutions 2,217,734 6,019,134 1,349,887 1,123,040 10,709,795 Financing, net Corporate Mutajara 3,496,901 30,057,369 6,603,136 6,209,560 46,366,966 Installment sale 3,252,120 37,121, ,151,183 21,689, ,214,269 Murabaha 4,812,673 4,346,445 3,173,356 2,707,131 15,039,605 Credit cards 914, ,733 Investments Investment in an associate 124, ,825 Investments held at amortized cost 999,925 7,135,000 25,923,083 34,058,008 Investments held as FVSI 389, ,193 Availablefor sale investments 1,829,066 1,829,066 Other assets, net 2,262,542 2,262,542 Total 66,239,099 77,544, ,801,755 59,605, ,191,473 Liabilities Due to banks and other financial institutions 4,772, ,308 5,522,567 Customer deposits 39,323,785 32,792, ,889,718 42,050, ,056,445 Other liabilities 7,921,322 7,921,322 Total 52,017,366 32,792, ,889, ,500,334 Gap 14,221,733 44,752,046 (31,087,963) 16,805,323 44,691,139 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

140 Assets 2016 (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Total Cash and balance with SAMA and central banks 24,006,460 24,006,460 Due from banks and other financial institutions 10,125,020 16,453,505 26,578,525 Financing, net Corporate Mutajara 10,717,206 12,389,090 9,045,322 10,717,205 42,868,823 Installment sale 12,729,516 35,509, ,716,438 14,443, ,398,906 Murabaha 3,819,246 4,415,048 3,223,443 3,819,245 15,276,982 Credit cards 449, ,413 Investments Investment in an associate 89,280 89,280 Investments held at amortized cost 7,894,344 1,274,565 23,383,203 32,552,112 Investments held as FVSI 138, ,709 Availablefor sale investments 1,252,778 1,252,778 Other assets, net 1,678,348 1,678,348 Total 71,419,553 68,767, ,398,477 53,705, ,290,336 Liabilities Due to banks and other financial institutions 8,723,822 16, ,005 8,916,970 Customer deposits 39,257,062 32,737, ,620,122 41,978, ,593,136 Other liabilities 5,469,383 5,469,383 Total 53,450,267 32,753, ,620,122 42,155, ,979,489 Gap 17,969,286 36,013,908 (41,221,645) 11,549,298 24,310,

141 Notes To Consolidated Financial Statements The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at 31 December: 2017 (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years No fixed maturity Total Due to banks and other financial institutions 4,780, ,436 5,537,675 Customer deposits 39,389,542 33,037, ,724,895 42,449, ,601,879 Other liabilities 7,934,568 7,934,568 Total 52,104,349 33,037, ,724,895 43,207, ,074, (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years No fixed maturity Due to banks and other financial institutions 8,738,410 16, ,687 8,933,360 Customer deposits 39,322,708 32,981, ,452,184 42,377, ,134,250 Other liabilities 5,469,383 5,469,383 Total 53,530,501 32,997, ,452,184 42,556, ,536,993 The cumulative maturities of commitments & contingencies are given in note 16c1 of the financial statements. Total 273 Market risks The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Market risk exposures are monitored by Treasury / Credit & Risk department and reported to ALCO on a monthly basis. ALCO deliberates on the risks taken and ensure that they are appropriate. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

142 a. Market risks speculative operations The Bank is not exposed to market risks from speculative operations. The Bank is committed to Sharia guidelines which does not permit it to enter into contracts or speculative instruments such as hedging, options, forward contracts and derivatives. b. Market risks banking operations The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Profit rate risk Cash flow profit rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market profit rates. The Bank does not have any significant exposure to the effects of fluctuations in prevailing level of market profit rates on its future cash flows as a significant portion of profit earning financial assets and profit bearing liabilities are at fixed rates and are carried in the financial statements at amortized cost. In addition to this, a substantial portion of the Bank s financial liabilities are nonprofit bearing. Commission rate risk arises from the possibility that the changes in profit rates will affect either the fair values or the future cash flows of the financial instruments. The Board has established commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses gap management strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonable possible change in profit rates, with other variables held constant, on the Bank s statement of income or equity. The sensitivity of the income is the effect of the assumed changes in profit rates on the net income for one year, based on the floating rate nontrading financial assets and financial liabilities held as at 31 December 2017 and The sensitivity of equity is same as sensitivity of income since the Bank does not have fixed rate availableforsale financial assets as at 31 December 2017 and All the banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in SAR million. 142

143 Notes To Consolidated Financial Statements 2017 SAR in Million Currency Increase in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR Currency Decrease in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR SAR in Million Currency Increase in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR Currency Decrease in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR *Profit rate movements affect reported equity through retained earnings, i.e. increases or decreases in financing and investment income. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

144 Commission sensitivity of assets, liabilities and off balance sheet items ٢٠١٧ (SAR 000) Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total Assets Cash and balance with SAMA 39,687,434 8,595,037 48,282,471 Due from banks and other financial institutions 2,217, ,993 5,905,141 1,349,887 1,123,040 10,709,795 Investments Investment in an associate 124, ,825 Investments held at amortized cost 23,300,000 2,025,000 7,135,000 1,598,008 34,058,008 Investments held as FVSI 389, ,193 Availablefor sale investments 1,829,066 1,829,066 Financing, net Corporate Mutajara 18,116,065 19,215,293 3,967,317 4,596, ,760 46,366,966 Installment sale 10,428,446 10,553,290 19,861, ,637,764 20,733, ,214,269 Murabaha 4,812,673 2,662,010 1,684,435 3,173,356 2,707,131 15,039,605 Credit cards 914, ,733 Other assets 2,262,542 2,262,542 Total Assets 101,739,627 34,569,586 31,418, ,892,538 37,571, ,191,473 Liabilities Due to banks and other financial institutions 4,772, ,308 5,522,567 Customer deposits 267,961,193 2,104,555 1,914,732 1,075, ,056,445 Other liabilities 7,921,322 7,921,322 Total Liabilities 280,654,774 2,104,555 1,914,732 1,075, , ,500,334 Gap (178,915,147) 32,465,031 29,503, ,816,573 36,821,151 44,691,139 Profit Rate Sensitivity On Statement of Financial Positions (178,915,147) 32,465,031 29,503, ,816,573 36,821,151 44,691,139 Profit Rate Sensitivity Off Statement of Financial Positions 472, ,420 Total Profit Rate Sensitivity (178,442,727) 32,465,031 29,503, ,816,573 36,821,151 45,163,559 Gap Cumulative Profit Rate Sensitivity Gap (178,442,727) (145,977,696) (116,474,165) 8,342,408 45,163,559 90,327,

145 Notes To Consolidated Financial Statements The Bank manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market commission rates on its financial position and cash flows. The Board sets limits on the level of mismatch of commission rate reprising that may be undertaken, which is monitored daily by Bank Treasury. The table below summarizes the Bank s exposure to profit rate risks. Included in the table are the Bank s financial instruments at carrying amounts, categorized by the earlier of contractual repricing or maturity dates. The Bank is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Bank manages this risk by matching the repricing of assets and liabilities through risk management strategies. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

146 2016 (SAR 000) Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total Assets Cash and balance with SAMA 16,081,405 7,925,055 24,006,460 Due from banks and other financial institutions 8,998,610 4,188,366 12,265,139 1,126,410 26,578,525 Investments Investment in an associate 89,280 89,280 Investments held at amortized cost 30,776,721 38,452 1,235, ,547 32,552,112 Investments held as FVSI 138, ,709 Availablefor sale investments 1,252,778 1,252,778 Financing, net Corporate Mutajara 13,718,023 7,587,782 4,801,308 9,045,322 7,716,388 42,868,823 Installment sale 12,729,516 11,797,682 23,728, ,699,798 14,443, ,398,906 Murabaha 4,888,634 2,704,026 1,711,022 3,223,443 2,749,857 15,276,982 Credit cards 449, ,413 Other assets 1,678,348 1,678,348 Total Assets 89,320,670 26,316,308 42,505, ,203,955 35,943, ,290,336 Liabilities Due to banks and other financial institutions 4,175, , ,202 4,036,263 8,916,970 Customer deposits 267,506,530 2,100,984 1,911,483 1,074, ,593,136 Other liabilities 5,469,383 5,469,383 Total Liabilities 277,151,747 2,249,655 1,911,483 1,630,341 4,036, ,979,489 Gap (187,831,077) 24,066,653 40,549, ,573,614 31,907,187 24,310,847 Profit Rate Sensitivity On Statement of Financial Positions 187,831,077 (24,066,653) (40,594,470) (115,573,614) (31,907,187) (24,310,847) Profit Rate Sensitivity Off Statement of Financial Positions 408, ,353 Total Profit Rate Sensitivity Gap 188,239,430 (24,066,653) (40,594,470) (115,573,614) (31,907,187) (23,902,494) Cumulative Profit Rate Sensitivity Gap 188,239, ,172, ,578,307 8,004,693 (23,902,494) (47,804,988) 146

147 Notes To Consolidated Financial Statements Notes To Consolidated Financial Statements The tables below summarize the Bank s exposure to foreign currency exchange rate risk at 31 December 2017 and 2016 and the concentration of currency risks, Included in the table are the Bank s financial instruments at carrying amounts, categorized by currency: UAE Dirham Japanese Yen Euro Malaysian Ringgit US Dollar Pound Sterling Other Total ASSETS Cash and cash equivalents 25,828 23, , ,979 21, ,309 1,384,791 Due from banks and other financial institutions 72,459 3, , , ,364 33, ,180 2,422,658 Financing, net 393 1,634, , ,432 2,757,273 Investments 5,522,749 4,389,826 3,724,296 13,636,871 Fixed assets 55 5,174 42, , , ,247 Other assets, net ,139 61,125 (24) 34, ,898 Total Assets 98,342 3, ,266 8,605,203 6,383,960 54,652 5,344,922 20,715,738 LIABILITIES Due to banks and other financial institutions 12,176 2,085 1,100, , ,812 2,109,445 Customer deposits 3,711 2, ,830 6,865,588 1,054,707 56,596 4,498,133 12,668,204 Other liabilities 13, ,415 91, ,488 7, , ,579 Total Liabilities 29,813 3, ,330 8,056,925 1,962,457 64,364 5,218,790 15,585,228 Net 68,529 (156) (24,064) 548,278 4,421,503 (9,712) 126,132 5,130,510 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

148 Notes To Consolidated Financial Statements UAE Dirham Japanese Yen Euro Malaysian Ringgit US Dollar Pound Sterling Other Total ASSETS Cash and cash equivalents 41,334 17, , ,909 14, ,318 1,274,291 Due from banks and other financial institutions 140,601 4,634 75, , ,597 42, ,513 2,096,820 Financing, net 5,259,880 4,483,395 3,107,484 12,850,759 Investments 342 1,504,066 98, ,955 2,008,282 Fixed assets 4,012 36,825 41, , ,749 Other assets, net ,340 42,139 15, ,322 Total Assets 181,935 4,634 97,764 7,548,167 5,673,730 57,334 5,015,659 18,579,223 LIABILITIES Due to banks and other financial institutions 72 37, , , ,427 1,483,895 Customer deposits 8,969 2, ,404 5,635,654 2,853,232 57,161 4,180,470 12,867,677 Other liabilities 6, ,466 98,836 4,728 5, , ,410 Total Liabilities 16,012 3, ,223 6,389,525 3,643,952 62,808 4,384,015 14,694,982 Net 165,923 1,187 )97,459( 1,158,642 2,029,778 )5,474( 631,644 3,884,

149 Notes To Consolidated Financial Statements Foreign currency risks Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The Bank management has set limits on positions by currencies, which are regularly monitored to ensure that positions are maintained within the limits. The table below shows the currencies to which the Bank has a significant exposure as at 31 December 2017 on its nontrading monetary assets and liabilities and forecasted cash flows. The analysis calculates the effect of reasonable possible movement of the currency rate against SAR, with all other variables held constant, on the statement of income (due to the fair value of the currency sensitive nontrading monetary assets and liabilities) and equity. A positive effect shows a potential increase in the statement of income statement of income or equity, whereas a negative effect shows a potential net reduction in the statement of income or statement of changes in shareholders equity. (SAR in million) Currency Exposures As at 31 December 2017 Change in Currency Rate in % Effect on Net Income Effect on Equity AED +/ 2 ٢.١٢ ٢.١٢ USD +/ 2 ٨٨.٦٦ ٨٨.٦٦ EUR +/ INR +/ 5 ٠.٤٠ ٠.٤٠ PKR +/ 5 ٠.٨٧ ٠.٨٧ (SAR in million) Currency Exposures As at 31 December 2016 Change in Currency Rate in % Effect on Net Income Effect on Equity AED +/ USD +/ EUR +/ INR +/ PKR +/ Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

150 Currency position The Bank manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intraday positions, which are monitored daily. At the end of the year, the Bank had the following significant net exposures denominated in foreign currencies: ٢٠١٧ SAR 000 Long/(short) ٢٠١٦ SAR 000 Long/(short) US Dollar 4,432,919 1,727,455 Japanese Yen (157) 1,187 Euro (19,569) )56,285( Pound Sterling (9,713) )3,213( Others 115, ,058 Total 4,519,324 2,022,202 c. Price risk The Bank has certain investments which are carried at fair value through the income statement (FVSI) and includes investments in quoted mutual funds and other investments. Price risk arises due to changes in quoted market prices of these mutual funds. As these investments are in a limited number of funds and are not significant to the total investment portfolio, the Bank monitors them periodically and determines the risk of holding them based on changes in market prices. Other investments have little or no risks as these are bought for immediate sales. Investments are made only with a confirmed sale order and therefore involve minimal risk. 150

151 Notes To Consolidated Financial Statements Equity Price Risk Equity risk refers to the risk of decrease in fair values of equities in the Bank s nontrading investment portfolio as a result of reasonable possible changes in levels of equity indices and the value of individual stocks. The effect on the Bank s equity investments held as availableforsale due to reasonable possible change in prices, with all other variables held constant is as follows: 31 December ٢٠١٧ 31 December ٢٠١٦ Market Indices Change in Equity price % Effect in SAR Million Change in Equity price % Effect in SAR Million Equity + / 10 + / / 10 + / 2.3٤ Mutual funds + / 10 + / ١٤٢.٣٥ + / 10 + / ٥٣.٠٣ d. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events. Operational risk is inherent in most of the Bank s activities this necessitates an integrated approach to the identification, measurement and monitoring of operational risk. An Operational Risk Management Unit (ORMU) has been established within the Credit and Risk Management Group which facilitates the management of Operational Risk within the Bank. ORMU facilitates the management of Operational Risk by setting policies, developing systems, tools and methodologies, overseeing their implementation and use within the business units and providing ongoing monitoring and guidance across the Bank. The three primary operational risk management processes in the Bank are Risk Control Self Assessment, Operational Loss Database and eventual implementation of Key Risk Indicators which are designed to function in a mutually reinforcing manner. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

152 Notes To Consolidated Financial Statements ٢٨. GEOGRAPHICAL CONCENTRATION a) The distribution by the geographical region of the major categories of assets, liabilities, commitments, contingencies and credit exposure accounts as of 31 December is as follows: ٢٠١٧ (SR 000) Kingdom of Saudi Arabia Other GCC and Middle East Europe North America South East Asia Other Countries Assets Cash and balances with SAMA and central banks 47,364, , ,887 48,282,472 Due from banks and other financial institutions 2,873,774 6,298, , ,962 1,030,678 1,474 10,709,795 Financing, net Corporate Mutajara 44,791,518 1,661,821 46,453,339 Installment sale 166,922,446 2,553,313 1,680, ,156,410 Murabaha 10,022,780 1,167,348 3,840,732 15,030,860 Credit cards 889,808 3,789 1, ,962 Investments, net Investment in an associate 124, ,825 Investments held at amortized cost 32,512, ,189 1,367,870 34,058,008 Investments held as FVSI 2, , , ,680 Availablefor sale investments 1,636, , ,805,580 Total 307,140,977 11,220,284 1,895, ,962 8,398,304 1, ,928,931 Liabilities Due to banks and other financial institutions 4,371, ,487 6, , ,968 3,198 5,522,567 Customer deposits 261,776,977 4,429,765 6,849, ,056,445 Total 266,148,058 4,852,252 6, ,218 7,317,671 3, ,579,012 Commitments and contingencies 10,167, ,234 2,818 2,989,605 1,300 13,567,435 Credit exposure (stated at credit equivalent value) 5,109, ,503 1,409 1,486, ,776,468 Total 152

153 Notes To Consolidated Financial Statements Notes To Consolidated Financial Statements ٢٠١٦ (SR 000) Kingdom of Saudi Arabia Other GCC and Middle East Europe North America South East Asia Other Countries Assets Cash and balances with SAMA and central banks 41,249, , ,262 42,149,905 Due from banks and other financial institutions 16,271,501 9,478, ,903 9, , ,291 26,578,525 Financing, net Corporate Mutajara 42,868,823 42,868,823 Installment sale 162,534,805 2,260,477 1,603, ,398,906 Murabaha 10,775, ,160 3,654,774 15,276,982 Credit cards 447,931 1, ,413 Investments, net Investment in an associate 89,280 89,280 Investments held at amortized cost 31,251,217 68,580 1,232,315 32,552,112 Investments held as FVSI 2,188 32, , ,709 Availablefor sale investments 1,135, , ,252,778 Total 306,626,013 13,438, ,245 9,242 7,230, , ,755,433 Total Liabilities Due to banks and other financial institutions 3,556,926 4,571,674 8,738 62, ,102 17,405 8,916,970 Customer deposits 262,806,339 4,151,144 5,635, ,593,136 Total 266,363,265 8,722,818 8,738 62,125 6,335,755 17, ,510,106 Commitments and contingencies 7,890, , ,887 33,258 3,084, ,982 12,660,396 Credit exposure (stated at credit equivalent value) 4,608, , ,887 33, , ,982 7,016,237 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

154 Credit equivalent amounts reflect the amounts that result from conversion of the Bank s offbalance sheet liabilities relating to commitments and contingencies into the risk equivalent of financing, using credit conversion factors prescribed by SAMA. Credit conversion factor is meant to capture the potential credit risk related to the exercise of that commitment. 154

155 Notes To Consolidated Financial Statements b) The distributions by geographical concentration of nonperforming financing and allowance for impairment of financing as of 31 December are as follows: ٢٠١٧ (SAR 000) Kingdom of Saudi Arabia GCC & Middle East South East of Asia Total Nonperforming Corporate Mutajara 1,217,981 4,333 1,222,314 Installment sale 495,193 14,827 11, ,287 Murabaha 5,418 5,418 Credit cards 19,168 1,992 21,160 Allowance for impairment of financing Corporate Mutajara (982,385) (3,609) (985,994) Installment sale (620,357) (10,149) (4,491) (634,997) Murabaha (1,020) (1,020) Credit cards (4,792) (1,539) (6,331) ٢٠١٦ (SAR 000) Kingdom of Saudi Arabia GCC & Middle East South East of Asia Total Nonperforming Corporate Mutajara 1,469,909 25,016 1,494,925 Installment sale 1,328,215 9,006 1,356 1,338,577 Murabaha 4,082 10,934 15,016 Credit cards 18, ,083 Allowance for impairment of financing Corporate Mutajara (1,551,633) (1,551,633) Installment sale (1,347,571) (5,241) (588) (1,353,400) Murabaha (4,134) (19,512) (23,646) Credit cards (19,430) (63) (19,493) Refer to Note 7a for performing financing. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

156 ٢٩. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Determination of fair value and fair value hierarchy The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: quoted prices in active markets for the same instrument (i.e. without modification or additions). Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant inputs are based on observable market data. Level 3: valuation techniques for which any significant input is not based on observable market data. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either: In the accessible principal market for the asset or liability, or In the absence of a principal market, in the most advantageous accessible market for the asset or liability Carrying amounts and fair value: The following table shows the carrying amount and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 156

157 Notes To Consolidated Financial Statements (SAR 000) 31 December ٢٠١٧ (audited) Financial assets Carrying value Level 1 Level 2 Level 3 Total Financial assets measured at fair value Investments held at FVSI 412, ,193 23, ,680 Availableforsale investments 1,805, ,293 1,034,286 1,805,579 Financial assets not measured at fair value Due from banks and other financial institutions 10,709,795 10,698,223 10,698,223 Investments held at amortized cost Murabaha with SAMA 23,452,869 23,459,853 23,459,853 Sukuk 10,605,139 10,559,636 10,559,636 Gross Financing 239,090, ,834, ,834,350 Total 286,076, ,293 1,423, ,575, ,770,321 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions 5,522,567 5,522,554 5,522,554 Customers deposits 273,056, ,056, ,056,440 Total 278,579, ,578, ,578,994 Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

158 (SAR 000) 31 December 2016 (audited) Financial assets Carrying value Level 1 Level 2 Level 3 Total Financial assets measured at fair value Investments held at FVSI 138, ,272 23, ,709 Availableforsale investments 1,252, , ,046 1,252,778 Financial assets not measured at fair value Due from banks and other financial institutions 26,578,525 26,460,455 26,460,455 Investments held at amortized cost Murabaha with SAMA 30,451,217 30,493,097 30,493,097 Sukuk 2,100,895 2,115,057 2,115,057 Gross Financing 231,626, ,304, ,304,256 Total 292,148, , , ,396, ,764,352 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions 8,916,970 8,916,640 8,916,640 Customers deposits 272,593, ,597, ,597,959 Total 281,510, ,514, ,514,599 FVSI and Availableforsale investments classified as level 2 include mutual funds, the fair value of which is determined based on the latest reported net assets value (NAV) as at the date of statement of consolidated financial position. The level 3 financial assets measured at fair value represent investments recorded at cost. The carrying value of these investments approximate fair value. Gross financing classified as level 3 has been valued using expected cash flows discounted at relevant SIBOR as at December 31, Investments held at amortized cost, due to / from banks and other financial institution have been valued using the actual cash flows discounted at relevant SIBOR/ SAMA murabaha rates as at December 31, The value obtained from the relevant valuation model may differ from the transaction price of a financial instrument. The difference between the transaction price and the 158

159 Notes To Consolidated Financial Statements model value commonly referred to as day one profit and loss is either amortized over the life of the transaction, deferred until the instrument s fair value can be determined using market observable data, or realized through disposal. Subsequent changes in fair value are recognized immediately in the statement of income without reversal of deferred day one profits and losses. During the current year, no financial assets / liabilities have been transferred between level 1 and/ or level 2 fair value hierarchy. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

160 ٣٠. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank transacts business with related parties. The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA, The nature and balances resulting from such transactions as at and for the year ended 31 December are as follows: (SAR 000) Related parties Members the Board of Directors Mutajara 39, ,498 Contingent liabilities * 3,594 Current accounts ,971 Companies and establishments guaranteed by members of the Board of Directors Mutajara 1,585, ,009 Contingent liabilities * 16, ,875 Other major shareholders (above 5% equity share) Mutajara 3,308,232 2,859,571 Contingent liabilities * 171,668 Current accounts 26,039 Other liabilities 26,067 26,230 Associate Contributions receivable 121, ,912 Payable against claims 150, ,154 Bank balances 289, ,802 * = off balance sheet items Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the years ended 31 December are as follows: 160

161 Notes To Consolidated Financial Statements (SAR 000) Income from financing and other 194, ,945 Mudaraba Fees 49,860 61,484 )Employees salaries and benefits (air tickets 4,253 4,274 Rent and premises related expenses 1,131 1,106 Contribution policies written 1,339,545 1,017,324 Claims incurred and notified during the period 1,139, ,195 Claims paid 1,023, ,670 Board of Directors remunerations 5,418 4,401 The amounts of compensations recorded in favor of or paid to the Board of Directors and the executive management personnel during the years ended 31 December are as follows: (SAR 000) Shortterm benefits 37,866 44,935 Provision for end of service benefits 1,280 2,024 The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank directly or indirectly. Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

162 31. MUDARABA FUNDS Mudaraba funds as of 31 December comprise the following: (SAR 000) Customers Mudaraba and investments 21,199,185 16,881,090 Current accounts, metals 2,031 2,031 Total 21,201,216 16,883,121 Mudaraba and investments represents customer s investment portfolio managed by Al Rajhi Capital Company and are considered as off balance sheet. Consistent with the accounting policies of the Group, such balances are not included in the Consolidated financial statements as these are held by the Group in fiduciary capacity. 32. SPECIAL COMMISSIONS EXCLUDED FROM THE CONSOLIDATED STATEMENT OF INCOME The following represents the movements in charities account, which is included in other liabilities (see note 13): (SAR 000) Balance at beginning of the year 23,785 23,875 Additions during the year 5,201 20,444 Payments made during the year (12,132) (20,534) Balance at end of the year 16,854 23, INVESTMENT MANAGEMENT SERVICES The Group offers investment services to its customers. The Group has established a number of Mudaraba funds in different investment aspects. These funds are managed by the Bank s Investment Department, and a portion of the funds is also invested in participation with the Group. The Group also offers investment management services to its customers through its subsidiary, which include management of funds with total assets under management of SAR 26,595 million (2016: SAR 38,621 million). The mutual funds are not controlled by the Bank and neither are under significant influence to be considered as associates. Mutual funds financial statements are not included in the consolidated statement of financial position of the Group. The Group s share of investments in these funds is included under investments, and is disclosed under related party transactions. Funds invested by the Group in those investment funds amounted to SAR 1,423 million at 31 December 2017 (2016: SAR 540 million). 162

163 Notes To Consolidated Financial Statements 34. CAPITAL ADEQUACY The Bank s objectives when managing capital are, to comply with the capital requirements set by SAMA to safeguard the Bank s ability to continue as a going concern; and to maintain a strong capital base. Capital adequacy and the use of regulatory capital are monitored daily by the Bank s management, SAMA requires the banks to hold the minimum level of the regulatory capital and also to maintain a ratio of total regulatory capital to the riskweighted assets at or above 8%. The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank s eligible capital with its consolidated statement of financial position, commitments and contingencies, to reflect their relative risk as of 31 December 2017 and (SAR 000) Credit risk weighted assets 219,687, ,810,142 Operational risk weighted assets 26,832,383 25,067,746 Market risk weighted assets 4,594,750 2,096,868 Total Pillar I risk weighted assets 251,115, ,974,756 Tier I capital 55,750,918 51,946,872 Tier II capital 2,746,100 2,772,627 Total tier I & II capital 58,497,018 54,719,499 % Capital Adequacy Ratio Tier I ratio 22.20% 20.86% Tier I and II ratio 23.29% 21.98% Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

164 35. STANDARDS ISSUED BUT NOT YET EFFECTIVE The Bank has chosen not to early adopt the following new standards which have been issued but not yet effective for the Bank s accounting year beginning on or after 1 January 2018 and is currently assessing their impact. Following is a brief on the new IFRS and amendments to IFRS effective for annual periods beginning on or after 1 January IFRS 15 Revenue from contracts with customers Applicable for the annual periods beginning on or after 1 January The new standard presents a fivestep model to determine when to recognize revenue, and at what amount. The application of this standard will have a significant impact on how and when you recognize revenue, with new estimates and judgments, and the possibility of revenue recognition being accelerated or deferred. The management is in the process of assessing the impact on financial statements. Amendments to IFRS 2 Sharebased Payment Applicable for the period beginning on or after 1 January The amendments cover classification and measurement of three accounting areas, first, measurement of cashsettled sharebased payments, second, classification of sharebased payments settled net of tax withholdings, and third, accounting for a modification of a sharebased payment from cashsettled to equitysettled. The impact is not material for the Bank. IFRS 16 Leases Applicable for the period beginning on or after 1 January The new standard eliminates the current dual accounting model for lessees under IAS 17, which distinguishes between onbalance sheet finance leases and offbalance sheet operating leases. Instead, IFRS 16 proposes onbalance sheet accounting model. The impact is not material for the Bank. IFRS 9 Financial Instruments Will be effective from 1 January 2018 and will replace IAS 39 by building models using internal and external experts. The Group will recognize loss allowances based on Expected Credit Loss (ECL) considering forwardlooking information. Setting framework with detailed policies and controls including roles and responsibilities will be implemented. The Group is in the process of evaluating how the new ECL model will impact its ongoing regulatory capital structure planning and further details will be provided once the assessment is complete. Implementation and impact analysis of IFRS 9. Implementation strategy In July 2014, the IASB issued IFRS 9 Financial Instruments, the standard that replaces IAS 164

165 Notes To Consolidated Financial Statements 39 Financial Instruments: Recognition and Measurement effective from 1 January 2018, with early adoption permitted. The Bank considers implementing IFRS 9 as a significant project and therefore has set up a multidisciplinary implementation team with members from its Credit risk and Modeling, Finance, IT, Operations and other respective businesses to achieve a successful and robust implementation. The project is managed by the Chief Financial Officer and the Chief Risk Officer. Classification and measurement The classification and measurement of financial assets (except equity instruments and derivatives) will depend on how these are managed (the entity s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income ( FVOCI ) or fair value through profit or loss ( FVTPL ). For equity instruments that are not held for trading, the bank may irrevocably elect to designate them as FVOCI, with no subsequent reclassification of gains or losses to the income statement. This election is made on an investmentbyinvestment basis. The majority of the bank s debt instruments that are currently classified as available for sale (AFS) will satisfy the conditions for classification as at fair value through other comprehensive income (FVOCI) and hence there will be no change in the accounting for these assets except for new impairment requirements. Equity investments currently measured at FVTPL will continue to be measured on the same basis under IFRS 9. The majority of financial assets that are classified as loans and receivables and are measured at amortised cost under IAS 39 are expected to be measured at amortised cost under IFRS 9 as well. Debt securities classified as held to maturity (HTM) are expected to continue to be measured at amortised cost. Debt instruments that are classified as AFS under IAS 39 may, under IFRS 9, be measured at amortised cost, FVOCI or FVTPL, depending on particular circumstances. Under IFRS 9, the accounting for financial liabilities will largely remain similar to IAS 39, except for the treatment of gains or losses arising from an entity s own credit risk relating to liabilities designated at FVTPL. The derecognition rules have been transferred from IAS 39 and have not been changed. The Bank therefore does not expect any material impact on its financial liabilities and the derecognition accounting policy. Impairment The Bank will recognise impairment allowances based on a forward looking Expected Credit Loss (ECL) approach on financial assets that are not measured via FVTPL. This mainly includes, financing, and investments that are measured at amortised cost or at FVOCI (other than equity investments), interbank placements, financial guarantees, lease receivables and credit commitments. No impairment loss will be recognised on equity investments. The key inputs into the measurement of ECL are the term structure of the following variables: Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

166 Probability of default (PD) Loss given default (LGD) Exposure at default (EAD) The above parameters are generally derived from internally developed statistical models, other historical data and are adjusted for forward looking information. The Bank will categorise its financial assets into following three stages in accordance with IFRS 9 methodology: Stage 1: Performing assets: Financial asset(s) that have not significantly deteriorated in credit quality since origination. The impairment allowance will be recorded based on 12 months ECL. Stage 2: Underperforming assets: Financial asset(s) that have significantly deteriorated in credit quality since origination. This credit quality assessment is made by comparing the remaining lifetime PD as at reporting date with the remaining lifetime PD point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations). The impairment allowance will be recorded based on lifetime ECL. Stage 3: Impaired assets: For Financial asset(s) that are impaired, the Bank will recognise the impairment allowance based on lifetime ECL. The Bank will also consider the forwardlooking information in its assessment of significant deterioration in credit risk since origination as well as the measurement of ECLs. The forwardlooking information will include the elements such as macroeconomic factors (e.g., unemployment, GDP growth, inflation, profit rates and house prices) and economic forecasts obtained through internal and external sources. To evaluate a range of possible outcomes, the Bank intends to formulate various scenarios. For each scenario, the Bank will derive an ECL and apply a probability weighted approach to determine the impairment allowance in accordance with the accounting standards requirements. The bank is now in the final phase of implementation; whereby parallel run exercise is currently under process together with various level of validation before going live on 1 January Hedge accounting The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. However they do not explicitly address macro hedge accounting strategies, which are particularly important for banks. As a result, IFRS 9 allows an accounting policy choice to continue to apply hedge accounting requirements of IAS 39 instead of the requirements of IFRS

167 Notes To Consolidated Financial Statements Based on the analysis performed to date, the bank expects to exercise the accounting policy choice to continue IAS 39 hedge accounting requirements. Overall expected impact The bank has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of IFRS 9 on 1 January 2018: According to transitional provisions for initial application of IFRS 9, the bank is allowed to recognise any difference between previous carrying amount under IAS 39 and the carrying amount at the beginning of the annual reporting period that includes the date of initial application in opening retained earnings. Accordingly, the overall effect is approximated to be SR 2,878 million on the date of initial application in opening retained earnings arising due to application of expected credit loss model as against Incurred loss model; Furthermore and as a result, the bank s Tier 1 ratio will be impacted primarily from potential increase in credit impairment provisions, net of tax. Based on the balances as at 31 December 2017, the day 1 impact of IFRS 9 (applicable from 1 January 2018) would be an estimated reduction of approximately 1.15% which would be transitioned over five years in accordance with SAMA guidelines. Further key impacts worth highlighting are as follows: Certain investments, amounting to SR 1,034 million, that do not meet the criteria to be classified either as at FVOCI or at amortized cost will have to be reclassified to financial assets at FVTPL. Related fair value gains of SR will have to be transferred from available for sale (AFS) financial assets reserve to retained earnings on 1 January Gains or losses realised on the sale of equity instruments classified as FVOCI will no longer be transferred to profit or loss on sale, but instead reclassified below the line from the FVOCI reserve to retained earnings. During the year ended 31 December 2017, SR million of such gains were recognised in profit or loss in relation to the disposal of AFS financial assets. The new standard also introduces extended disclosure requirements and changes in presentation. These are expected to change the nature and extent of the bank s disclosures about its financial instruments particularly in the year of the adoption of the new standard. Governance and controls The Governance structure and controls is currently under implementation in line with the IFRS 9 Guidance document applicable to Saudi banks. These Guidelines require Banks to establish a Board approved Governance framework with detailed policies and controls, including roles and responsibilities. The Bank has a centrally managed IFRS 9 programme which includes subject matter experts on methodology, data sourcing and modelling, IT processing and reporting. The Bank s work to date has covered performing an assessment of the population of financial instruments impacted by the classification and measurement requirements of IFRS 9 and developing an impairment methodology Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

168 to support the calculation of the Expected Credit Loss (ECL) allowance. Specifically, during 2017 the Bank conducted business model assessments and financial instrument s contractual cash flow analysis, developed its approach for assessing significant increase in credit risk ( SICR ), incorporating forward looking information, including macroeconomic factors and preparing the required IT systems and process architecture. The Bank has performed a full end to end parallel run based on 31 December 2017 data to assess procedural readiness. Overall governance of the program s implementation is through the IFRS 9 Steering Committee and includes representation from Finance, Risk and IT. The Bank is in the process of enhancing its governance framework to implement appropriate validations and controls over new key processes and significant areas of judgment such as SICR determining and applying forward looking information in multiple economic scenarios and computation of ECL. Caveat: The estimated decrease in shareholders equity includes the impact of both balance sheet classification and measurement changes and the increase to credit impairment provisions compared to those applied at 31 December 2017 under IAS 39. The assessment above is a point in time estimate and is not a forecast. The actual effect of the implementation of IFRS 9 on the Bank could vary significantly from this estimate. The Bank continues to refine models, methodologies and controls, and monitor developments in regulatory rulemaking in advance of IFRS 9 adoption on 1 January Although parallel runs were carried out in the second half of 2017, the new systems and associated controls in place have not been operational for a more extended time. As a result, the Bank has not finalised the testing and assessment of controls over its new IT systems and changes to its governance framework. All estimates are based on the Bank s current interpretation of the requirements of IFRS 9, reflecting industry guidance and discussions to date. 36. APPROVAL OF THE BOARD OF DIRECTORS The consolidated financial statements were approved by the Board of Directors on 28 Jumada I 1439H (corresponding to February 14, 2018). 37. COMPARATIVE FIGURES Figures have been rearranged or reclassified wherever necessary for the purpose of better presentation, however, no significant rearrangements or reclassifications have been made in these consolidated financial statements, other than the following: Note Reclassification from component Note Reclassification to component SAR ( 000) 23 Proposed gross dividends and zakat N/A Other reserves 900, SUBSEQUENT EVENTS The Board of Directors proposed, on 18 February 2018, a distribution of final dividends to the shareholders for the year amounting to SAR 4,062.5 million, for SAR 2.5 per share. The Board s proposal is subject to the approval of the ordinary General Assembly in the next meeting. 168

169 Notes To Consolidated Financial Statements Notes To Consolidated Financial Statements / Al Rajhi Bank Annual Report

170

171 Basel III Pillar 3 Qualitative disclosures (Remuneration)