The Late His Highness Sheikh Zayed Bin Sultan Al Nahyan Founder of The United Arab Emirates

Transcription

1 ANNUAL REPORT

2

3 The Late His Highness Sheikh Zayed Bin Sultan Al Nahyan Founder of The United Arab Emirates

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

5 Contents 9 Chairman s Message 13 Group Chief Executive Officer s Message 19 Business and Economic Review 25 Performance Highlights 33 Al Hilal Bank Group 37 About You 45 About Us 59 Financial Review 65 Fatwa and Supervisory Board Report 67 Independent Auditors Report 69 Consolidated Financial Statements 133 Supplementary Information 163 Branch Network

6 marks our seventh year in operation, and has brought a blend of challenges, rewards and opportunities. The upgrade of the Bank s standalone rating by Fitch and our maintenance of the highest credit rating among UAE Islamic banks at Group level provide assurance of our strength and position in the global Islamic banking community. Ahmed Ateeq Al Mazrouei 9 Chairman s Message Al Hilal Bank Annual Report Al Hilal Bank Annual Report Chairman s Message 10

7 Chairman s Message بسم اهلل الرحمن الرحيم In the name of Allah, the Most Gracious, the Most Merciful On behalf of the Board of Directors, I am honored to present the Annual Report of Al Hilal Bank Group, for. marks our seventh year in operation, and has brought a blend of challenges, rewards and opportunities. The upgrade of the Bank s standalone rating by Fitch and our maintenance of the highest credit rating among UAE Islamic banks at Group level provide assurance of our strength and position in the global Islamic banking community. Our debut Tier 1 sukuk issuance, the first ever Basel III compliant Tier 1 Sukuk, was received with the tightest ever spread by a UAE Islamic bank, and was 9.5 times oversubscribed. This affirms investor trust in our future, in European, MENA and Asian markets. The Bank achieved record top line growth in and was able to enhance capitalization and improve liquidity. The Bank has surpassed UAE average growth this year in financing book, and has tracked UAE average growth in total bank assets and we have maintained our position for financings among the top three UAE Islamic banks. The Business Environment Global growth has been slower than expected, but slightly higher than in. The onset of a deflationary environment in Europe and a slowdown in some Asian sectors are contributing factors. The energy industry s supply and demand structure has changed since mid-, resulting in markedly lower oil prices as we enter While current price levels will support global trade and help offset growth headwinds in oil-importing economies, they are expected to limit prospects for oil-exporting countries and affect liquidity in the near term. However, in spite of a downturn in equity market sentiment and other indicators towards the end of, the outlook for the UAE s economy, which has diversified away from energy as a proportion of GDP during the last few years, remains promising in Prudent Government policy has, and will continue to safeguard the nation from short-term volatility and adverse impacts. In addition, Abu Dhabi s Vision 2030 and Dubai s expansionist government investment programmes are expected to sustain private sector growth and business activity. The introduction of Etihad Credit Bureau, tighter liquidity regulations by Central Bank of UAE and expected adoption of Basel III during the year will all serve to strengthen the UAE s banking sector and the local economy. In spite of expected volatility until the energy sector stabilizes, the Bank looks forward to 2015 confidently. Al Hilal Bank Group Key Results The Group continued to grow its net revenue, increased capitalization, and improved liquidity. Our balance sheet has grown and our risk management framework ensure prudent stewardship of our assets and funds. Revenues: AED 2.1 billion (7% over ) Net profit before impairment: AED 830 million (26% over ) assets: AED 41.4 billion (7% over ) financings: AED 30.9 billion (14% over ) customers accounts: AED 31.1 billion (11% over ) Capital adequacy ratio: 17.4% (3.4% over ) Liquid asset ratio: 16.1% (1.3% over ) Performance; health and development, our three strategic pillars, orient us towards our purpose: building the world s leading Islamic bank and contributing to the UAE s society. Our transformational strategy was implemented in ; it guides the ways in which we configure infrastructure, products and services for customer value, and how we address our mandates for leadership in banking and social development. To date, we can report successful achievement of near term objectives against long-term goals. Looking forward, the strategy is robust and will help to ensure that any adverse conditions in the business environment can be met proactively. Human Capital Development and Social Responsibility The acquisition and development of UAE national talent remains critical to our strategic vision and business success. The alignment of our human capital strategy with Abu Dhabi Economic Vision 2030 sets a challenging mandate for offering employment and career paths, and this year saw continued success in this area, with Leadership 2020 and other programs. We are able to report an Emiratization level of 35 percent of total Bank headcount in. Social responsibility involves us in charitable causes and outreach programs, beyond our contribution to the UAE economy. During we supported fund raising initiatives, maintained our involvement as an education partner with schools and contributed substantially to a number of new causes. We will look for opportunities in 2015 to build on our established social programmes, in pursuit of this important goal. Board of Directors This year we bid farewell to HE Jassim Ahmed Al Meraikhi and HE Jamal Sultan Al Hameli, who have rendered the Bank invaluable service and brought great wisdom and insight to the Board of Directors. We wish them every success. We welcome HE Mohamed Abdulla Al Remeithi, HE Naser Mohamed Al Zaabi, HE Mohamed Hamad Al Mehairi and HE Hamdan Zakaria Awda to the Board and look forward to benefiting from their insights and depth of experience. Recognition On behalf of our shareholders, the Board of Directors and our management, I wish first to express our gratitude to the President His Highness Sheikh Khalifa bin Zayed Al Nahyan and His Highness the Crown Prince of Abu Dhabi, Sheikh Mohammed bin Zayed Al Nahyan, for their vision, leadership and inspired guidance. Second, I take this opportunity to thank our staff for their continuing loyalty to Al Hilal Bank. Third, I reiterate our commitment to our customers and regulators: we will continue to seek and to justify their trust and confidence. Ahmed Ateeq Al Mazrouei Chairman 11 Chairman s Message Al Hilal Bank Annual Report Al Hilal Bank Annual Report Chairman s Message 12

8 Since 2008, our strategy has enabled us to establish our franchise, set benchmarks among our peers and build the business and organizational capabilities for enduring success. In, our Tier-1 capital issue and around 100,000 customer milestone both attest to the validity of our vision and goals, and justify our belief in the future. 13 Group Chief Executive Officer s Message Al Hilal Bank Annual Report

9 Group Chief Executive Officer's Message بسم اهلل الرحمن الرحيم Al Salam Alaykom, I am pleased to share Al Hilal Bank s fifth annual report with you. The Year In Review This year the Bank completed its seventh year, and entered what we expect to be a period of sustained, steady profitability and expansion. Our Tier-1 sukuk issue was oversubscribed by more than 9.5 times, with a record tight credit spread. The investor base included Europe, the MENA region and the Far East, with 71 percent of uptake outside the GCC. Our success in issuing capital at this level, at an exceptionally healthy profit rate, contributed substantially to our franchise in the market. A milestone for us, it has contributed to our reputation among our peers, and to our balance sheet's strength. In addition, the sukuk was structured to comply with Basel III, making it the first of its kind. While Basel III is not yet a UAE Central Bank requirement, we saw the opportunity to anticipate the need for compliance in future. The Bank s upgrade by the Fitch, the ratings agency, improved risk management function and high capital asset ratio enable us to approach 2015 with confidence. Of particular note this year is the expansion of our customer base to around 100,000; this attests to confidence in the market and the strength of our franchise. As our customers and other stakeholders are aware, the Bank s financial performance, while notable in itself, is also critical to the achievement of our aims for society, developing the communities in which we operate and the advancement of Islamic banking. saw substantial initiatives in human capital development, operational excellence and social responsibility, all key elements of who we are as an organization and corporate citizen of the UAE. The Economy and the Business Environment Business sentiment and conditions were favorable locally, throughout most of. UAE equities reached record levels, indicative of sustained investor confidence and the UAE s upgrade in from frontier to emerging market status. High liquidity and expectations for future returns from large cap local stocks indicate investor confidence. Local real estate markets were healthy, with Dubai property in particular reaching levels near its peak of a few years ago. Inflation rose around the UAE, as a consequence of real estate activity. The banking sector overall had a successful year, with total financings and assets rising in line with GDP. Jobs data, GDP growth, high stock market valuations and the strength of the dollar suggest that the US economy has recovered from the crisis of , and that interest rate increases may be expected in Internationally, Europe is still in a period of near deflation, and Chinese and Far Eastern economies appear to be slowing. Reponses to changes in the supply and demand structure of energy markets and the effects of high US production levels saw a drop in crude oil prices from the highs experienced since Given the importance of the oil and gas industry to the UAE and to Abu Dhabi, there are likely to be impacts on liquidity in 2015 as a consequence of this shift. While the UAE, and to an extent GCC countries in general are shielded from events in other parts of the world, the potential knock-on effects of reduced energy sector revenues, conditions in Europe and lowered expectations for China, both key markets for the UAE and its neighbours, cannot be ignored. However, the local economy is well diversified, credit ratings and CDS rates are high, and public sector reserves should provide a buffer, if necessary, over the short term. Expansionary government budgets, driven by Abu Dhabi s 2030 vision and Dubai s Expo 2020 project are also expected to maintain the economy s resilience during oil price fluctuations. The Bank monitors trends and events closely, and will put policies in place to ensure that our balance sheet and operations are sufficiently robust whatever uncertainties the international economy and business environment may pose. Regulatory frameworks from UAE Central Bank and potentially Basel III set limits on our scope of operations and thus restrict our options for expansion and the range of opportunities available. However, at the same time they establish sound practices, put standards in place and we support all local and international initiatives that strengthen our industry and thus benefit UAE banks and their customers. About You Wholesale and personal banking benefited this year from the loyalty of existing customers and the confidence of new individuals, families and entities, enabling us to reach around 100,000 customers, over 20 percent up on numbers. This is a significant event for any bank, and is so particularly for us, given the power and reach of our competitors. For customers, we focused this year on enhancing offerings to segments and operational and service excellence. Our SME banking portfolio doubled in size, and the products offered to this segment now include term financings and a small business credit and debit card. Our Tharwa segment, dedicated to high net worth customers, now has three centers and provides customized accounts and services. Two new branches and more ATMs were established, providing greater access for customers to our products and services. The Bank acted as lead arranger and book runner for several high level mandates this year, pursuing our goal of customer acquisition and diversification in the wholesale sector. Investment products, such as the Global Balanced Fund were well subscribed and we continue to diversify our corporate client base. Performance As we have done since our establishment, in we set and met goals for asset and financings, profitability and cost of funds. We achieved consolidated Group net profit before impairment of AED 830 mn, 25.6 percent greater than. This increase reflects economies of scale, tight controls on operating expense, growth in financings, our low cost of funds and the significant expansion of our customer base in. Consolidated Group net profit was 90.1 mn in. The Bank s total assets ended the year at AED 41.4 bn, 7.0 percent over, the result of increased financings, particularly in the last quarter when large wholesale deals were concluded. deposits at the close of were at AED 31.1 bn, the result of our aggressive capital acquisition focus. This year has given us a powerful basis for performance next year, with significant growth in our capital adequacy ratio, and improvements in our liquid asset ratio. Now at 16 percent, and well within UAE Central Bank limits, we aim to increase the ratio next year. Our ranking alongside other UAE banks and UAE Islamic banks is sustained, despite a slight reduction in our shares of financings and asset growth, which reflects of fierce competition. While Libor was largely flat throughout the year, Eibor increased marginally in the last quarter, owing to changes in market liquidity levels. We will monitor rate expectations for next year, and their potential impact on profit levels. However, given that our customer and capital acquisition strategies have enabled us to keep cost of funds is low, we expect to be able to to respond successfully to changes. Overseas, the Group s Kazakhstan operations maintained profitable for the third year, and Al Hilal Takaful has consolidated its position as an Islamic insurance provider. Strategic Goals and Initiatives The Bank s strategic model is the basis for initiatives in three areas: health, development and performance. This year, the aims of building liquid capital assets, lowering our cost of funds and expanding and diversifying our wholesale and personal banking customer bases were achieved through focused initiatives by Group Heads, and brought results in all three target areas. Our health as a business, with a duty of care for the assets of our shareholder and investors, was supported by enhancements and developments in corporate governance and risk management. No less important was our progress in human development and engagement with society. People The Bank headcount this year was 798, of which 35 percent are UAE nationals, who constituted 52 percent of new hires. Consistent with our strategy and industry standards, training and development in banking practices, technology and leadership were provided this year. Our Leadership 2020 program, which will prepare UAE nationals to lead the banking sector into the next generation, is supported by management at all levels. All UAE national employees have career development programs, monitored by the Board Human Resources Committee. Corporate Social Responsibility Our CSR strategy and activities are integrated into our products, services and stakeholder engagement processes at all levels. For us, social responsibility is a mandate to approach the community proactively. Indicative of this is the way in which our products are designed to promote customer interactivity, transparency and involvement, and sustainability drives our approach to facilities management and the use of resources. Our involvement in charities, sports events, education and conferences enables us to address important community concerns, build and maintain relationships and play a role in the UAE s society beyond simply that of wealth creation.. Infrastructure, Systems And Technology The Bank dedicated to fine tuning and strengthening its operating systems and their functionalities. The Target Operating Model will provide a digital infrastructure platform, enhanced to reflect technological innovations, customer preferences and requirements for data security and integrity. Developing the Model will be among our initiatives next year. Corporate Governance The Board of Directors has been expanded to seven members this year. The Corporate Governance Framework provides the structure within which the Board guides, oversees and ensures that our strategy, risk management approach and methodologies and our operations are aligned in the interests of our shareholder and stakeholders. Risk Management And Compliance Credit, risk and compliance are managed through the Risk Management Framework. This year, the Board Risk Committee increased its oversight function, with more meetings and closer scrutiny of risk appetites and credit management. The compliance function was separated from credit management, providing it with independent status in the Risk Management Group Our history since 2008 shows a consistent growth trajectory, marked by achievements in business, social engagement, innovation and contribution to the fulfilment of Abu Dhabi s 2030 vision. Our strategic targets next year will include customer acquisition, balanced by diversification, and the achievement of greater depth of market share, as well as product and service innovation. We expect that 2015 will bring its share of challenges and provide us with opportunities to merit the trust and support of our shareholder, the confidence of our customers and the loyalty of our staff. Recognition I would like to follow our Chairman in recognizing the dedication of our employees this year and their thorough professionalism as they rise to each challenge. I also wish to thank our Board of Directors for its insightful guidance, support and encouragement. With my best wishes, Mohammed Jamil Berro 15 Group Chief Executive Officer s Message Al Hilal Bank Annual Report Al Hilal Bank Annual Report Group Chief Executive Officer s Message 16

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11 Business and Economic Review Overview UAE Real GDP Growth 1.3% 5.2% 3.9% 4.4% 3.6% The UAE s real GDP growth rate was 3.6 percent in, lower than s rate, due to changes in energy supply and demand levels from Q2 onwards. Source: International Monetary Fund UAE Inflation 0.9% 0.9% 0.7% 1.5% 3.1% The inflation rate in was 3.1 percent, slightly more than double the rate in, indicative of rising real estate prices, food costs and continuing the return towards dynamic growth begun in. Source: International Monetary Fund Crude Oil, Brent Average Price (USD) Crude oil prices (Brent index) were steady for the first two quarters, adjusting in Q3 in response to high supply levels and perceived lessening demand in key markets. Source: Bloomberg & Reuters The UAE s economy provided a favourable business environment through, with continued expansionary public sector spending and private sector confidence. 19 Business and Economic Review Al Hilal Bank Annual Report Al Hilal Bank Annual Report Business and Economic Review 20

12 Overview Gold Closing Prices (USD) 1,421 1,564 1,676 1,206 1,184 Gold ended the year slightly lower than its closing price, and significantly lower than its levels of This is to be expected, given confidence in the US dollar. Source: Bloomberg M Eibor and Libor Rates The UAE interbank offer rate (Eibor) fluctuated over the year, ending lower than its level at the close of, while Libor stayed virtually flat, both attributable to market liquidity levels. Source: Bloomberg Mar Jun Sep Dec 14 Libor Eibor UAE Credit Default Swap Rates Abu Dhabi Dubai Abu Dhabi s Credit Default Swap (CDS) index reflects local and international trust in Abu Dhabi s economic performance and outlook. Source: Bloomberg The Eibor rate ended the year lower than its level at the end of, rising slightly from Q2 to Q3 in response to changes in liquidity. 21 Business and Economic Review Al Hilal Bank Annual Report Al Hilal Bank Annual Report Business and Economic Review 22

13 Overview UAE Assest (AED bn) 2,004 2,211 UAE banking assets ended at AED 2,211 billion, up by more than 10 percent from. The rise in asset levels is in line with GDP growth and overall economic conditions. Source: Central Bank of UAE UAE Financings, Net (AED bn) 1,179 1,284 UAE financings grew marginally, from AED 1,179 billion to AED 1,284 billion, an increase of over eight percent, reflecting GDP growth and market conditions. Source: Central Bank of UAE UAE Markets Emirates Securities and Commodities Authority (ESCA) Index Closing Levels ESCA data showed positive results for Abu Dhabi and Dubai equity prices, largely supported by real estate share levels. 4,314 4,580 Source: Emirates Securities and Commodities Authority (ESCA) UAE Customer Deposits (AED bn) 1,279 1,421 Deposit levels across the sector finished at AED 1,421 billion, slightly more than 11 percent above their closing levels in, in line with asset and financings growth across the banking sector. Source: Central Bank of UAE Average Daily Trading Volumes (mn) 982 2,095 Average daily trading volumes in were more than double those of, a powerful indicator of investor sentiment and equity market dynamics. Source: Emirates Securities and Commodities Authority (ESCA) 23 Business and Economic Review Al Hilal Bank Annual Report Al Hilal Bank Annual Report Business and Economic Review 24

14 Performance Highlights The Bank stands at 10th place among UAE banks in financings, reflecting the Bank s ability to stand out amongst its peers in a challenging market. Financial Assest (AED bn) Assets in AED 41.4 bn Benchmark ranking: 11th (all UAE banks) 4th (all UAE Islamic banks) Profitability Consolidated Net Profit (AED mn) Consolidated Group Net Profit in AED 90.1 mn Financings, Net (AED bn) Financings in AED 30.9 bn Benchmark ranking: 10th (all UAE banks) 3rd (all UAE Islamic banks) Return on Equity (Percent) 12.0% 1.0% Return on Equity (ROE) in 1.0 % Customer Deposits (AED bn) Customer Deposits in AED 31.1 bn Benchmark ranking: 11th (all UAE banks) 4th (all UAE Islamic banks) Earnings Per Share (AED) Earnings per Share (EPS) in 0.03 AED 25 Performance Highlights Al Hilal Bank Annual Report Al Hilal Bank Annual Report Performance Highlights 26

15 Performance Highlights Collective Cover (Percent) 195.8% 42.5% Collective Cover in 42.5% Specific Cover (Percent) 65.6% 57.7% Specific Cover in 57.7% Cover (Percent) 261.4% 100.2% Cover in 100.2% 27 Performance Highlights Al Hilal Bank Annual Report Al Hilal Bank Annual Report Performance Highlights 28

16 Services Branches () () UAE International ATM Network ATMS Group Headcount Group Headcount 29 Performance Highlights Al Hilal Bank Annual Report

17 We create Islamic banking opportunities for government and private sector entities. Our strategy and operational systems ensure reliable support for customers financing and day-today banking needs.

18 Al Hilal Bank Group The Bank was the Bank s seventh year in operation. The Group s ranking by Fitch and Moody s was maintained, and the Bank s standalone rating was upgraded by Fitch to match the grade awarded by Moody s. Our Tier-1 sukuk issue, record low cost of funds and aggressive balance sheet diversification are all indicative of our maturity and the confidence of the marketplace in our franchise. The Bank Has Six Principal Business Lines: Wholesale Banking, serving entities in the private and public sectors Investment Banking, developing and managing investment products and the Bank s own investments Personal Banking, serving retail customers and small and medium size enterprises (SMEs) Al Hilal Takaful, providing Shariah compliant insurance Al Hilal Bank Kazakhstan, serving Kazakhstan s corporate market Al Hilal Auto, providing motor vehicle financing solutions Al Hilal Bank Group Companies The Group has advanced in maturity and consolidation, building on its established franchise. Al Hilal Auto Al Hilal Auto completed its fifth year in operation, offering UAE customers solutions for motor vehicle financing. Instant finance approval, registration, takaful, customization and sourcing have enabled the Group to define Islamic banking standards in this sector. Al Hilal Islamic Bank Kazakhstan Al Hilal Islamic Bank Kazakhstan, established in 2010, is Kazakhstan s first Islamic bank. The Bank has served the corporate sector through three branches and provides Islamic banking leadership in building the sector in Kazakhstan and neighboring countries. The Bank is also a facilitator for UAE investment in Kazakhstan. This year, the Bank was profitable for the third successive year, grew its customer base and successfully concluded a number of major corporate financing deals. Al Hilal Takaful Al Hilal Takaful, established in 2008, is an Islamic insurance company providing general, property, casualty, engineering, marine, motor and medical insurance, structured to the requirements of corporate customers and according to Shariah principles. Al Hilal Takaful has four branches in Abu Dhabi and one in Dubai. The Company achieved profitability in and supports the Bank s three-pillar strategic framework: growth; health and development. Commenced operations on 19 June 2008 with authorized capital of AED 4 billion. Al Hilal Takaful Commenced operation on 11 November 2008 Capital of AED 100 million Al Hilal Auto Commenced operation on 16 February 2009 Capital of AED 150 thousand Al Hilal Islamic Bank Kazakhstan Commenced operation on 17 March 2010 Capital of AED 165 million 33 Al Hilal Bank Group Al Hilal Bank Annual Report Al Hilal Bank Annual Report Al Hilal Bank Group 34

19 The strength of our franchise is ultimately determined by our ability to engage customers, listen to them and respond with products and services that enable them to meet their goals.

20 About You Corporate Solutions and Services Wholesale and investment banking start with understanding customers aspirations, strategies and business models. The Bank develops and participates in Shariah compliant financing products and services that fit customer profiles and reflect current and forecasted economic conditions. Wholesale Banking The Bank ended as, once again, the only UAE Islamic bank rated A+ (by Fitch) and A1 (by Moody s) and the third Islamic bank worldwide to sustain these ratings. Both credit ratings are instrumental in the Bank s ability to negotiate, maintain low cost of funds and expand the franchise, all of which benefit wholesale banking customers and investors. This year has seen the Wholesale Banking Group continuing to implement the Bank s strategic framework, with emphasis on building customer segments, entering new markets and ensuring that our organizational structure and processes provide sufficient scope and scale for current and future business. We have worked this year with our target markets - mid-size to large corporate firms and government entities - and established relationships and built partnerships.,14 major ijara, murabaha and musharaka deals were concluded with new and existing clients to finance asset purchases and construction projects. Beyond the UAE, we were active in Kazakhstan and Saudi Arabia, and will continue to support trade clients there and in other countries in While the market has been challenging, from a pricing perspective and the strength of competition, we have been able to enter new markets, such as agriculture, with asset backed financing. In our export financing line grew by 300 percent. For mid-market clients we have developed new export financing services, using receivables financing and other instruments. This benefited our clients and ensured that the Bank maintained its target risk levels and complied with UAE Central Bank requirements. Our corporate clients benefited from expansion of our correspondent and Foreign Institutions (FI) network, which is now optimal at over 600. The network gives us the opportunity to arrange trade deals around the world for our clients and to increase client convenience, particularly where transfers to support trade and operations are concerned. Transactional banking has grown, and the Bank is now increasingly involved in many aspects of its clients businesses; our VIP sector has also expanded, and will benefit from changes that we are planning for transactional banking during A specialized transactional banking unit is planned, bringing new, efficient processes to midmarket clients financing needs. This structure will also enable us to ensure Shariah compliance through segregating product design and execution; clients will benefit from stronger assurance of compliance and optimal business outcomes. During 2015 we will maintain our strategic focus, make organizational adjustments to reflect our clients requirements for specialization, speed and innovation, and enhancements to our Internet-based trading platforms will increase interaction between clients and our specialists. Investment Banking The Investment Banking Group was responsible for the launch of our first Tier-1 sukuk, which attracted corporate investors from Europe, the MENA region and Asia. This sukuk was the UAE s first Basel III contingent sukuk. Issued at a record low profit rate and oversubscribed by more than nine times, the sukuk reflects the strength of the Bank s franchise and the confidence of the international investing community. The Bank s GCC Equity Fund for investment in Shariah compliant stocks, provided investors a very strong return (up 42% since inception in 2011), and received awards for best GCC equity fund and best equity fund in UAE. The Bank s Global Sukuk Fund paid a dividend of 4.78 percent this year. In the debt capital markets, the Bank was join lead arranger for six sukuk mandates, and book runner for a major sukuk in the banking sector. This supported the Bank s rise league table ranking as lead arranger. Infrastucture and Resources Internally, several automation procedures were rolled out, speeding up the processes and improving security and service levels. Professional Associations and Industry Participation The Bank sponsored the Association of Corporate Treasurers (ACT) conferences in Dubai and Abu Dhabi, and co-sponsored the Global Financial Market conference with National Bank of Abu Dhabi. In addition, the Bank sent delegates to the World Islamic Banking Conference. Goals for will see the launch of more investment funds and participation in more sukuk mandates and the development of client relationships. The strength of our franchise is ultimately determined by our ability to engage customers, listen, and respond with products and services that enable them to meet their goals. Trade Finance Services Letters of credit Letters of guarantee Investment Management Services Asset management through funds Investment mandate management Islamic Financing Services Project and contract finance Asset aquisition finance Working capital finance Cash Management Services Account services Transaction management Channel management Islamic Hedging Services Foreign currency solutions Profit rate solutions Financial Advisory Services Initial offerings Mergers and acquisitions Finance restructuring Sukuk raising Islamic Takaful Services Medical and Auto Marine and non-marine 37 About You Al Hilal Bank Annual Report Al Hilal Bank Annual Report About You 38

21 About You People of all ages and their families Growth and consolidation saw us achieve around 100,000 customers, up over 20 percent from. Service excellence was improved substantially, with fewer complaints and higher satisfaction indicated in surveys. Our strategic framework, encompassing health, growth and development is now in its second year and Personal Banking customers had benefited from initiatives to fine-tune products, services and delivery platforms to offer greater convenience and access. Segmentation, products and services Along with the development of our branch network and online services, our approach to customer acquisition and retention, and product / service provision is based on our segmentation strategy, initiated in Segments are defined after research into the economy, market demographics, technological innovations and segment viability, according to the Bank s strategic framework. This year, the Personal Banking Group continued with its implementation of the Seghaar and Business segments. The Seghaar segment strategy includes our educational CSR outreach programs to the schools, and offers children the opportunity to experience banking at Kidzania, with which the Bank has partnered at Dubai Mall. Personal Banking offers individuals secure internet and mobile banking facilities, Shariah compliant products to support their aspirations at each milestone in their lives. Accounts and Cash Management Current and savings accounts Wakala deposit accounts Transaction management Channel management Foreign currency solutions Assets Medical Dental Takaful Personal finance Home finance Construction finance Vehicle finance SME Finance Financing Services Financial Mall Personal banking Wealth management Etihad kiosk Etisalat kiosk Emirates Identity Authority (EID) Safe deposit lockers Ladies and children s banking Customers of the Business segment doubled in number this year. This segment targets SME businesses with annual turnover of AED 50 million or less. Product and service packages for SMEs support young UAE national entrepreneurs and other small business owners, one of the ways in which we support the Abu Dhabi 2030 Vision and the wider economy. Companies fitting this profile benefit from specially designed small business credit and debit cards and structured term loans. In we established a direct sales team for SMEs and opened the first SME service center. A third segment developed this year is Tharwa, for high net worth individuals. This segment has its three service centers with dedicated representatives, and over 2,000 clients. A Risk Mitigated Empowerment Matrix enables relationship managers to provide customized customer services quickly, wherever they are in the world. This segment has its own VIP current account and credit card. Assuring customer satisfaction The Call Back program reported a 95% satisfaction rate with account opening and financing services; customer complaints continued to decrease and turnaround times for responding to complaints were improved. The Bank s service quality monitoring program was used to guide changes in branch service configurations, and staff knowledge was supported with training programs. In, the Contact Center and Operations Division ISO 9001:2008 certification for quality management was renewed, and Customer Complaint Management, Talent Management and Business Continuity Management were audited and recertified to ISO standards. These awards at international standards provide a benchmark for continuous improvement and assurance to customers of the Bank s investment and dedication of resources to the management of quality, excellence and security. The Contact Center s certification as a Centre of Excellence from Purdue University and the Benchmark Portal USA, was also renewed in. The Bank worked towards implementation of the International Standard for Service Excellence (TISSE2012) across the Bank s operating divisions. When completed, this standard will provide a framework for assessing and improving customer satisfaction. Plans for will see the Personal Banking Group add to the products and services offered to each segment, while maintaining its commitment to retail customers in general. The Bank s infrastructure is being reconfigured as a digital platform for the customer s journey, and will result in changes to the way we engage with you and to your banking experience. Shopping cards Covered cards Card Services Investment Funds Equity and sukuk funds Investment mandate management Internet banking SMS banking Call centre ATMs Smart Phone App Vehicle purchase Vehicle registration E-Channels Al Hilal Auto 39 About You Al Hilal Bank Annual Report Al Hilal Bank Annual Report About You 40

22 Corporate Social Responsibility (CSR) is not an option for Islamic banks; as a strategic imperative, CSR is integrated into all our products, services and operations.

23 About You Us in the community The Bank s CSR initiatives and activities further cemented our stature as a progressive Islamic bank that genuinely cares about the community it serves and constantly champions the welfare and development of society in general. Establishing and Communicating CSR The Bank s CSR policy formally establishes CSR requirements, according to Shariah principles, in the following areas: Compliance Economic development Environmental practices Employment practices Product and service responsibility Society Compliance Following practices launched in, the Bank provides Shariah certification for products and services: attestation from the Global Board of Shariah Scholars for Islamic Banking that each product and service complies with Shariah principles. We continue to lead the UAE s Islamic banking community in this regard. Our monthly publication of the weightage of invested amounts in our common investment pool and updates on the performance of our investments is a Shariah law requirement and provides transparency to customers. Customers have access to fee schedules for our products, and fee changes and profit distributions are communicated to customers in writing. Economic Development The Bank contributes to economic development in the UAE through its Emiratization initiatives, participation in banking conferences and associations, the provision of products and services to meet the needs of corporate and personal banking customers, and its leadership of innovations in Islamic banking. Environmental Practices The Bank s egrab fleet of the world s first 100 per cent electricpowered mobile banking branches was developed in cooperation with Masdar City as an environmental initiative and to support customer convenience. The Bank s headquarters building, the award-winning Al Bahar Towers in Abu Dhabi, is one of the first buildings in the Gulf to receive Leadership in Energy and Environmental Design (LEED) Silver rating. The Bank s Sowwah square property is likewise LEED certified, and Health, Safety and Environment (HSE) programs are integrated into branch operations. In, the Bank s Plant-a-Tree partnership with Emirates Environmental Group (EEG) was continued, and the Bank plans to replace poster spaces inside its branches and offices with digital screens to reduce print production and allow real-time communication updates. Employment Practices The Bank s Human Capital policies and procedures ensure fairness and objectivity in recruitment and compensation, opportunities for employees to voice their concerns and an emphasis on training and career development. Internships, scholarships and related programs give members of the community opportunities for employment, and the Bank s attendance at job fairs and events helps ensure that potential employees know about, and understand, what the Bank can offer them. Product and Service Responsibility In, we became the first bank in the UAE to allow customers to use their Emirates ID cards to make ATM cash withdrawals. This initiative has improved the convenience, efficiency and overall banking experience of community, and is the result of a strategic partnership agreement signed by the Bank and Emirates Identity Authority in. Last year, we launched yet another initiative specifically developed for women, the Laha Al Hilal Card. The card was especially developed for the UAE s young, ambitious and empowered women. The firstof-its-kind card has a built-in applet that can absorb the scent of any perfume. It comes with exclusive benefits, rewards and privileges such as murabaha profit-free purchases, platinum dining offers, complimentary airport lounge access and exclusive discounts from major women s brands. To enhance customer and community engagement, we also began using a new medium Snapchat, is a popular mobile photo messaging app which allows users to share content called Snaps to a controlled list of recipients. Through Snapchat, Al Hilal clients are able to receive regular updates and share information on topics such as the bank s facilities, services, staff and events. Customers are also encouraged to share their daily routines and interesting facts about them via the social media platform. This initiative marks the first time in the world that Snapchat is being used by a bank to reach out further to its customers. Society Each year, the Bank launches a special campaign dedicated to the Holy Month of Ramadan. For, the Ramadan campaign focused on the four main pillars of Jood Bil Khair doing good, joy, health and religion and was undertaken with the help of employee volunteers ( Forsan Al Khair ( heroes of welfare )). Part of the campaign involved the placement of in-kind handout boxes at all branches and the acceptance of cash donations, which were forwarded to charities in the UAE. The Bank also formed a partnership agreement with Shaabiat Al Cartoon, a popular Emirati animated TV show, to air a special episode on the advantages of bank savings. As part of the campaign, an online initiative pooled AED 1 million worth of donations, which were transferred from a special Al Hilal Charity account to over 10 local charities. The Forsan Al Khair team also visited humanitarian and healthcare institutions, distributed gifts and interacted with children and the elderly. To celebrate the UAE s 43rd National Day, the Bank launched an ambitious Raise your voice, raise your flag campaign, which successfully floated the UAE flag to the edge of space at an altitude of 102,000 feet via a high-altitude helium balloon. The height was determined by the collective intensity of voices of citizens singing the UAE National Anthem through a special online website and mobile stations. The feat has given us the distinction of being the first bank in the Arab World to raise such a large flag towards outer space. To support local families, in we provided financial assistance to a special mass wedding organized by Al Nahda Women s Association to solemnize the partnership of 10 Emirati couples. We helped facilitate the marriages with the broader goal of stabilizing the structure of UAE society and building a debt-free society. Our active partnerships with charitable organizations such as Red Crescent, Make-A-Wish Foundation, Al Jalila Foundation and Dar Zayed Foundation continued, and we extended our collaboration with Abu Dhabi Education Council in running an innovative educational program to enhance children s awareness of the value and use of money and impart banking and savings skills. 43 About Us Al Hilal Bank Annual Report Al Hilal Bank Annual Report About Us 44

24 About Us Corporate Governance The Board of Directors of Al Hilal Bank oversees implementation of appropriate corporate governance standards throughout the Bank. The Board is ultimately responsible to the Bank s shareholder and other stakeholders for the development and execution of the Bank s strategy which is aimed at successfully delivering sustainable value. Governance Structure The Bank operates within a clearly defined governance framework. Through this framework, the Board balances its role of providing risk oversight and strategic counsel while ensuring adherence to regulatory requirements and risk tolerance. The governance framework provides for delegation of authority while enabling the Board to retain effective control. The Board delegates authority to relevant Board Committees and the Group CEO and Executive Management with defined mandates and authorities, while preserving its accountability. Board committees facilitate the discharge of Board responsibilities and provide in-depth focus on specific areas. Each committee has a mandate, which the Board reviews at least once a year. Mandates for each committee set out its role, responsibilities, scope of authority, composition, terms of reference and procedures. The committees report to the board through their respective chairmen and minutes of all committee meetings are submitted to the board. Stakeholder Engagement The Bank s success depends on continued and meaningful engagement with all stakeholders. Building and maintaining good stakeholder relationships help the Bank to manage and respond to expectations, minimise reputational risk and form strong partnerships, all of which support commercial sustainability. Stakeholder Group Shareholder Government and Regulators Employees Customers Suppliers Communities Official Communications The Board considers stakeholders to be all individuals and entities that are impacted by the Bank s activities or who can also impact the Bank s strategy and objectives. Engagement Mechanism Face-to-face ad Line management/ hoc engagements relationship managers Regulatory Returns Board of Directors Fatwa and Shariah's Board Board Committees Board Audit Committee Board Risk Committee Board Human Resources Committee Board Corporate Governance Committee Management Committees Management Executive Committee Management Risk Committee Management Credit Risk Committee Management Investment Committee Management Assets and Liabilities Management Finance Committee Management Operational Risk Committee Management Remedial Committee Management Human Resources Committee Management Procurement Committee 45 About Us Al Hilal Bank Annual Report Al Hilal Bank Annual Report About Us 46

25 About Us Board of Directors In July the Articles of Association was amended to provide that the Board consist of a minimum of 7 members. Previously, the Articles required that the Board consist of 5 members. Board members are appointed by the sole shareholder in terms of the Articles of Association for a renewable period of 3 years. In July, Mr. Hamdan Zakaria Awda and Mr. Mohamed Abdullah Al Rumaithi were appointed to the Board and in November, Mr. Naser Al Mur Al Zaabi, and Mr. Mohamed Hamad Al Mehairi were appointed to the Board. In July, Jassim Ahmed Al Meraikhi and Mr. Jamal Sultan Al Hameli resigned from the Board. Mr. Ali Majid Al Mansoori Independent Non-executive Deputy Chairman CFA (CFA Institute) First appointed September 2010 Ali Majed Al Mansoori is a member of the Executive Council of Abu Dhabi, Chairman of Department of Economic Development he is also Chairman of Abu Dhabi Airports Company he also has held several high positions including the Director of External Equities Europe at the Abu Dhabi Investment Authority and Deputy Director at External Funds-America.And the Executive Director at the office of the Vice Chairman at the Executive Council. He plays an active role in developing fiscal policies and formulating strategic plans of the office. Directorships External: Abu Dhabi Airports Company Chairman TDIC Chairman Mr. Mohamed Abdulla Al Rumaithi Independent Non-executive Director Bachelor Degree in Accounting UAE University First appointed July Mohamed Abdulla Al Rumaithi is the Undersecretary of the Finance and Purchasing Division at the UAE Ministry of Presidential Affairs. Prior to joining the Ministry, he was the Undersecretary of Finance in H.H. the President's Private Office. He also previously served in the Financial Department of H.H. Diwan. Directorships Al Hilal Group: Al Hilal Takaful Deputy Chairman Mr. Hamdan Zakaria Awda Independent Non-executive Director Mr. Ahmed Ateeq Al Mazrouei, Non-Executive Chairman CFA (CFA Institute) First appointed September 2008 Directorships Al Hilal Group: Al Hilal Islamic Bank Kazakhstan Chairman Al Hilal Takaful - Chairman Bachelor Degree in Accounting UAE University Masters in Accounting Information Systems - Bentley College, USA Executive Masters in International Business Administration - INSEAD Business School Certified Public Accountant and Certified Management Accountant First Appointed July Ahmed Ateeq Al Mazrouei has served as chairman of the Abu Dhabi Securities Market and as a board member of several financial Directorships - External: Hamdan Zakaria Awda is the Director of Internal Audit at the Ministry of Presidential Affairs. institutions, including NBAD, Arab Banking Corporation, Arab Al Falah Private Equity Growth Fund He has a diverse and progressive career extending over 19 years in the public sector, oil and International Bank and Tunis Emirates Bank. He started his career gas and shipbuilding industry. He was the Vice President Finance at Abu Dhabi Ship Building with the Abu Dhabi Investment Authority and is currently the head Company PJSC where he championed the implementation of the corporate governance of the Infrastructure Department at Abu Dhabi Investment Council. regulations. He has also served as member of the Finance and Audit Committee of Abu Dhabi Ship Building Company PJSC. 47 About Us Al Hilal Bank Annual Report Al Hilal Bank Annual Report About Us 48

26 About Us Board of Directors Mariam Saeed Ghobash Non-executive Director Bachelor of Science in Economics - Wharton School, University of Pennsylvania First appointed September Mariam Saeed Ghobash is a Senior Investment Professional in the Direct Investments Department at Abu Dhabi Investment Council dealing with the Council's portfolio of investments in the MENA region. Previously, she worked as an Investment Associate within HSBC's Investment Banking and Private Equity teams. Directorships External: Emirates Development Bank Mr. Mohamed Hamad Al Mehairi Independent Non-executive Director Bachelor of Science in Business Administration and Finance - Suffolk University, Boston, U.S.A. First appointed November Mohamed Hamad Al Mehairi is the Director of the Investment Department at the International Petroleum Investment Company (IPIC) in Abu Dhabi, having previously worked within the Marketing Department at Abu Dhabi National Oil Company (ADNOC) from 1999 and Directorships External Pak-Arab Refinery Ltd NOVA Chemicals Corporation COSMO Oil Mr. Naser Al Mur Al Zaabi Independent Non-executive Director Bachelor of Science in Business Administration The College of Mount Saint Joseph, USA First appointed November Naser Al Mur Al Zaabi is the Chief Operating Officer at Das Holding, one of the largest investment holding groups in Abu Dhabi. He is also the Head of Debts Settlement and Financial Aid at the Ministry of Presidential Affairs. He previously worked at the National Bank of Abu Dhabi where he was the Head of Elite Banking. He serves as a member of the Supreme Committee of Debts Recovery Fund for UAE nationals and also serves on the boards of Abu Dhabi National Takaful and Manazel Properties Directorships External: Abu Dhabi National Takaful Manazel Properties Board Attendance Five Board meetings were held in, with one meeting dedicated to reviewing the Bank's strategy. The table below shows each Director's attendance at Board meetings and Board committee meetings. Ahmed Ateeq Al Mazrouei Ali Majid Al Mansoori Mariam Saeed Ghobash Hamdan Zakaria Awda* Mohamed Abdullah Al Rumaithi* Naser Al Mur Al Zaabi** Mohamed Hamad Al Mehairi** Jassim Ahmed Al Meraikhi*** Jamal Sultan Al Hameli*** Clive Galierˆ1 Dr. Assem Saffiedienˆ2 Board Board Audit Committee 10 0**** 4**** Board Risk Committee **** Board Human Resources Committee **** 5 5 Board Corporate Governance Committee 4 Mr Clive Gallier joined the Audit Committee of Al Hilal Bank in December. Mr. Gallier has a wealth of international experience in the banking and finance sector. He joined the Abu Dhabi investment Council in February 2009 as the Director of the Business Assurance Unit from Arab Banking Corporation, Bahrain where he was Deputy Head of its Global/Group Audit function. Before ABC he worked for UK and US banks out of London and New York in commercial and investment banking operations (including Islamic banking) and financial control. Mr. Galllier studied at Oxford, the London School of Economics, and Manchester Universities and is a visiting graduate of King s College, Cambridge University. He holds a First Class Honours degree, a Post Graduate Diploma in Finance (distinction) and an MBA. He is a qualified member of the Chartered Institute of Bankers (UK). Dr. Saffiedine was appointed to the Board Corporate Governance Committee in August He is a recognized corporate governance expert in the MENA region as well as internationally. Dr. Saffiedine is the Director of the Finance and Corporate Governance Program at the Olayan School of Business and American University of Beirut. Mr. Taleb was appointed to the Board Corporate Governance Committee in August 2009 as an external corporate governance expert. He is a charterholder of the CFA Institute and is a Financial Advisor at the Abu Dhabi Fund for Development. * Appointed to the Board on 20 July ** Appointed to the Board 23 November *** Resigned from the Board in July **** Member from September ^ External subject matter experts. 4 1**** 4 49 About Us Al Hilal Bank Annual Report Al Hilal Bank Annual Report About Us 50

27 Director Independence The Bank considers that other than for the Chairman and Ms. Mariam Saeed Ghobash, the other Directors are considered independent. Conflict of interest In terms of the Bank s governance framework if a Director has a personal financial interest in respect of a matter to be considered at a meeting of the Board or knows that a related person has a personal financial interest, the Director is obliged to disclose the interest and its general nature, recuse themselves and not take part in the consideration of the matter. The Board is aware of the other commitments of its directors and is satisfied that all directors allocate sufficient time to enable them to discharge their responsibilities effectively. Directors are required to annually complete a Director declaration of interest form through which potential conflicts could be identified. Board Committees The Board Committee structure is designed to assist the Board in discharging its duties and responsibilities. Each Board Committee has formal written terms of reference that are reviewed annually. Certain of the Board s responsibilities are delegated in accordance with the terms of reference. The Board monitors these responsibilities to ensure effective coverage of and control over AHB. During the Following Board Committees operated with the Bank: Board Audit Committee Board Risk Committee Board Human Resources Committee Board Corporate Governance Committee Board Audit Committee Roles and Responsibilities The role of the Board Audit Committee is to: Assist the Board of Directors and management in fulfilling their oversight responsibilities to the stakeholders, and others relating to the: Integrity of the Bank s Financial Statements and financial reporting process; The systems of internal accounting and financial controls; The Internal Audit Function and its qualifications, independence and performance; The Bank s External Auditors and their qualifications, independence and performance; The legal compliance including all agreements and the Corporate Governance Code ( CGC ), as established by the management and the Board of Directors. Maintain free and open communication between the Committee, internal auditors, external auditors, and management of Al Hilal Bank. Summary of Key focus areas in General oversight of the Internal Audit Division of the Bank and the assignments it conducted during the year. This also included approval of the Internal Audit strategy for the years -2015; Quarterly review of the financial performance of the Bank and review of the financial statements submitted by management and examined by the external auditors prior to the Committee recommending these for the Board s approval; Review of the inspection reports raised by the Central bank and ensuring that suitable action plans were set in place by the Bank s Management to address the raised findings; General oversight of the Compliance Department duties including ensuring that any concerns raised via the Whistle blowing policy are adequately reviewed and addressed; and Review of the Committee s charter to reflect updates in the governance structure as well as streamlining its directives with sound governance practices. Looking ahead to 2015 After the amendments introduced by Abu Dhabi Accountability Authority to the Statutory Auditors Appointment Rules in late, the Committee will be overseeing the tendering and appointment of external auditors for the Bank for the year Board Risk Committee Committee members as at 31 December : Role and Responsibilities The BRC, whose membership is comprised of non-executive directors of the Group, has the responsibility for oversight and review of all risks including credit risk, market risk, liquidity risk and operational risk. The BRC receives regular comprehensive reports on key risks visa-vis the achievement of strategic objectives of the Group from a risk perspective including comprehensive oversight of Group s credit risk, market risk, liquidity risk, capital adequacy and operational risk. The BRC is responsible for: Providing independent risk advice to the Board for its consideration and approval; Make recommendations to the Board concerning the levels of current and future risks, including, risk appetite, tolerances, strategy, emerging and top risks of the Group; Review, endorsement and approval of the Group s risk management framework and policies; Oversight for the Group s risk appetite limits and maximum tolerances as agreed by Board against actual measures achieved and recommend necessary action if any; Review the Group s overall risk profile; Approve credit and investment proposals and other matters beyond the approval discretion of Management Credit Risk Committee and Management Investment Committee; Ensure that continuous risk monitoring by management takes place; Review and recommend the Group s annual ICAAP and all external risk disclosures. Summary of Key focus areas in Given the continuing challenging macroeconomic conditions and the pace and complexity of continuous evolving regulatory requirements, the Committee has been proactive in ensuring that the risks of the Group are well understood and mitigated by managing the Group in a fair and responsible manner and thereby provides the foundation of a sustainable and prudent institution. Some of the major activities of the BRC during included the following: Considered major credit decisions within its delegation. Noting of all Management Credit Risk Committee decisions. Review of the Enterprise Risk Profile of the Group at a minimum quarterly basis and recommend any changes therein. Supervision of risk related Management Committees. Review and recommend for approval to the Board the Internal Capital Adequacy Assessment Process (ICAAP) & Risk Appetite for. Review and recommend for approval to the Board the following new policies and/or amendments to existing policies: Amendments to the Global Credit Risk Policy (GCRP) Risk Appetite Policy ICAAP Policy and Framework Share Margin Financing Policy Risk Management Framework Review and recommend for approval to the Board the following rating models and methodologies: Bank / FI Rating Model Mid-market Rating Model and Large Corporate Rating Model Application Scorecard for the Retail Portfolio Behavioural Scorecard for the Retail Portfolio RAROC Methodology Looking ahead to 2015 In 2015, the Committee has elected H.E. Mohamed Abdullah al Rumaithi as the new Committee Chairman. As well, H.E. Naser Mohamed AlMur Al Zaabi and H.E. Mohamed Hamad Al Mehairi have joined the Committee as Members. Furthermore in 2015, the Committee will be increasing the frequency of Committee meetings in 2015 to a minimum of 10. The increase regularity of such meetings will enable the Committee to oversee and assess the Group s enterprise risk profile and position more dynamically. Board Human Resources Committee Role and Responsibilities The BHRC is responsible for assisting the Board in its oversight responsibilities in respect of the appointment, performance evaluation, compensation structure of the GCEO and other senior executives while also ensuring that the HR polices support the strategic objectives of the Bank Summary of Key focus areas in In July, Mr Ali Majed Al-Mansoor was appointed as Committee Chairman while Mr. Mohamed Abdulla Sultan Rumaithi was appointed as a member of the Committee. At the same time Mr. Jamal Al Hameli and Jasim Al Meraikhi resigned from the Committee. The matters considered by the Committee largely build on what was accomplished in. The key matters considered by the Committee: Enhancement of the overall HR Policies to better support the Bank s strategy, and Enhancement of the Committee own charter to ensure that the Committee has the appropriate delegated responsibilities to properly support the Board in its HR oversight responsibilities. Looking ahead to 2015 In line with the Bank s strategy, Emiratization and leadership development will be key focus areas. An enhancement of an overall risk based reward structure will be another key focus area for the BHRC in Board Corporate Governance Committee Role and Responsibilities The BCGC is an enabling committee responsible for the oversight of overall Board effectiveness and governance issues, monitoring corporate governance developments and emerging best practice across the markets in which the Group operates. The Committee is responsible for the development and regular updates of appropriate corporate governance procedures and best practices within the Bank. It monitors their implementation, ensures compliance with these guidelines and regulatory requirements and performs public reporting on corporate governance matters. The Committee is also accountable for reporting material governance concerns and violations to the Board in addition to proposing developments in the corporate governance procedures and structures. 51 About You Al Hilal Bank Annual Report Al Hilal Bank Annual Report About You 52

28 Summary of Activities in In July Mr. Mohamed Abdullah Al Rumaithi was appointed to the Committee. The Committee met 4 times during The agenda was largely driven by an annual work plan that the Committee had adopted at the end of. The Committee considered the following key items: Review and amendment of the Committee Charter to ensure that the Committee and the Board is able to better reflect and also respond to the evolving governance landscape, Recommended the adoption of a Subsidiary Board Policy, that would guide the membership of subsidiary boards and board committees as well as the interaction between the subsidiary boards and the main board Recommended to the board and new director induction policy and procedure to ensure that new directors are familiarized with their fiduciary duties, the banking strategic and regulatory landscape as well as the operations of the Group Adopted as a standing agenda item the financing disclosures of board members and their related parties Adopted a work plan for 2015 to reflect to respond to the changes that will be required to ensure that the Group continues on its growth plan. Recommended the establishment of an independent Board Secretarial function to ensure that the Board and Board Committees have the necessary support to effectively carry out their duties Recommended the approval of a director financing policy Looking ahead to 2015 The Committee views 2015 as an opportunity to build on the momentum created in, by focusing on those issues that will support the growing maturing of the Group. The 2015 annual work plan adopted by the Committee at the end of, will focus on Reviewing the key performance indicators of the Bank to ensure that it is properly aligned to the strategy and the business plan, Reviewing the delegated authorities from the Board to Board Committees, Incorporating the results of an employee ethics survey into the Bank s training programs, performance evaluations and remuneration systems and ethics reporting and monitoring framework. Enhancing the professional development programs for the Board. Director Access to Senior Management and Information Directors shall have full and free access to senior management and other employees of the Company. The Board may invite Executive Management to attend Board meetings for specific items on the agenda. In terms of an agreed procedure, directors are also empowered to seek independent advice at cost to the Bank. Directors Remuneration Directors remuneration is set by the sole shareholder as provided for by the Articles. Chairman AED 450,000 Directors AED 315,000 External Board Committee Members AED 60,000 As at 31 December, no other fees, bonus, long-term or other incentives were paid to the Board. Directors do not receive any pension benefits from the Bank. External Auditors The external auditor is independent of the Bank and its directors. The Board Audit Committee is responsible for ensuring that the auditor remains independent and the auditor may not, during assigned audit periods, undertake consultancy work related to its audit activity, where such consulting could affect its decisions or independence as an external auditor. The Board Audit Committee Charter requires that the Board Audit Committee approve all non-audit services provided by the external auditor, and the shareholder is informed of the appointment of external auditors. Shari a Supervisory Panel In compliance with the Bank s Articles, together with governance best practice for Islamic banks, the Board has appointed a Shari a Supervisory Panel. The Panel was appointed for a period of three years. The appointment commenced on 1 January. The Panel is responsible for supervising all the Shari a activities of the bank to ensure that they are in compliance with Islamic principles and rules. The Panel has issued its report, confirming that the contracts, operations and transactions executed by the Bank, investments entered into and the activities conducted by it during the financial year ending 31 December were generally in accordance with Shari a rules and principles. Shari a Supervisory Board profile Sheikh Dr. Abdussattar Abu Ghuddah Chairman & Executive Member Sheikh Dr. Abu Ghuddah holds PhD in Shari a from Al-Azhar University. Dr. Abu Ghuddah is a member of several Fatwa and Shari a boards which include UBS, Standard Chartered Bank, Dow Jones, Calyon, Bank, SAMBA Financial Group, Qatar Islamic Bank, Jordan Islamic, Abu Dhabi Islamic Bank and Noor Islamic Bank. He also sits in AAOIFI Shariah Board as well as in Bahrain Central Bank s Shariah Committee Sheikh Nizam M.S. Yaqoobi Deputy Chairman Sheikh Yaqoobi holds BA from McGill University in economics and comparative religion and is currently a candidate for awarded PhD in Islamic Law at the University of Wales. Sheikh Yaqoobi is a member of several Fatwa and Shari a boards which include UBS, Standard Chartered Bank, HSBC, Lloyds, BNP Paribas, Dow Jones, Abu Dhabi Islamic Bank and Samba Financial Group. Sheikh Essam Ishaq Member Sheikh Ishaq teaches Fiqh, Aqeeda, and Tafseer courses in Bahrain and holds a BA in Political Science from McGill University. Sheikh Ishaq is a member of several Fatwa and Shari a boards which include Al Meezan Investment Management Limited, Al Ritaj Investment Company, Al Baraka Islamic Bank, Bahrain Development Bank, Tadhamon Capital B.S.C. and a Member of Accounting and Auditing Organisation for Islamic Financial Institutions, Bahrain. Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama Member Sheikh Dr. Al Olama holds a Bachelor degree in Shari a from Islamic University in Madina Al Munawarrah, a Masters degree and a Doctorate of Jurisprudence from the University of Umm Al-Qura in Makkah Al Mukarramah. Dr. Al Olama is a member of several Fatwa and Shari a boards which include Takaful House, Zakat Fund, Mawarid Finance, Tabarak, Noor Islamic Bank, Dubai Islamic Bank, AlJazira Capital, Minhaj, Awqaf and Islamic Affairs and a member of Accounting and Auditing Organisation at Islamic Financial Institutions, Bahrain. six (6) Shari a Supervisory Panel meetings were held during. Name Number of Meetings Attended Sheikh Dr. Abdussattar Abu Ghuddah 6 Sheikh Nizam M.S. Yaqoobi 6 Sheikh Essam Ishaq 6 Sheikh Dr. Mohammad Abdul Rahim Sultan Al Olama 6 Ethics As a Shari a compliant bank, ethics is at the centre of everything we do. That this is so is reflected in the values to which we aspire as a bank. These values support our aspirations as described in our Code of Ethics of being: A bank with the highest standards of ethical conduct, working to earn customer trust, A bank following high standards of Shari a compliant products and services, A bank that people can trust doing what it says and reporting results with accuracy and objectivity, and A bank dedicated to community service, taking a leadership role. To obtain a measurement of the Bank s ethics performance, the Board that an employee ethics survey be conducted during 2015 to reinforce these values. The results could potentially pinpoint those areas which may need to be enhanced to improve not only our actual ethics performance but also the perception of ethics at the bank. The areas that could directly benefit from the survey results are our training programs, our management and reward processes and systems, and our ethics reporting and monitoring systems. The ultimate beneficiaries of the survey would be the bank itself, management, our shareholder as well as other stakeholders. Management Remuneration The Bank s remuneration structures are designed to attract, motivate and retain high-calibre people, at all levels of the organization, in a highly competitive environment. The total reward given strike an appropriate balance between fixed and variable pay for all employees, depending on seniority and roles. Fixed remuneration Fixed remuneration consists of base salary and other benefits. The fixed remuneration is based on function, experience and market pay levels. The fixed remuneration components consist of base salary, the objective of which is to attract and retain staff, and compulsory benefits such as medical insurance, flights home etc. Variable Remuneration Variable remuneration consists of annual cash awards, annual deferred awards and long-term incentive awards. All variable remuneration awards are discretionary. 4 Directors fees to be paid on a pro-rate basis by reference to a directors length of service (months) in the bank for the financial year. 53 About You Al Hilal Bank Annual Report Al Hilal Bank Annual Report About You 54

29 Credit, Risk and Compliance Management Credit, risk and compliance management provides an environment for profitability and business growth using risk mitigation strategies. Risk management and the assurance of compliance for the Bank is the responsibility of the Credit, Risk and Compliance Management Group. Overview The Bank is exposed to a variety of financial risks. All transactions involve the analysis, evaluation, acceptance and management of risks, or combinations of risks. The Bank s risk management function implements local and international best practices to provide adequate protection for the Bank, while allowing for flexibility. This supports the Bank s strategic framework and enables the Bank to meet regulatory requirements or capital levels and achieve targets for profitability, assets, financings and liquidity, among others. Credit, risk and compliance are managed according to the Bank s Risk Management Framework. The Framework is aligned to the Bank s culture, mission and vision, and provides for proactive risk assessment and control. The Board is responsible for ensuring that all business units are informed of, and comply with the Framework, as applicable. Primary risks The Bank faces the following five significant types of risk: Credit risk risk of financial loss where a customer or counterparty fails to meet his financial obligations (the most considerable risk for the Bank in terms of capital consumption, frequency and severity) Liquidity risk risk of not being able to fund our assets and meet obligations as they come due, without incurring unacceptable losses Market risk risk of an adverse impact on earnings caused by changes in market factors such as foreign exchange rates, profit rates, commodity and equity prices Operational risk risk of loss resulting from inadequate or failed internal processes, people and systems or external events. The Bank follows the regulatory (Basel II) definition, including legal and regulatory risk, but excluding strategic and reputation risk Compliance risk risk of legal or regulatory sanction and financial or reputational loss arising from our failure to abide by our compliance obligations Policies for each risk type have been created and are maintained through the Risk Management Framework. Risk Management Philosophy The Bank s risk management philosophy is based on five pillars of risk management, namely; Strong corporate governance Robust risk architecture Adherence to globally accepted risk standards Skilled and seasoned human resources Robust risk culture Risk Governance To ensure that risks are controlled, monitored, reported and communicated effectively the Board delegates risk and control oversight to the Board Risk Committee. The following other management committees support risk management: Management Risk Committee Management Credit Risk Committee Management Remedial Committee Assets and Liabilities Committee (ALCO) Management Investment Committee Management Operational Risk Committee The Board Audit Committee provides additional assurance that internal controls and risks are managed effectively. The Shari a Supervisory Board ensures that the Bank follows and adopts Shari a principles in all our products and services. Risk Management Framework Risk management has a fundamental influence on the Bank s performance, reputation and success. Effective risk management is an integrated and balanced approach to risk and reward, thus enabling the Bank to increase financial growth opportunities and mitigate potential loss or damage. Mitigation strategies need to be effectively aligned and integrated. The organizational structure of the Credit, Risk and Compliance Management Group provides clear lines of communication, transparency and accountability that support the Bank s strategic vision. It is also flexible to enhancement to infrastructure, systems and processes. External Oversight Internal and external auditors carry out independent reviews of the Credit, Risk and Compliance Management Group, and the Central Bank of the UAE maintains proactive oversight and regular inspections. Achievements and Changes in In, the Risk Management Group achieved significant milestones in the enhancement of risk management and control, as follows: Board Risk Committee: The Board Risk Committee now has five members, and meets every two weeks. These changes will tighten oversight and enable the Committee to respond quickly to changes. Risk Management Framework The Risk Management was refreshed and updated to address compliance requirements and the findings of risk management reviews. Basel II Compliance: The Internal Capital Adequacy Assessment Process (ICAAP) policy framework was adopted by the Bank, and is expected to bring benefits to risk management overall. Credit Risk Management Credit risk is the Bank s major risk, in terms of capital consumption. The objective of credit risk management is to provide independent reviews and objective assessments of the risks of all credit facilities and to partner with and challenge the business in defining, implementing and continually re-evaluating the Bank s risk appetite, in line with the Group s policies and procedures, taking into account market conditions and regulations. In, the Bank's credit ratios, declined but are still very strong: Non Performing Financing (NPF) ratio increased from 1.2 percent in to 4.8 percent in, however still well below the market average of 5.8 percent. The Bank s success in maintaining these ratios at very low levels confirms the effectiveness of the Risk Management Framework and the effectiveness of its implementation across the Bank. As part of the Bank s Basel II Internal Ratings Based (IRB) approach, rating models were developed this year for large and mid cap corporate entities, small businesses and banks, replacing off-the-shelf methodologies with the Bank s own models. During, the Bank s provision computation function was automated, providing a limits, exposure and collateral management system. This year, continuing its Basel II IRB compliance initiatives from, the Bank rolled out the remaining risk scorecards for retail applications and developed behavioural scorecards for credit cards, auto finance, personal finance and home finance. In addition, Loss Given Default (LGD) and Exposure at Default (EAD) models were built for retail portfolio products; they will enable the Bank to calculate the effects of individual customers on the Bank s risk. Loss forecasting models, also prepared in, to provide information on the future effects of defaults. Market, Profit Rate, Liquidity and Concentration Risk The centralized market risk middle office was developed further, providing for control and assessment of market, profit rate, liquidity and concentration risks. The work of the middle office will support the Bank s emphasis on customer diversification in Operational Risk The Bank continues to review and enhance the control and management of operational risk, under the oversight of the Management Operational Risk Committee. The Operational Risk Management System, which provides management with real time information of incidents and potential risks, was enhanced to support further improvements in risk reporting and monitoring. SAS Safeer Phase 1 was implemented to provide risk management information for the Group s insurance business, Takaful, and incident management was reviewed and fine tuned to address operational risks. Compliance The purpose of the Compliance function is to provide assurance that the Bank complies with laws and regulations, such as those concerning money laundering, fraud and financial crime, information security and fraud prevention. Compliance training and awareness programs, such as Know-Your Customer (KYC) and Anti-Money Laundering (AML) are provided by the Bank to all employees on a mandatory basis. During, the Compliance function was established as an independent function within the Credit, Risk and Compliance Management Group. This change will strengthen the Compliance function s ability to conduct objective reviews of compliance in business areas and across risk management functions. External Ratings The Group has maintained its A+ and A1 ratings by Fitch and Moody s, respectively, continuing to lead Islamic banks in the UAE as one of only three Islamic banks to have achieved these ratings worldwide. The Bank s standalone rating was upgraded by Fitch, and now matches the standalone rating awarded in by Moody s. Retention of our Group rating and the upgrade this year are both evidence of the Bank s ability to achieve critical KPIs over time, and in changing conditions and Beyond The Risk Management Group will continue to enable the Bank to provide innovative products and services, within parameters set by the Bank s strategic framework and the Board s approved risk appetites will see the development of the Bank s Enterprise Risk Management (ERP) reporting system, along with the ERM framework and policies. The ERM dashboard will enable top management to have real time access to ERM data, which will enhance decision making. Control gaps, including policies and procedures, will be identified and addressed, and credit risk management will be improved through a corporate credit workflow and target market and risk acceptance criteria. Rating models and scorecards will be revalidated, as part of our ongoing work in this area. 55 About You Al Hilal Bank Annual Report Al Hilal Bank Annual Report About You 56

30 Our People Our people supply initiative, energy and commitment to our values, business objectives and stakeholders. Employment This year our total Bank headcount was 798, an increase of four percent over. Bank Headcount Emiratization We achieved an Emiratization rate of 35% up from 34% in. Of new hires, 52 percent were UAE nationals. Cooperation with Tawteen Council and in-house referrals provided the majority of new employees. Our Emiratization goals and strategic policy of building a UAE national banking cadre have been significant drivers of human capital and talent management initiatives since 2008, and are the main factor in shaping our education, training and career development programs. This year we continued our participation in career fairs and events for students, and reviewed our human capital policies for their potential impact on UAE national recruitment and retention. Emiratization % % Human Capital Development Training this year included technical, soft skills and industry courses. Programs that were initiated in our early years are constantly being reassessed and enhanced, as we look at modes of delivery and course content, matching them with learning styles, employee schedules and learning needs arising from changes in the Bank and in the sector. Three new models were added to our e-learning library as compulsory courses (Anti Money Laundering, corporate governance and risk adjusted return on capital (RAROC). The Bank s Boot Camp training program now has 323 graduates, with 102 enrolled in. The i-train program, which utilizes internal subject matter experts was extended this year, with 98 sessions conducted for 581 employees. In addition, 15 training programs were conducted for core banking systems. Support for UAE national development includes: Scholarship program Secondment program (in partnership with Deloitte) English language Internship program Fellowship program (in partnership with Deloitte) Under Development program The Bank s scholarship program, Deloitte secondment and fellowships and internships provide opportunities for UAE nationals to receive education, world class experience and banking work experience. This year the Bank began a schools outreach program to identify candidates for internships. 16 interns were given the opportunity to experience banking during. Two employees are currently attached to Deloitte. Career development programs have now been designed for all UAE national employees, with 208 programs completed in. The Board of Directors reviews progress in this area to ensure that nationals have the greatest possible levels of support, guidance and learning opportunities as they progress in the Bank. Leadership 2020, which targets high achieving UAE national employees has expanded. All eligible UAE nationals have been assessed for the program in technical, behavioral and leadership competencies, and 38 employees have been selected to date. Infrastructure and Excellence in Operations Creating and delivering an environment for customers and employees The Bank operates with a philosophy of digital banking, but does not ignore the importance of physical space for customer interaction, building relationships and providing the best possible working environment for our staff. Achievements in This year the Bank opened two new branches, and now has branches in four emirates. HSE management is integrated into branch operations, ensuring safety and reliability for customers and staff. The Operations Group supported the launch of the Bank s Tier-1 sukuk issue, the Global Balanced Fund and the Bank s takaful products. Having achieved a landmark 100,000 customers, the Bank s operational needs for efficient process operations has likewise increased. To ensure process integrity, IT infrastructure continues to be enhanced, and Operational Risk Management gives management the necessary controls and visibility. Control incidents have been reduced again this year, and the Operations Group has passed all its Shariah audits. Automation of the liability management system was begun in, and the project was continued in. It has, and will continue to reduce risk and improved transaction processing for wakala and mudarib portfolios. Security was enhanced in with the achievement of PCI-DSS V3.0 complaince (Payment Card Industry - Data Security Standard). This standard requires security of card data while in transit, storage and processing. Systems are secured to protect customers sensitive payment card information and the Bank s reputation with acquirers and payment brands is improved. Compliance is expected to prevent security breaches and card data theft. The Bank is one of only a few UAE institutions to achieve PCI-DSS certification. Security and reliability of operations was addressed through compliance with ISO 22301, known as the societal security standard for business continuity management. Accordingly, a business continuity management policy and manual were developed, and a business continuity plan (BCP) lists responsibilities assign to department coordinators should the BCP to be invoked. The plans are tested regularly and supported with training, staff awareness and the creation of a dedicated operational center in the event of disruption. A Crisis Management Plan has been developed to provide continuity in the event of a crisis, with a fully functional data center set up in a remote location. Systems, networks and facilities form the background against which our people excel, customers benefit and we build our franchise and reputation. The Bank is among a select group of UAE banks in having the capability to run the entire bank from its remote back-up location. HSE is supported with a dedicated HSE officer, documented HSE policies and procedures, periodic risk assessments and emergency response planning. At head office and each branch, the Bank cooperates with local civil defense forces in fire and emergency drills and exercises, and aligns HSE compliance to UAE and emirate regulatory frameworks. Other notable IT achievements includes but not limited to EIDA card launch, automated Teller and Cash Recycling in branches to speed up customer transactions, ATM Upgrade, Etihad Credit Bureau, State of Art Next Generation Contact Center and Platforms Availability at 99.97%. 57 About You Al Hilal Bank Annual Report Al Hilal Bank Annual Report About You 58

31 Financial Review Assets Asset 1.84% 1.88% 1.93% 1.91% 1.80% Assets in 41.4 bn Share of Sector Assets in 1.8% At AED 41.4 bn, the Bank s total assets market share was almost level with those at the end of. Our share of total assets was slightly lower, but not significantly so. Share of Sector Asset Growth 3.1% 1.3% The Bank s share of total UAE bank asset growth was 1.3 percent, representing a decrease from s share of approximately 50%. This change can be attributed to the power of our major competitors and market demographics Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Asset Balance Market Share of UAE Assets Financings Financings 2.30% 2.34% 2.35% 2.33% 2.41% Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Financings in 30.9 bn Share of Sector in 2.41% financings in reached AED 30.9 bn, 14 percent higher than s closing level. Financings grew steadily through to September, with a substantial increase in the last quarter as deals booked in the earlier part of the year were concluded. The Bank s market share of total UAE financings was 2.4 percent at year end, the increase over s share parallels with our growth in total financings. Share of Sector Financings Growth 5.3% 3.6% The Bank s share of financings growth, at 3.6% percent, is marginally lower than its share in. Reasons include competition and an overall maturing of banking sector activity during the year. Financings Balance Market Share of UAE Financings Deposits Deposits 2.20% 2.21% 2.06% 2.01% 2.19% Deposits in 31.1 bn Share of Sector in 2.19% deposits rose by 11 percent in. The increase reflects the Bank s expanding customer base and liquidity in the UAE economy. Share of Sector Deposit Growth 2.9% 2.1% The Bank s share of total deposit growth at the end of was 2.1 percent, down from by 0.8 percent. This result should be seen in the context of our increase in total deposits from last year Dec Mar 14 Jun 14 Sep 14 Dec 14 The Bank s share of the UAE s total deposits stayed at 2.2 percent, indicating that the Bank has maintained its position. Customer Deposits Balance Market Share of UAE Deposits 59 Financial Review Al Hilal Bank Annual Report Al Hilal Bank Annual Report Financial Review 60

32 Net Profit Consolidated Net Profit (AED mn) Net Profit in AED 90.1 mn The Bank s profit were below level, despite increased revenues from corporate and retail activity, and effective cost control. The reason can be attributed to increased provisions from. Earnings per Share Earnings per Share (AED) Earnings per Share in AED 0.03 Earnings per Share (EPS) declined from, as a result of lower profits Provisions Cover in 100.2% Cover (percent) 261.4% 100.2% The Bank has maintained adequate provision to cover non-performing financings, which now stands at 100.2%. Because of the increase in nonperforming financings, total cover decreased from to percent, but stayed within Central Bank limits and complies with other regulatory requirements. 61 Financial Review Al Hilal Bank Annual Report Al Hilal Bank Annual Report Financial Review 62

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34 Fatwa and Shariah Supervisory Board Report بسم اهلل الرحمن الرحيم Praise be to Allah and peace be upon His Messenger, Mohammed and upon his family and companions. To:Abu Dhabi Investment Council السالم عليكم ورحمة اهلل تعالى وبركاته In line with Article No. 44 of the Bank s Articles of Association, the Fatwa and Shariah Supervisory Board (FSSB) is pleased to present its report as follows: We have examined the policies, procedures and the contracts related to the products and transactions, which the Bank has executed or launched during the period of our required monitoring and supervision, in order to pronounce whether or not the Bank has complied with the Shariah rules and principles as well as with the opinions, resolutions and instructions issued by us taking into consideration the Shariah Standards of Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI), Bahrain. The FSSB asserts that the responsibility of ensuring the Bank s conformity, in its practice, with Shariah rules and principles rests solely with the Executive Committee and Board of Directors of the Bank. However, the responsibility of FSSB is confined only to express an independent opinion based either on its direct supervision of the Bank s activities or through the Shariah Supervision Group, and to report our findings thereof to you, in light of the details shown by the minutes and reports of our meetings and audit. We have reviewed all products launched by the Bank during the year in question, including manuals, execution mechanisms and standard contracts as well as non-standard agreements, especially contracts related to syndicated finance which the Bank has concluded with third parties. With the help of the Shariah Supervision Group, we have planned and performed the Shariah audit on the transactions executed during the year and obtained all the information and explanations which we deem necessary to give us reasonable assurance that the Bank has not violated Shariah rules and principles. Likewise, we have reviewed periodical Shariah audit reports and observations raised to us by the Shariah Supervision Group including different kinds of operations carried out by the Bank. The Shariah audit s findings have been reviewed by us in light of the concerned departments clarifications and justifications and according to which resolutions and appropriate instructions have been given. This is in addition to our review of the Bank s Consolidated Financial Statements and the associated notes, and also the monthly distribution of profits among the depositors and shareholders. The FSSB held a total number of six meetings during the year, answered the queries raised to it and approved some new products proposed by the Management. The Executive Member of the Board, Sheikh Dr. Abdul Sattar Abu Ghuddah has convened two meetings during the year and answered queries received through telephone calls. Likewise, the Executive Member of the Board, Sheikh Dr. Nizam Yaqubi has reviewed those corporate transactions presented to him by way of s, including a number of syndications in which the Bank has participated with other banks. He also answered queries on issues raised to him via telephone calls. In line with the duty of the Board to promote Shariah awareness of Islamic banking in the society, especially in those communities where Islamic banking is still new, one of the Members of the Board, Sheikh Essam Mohamed Ishaq has delivered highly advanced training programs pertaining to the Islamic Banking to a number of university students, scholars and the prayer leaders in Kazakhstan, in addition to staff of Al Hilal Islamic Bank in Kazakhstan. Accordingly, the FSSB is of the opinion that: 1. The contracts, operations and transactions executed by the Bank (and its subsidiaries), the investments entered into and the activities conducted by it during the financial year ended on 31 December as presented to us, are overall in accordance with Shariah rules and principles. And whatever discrepancies found in some of the cases, the Management has been guided as to how to correct them and tackle their effects and consequences as required by Shariah. 2. Distribution of profits and Shariahing of losses on investment accounts (including allocating costs and expenses to these accounts and that of the shareholders) are in conformity with the standards approved by us as per Shariah rules and principles. 3. All the revenues earned through non-shariah compliant sources and means have been forfeited to the charity account to be spent for charity causes as per our guidelines, far away from being utilized by the Bank in any manner whatsoever. 4. Owing that the Bank is fully owned by the government, its funds become public funds, and hence the Bank is not under an obligation to pay Zakat on them. However, given the Shariah opinion that public funds are subject to Zakat if they are invested or put into business, the Board advises that the Bank should pay Zakat on its funds in support of Zakat beneficiaries. As the Bank has no absolute authority to discharge Zakat directly, the obligation to discharge Zakat falls on the shareholders themselves out of their adherence to the third pillar of Islam. The FSSB extends its thanks to the Management of the Bank, and prays to Allah to enable them to serve the Islamic economy, and to bless the wealth of the Bank s shareholders and its customers and to bestow us all with Halal provision, and sincerity in our words and deeds. Finally praise to Allah and peace be upon His Messenger, Mohammed and upon his family and companions. والسالم عليكم ورحمة اهلل تعالى وبركاته Sheikh Dr. Abdulsattar Abughuddah Chairman Sheikh Dr. Nedham Mohamed Saleh Yaqoobi Vice-Chairman Shaikh Esam Mohamed Ishaq Member Professor Dr. Mohammad Abdulrahim Sultan Member Place: Abu Dhabi, UAE. Date: Tuesday, 5th Jamadi Al Aula, 1436 AH, corresponding to 24th February Fatwa and Supervisory Board Report Al Hilal Bank Annual Report Al Hilal Bank Annual Report Fatwa and Supervisory Board Report 66

35 Independent Auditors Report Independent Auditors Report Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Al Hilal Bank PJSC ( the Bank ) and its subsidiaries ( the Group ), which comprise the consolidated statement of financial position as at 31 December, the consolidated statements of income, other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as 31 December, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements As required by the UAE Federal Law No. 8 of 1984 (as amended), we further confirm that we have obtained all information and explanations necessary for our audit; the financial statements comply, in all material respects, with the applicable requirements of the UAE Federal Law (8) of 1984 (as amended), Union Law no. 10 of 1980 and the Articles of Association of the Bank; that proper financial records have been kept by the Bank; and the contents of the Chairman s report which related to these consolidated financial statements are in agreement with the Group s financial records. We are not aware of any violation of the above mentioned Laws and the Articles of Association having occurred during the year ended 31 December, which may have had a material adverse effect on the business of the Bank or its financial position. KPMG Lower Gulf Munther Dajani Registration No: 268 Abu Dhabi, United Arab Emirates 03 May Independent Auditors Report Al Hilal Bank Annual Report Al Hilal Bank Annual Report Independent Auditors Report 68

36 Consolidated Financial Statements Consolidated statement of financial position as at 31 December Consolidated statement of income for the year ended 31 December Assets Note Cash and balances with banks 9 3,132,950 2,837,178 Wakala deposits with banks and other financial institutions 10 1,856,247 3,149,535 Receivables from Islamic financing activities 11 23,702,010 21,119,724 Ijara 12 7,192,851 5,983,441 Investment securities 13 3,065,888 2,928,196 Property and equipment 14 1,492,827 1,459,946 Other assets ,099 1,227,245 assets 41,407,872 38,705,265 Liabilities Note Equity Note Customers accounts 16 31,144,311 28,178,307 Wakala deposits from banks 1,406,096 3,180,210 Sukuk financing instrument 17 1,836,250 1,836,250 Other liabilities 18 1,307,308 1,576,763 liabilities 35,693,965 34,771,530 Share capital 19 3,090,000 3,090,000 Tier 1 Sukuk 20 1,836,250 - Statutory reserve , ,521 Other reserves 21 (65,311) (13,694) Retained earnings 730, ,202 equity attributable to the equity holder of the Bank 5,713,907 3,907,029 Non - controlling interest 22,31-26,706 equity 5,713,907 3,933,735 liabilities and equity 41,407,872 38,705,265 Income Note Income from Wakala investments 66,954 89,751 Income from Islamic financing activities and Ijara, net 23 1,647,056 1,527,797 Investment income , ,178 Commission, fees and foreign exchange income, net , ,225 2,070,649 1,937,951 Expenses Note Personnel costs (396,954) (417,480) General and administrative expenses 25 (301,627) (287,822) Impairment charges, net 26 (740,058) (219,203) Depreciation 14 (96,524) (74,718) Profit before distribution 535, ,728 Profit distribution 27 (445,388) (496,941) Profit for the year 90, ,787 Attributable to: Note Equity holder of the Bank 90, ,361 Non-controlling interest Profit for the year 90, ,787 Ahmed Ateeq Al Mazrouei Mohamed Jamil Berro Nabil Mushahwar Chairman Chief Executive Officer EVP Finance & Strategic Planning The accompanying notes 1 to 38 form an integral part of these consolidated financial statements. The independent auditors report is set out on page 67. The accompanying notes 1 to 38 form an integral part of these consolidated financial statements. The independent auditors report is set out on page Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 70

37 Consolidated statement of comprehensive income for the year ended 31 December Attributable to: Note Profit for the year 90, ,787 Other comprehensive income Items that will never be reclassified to profit or loss Note Net (loss) / gain on investment in equity instrument designated at fair value (8,757) 7,524 through other comprehensive income Directors remuneration and others (note 33) (2,990) (2,831) Items that are or maybe reclassified to profit or loss 21 (42,797) (8,387) Foreign currency translation difference for foreign operation Other comprehensive expenses for the year (54,544) (3,694) comprehensive income for the year 35, ,093 Attributable to: Note Equity holder of the Bank 35, ,667 Non-controlling interest comprehensive income for the year 35, ,093 The accompanying notes 1 to 38 form an integral part of these consolidated financial statements. The independent auditors report is set out on page Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 72

38 Consolidated statement of changes in equity for the year ended 31 December Share capital Statutory reserve Attributable to equity holder of the Bank Translation reserve Fair value reserve Retained earnings Tier 1 Sukuk Non-controlling Balance at 1 January 3,090, ,521 (15,134) 1, ,202-3,907,029 26,706 3,933,735 comprehensive income for the year: Profit for the year ,098-90,098-90,098 Other comprehensive income - Net (loss) / gain on investment in (8,820) 63 - (8,757) - (8,757) equity instrument designated at fair value through other comprehensive income Foreign currency translation difference for foreign operations - - (42,797) (42,797) - (42,797) Directors remunerations and others (note 33) (2,990) - (2,990) - (2,990) equity other comprehensive (loss) / income - - (42,797) (8,820) (2,927) - (54,544) - (54,544) comprehensive (loss) / income for the year - - (42,797) (8,820) 87,171-35,554-35,554 Transaction with owner of the Bank Contributions and distributions Tier 1 Sukuk (note 20) ,836,250 1,836,250-1,836,250 Tier 1 Sukuk issuance cost (14,429) - (14,429) - (14,429) Tier 1 Sukuk dividend (50,497) - (50,497) - (50,497) Disposal of subsidiary (note 31) (26,706) (26,706) Transfer to statutory reserve - 9, (9,116) contributions and distributions - 9, (74,402) 1,836,250 1,771,324 (26,706) 1,744,618 Balance at 31 December 3,090, ,637 (57,931) (7,380) 730,331 1,836,250 5,713,907-5,713,907 The accompanying notes 1 to 38 form an integral part of these consolidated financial statements. The independent auditors report is set out on page Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 74

39 Consolidated statement of changes in equity for the year ended 31 December Share capital Statutory reserve Attributable to equity holder of the Bank Translation reserve Fair value reserve Retained earnings Tier 1 Sukuk Non-controlling Balance at 1 January 3,090,000 69,410 (6,747) (4,705) 321,404-3,469,362 26,280 3,495,642 comprehensive income for the year: Profit for the year , , ,787 Other comprehensive income - Net (loss) / gain on investment in ,145 1,379-7,524-7,524 equity instrument designated at fair value through other comprehensive income Foreign currency translation difference for foreign operations - - (8,387) (8,387) - (8,387) Directors remunerations and others (note 33) (2,831) - (2,831) - (2,831) equity other comprehensive (loss) / income - - (8,387) 6,145 (1,452) - (3,694) - (3,694) comprehensive (loss) / income for the year - - (8,387) 6, , , ,093 Transaction with owner of the Bank Contributions and distributions Transfer to statutory reserve - 44, (44,111) contributions and distributions - 44, (44,111) Balance at 31 December 3,090, ,521 (15,134) 1, ,202-3,907,029 26,706 3,933,735 The accompanying notes 1 to 38 form an integral part of these consolidated financial statements. The independent auditors report is set out on page Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 76

40 Consolidated statement of cash flows for the year ended 31 December Cash flows from operating activities Profit for the year 90, ,787 Adjustment for: Depreciation 96,524 74,718 Loss on disposal of subsidiary (note 31) Net impairment charges on financial assets 743, ,639 Unwinding of impairment charge (22,388) (9,362) Realised gain on sale of investments (38,233) (23,321) Unrealised revaluation loss on investment securities , , ,540 Changes in: Wakala deposits with banks 558,947 (1,433,668) Receivables from Islamic financing activities (3,309,952) (3,429,607) Ijara (1,244,583) (964,302) Other assets 262,146 (428,568) Customers accounts 2,966,004 3,221,642 Wakala deposits from banks (34,900) 16,808 Other liabilities (269,453) 398,758 Net cash used in operating activities (201,723) (1,906,397) Cash flows from investing activities Disposal of subsidiary (note 31) (27,085) - Acquisition of property and equipment, net (129,405) (164,923) Acquisition of investment securities (3,235,072) (959,643) Proceeds from sale of investment securities 3,116, ,236 Net cash used in investing activities (274,938) (284,330) Cash flows from financing activities Issuance of Sukuk financing instrument (note 17) - 1,836,250 Tier 1 Sukuk issued (note 20) 1,836,250 - Tier 1 Sukuk issuance cost (14,429) - Profit paid on Tier 1 Sukuk (50,497) - Directors remuneration paid and others (note 33) (2,990) (2,831) Net cash from financing activities 1,768,334 1,833,419 Net increase/ (decrease) in cash and cash equivalents 1,291,673 (357,308) Cash and cash equivalents, beginning of the year 1,555,567 1,912,875 Cash and cash equivalents, end of the year (note 28) 2,847,240 1,555, Consolidated Financial Statements Al Hilal Bank Annual Report The accompanying notes 1 to 38 form an integral part of these consolidated financial statements. The independent auditors report is set out on page 67.

41 Notes to the consolidated financial statements 1. Legal Status and Principal Activities Al Hilal Bank PJSC (the Bank ) was incorporated in Abu Dhabi, United Arab Emirates ( UAE ) on 18 June 2007 by virtue of Amiri Decree number 21 of 2007, with limited liability, and is registered as a Public Joint Stock Company in accordance with the United Arab Emirates Federal Law number 8 of 1984 (as amended), United Arab Emirates Federal Law number 10 of 1980 (as amended) and United Arab Emirates Federal Law number 6 of 1985 regarding Islamic banks, financial institutions and investment companies. The Bank s registered office address is Al Bahr Towers (P. O. Box 63111), Abu Dhabi, United Arab Emirates. These consolidated financial statements as at and for the year ended 31 December comprise the Bank and its subsidiaries (Note 32) (together referred to as the Group ). The Group is primarily involved in Islamic corporate, retail and investment banking activities as well as Islamic insurance ( Takaful ) and carries out its operations through its branches in the United Arab Emirates and subsidiaries located in the United Arab Emirates and Kazakhstan. The consolidated financial statements of the Group include the Shareholder, depositors funds and the Sukuks. The consolidated financial statements were authorized for issue by the Board of Directors on 3rd May Basis of Preparation The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. a) Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and the requirements of UAE Federal Law No. 8 of 1984 (as amended). b) Basis of Measurement These consolidated financial statements have been prepared under the historical cost convention except for the following: Items Measurement basis Islamic derivative financial instruments Financial instruments designated at fair value through profit or loss Financial instruments designated at fair value through other comprehensive income Investment property Recognised financial assets and financial liabilities designated as hedged items in qualifying fair value hedge relationships Fair value Fair value Fair value c) Use of Estimates and Judgments In preparing these consolidated financial statements, management has made judgments, estimates and assumptions that affect the application of the Group s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5. d) Functional and Presentation Currency i) Functional and Presentation Currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the respective entity operates ( the functional currency ). These consolidated financial statements are presented in Arab Emirates Dirham ( AED ), which is the Group s presentation currency. Amounts have been rounded to nearest thousand except where otherwise indicated. ii) Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income. e) Standards early adopted by the Group IFRS 9, Financial instruments: Classification and measurement was issued in November It replaces the parts of IAS 39 that relate to the classification and measurement of financial assets. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. Adoption of IFRS 9 is mandatory from 1 January 2018; earlier adoption is permitted. The Group has early adopted IFRS 9 from 1 October 2010, as well as the related consequential amendments to other IFRSs, because this new accounting policy provides reliable and more relevant information for users to assess the amounts, timing and uncertainty of future cash flows. In accordance with the transition provisions of the standard, comparative figures have not been restated. The main effects resulting from this assessment were: Investments in Sukuk instruments, previously classified as available-for-sale, meet the criteria to be classified as at amortised cost in accordance with IFRS 9. They are now therefore classified as financial assets at amortised cost. Equity investments not held for trading that were previously measured at fair value and classified as available-for-sale have been designated as at fair value through other comprehensive income. 3. Significant accounting policies The Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. a) Hedge Accounting In order to manage profit rate risks, the Group enters into Shariah compliant arrangements including profit rate swaps. Hedge Documentation At the inception of the hedge, formal documentation of the hedge relationship must be established. The hedge documentation prepared at the inception of the hedge must include a description of the following: The Group s risk management objective and strategy for undertaking the hedge; The nature of risk being hedged; Clear identification of the hedged item and the hedging instrument; and How the Group will assess the effectiveness of the hedging relationship on an on-going basis. Hedge Effectiveness Testing The hedge is regarded as highly effective if the following conditions are met: At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in offsetting the changes in fair value of the hedging instruments with corresponding changes in the hedged risk and should be reliably measurable; and The actual results of the hedge are within a range of 80 to 125 percent. These hedging relationships are discussed below: to the hedged risk (in the same line item in the consolidated statement of income and other comprehensive income as the hedged item). Cash Flow Hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount recognised in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the consolidated statement of income and other comprehensive income. Discontinuance of Hedge Accounting The hedge accounting is discontinued when a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting. At that point of time, any cumulative gain or loss on the hedged instrument that has been previously recognised in the consolidated statement of income is immediately reversed in the consolidated statement of income. b) Islamic Financial Assets i) Murabaha Murabaha receivables are non-derivative financial assets with fixed payments that are not quoted in an active market. A Murabaha contract is a sale of goods with an agreed upon profit mark up on the cost of the goods. A Murabaha contract is of two categories. In the first category, the Bank purchases the goods and makes it available for sale without any prior promise from a customer to purchase it. In the second category, the Bank purchases the goods ordered by a customer from a third party and then sells these goods to the same customer. In the latter case, the Bank purchases the goods only after a customer has made a promise to purchase them from the Bank. ii) Ijara Muntahia Bittamleek A form of leasing contract which includes a promise by a lessor to transfer the ownership in the leased property to the lessee, either at the end of the term of the Ijara period or by stage during the term of the contract. iii) Wakala Fair value hedges A contract between the Bank and customers whereby one party (the Fair value When a derivative is designated as the hedging instrument in a hedge principal: the Muwakkil) appoints the other party (the agent: Wakil) Amortised cost adjusted of the change in fair value of a recognised asset or liability or a firm to invest certain funds according to the terms and conditions of the for changes in fair value commitment that could affect profit or loss, changes in the fair value Wakala for a fixed fee in addition to any profit exceeding the expected attributable to the risk of the derivative are recognised immediately in profit or loss together profit as an incentive for the Wakil for the good performance. Any The Group s management has assessed the financial assets held by being hedged with changes in the fair value of the hedged item that are attributable the Group at the date of initial application of IFRS 9 (1 October 2010). 79 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 80

42 losses as a result of the misconduct or negligence or violation of the terms and conditions of the Wakala are borne by the Wakil; otherwise, they are borne by the Muwakkil. iv) Mudaraba Mudaraba is a contractual arrangement whereby two or more parties undertake an economic activity. Mudaraba is a partnership in profit between capital and work. It may be conducted between investment account holders as providers of funds and the Bank as a Mudarib. The Bank announces its willingness to accept the funds of investment account holders, the Shariahing of the profits being as agreed between the two parties and the losses being borne by the provider of the funds except if they were due to misconduct, negligence or violation of the conditions agreed upon by the Bank, in which case, such losses would be borne by the Bank. v) Sukuk Certificates which are equal in value and represent common shares in the ownership of a specific asset (leased or to be leased either existing or to be constructed in future), or in the ownership of cash receivables of selling an existing-owned asset, or in the ownership of goods receivables, or in the ownership of the assets of Mudaraba or Partnership companies. In all these cases, the Sukuk holders shall be the owners of their common shares in the leased assets, or in the cash receivables, or the goods receivable, or in the assets of the Partnership or the Mudaraba. vi) Musharaka It is an agreement between two or more parties to combine their assets or to merge their services or obligations and liabilities with the aim of making profit. Profit in Musharaka is shared as per the agreed ratio whereas loss is distributed in proportion to the contribution of each partner. c) Consolidation i) Subsidiaries 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 Group reassesses whether it has control if there are changes to one or more elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a financing relationship) become substantive and lead to the Group having power over an 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 subsidiaries consolidated in the Group financial statement are listed in note 32. ii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. iii) Non-controlling Interest ( NCI ) Non-controlling interest are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. iv) Loss of Control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interest and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. d) Foreign Currency i) Foreign Currency Transactions Transactions in foreign currencies are translated into the respective functional currency of Group entities at the spot exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the year, adjusted for effective profit and payments during the year, and the amortised cost in the foreign currency translated at the spot exchange rate at the end of the year. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the spot exchange rate at the date on which the fair value is determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction. Foreign currency differences arising on translation are generally recognised in profit or loss. ii) Foreign Operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into AED at spot exchange rates at the reporting date. The income and expenses of foreign operations are translated into AED at spot exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and accumulated in the foreign currency translation reserve (translation reserve), except to the extent that the translation difference is allocated to non-controlling interest. When a foreign operation is disposed of such that control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, then the relevant proportion of the cumulative amount is reattributed to non-controlling interest. If the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, then foreign currency differences arising on the item form part of the net investment in the foreign operation and are recognised in other comprehensive income, and accumulated in the translation reserve within equity. e) Property and Equipment i) Recognition and Measurement Property and equipment are stated at historical cost less accumulated depreciation and amortisation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Purchased software that is integral to the functionality of related equipment is capitalized as part of equipment. If significant parts of an item of property or equipment have different useful lives, then they are accounted for as separate items (major components) of property and equipment. Any gains and losses on disposal of an item of property and equipment is recognised in the consolidated statement of income. ii) Subsequent Costs Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated statement of income during the financial period in which they are incurred. iii) Depreciation and Amortisation Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: Buildings 40 yrs 40 yrs Leasehold improvements 7-10 yrs 7-10 yrs Computer systems and equipment 4 years 4 years Furniture, equipment, safes and vehicles 4 years 4 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. f) Capital Work in Progress Properties or assets in the course of construction for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Cost includes all direct cost attributable to design and construction of the property including related staff costs, and for qualifying assets, financing costs capitalised in accordance with Group s accounting policy. When the assets are ready for the intended use, the capital work in progress is transferred to the appropriate property and equipment category and is depreciated in accordance with the Group s policies. g) Qard Hasan Qard Hasan receivables are non-profit bearing financing receivables whereby the customer borrows funds for a period of time with an understanding that the same amount shall be repaid at the end of the agreed period. h) Swap Transactions Currency and profit rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or profit rates (for example, fixed rate for floating rate) or a combination of all these (i.e., cross-currency profit rate swaps). The Group s credit risk represents the potential loss if counterparties fail to fulfill their obligations. i) Impairment of Non-financial Assets Assets that have indefinite useful life (for example, land, goodwill or intangible assets not ready for use) are not subject to amortization or depreciation and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). An impairment loss is recognised if the carrying amount of an asset or cash-generating units exceeds its recoverable amount. Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of impairment at each reporting date. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 81 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 82

43 j) Cash and Cash Equivalents In the consolidated statement of cash flows, cash and cash equivalents comprise cash in hand, due from banks, balances with Central Banks, Wakala deposits with banks (net) and financial institutions with original maturity of less than three months which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. k) Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are recognised as deduction from equity. l) Fair Value Reserve The fair value reserve is related to revaluation of investment securities classified at fair value through other comprehensive income, the policy of which is set out in Note 3(n). m) Customers accounts and Wakala deposits from banks Customers accounts and Wakala deposits from banks are initially recognised at fair value less transaction costs and are subsequently measured at amortised cost. n) Financial Assets i) Recognition and Initial Measurement The Group initially recognises financial assets on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Financial assets are initially measured at fair value. If the financial asset is not subsequently accounted for at fair value through profit or loss, then the initial measurement includes transaction costs that are directly attributable to the asset s acquisition or origination. On initial recognition, the Group classifies its financial assets as subsequently measured at either amortised cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. ii) Classification Classification prior to 1 October 2010 The Group classifies its financial assets in the following categories: at fair value through profit or loss, receivables from Islamic financing activities, available-for-sale and held to maturity. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. a) Financial Assets at Fair Value Through Profit or Loss A financial asset at fair value through profit or loss is either classified as held-for-trading or designated as such on initial recognition. Financial assets at fair value through profit or loss are subsequently measured at fair value and changes therein, including profit or dividend income, are recognised in profit or loss. b) Receivables from Islamic Financing Activities Receivables from Islamic financing activities are non-derivative financial assets with fixed payments that are not quoted in an active market. c) Available-for-sale Fnancial Assets These assets are subsequently measured at fair value and changes therein, other than impairment losses and foreign currency differences on Sukuk instruments, are recognised in other comprehensive income and accumulated in the fair value reserve. When these assets are derecognised, the gain or loss accumulated in equity is reclassified to profit or loss. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in other comprehensive income. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the consolidated statement of comprehensive income. Classification after 1 October 2010 As of 1 October 2010, the Group classifies its financial assets in the following categories: those to be measured at amortised cost, and those to be measured subsequently at fair value. a) Financial Assets Measured at Amortised Cost A financial asset is subsequently measured at amortised cost, using effective profit rate method and net of any impairment loss, if: The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and The contractual terms of financial asset give rise, on specified dates, to cash flows that are solely payments of principle and profit. The Group s policy on impairment of financial assets measured at amortised cost is the same as that applied in its consolidated financial statements as at and for the year ended 31 December for Islamic financing receivables and Sukuk investments. The Group makes an assessment of a business model at portfolio level as this reflects the best way the business is managed and information is provided to management. In making an assessment of whether an asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows, the Group considers: management s stated policies and objectives for the portfolio and the operation of those policies in practice; how management evaluates the performance of the portfolio; whether management s strategy focuses on earning contractual cash flow; the degree of frequency of any expected asset sales; the reason of any asset sales; and whether assets that are sold are held for an extended period of time relative to their contractual maturity or are sold shortly after acquisition or an extended time before maturity. Financial assets held for trading are not held within a business model whose objective is to hold the asset in order to collect contractual cash flows. b) Financial Assets Measured at Fair Value These assets are measured at fair value and changes therein, including any profit or dividend income, are recognised in profit or loss. However, for investment in equity instruments not held for trading, the Group may elect at initial recognition to present gains and losses in other comprehensive income. For such investments measured at fair value through other comprehensive income, gains and losses are never reclassified to profit or loss, and no impairment is recognised in profit or loss. Dividends earned from such investments are recognised in profit or loss, unless dividend clearly represents repayment of part of the cost of the investment. c) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the statement of financial position. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) is recognised in profit or loss. In addition, prior to 1 April 2010 any cumulative gain or loss that had been recognised in other comprehensive income was also recognised in consolidated statement of income. Transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. d) Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from group of similar transactions such as in the Group s trading activity. e) Amortised Cost Measurement The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective profit rate method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. iii) Fair Value Measurement 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 in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its nonperformance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an on going basis. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. o) Impairment of Financial Assets At each reporting date the Group assesses whether there is objective evidence that financial assets carried at amortised cost are impaired. A financial asset or a group of financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired can include significant financial difficulty of the issuer, default or delinquency by an issuer, restructuring of Islamic financing receivables by the Group on terms that the Group would not otherwise consider, indications that an issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of 83 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 84

44 assets such as adverse changes in the payment status of issuers in the group, or economic conditions that correlate with defaults in the group. The Group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and collective level. All individually significant financial assets measured at amortised cost are assessed for specific impairment. All individually financial assets at amortised cost found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets are impaired. For Sukuk securities, the Group uses the criteria referred to in Note 3(n)(i). p) Financial Liabilities Financial liabilities, including customers accounts, Sukuk financing instrument and Wakala deposits, are initially measured at fair value, net of transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective profit method, with profit expense recognised on an effective yield basis. The effective profit rate method is a method of calculating the amortised cost of a financial liability and of allocating profit expense over the relevant period. The effective profit rate is the rate that exactly required to unwind estimated future cash payments through the expected life of the financial liability (or, where appropriate, a shorter period) to the net carrying amount on initial recognition. De-recognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group s obligations are discharged, cancelled or expired. q) Revenue Recognition The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. i) Profit Income Profit income is recognised using the effective profit rate method. The effective profit rate is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset (or, where appropriate, a shorter period) to the carrying amount of the financial asset. When calculating the effective profit rate, the Group estimates future cash flows considering all contractual terms of the financial asset, but not future credit losses. The calculation of the effective profit rate includes transaction costs and fees and points paid or received that are an integral part of the effective profit rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset. When a financial asset is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow required to unwind at the original effective profit rate of the instrument, and continues unwinding the discount as profit income. Profit income on impaired finance facilities and receivables is recognised using the original effective profit rate. ii) Dividend Income Dividend income is recognised when the right to receive the income is established. Usually this is the ex-dividend date for equity securities. Dividends are presented in net trading income or net income from other financial instruments at fair value through profit or loss based on the underlying classification of the equity investment. Dividends on equity instruments designated at fair value through other comprehensive income are presented in other revenue in the consolidated statement of income unless the dividend clearly represents a recovery of part of the cost of the investment, in which case it is presented in other comprehensive income. iii) Fee and Commission Income, Net Fees and commission income and expense that are integral to the effective profit rate on a financial asset or financial liability are included in the measurement of the effective profit rate. Other fees and commission income including account servicing fees, investment management fees, sales commission, placement fees and syndication fees are recognised as the related services are performed. If a finance commitment is not expected to result in the drawn of finance, then the related finance commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. r) Investment Property Investment property is property held for rental income or for capital appreciation, or both, but not for sale in the ordinary course of business, use in the production, supply of goods or services or for administrative purposes. Investment property is measured at cost and subsequently at fair value with any change therein recognised in the consolidated statement of income. s) Lease Payment Payments made under operating leases are recognised in the consolidated statement of income on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. t) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. u) Onerous Contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. v) Staff terminal Benefits UAE nationals employed by the Group are registered in the scheme managed by Abu Dhabi Retirement Pensions and Benefits Fund in accordance with Law number (2) of Staff terminal benefits for expatriate employees are accounted for on the basis of their accumulated services at the reporting date and in accordance with the Group s internal policies, which comply with the applicable laws. An actuarial valuation is not performed on staff terminal and other benefits as the net impact of the discount rate and future salary and benefits level on the present value of the benefits obligation are not expected by management to be significant. w) Director s Remunerations In accordance with the Ministry of Economy and Commerce interpretation of Article 119 of Federal Law No. 8 of 1984 (as amended), Directors remuneration has been treated as an appropriation from other comprehensive income. x) Profit Distribution Profit distribution is an amount accrued as an expense on the funds accepted from banks and customers in the form of Wakala deposits, Mudarba contracts & Sukuk financing instruments and recognised as expenses in the consolidated statement of income. The amounts are calculated in accordance with agreed terms and conditions of the Wakala deposits and Shariah principles. y) Financial Guarantees and Financing Commitments Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified party fails to meet its obligation when due in accordance with the contractual terms. Financing commitments are firm commitments to provide credit under pre-specified terms and conditions. For other financial guarantee contracts, financial guarantees are initially recognised at their fair value (which is the premium received on issuance). The received premium is amortised over the life of the financial guarantee. The guarantee liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment. The premium received on these financial guarantees is included within other liabilities. z) Takaful Contracts i) Classification The Group issues contracts that transfer either Takaful risk or both Takaful and financial risks. The Group does not issue contracts that transfer only financial risks. Contracts under which the Group accepts significant Takaful risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as Takaful contracts. ii) Recognition and Measurement Gross written contributions, in respect of annual policies, are recognised in the consolidated statements of income at the inception of the policy. In respect to policies with a term of more than one year, the contributions are spread over the tenure of the policies on a straight line basis, and the unexpired portion of such contributions is included under unearned contributions in the consolidated statement of financial position. iii) Claims Claims incurred comprise the settlement, the internal and external handling costs of paid and changes in the provisions for outstanding claims arising from events occurring during the year. Where applicable, deductions are made for salvage and recoveries. Claims outstanding comprise provisions for the Group s estimate of the ultimate cost of settling all claims incurred but unpaid at the reporting date whether reported or not, and related internal and external claims handling expenses and reduced by expected salvage and recoveries. Claims outstanding are assessed by reviewing individual reported claims. Provisions for claims outstanding are not discounted. Adjustments to claims provisions established in prior periods are reflected in the period in which the adjustments are made. The methods used, and the estimates made, are reviewed regularly by management. iv) Gross Claims Paid Gross claims paid are recognised in the consolidated statement of income when the claim amount payable to policyholders and third parties is determined as per the terms of the Takaful contracts. v) Claims Recovered Claims recovered include amounts recovered from re-takaful companies in respect of the gross claims paid by the Group, in accordance with the re-takaful contracts held by the Group. It also includes salvage and claims recoveries. 85 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 86

45 vi) Gross Outstanding and Ibnr Claims Gross outstanding claims comprise the estimated costs of claims incurred but not settled at the consolidated financial position date. Provisions for reported claims not paid as at the end of the reporting period are made on the basis of individual case estimates. This provision is based on the estimate of the loss, which will eventually be payable on each unpaid claim, established by management in the light of currently available information and past experience. An additional net provision is also made for any claims incurred but not reported ( IBNR ) at the end of the reporting period, on the basis of management estimates. The re-takaful share of the gross outstanding claims is estimated and shown separately. vii) Unearned Contribution Reserves A provision is made for contribution deficiency arising from general Takaful contracts where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the consolidated financial position date exceeds the unearned contributions provision and already recorded claim liabilities in relation to such policies. The provision for contribution deficiency is calculated by reference to classes of business which are managed together. viii) Re-takaful The Group cedes re-takaful in the normal course of business for the purpose of limiting its net loss potential through the diversification of its risks. Assets, liabilities, income and expense arising from ceded retakaful contracts are presented separately from the assets, liabilities, income and expense from the related Takaful contracts because the re-takaful arrangements do not relieve the Group from its direct obligations to its policyholders. Amounts due to and from re-takaful are accounted for in a manner consistent with the related contributions and is included in re-takaful assets. Re-takaful assets are assessed for impairment at the end of each reporting period. A re-takaful asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due, and that event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Impairment losses on re-takaful assets are recognised in the consolidated statement of income in the year in which they are incurred. Commissions in respect of re-takaful contracts are recognised on an accrual basis. ix) Takaful Receivables and Payables Amounts due from and to policyholders, agents and reinsurers are financial instruments and are included in other assets and other liabilities, respectively, and not in Takaful contract provisions or retakaful assets. x) Liability Adequacy Test At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities using current estimates of future cash flows under Takaful contracts. In performing these, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets supporting such liabilities are used. Any deficiency in the carrying amounts is immediately charged to the consolidated statement of income by establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision). Where the liability adequacy test requires the adoption of new best estimate assumptions, such assumptions (without margins for adverse deviation) are used for the subsequent measurement of these liabilities. aa) New Standards and Interpretations Not Yet Adopted A number of new standards, amendments to standards and interpretations that are issued but not effective for the accounting period starting 1 January, and have not been early adopted in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group. IFRS-9 Financial instrument The International Accounting Standards Board has decided to replace IAS 39 Financial Instruments over a period of time and by three phases: Phase 1: Classification and measurement of financial assets and financial liabilities. Phase 2: Impairment methodology. Phase 3: Hedge accounting. Recognition and Measurement: The early adoption of the standard continues to be permitted. Given the nature of the Groups operations, this standard is expected to have a pervasive impact on the Group s consolidated financial statement. The Group, however, has already early adopted part of Phase 1 Classification and measurement of financial assets Note 2 (e). IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additions relating to financial liabilities. IFRS 9 () introduces new requirements for hedge accounting. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets. The mandatory effective date of IFRS 9 is 1st January IFRS-15 Revenue from contracts with customers The International Accounting Standards Board issued IFRS 15 in May. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Application of the standard is mandatory for annual reporting periods starting from 1 January 2017 onwards. 4. Financial risk management i) Financial risk factors Introduction and overview The Group s activities expose it to a variety of financial risks and involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Financial instruments are fundamental to the Group s business, constituting the core element of its operations. Accordingly, the risks associated with financial instruments are a significant component of the risks faced by the Group. Financial instruments create, modify or reduce the credit, market (including traded or fair value risks and nontraded or profit rate and foreign currency related risks) and liquidity risks of the Group s balance sheet. Risk taking is core to the banking business and operational risks are an inevitable consequence of such activities. The Group s aim is, therefore, to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Group s financial performance. The Group s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Group regularly reviews its risk management policies and systems to reflect changes in regulations, markets, products and emerging best practice. In order to keep financial risk at a minimum and acceptable level within agreed risk appetite parameters. The Group has exposure to many financial instruments and entails the following financial risks: Credit risk - The risk of financial loss where a customer or counterparty fails to meet their financial obligations; Market risk - The risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, profit rates, commodity prices and equity prices. Market risk arises in both trading and banking book activities; Liquidity risk - The risk that the Group will be unable to fund assets and meet obligations as they become due; Operational risk The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events including legal risk but excluding strategic or reputation risk. ii) Risk Governance and Framework The risk management framework is integral to the operations and risk culture of the Group. The Board of Directors ( The Board ) places significant importance on strong risk governance when shaping the Group s risk strategy and managing risks effectively. Risks are proactively managed within the Group with a clear policy framework of risk ownership. The framework is comprehensive and has been communicated from the Board down to individual Business lines. A well-established risk governance and ownership structure ensures oversight of, and accountability for, the effective management of risk at the Group, regional, customer group and entity levels. The Group s business strategy is to achieve the objective of being a strong financial player and at the same time managing risks associated with this objective effectively. The risk governance framework supports this objective and promotes the transparency in the Group. The Board approves the Group s Risk management framework, risk appetite, performance targets for the Group, the appointment of senior officers, and the delegation of authorities for credit and other risks and the establishment of effective control procedures. The Board has established a Board Risk Committee ( BRC ), comprising members from the Board, to monitor the Group s credit, operational, market and liquidity risks. The Board has further set up from within management, Assets and Liabilities Committee ( ALCO ), Management Investment Committee (MIC), Management Risk Committee ( MRC ), Management Credit Risk Committee ( MCRC ), Remedial Management Committee ( RMC ) (a sub-committee of MCRC) and Management Operational Risk Committee ( MORC ) (which is a subcommittee of MRC). A separate and independent Risk Management Group, reporting to the Management Risk Committee, assists in carrying out the oversight responsibility of the Board through the Board Risk Committee ( BRC ). The Board has established a Bank Audit Committee, which is responsible for monitoring compliance with the Bank s risk management policies and procedures and for reviewing the adequacy of the risk management framework. The Bank s Audit Committee is supported in the execution of these responsibilities by the Internal Audit Department. iii) Risk appetite Risk appetite policy describes the quantum and types of risk that the Group is prepared to take in executing its strategy. It is central to an integrated approach to risk, capital and business management and supports the Group in achieving its return on equity objectives, as well as being a key element in meeting the Group s obligations under Pillar I and Pillar II of Basel II. 87 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 88

46 The risk appetite covers both the beneficial and adverse aspects of risk. The formulation of risk appetite considers the Group s risk capacity, its financial position, and the strength of its core earnings and any potential impact on its reputation. iv) Credit Risk and Concentrations of Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from Islamic financing activities, Ijara, Investments and Takaful receivables. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). Management of Credit Risk The objective of credit risk management is to undertake an independent review and objective assessment of risk for all credit facilities as well as to both partner and challenge the businesses in defining, implementing and continually re-evaluating our risk appetite in line with the Group s policies, procedures and change in market conditions and regulations. Risk Management Group assesses all credit exposures and recommends approval from the designated credit committee by the Board (i.e. MCRC ), prior to facilities being committed to customers by the business unit concerned. Finance applications for Personal banking customers are reviewed and approved by Retail Financing & Credit team and Retail Risk Management team in line with the approved policies and delegated approval authorities. Credit policies for the Personal Banking Group, asset products, are reviewed by the Retail Risk Management team to ensure that the associated risks against asset financing are minimized. The Risk Management Group has developed and maintains an IRB compliant internal risk grading framework in order to categorize exposures according to the degree of risk probability of financial loss. There is a risk rating framework for the corporate portfolio that consists of twenty-two grades. Each customer is rated using portfolio specific rating model which in turn assigns a risk rating and corresponding probability of default. The responsibility for assigning risk grades lies with the concerned business unit and is independently vetted by the Risk Management Group. For the retail portfolio, four application and behavioral scorecards have been developed for each specific financing product and a small business rating model to assist in the credit decision process. Scorecards are based on statistical regression methodology using 5 years of historical data. Each new retail credit application is being scored using these application scorecards, additionally for existing customers, behavioral scorecards have been developed that assist in risk profiling and identifying cross sell opportunities to customer with low level of perceived risk. Since inception, the Group has established an independent Risk Analytics unit responsible for development and validation of corporate rating models and retail scorecards on an ongoing basis. Renewals and reviews of corporate facilities are subject to a thorough credit review process. In addition, the Group manages the credit exposure by obtaining security where appropriate and limiting the duration of exposure. In certain cases, the Group may also close out transactions or assign them to other counterparties to mitigate credit risk. Regular audits of business units and credit processes are undertaken by the Internal Audit Department. Wholesale Banking Group portfolio review and monitoring is performed on a regular basis through risk appetite measures, concentration report, LEC monitoring and other internal reports for management. Diverse industries research reports are prepared and circulated by the credit portfolio team to ensure that management is aware about the outlook of industries and fundamentals of the economy. Certain targeted reviews are also conducted by the risk management team. Credit portfolio review is conducted on a quarterly basis and the report is presented and discussed in MRC and BRC. A Personal Banking Group policy review and realignment is undertaken to ensure credit quality is maintained and is based on an on-going portfolio review and prevailing market conditions. Product Policies are realigned through deep dive analysis on the portfolio which includes monthly and quarterly reviews of the portfolio. Further assurance is also provided by an independent review of the credit portfolio that is undertaken by an independent credit review team separate from both the business unit and Credit Risk Management. This is to ensure that the credit portfolio is maintained on a prudent basis. Exposure to Credit Risk The Group measures its exposures to credit risk by reference to the gross carrying amount of financial assets less amounts offset, profit suspended and impairment losses, if any. At 31 December and 31 December, the Group s maximum exposure to credit risk before collateral held or other credit enhancements was as follows: Cash flows from operating activities Assets 40 years 40 years Balances with banks (note 9) 2,864,454 2,651,201 Wakala deposits with banks and other financial institutions 1,856,247 3,149,535 Receivables from Islamic financing activities 23,702,010 21,119,724 Ijara 7,192,851 5,983,441 Investment securities 3,065,888 2,928,196 Other assets (note 15) 679, ,903 39,361,147 36,815,000 Commitments and contingencies (note 29) 16,083,871 13,109,182 The above table represents a worst case scenario of credit risk exposure of the Group at 31 December and 31 December without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position. At 31 December and 31 December, the distribution by geographical region of major categories of assets and commitments was as follows: 31 December Assets United Arab Emirates Kazakhstan Others Balances with banks (note 9) 2,596,675 14, ,235 2,864,454 Wakala deposits with banks and other financial institutions 1,846,921 9,326-1,856,247 Receivables from Islamic financing activities 21,101, ,429 2,014,236 23,702,010 Ijara 7,020,118 26, ,916 7,192,851 Investment securities 2,879,032 12, ,802 3,065,888 Other assets (note 15) 679, ,697 36,123, ,175 2,588,189 39,361,147 Commitments and contingencies (note 29) 13,552, ,096 2,197,122 16,083, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 90

47 31 December 31 December Assets United Arab Emirates Kazakhstan Others Balances with banks (note 9) 2,132, , ,072 2,651,201 Wakala deposits with banks and other financial institutions 3,130,935 18,600-3,149,535 Receivables from Islamic financing activities 19,944, , ,406 21,119,724 Ijara 5,801,616 20, ,539 5,983,441 Investment securities 2,756,329 14, ,640 2,928,196 Other assets (note 15) 982, ,903 34,747, ,812 1,500,657 36,815,000 Commitments and contingencies (note 29) 10,894, ,982 2,086,830 13,109,182 At 31 December and 31 December, the distribution by sector of major categories of assets and commitments was as follows: 31 December Assets Government Public Corporate / private Retail Balances with banks (note 9) 2,256, ,831-2,651,201 Wakala deposits with banks and other financial institutions - - 3,149,535-3,149,535 Receivables from Islamic financing activities 1,885,534 1,899,186 7,551,002 9,784,002 21,119,724 Ijara 109,928 1,716,448 1,489,222 2,667,843 5,983,441 Investment securities 2,191, , ,107-2,928,196 Other assets (note 15) , ,903 6,443,136 3,808,419 13,128,697 13,434,748 36,815,000 Commitments and contingencies (note 29) 1,332,258 2,321,478 9,204, ,426 13,109,182 During the year, the Central Bank of UAE amended the definition of Government Related Entities which has been affected in the and sector classifications. Assets Government Public Corporate / private Retail Balances with banks (note 9) 2,561, ,834-2,864,454 Wakala deposits with banks and other financial institutions - - 1,856,247-1,856,247 Receivables from Islamic financing activities 1,595,961 1,595,392 8,472,063 12,038,594 23,702,010 Ijara 156,926 1,669,978 2,595,226 2,770,721 7,192,851 Investment securities 1,001, ,109 1,631,055-3,065,888 Other assets (note 15) , ,697 5,316,231 3,698,479 14,857,425 15,489,012 39,361,147 Commitments and contingencies (note 29) 1,833,534 1,173,754 12,744, ,386 16,083, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 92

48 Impairment And Provisioning Policies Impaired receivables from Islamic financing activities are financial assets carried at amortised cost for which the Group determines that it is probable that it will be unable to collect all principal and profit due according to the contractual terms of the related financial assets. These financial assets are graded in accordance with the Group s internal credit risk grading system. Credit Quality Per Class of Financial Assets Our credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk factors and higher potential severity of loss. The credit quality of financial assets is managed by the Group using internal credit ratings, as follows: Rating Grade Category Rating Description As at 31 December, the Group s renegotiated facilities amounted to AED 702,034 thousand (: AED 978,938 thousand). Allowances for Impairment The Group establishes an allowance for impairment losses on assets carried at amortised cost that represents its estimate of incurred losses in its financing portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective financing loss allowance for losses that have been incurred but not identified, established for a group of homogeneous assets with similar risk characteristics that are indicative of the customer s ability to pay amounts due according to the contractual terms on the basis of a credit risk evaluation or grading process that considers asset type, industry, geographical location, collateral type, past due status and other relevant factors. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. The table below sets out a reconciliation of changes in the carrying amount of impaired financings and advances to customers. 1 Exceptional 2+ 2 Excellent 2-3+ Investment- Grade 3 Superior Good Satisfactory Non-Investment- Grade Adequate Very High Risk Substandard 9 Classified Doubtful 10 Loss Cash flows from operating activities Impaired Islamic financing activities and Ijara at 1 January 340, ,984 Change in allowance or classified as impaired 1,329, ,780 Transferred to not impaired or settled (64,847) (102,039) Write offs (31,597) (16,316) Impaired Islamic financing activities and Ijara at 31 December 1,573, ,409 Settlement Risk The Group s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a counter party to honour its obligations to deliver cash, securities or other assets as contractually agreed. Any delays in settlement are rare and are monitored and quantified by Risk Management Group. For certain types of transactions, the Group mitigates this risk by conducting settlements through a settlement / clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval / limit monitoring process. Collateral Risk Collateral is used to mitigate credit risk, as the secondary source of repayment in case the counterparty cannot meet its contractual repayment obligations. Credit policy and procedures set out the acceptable types of collateral, as well as a process by which additional instruments and/or asset types can be considered for approval. As at 31 December, the Group held credit risk mitigants with an estimated value of AED 8,625,769 thousand (: AED 8,581,115 thousand) against receivables from Islamic financing activities, Ijara finance and investments in the form of real estate collateral, other securities over assets, cash deposits and guarantees. The Group accepts sovereign guarantees and guarantees from well reputed local or international banks, well established local or multinational large corporate and high net-worth private individuals. Collateral generally is not held against Wakala deposits with banks and other financial institutions, and no such collateral was held at 31 December or 31 December. The tables below stratify credit exposures from home finances retail customers by ranges of finance-to-value (FTV) ratio: Past Due But Not Impaired Financial Assets Past due but not impaired financial assets are those for which contractual profit or principal payments are past due but the Group believes that impairment of such financial assets is not appropriate on the basis of the level of security, collateral available and / or the stage of collection of amounts owed to the Group. Financial Assets with Renegotiated Terms Financial assets with renegotiated terms are facilities that have been renegotiated due to the deterioration in the customer s financial position and where the Group has made concessions that it would not otherwise consider. Once the facility is renegotiated it remains in this category for a minimum of six months of satisfactory performance. FTV ratio Less than 50% 603, , % 696, , % 522, , % 154, ,825 More than 100% 337, ,404 2,314,835 2,277, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 94

49 v) Market Risk The Group is exposed to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk arises from open positions in profit rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, credit spreads, foreign exchange rates and equity prices. Overall authority for market risk is vested in Asset and Liability Committee ( ALCO ). The Risk Management Group is responsible for the development of detailed policies (subject to review and approval by ALCO and BRC) and for the day to day monitoring of the actual position versus the established limits and tolerance ranges. Management of Market Risk The Market and Liquidity Risk Department reports to ALCO and MRC and is an independent control function which is responsible for measuring market risk exposures in accordance with approved policies and risk appetite. The Market and Liquidity Risk Department manages and monitors market risk exposures with the production of a daily limit monitoring and control reports that are circulated to all stakeholders to advise of current outstanding exposures versus prescribed limits and any breach is immediately advised for adjudication. Primarily the Market Risk in the Bank is divided broadly into trading book and banking book exposures. In trading book, the Bank is exposed to various types of market risk such as equity price risk, profit rate risk, foreign exchange risk etc. The banking book is primarily comprised of Islamic financing activities, Ijara, investment in Sukuks held to maturity which are exposed to profit rate risk. Separate set of limits and tolerance ranges are defined for all the trading and banking book exposures in order to ensure that the market risk remains within the BRC approved risk appetite. The Group follows IFRS 9 guidelines for the treatment of its banking and investment portfolio exposed to market risk. Price Risk The Group is exposed to price risk arising from its equity investment securities portfolio classified on the financial statements as fair value through profit and loss and other comprehensive income. Before the year end 31 December the Bank liquidated its fair value portfolio and the only investment that the Bank carried as at that date were mutual funds classified in the Other Comprehensive Income category. The table below summarizes the impact of a 10% increase / decrease of the prices of this portfolio, on the Group s results and equity for the year ended 31 December. The analysis is based on the assumptions that all other variables will remain constant and where applicable, the Group s investments moved according to the historical correlation of the relevant index. Impact on results and equity of the Group ± 10 % change in equity prices: Profit and loss - 1,589 Other comprehensive income 43,686 5,567 Currency Risk The Group is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. MCRC sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, and monitors currency positions on a daily basis. Had the exchange rate between the various currencies and the AED increased or decreased by 10 %, with all other variables held constant, the impact on the results and equity of the Group would not have been material as the exposure primarily related to currencies that were pegged to the AED. The exposure relating to non-pegged currencies amounts to only AED 1,465 thousand while to total net open position on foreign exchange as at 31 December stands at AED 14,435 thousand. In addition, as the Group does not actively trade in foreign currency but manages all customer requests on a back to back basis, this further reduces this risk. Profit Rate Risk The Bank is exposed to profit rate risk in trading book due to holding the Sukuk instruments which are sensitive to profit rate movement. Any change in market profit rate will cause the Sukuk value to fluctuate. This impact is quantified using the duration approach and following calculations demonstrate the impact of assumed 200 basis points rate shock on the Group s trading book positions in Sukuk portfolio. Impact on Sukuk Portfolio for ± 200 basis points change in profit rate: Profit and loss 4,278 1,654 Profit rate risk in the banking book is applicable to the Group s exposure to receivables from Islamic financing activities, Ijara as well as investment in Sukuks held to maturity. To the extent that the profit rate sensitive assets are funded and backed by rate sensitive liabilities the exposure is mitigated, however if there is a gap between the time to re-pricing of assets and liabilities this creates an exposure. ± 200 basis points change in profit rates 70, ,018 This exposure arises as a result of mis-matches in re-pricing of assets and liabilities reflected in the following net position schedule. Impact on results and equity of the Group The management of profit rate risk against profit rate gap limits is supplemented by monitoring the sensitivity of the Group s financial assets and financial liabilities to various standard and non-standard profit rate scenarios. Standard scenarios include a 200 basis point parallel fall or rise in all yield curves over a twelve month horizon maintaining a constant financial position. Impact on results and equity of the Group 95 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 96

50 A summary of the Group s profit rate re-pricing as at 31 December is as follows: Assets Less than 3 months 3-6 months 6-12 months 1-5 years Greater than 5 years Non-sensitive Cash and balances with banks - 201, , ,132,077 3,132,950 Wakala deposits with banks and other financial institutions 1,858, (2,726) 1,856,247 Receivables from Islamic financing activities 8,753,356 4,105,765 2,021,336 4,102,790 6,033,136 (1,314,373) 23,702,010 Ijara 4,254,292 2,624, , ,652 71,101 (148,970) 7,192,851 Investment securities 120, ,567, , ,200 3,065,888 Other assets , ,697 assets 14,986,502 6,931,715 3,018,035 5,865,613 7,075,873 1,751,905 39,629,643 Liabilities Customers accounts 16,369,398 5,300,112 5,288,406 89,635 33,500 4,063,260 31,144,311 Wakala deposits from banks 1,316,535-89, ,406,096 Sukuk financing instrument ,836, ,836,250 Other liabilities , ,879 liabilities 17,685,933 5,300,112 5,377,621 1,926,231 33,500 4,978,139 35,301,536 Net position (2,699,431) 1,631,603 (2,359,586) 3,939,382 7,042,373 (3,226,234) 4,328,107 A summary of the Group s profit rate re-pricing as at 31 December is as follows: Assets Less than 3 months 3-6 months 6-12 months 1-5 years Greater than 5 years Non-sensitive Cash and balances with banks , ,037,746 2,837,178 Wakala deposits with banks and other financial institutions 2,580, ,987 12, , ,149,535 Receivables from Islamic financing activities 8,489,301 4,155, ,273 3,126,710 4,525, ,772 21,119,724 Ijara 3,259,957 2,134, , ,322 17,892-5,983,441 Investment securities 170,000-1,836, , , ,664 2,928,196 Other assets , ,903 assets 14,499,578 6,662,965 3,468,381 4,316,379 4,812,589 3,241,085 37,000,977 Liabilities Customers accounts 15,812,921 4,327,749 4,210,788 90,584 2,000 3,734,265 28,178,307 Wakala deposits from banks 3,175,641 4, ,180,210 Sukuk financing instrument ,836, ,836,250 Other liabilities ,142,616 1,142,616 liabilities 18,988,562 4,331,909 4,210,788 1,926,834 2,000 4,877,290 34,337,383 Net position (4,488,984) 2,331,056 (742,407) 2,389,545 4,810,589 (1,636,205) 2,663, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 98

51 vi) Takaful and Re-takaful Risk Takaful risk Takaful risk is where the Group agrees to indemnify the insured parties against unforeseen future insured events. The frequency and severity of claims are the main risk factors. Due to the inherent risk in the Takaful business, actual claim amounts can vary compared to the outstanding claim reserves. Re-takaful (Reinsurance) Risk In order to minimize financial exposure arising from large claims, the Group, in the normal course of business, enters into Shariah compliant agreements with other parties for re-takaful (reinsurance) purposes. Such re-takaful (reinsurance) arrangements provides for greater diversification of business, allows management to control and minimise exposure to potential losses arising from large single name risks and provide additional capacity for growth and diversification. To minimize its exposure to significant losses from re-takaful (reinsurers) insolvencies, the Group evaluates the financial condition of its re-takaful (reinsurers) and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the re-takaful (reinsurers). Re-takaful ceded contracts do not relieve the Group from its obligations and as a result the Group remains liable for the portion of outstanding claims reinsured to the extent that the reinsurer fails to meet the obligations under the re-takaful (reinsurance) agreements. However, the Group takes comfort in that the bulk of re-takaful (reinsurance) risks are to generally well rated and reputed reinsurers with an average external rating of A. Reserve for Claims The Group maintains adequate reserves in respect of its Takaful business in order to protect against adverse future claims experience and developments. The uncertainties surrounding the amount and timing of claim payments are normally resolved within a year. Furthermore, the adequacy of such reserves is reviewed on annual basis by an independent external actuary with the final report shared with management on the level of reserving adequacy. Sensitivities The general Takaful claims provision is sensitive to the key assumptions which are not material to the consolidated financial statements of the Group. vii) Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its obligations associated with its financial liabilities. Management of Liquidity Risk The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient buffer of liquidity to meet its liabilities during the normal course of business. As part of its strategic liquidity management, contingency funding planning in the Group ensures that the liquidity management center (treasury) is well equipped to tap contingent funding sources during periods of market stress. The Group also maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities and inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The liquidity requirements of business units and subsidiaries are met through short-term financing from the Treasury Department to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The daily liquidity position is monitored by Market and Liquidity Risk Department and regular stress testing is conducted under a variety of scenarios covering the normal and more severe market conditions in order to assess the adequacy of the contingency funding plan. All liquidity policies and procedures are subject to regular review and approval by ALCO and the Board. Daily reports are produced covering the liquidity position of both the Group and operating subsidiaries. A summary report, including any exceptions and remedial action taken, is submitted regularly to ALCO. The Group relies on customers current accounts, saving accounts and Wakala deposits as its primary sources of funding. Customers accounts generally have shorter maturities and a large proportion of them are repayable on demand. The short-term nature of these deposits increases the Group s liquidity risk and the Group actively manages this risk through maintaining competitive pricing and constant monitoring of market trends. The Groups overall funding and liquidity risk profile improved as a result of the increase in medium term funding in the form of Sukuk issuance and Tier I note issuance each of USD 500 million during and respectively. Exposure to Liquidity Risk The key measures used by the Group for managing liquidity risk are regulatory driven ratios such as ASRR, Liquid Assets Ratio and Net Liquidity Ratio. ASRR take into consideration the extent of stable resources (stable funding sources) which are being utilized by the financing activities of the Bank. At 31 December, the Bank s advance to stable ratio was 85.15% (: 89.28%) The net liquid assets ratio considers cash and balances with central banks, Central Bank certificate of deposits and short term Wakala deposits with banks maturing within one month (net of interbank placements), investment in Sukuk divided by total assets. As at 31 December, this ratio stood at 16.1% (: 14.8%). The high quality liquid asset ratio considers the most liquid assets as a percentage of total liabilities. The high quality liquid assets definition is aligned with HQLA level 1-A and 1-B assets within LCR framework. These include cash / cash equivalent, balances with central bank and investment in Sukuk of local or federal government. As at 31 December, this ratio stood at 11.99% (: 8.19%). Cash flows from operating activities Cash and balances with banks 3,132,950 2,837,178 Wakala deposits with banks and other financial institutions (net) 450,151 (30,675) Investment securities 3,065,888 2,928,196 6,648,989 5,734,699 As at the reporting date, the Group had no pledged or encumbered financial assets (: Nil). In addition to the above ratios the Bank also monitors internally its liquidity profile through regular ALCO briefings which are held on a monthly basis. The table below sets out the availability of the Group s financial assets to future funding. 99 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 100

52 The Group prepares its liquidity risk profile on carrying value basis. A summary of the Group s maturity profile as at 31 December is as follows: Assets Carrying Amount Gross nominal cash inflows /(outflows) Less than 3 months 3 12 months 1 5 years Greater than 5 years Cash and balances with banks 3,132,950 3,136,105 2,132,078 1,001,127 2,900-3,136,105 Wakala deposits with banks and other financial institutions 1,856,247 1,863,115 1,857,296 1,239 4,580-1,863,115 Receivables from Islamic financing activities 23,702,010 30,439,381 4,637,250 5,460,226 12,001,995 8,339,910 30,439,381 Ijara 7,192,851 9,284, , ,703 3,838,577 4,236,719 9,284,379 Investment securities 3,065,888 4,263, , ,977 2,453,510 1,170,017 4,263,966 Other assets 679, , , ,697 assets 39,629,643 49,666,643 9,420,466 7,518,272 18,301,562 14,426,343 49,666,643 Liabilities Customers accounts 31,144,311 31,300,077 18,968,839 11,828, ,828 85,462 31,300,077 Wakala deposits from banks 1,406,096 1,417,221 1,319,150 93,080 4,991-1,417,221 Sukuk financing instrument 1,836,250 2,066,935 16,490 30,599 2,019,846-2,066,935 Other liabilities 914, , , ,879 liabilities 35,301,536 35,699,112 20,304,479 11,952,627 2,441,665 1,000,341 35,699,112 Net position 4,328,107 13,967,531 (10,884,013) (4,434,355) 15,859,897 13,426,002 13,967,531 A summary of the Group s maturity profile as at 31 December is as follows: Assets Carrying Amount Gross nominal cash inflows /(outflows) Less than 3 months 3 12 months 1 5 years Greater than 5 years Cash and balances with banks 2,837,178 2,840,295 2,019, ,544 3,117-2,840,295 Wakala deposits with banks and other financial institutions 3,149,535 3,160,670 2,581, , ,823-3,160,670 Receivables from Islamic financing activities 21,119,724 26,814,419 3,564,280 3,941,957 11,288,205 8,019,977 26,814,419 Ijara 5,983,441 7,216, , ,854 3,019,603 2,318,599 7,216,883 Investment securities 2,928,196 3,202,664 61,378 2,090, , ,059 3,202,664 Other assets 982, , , ,903 assets 37,000,977 44,217,834 9,133,577 8,209,258 15,187,461 11,687,538 44,217,834 Liabilities Customers accounts 28,178,307 28,330,254 18,253,301 9,784, ,167 3,514 28,330,254 Wakala deposits from banks 3,180,210 3,181,435 3,177,275 4, ,181,435 Sukuk financing instrument 1,836,250 2,123,967 17,513 30,023 2,076,431-2,123,967 Other liabilities 1,142,616 1,142, ,142,616 1,142,616 liabilities 34,337,383 34,778,272 21,448,089 9,818,455 2,365,598 1,146,130 34,778,272 Net position 2,663,594 9,439,562 (12,314,512) (1,609,197) 12,821,863 10,541,408 9,439, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 102

53 viii) Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events including legal risk but excluding strategic or reputation risk. Loss from operational risk can include fines, penalties, loss or theft of funds or assets, legal costs, customer compensation, loss of shareholder value, loss of life or injury to people, and loss of property and / or information. All operational risks carry at least a financial consequence. Examples of operational risks that the Group is exposed to include the losses arising from internal fraud, external fraud, acts that are inconsistent with employment, health or safety laws or agreements, failure to meet professional customer and legal obligations, disruption of business or system failures, failure to execute a transaction correctly including but not limited to internal restructures, inadequate process management and from failure caused by third parties. Direct or indirect losses that occur as a result of operational failures, breakdowns, omissions or unplanned events could adversely affect the Group s financial results. Operational risks arise from all of the Group s operations. The Group s objective is to manage operational risk so as to balance the avoidance of financial losses with overall cost effectiveness and innovation. In all cases, the Group s policy requires compliance with all applicable legal and regulatory requirements. The Board of Directors has delegated responsibility for the management of operational risk to its Management Operational Risk Committee ( MORC ) (which is a subcommittee of MRC), which is responsible for the development and implementation of controls to address operational risks. This responsibility is supported by the development of overall Group standards for the management of operational risk in the following areas: requirements for appropriate segregation of duties, including the independent authorisation of transactions; requirements for the reconciliation and monitoring of transactions; compliance with regulatory and other legal requirements; documentation of controls and procedures; requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; requirements for the reporting of operational losses and proposed remedial action; development of contingency plans; training and professional development; ethical and business standards; and risk mitigation, including insurance where this is cost effective. The day-to-day management of operational risk is executed through a strong second line of defense within business lines and control functions. Risk and Control Self Assessments (RCSAs), Key Risk Indicators (KRIs) and Incident Management (IM) form the core of the framework. A Group level Operational Risk function provides assistance in the implementation of the framework aswell as providing independent reporting on the effectiveness of the implementation of the framework by risk and control owners. The framework is implemented within business and control functions through the Operational Risk Community. This consists of Business Unit Operational Risk Managers ( BORMs ) who are tasked with embedding the framework into the Bank. Adherence with Group policies and procedures is supported by a programme of periodic reviews undertaken by Internal Audit. Summaries are submitted to the Audit Committee and senior management of the Group. 5. Critical Accounting Estimates and Judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Determination of Controls Over Investees Management applies its judgement to determine whether the control indicators set out in Note 3(c)(i) indicate that the Group controls an investee. 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 the aggregate economic interests of the Group in the fund (comprising any carried profits and expected management fees) and the investors rights to remove the fund manager. For all funds managed by the Group, the investors are able to vote by simple majority to remove the Group as fund manager without cause. As a result, the Group has concluded that it acts as agent for the investors in all cases, and therefore has not consolidated these funds. For further disclosure in respect of unconsolidated investment funds in which the Group has an interest or for which it is a sponsor, see Note 35. Impairment Charge on Other Financial Assets The Group evaluates impairment on financial assets on an ongoing basis and a comprehensive review is carried out at least quarterly to assess whether an impairment charge should be recognised in the consolidated statement of income. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of impairment charge required. In estimating these cash flows, management makes judgments about the counterparty s financial situation and other means of settlement and the net realizable value of any underlying collateral. Such estimates are based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such impairment charges. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the remedial committee. Collective Impairment Charge on Financial Assets In addition to specific impairment charge against individually impaired assets, the Group also maintains a collective impairment allowance against portfolios of Murabaha, Wakala and Islamic financing with similar economic characteristics which have not been specifically identified as impaired. In assessing the need for collective impairment charge, management considers concentrations, credit quality, portfolio size and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modeled and to determine the required input parameters, based on historical and current economic conditions. 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. Flow rates and loss rates are regularly benchmarked against actual loss experience. Liability Arising from Claims Made Under Takaful Contracts The estimation of the ultimate liability arising from claims made under Takaful contracts is a critical accounting estimate by the Group. There are several sources of uncertainty that need to be considered in estimating the liability that the Group will ultimately pay for such claims. The provision for claims Incurred But Not Reported ( IBNR ) is an estimation of claims which are expected to be reported subsequent to the reporting date, for which the insured event has occurred prior to the reporting date. Investment Property The carrying amount of investment property is the fair value of the property as determined by a registered independent appraiser having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Fair values have been determined using the residual method. The residual method is applicable to properties where the value would be maximized if it were to be developed, redeveloped, or refurbished. To arrive at the current market value of the property in its existing state the estimated end development value is calculated, then all costs in carrying out the development are deducted, including cost of the physical construction, professional fees, financing, and developer s profit. Contingent Liability Arising from Litigations Due to the nature of its operations, the Group may be involved in litigations arising in the ordinary course of business. Provision for contingent liabilities arising from litigations is based on the probability of outflow of economic resources and reliability of estimating such outflow. Such matters are subject to many uncertainties and the outcome of individual matters is not predictable with certainty. Impairment of Non-financial Assets Certain non-financial assets, including other intangible assets, are subject to impairment review. The Group records impairment losses on assets in this category when the Group believes that their carrying value may not be recoverable. Intangible assets, property and equipment and investments in subsidiaries, associates and joint ventures are tested for impairment whenever there is any objective evidence or indication that these assets may be impaired. A reversal of an impairment loss is recognised immediately if deemed necessary by the impairment reversal reviews up to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised The recoverable amounts of these assets and where applicable, cash-generating units, have been determined based on value-inuse calculations. These calculations require the use of estimates. The determination of the recoverable amount in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, necessitating management to make subjective judgments and assumptions. Because these estimates and assumptions could result in significant differences to the amounts reported if underlying circumstances were to change, the Group considers this estimate to be critical. In determining the net realisable value, the Group uses the selling prices determined by external independent valuer s companies, having appropriate recognised professional qualifications and recent experience in the location and category of asset being valued. The selling prices are based on market values, being the estimated amount for which an asset could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm s length transaction. Business Model In making an assessment whether a business model s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to management. However, in some circumstances it may not be clear whether a particular activity involves one business model with some infrequent asset sales or whether the anticipated sales indicate that there are two different business models. In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows the Group considers: management s stated policies and objectives for the portfolio and the operation of those policies in practice; how management evaluates the performance of the portfolio; 103 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 104

54 whether management s strategy focuses on earning contractual profit revenues; the degree of frequency of any expected asset sales; the reason for any asset sales; and whether assets that are sold are held for an extended period of time relative to their contractual maturity or are sold shortly after acquisition or an extended time before maturity. In particular, the Group exercises judgment to determine the objective of the business model for portfolios which are held for liquidity purposes. The Group Treasury Department holds Sukuk in a separate portfolio as liquid assets. The securities may be sold in order to meet unexpected liquidity shortfalls but such sales are not anticipated to be more than infrequent. The Group considers that these securities are held within a business model whose objective is to hold assets to collect the contractual cash flows. When a business model involves transfers of contractual rights to cash flows from financial assets to third parties and the transferred assets are not derecognised, the Group reviews the arrangements to determine their impact on assessing the objective of the business model. In making the assessment, the Group considers whether, under the arrangements, the Group will continue to receive cash flows from the assets, either directly from the issuer, or indirectly from the transferee, including whether it will repurchase the assets from the transferee. Contractual Cash Flows of Financial Assets The Group exercises judgment in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and profit on the principal outstanding and so may qualify for amortised cost measurement. In making the assessment the Group considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage. For financial assets in respect of which the Group s claims are limited to specific assets of the debtor (non-recourse assets) the Group assesses whether the contractual terms of such financial assets limit the cash flows in a manner inconsistent with those payments representing principal and profit. Where the Group invests in contractually linked instruments (tranches) the Group exercises judgment to determine whether the exposure to credit risk in the acquired tranche is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments and so the acquired tranche may qualify for amortised cost measurement. Qualifying Hedge Relationships In designating financial instruments in qualifying hedge relationships, the Group has determined that it expects the hedges to be highly effective over the period of the hedging relationship. In accounting for derivatives as cash flow hedges, the Group has determined that the hedged cash flow exposure relates to highly probable future cash flows. Operating Segment In preparation of the segment information disclosure, the Group employs assumptions to arrive at the segment reporting. These assumptions are reassessed by the management on a periodic basis. 6. Fair Values of Financial Instruments The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques. The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments. 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: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, such as profit rate and currency swaps that use only observable market data and require little management judgement and estimation. Observable prices or model inputs are usually available in the market for listed Sukuk and equity securities, exchange-traded derivatives and simple over-the-counter derivatives such as profit rate swaps. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determining fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. a) Financial Instruments Measured at Fair Value fair Value Hierarchy The table below analyses financial instruments measured at fair value 31 December b) Financial Instruments Not Measured at Fair Value Fair Value Hierarchy Where available the fair value of tradable instruments is based on quoted market prices in active markets for identical instruments. The fair value of financing and advances are estimated using 31 December Assets 31 December Assets at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the consolidated statement of financial position. Level 1 Level 1 valuation models, such as discounted cash flow techniques, where inputs into the valuation techniques include expected profit rates. The fair value of deposits from banks and customers is estimated using discounted cash flow techniques, applying profit rates that are offered for deposits of similar maturities and terms. The fair value of deposits payable on demand is the amount payable at the reporting date. Level 1 Level 1 Level 2 Level 2 Level 2 Level 2 Level 3 Level 3 Level 3 Level 3 Equity and other investments 486, ,113 Islamic derivatives (Positive value) - 98,908-98,908 Islamic derivatives (Negative value) - (98,908) - (98,908) Promise to sell foreign currencies, net - (119) - (119) 31 December Equity and other investments 93, ,935 Islamic derivatives (Positive value) - 100, ,284 Islamic derivatives (Negative value) - (100,284) - (100,284) Promise to sell foreign currencies, net - 3,394-3,394 Cash and balances with banks - 3,128,319-3,128,319 Wakala deposits with banks and other financial institutions - 1,911,726-1,911,726 Receivables from Islamic financing activities - 22,086,432-22,086,432 Ijara - 7,002,389-7,002,389 Investment securities 2,883, ,883,282 Liabilities Customers accounts - 31,127,740-3,127,740 Wakala deposits from banks - 1,385,656-1,385,656 Sukuk financing instrument 1,860, ,860,948 Cash and balances with banks - 2,829,516-2,829,516 Wakala deposits with banks and other financial institutions - 3,156,932-3,156,932 Receivables from Islamic financing activities - 20,407,467-20,407,467 Ijara - 5,900,695-5,900,695 Investment securities 2,835, ,835,754 Liabilities Customers accounts - 28,204,906-28,204,906 Wakala deposits from banks - 3,181,380-3,181,380 Sukuk financing instrument 1,853, ,853, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 106

55 7. Operating Segments a) Basis for Segmentation The Group is structured into the following five segments of which four qualify as reportable segments in terms of the quantitative threshold. These segments offer different products and services and are managed separately based on the Group s management and internal reporting structure. The segment results are prepared using the internal fund transfer pricing framework developed based on the Basel guidelines for pricing liquidity Wholesale Banking Group ( WBG ) provides Shariah compliant financial solutions to both the private and public sector and is organized into five business divisions which include Corporate Banking, Government Relations, Institutional Banking, Syndications & Structured Finance and Cash Management. Personal Banking Group ( PBG ) provides Shariah compliant products and services that are designed to meet the financial needs of individuals which include personal financings, vehicle financings, home financings, Islamic credit cards as well as day to day banking Reportable segment information for the year ended 31 December : PBG requirements such as account management, cash transfers and cheque management. Treasury Banking Group ( TBG ) provides Shariah compliant services to handle money market, trading and other treasury services, as well as the management of the Bank's funding operations by use of investment deposits. Investment Banking Group ( IBG ) provides the investment management services to the Bank and its customers by offering range of Shariah compliant investment management products. Others include Head office, support functions, and subsidiaries. Operating segment disclosures are consistent with the information provided in the consolidated financial statement. b) Information About Reportable Segments Information related to each reportable segment is set out below. Segment profit or loss, as included in the internal management reports reviewed by the CODM is used to measure the performance of each segment. WBG TBG IBG Others Segment revenues, net 606, ,142 52,226 27, ,374 1,625,260 Operating expenses (498,491) (113,797) (26,297) (16,294) (140,225) (795,104) Net operating income 108, ,345 25,929 11,229 45, ,156 Impairment charges, net (148,085) (588,338) (1,039) - (2,596) (740,058) Reportable segment (loss)/ profit (39,581) 51,007 24,890 11,229 42,553 90,098 Reportable segment assets 12,275,024 18,109,114 7,943, ,674 2,643,902 41,407,872 Reportable segment liabilities 6,718,208 24,608,908 1,375,958-2,990,891 35,693,965 The following is the analysis of the total segment revenues of each segment between revenues from external parties and inter-segment: c) Geographic information The Group operates primarily in the UAE and designates it as the domestic segment. The operations originating from its branches, associates and subsidiaries in the domestic segment form a significant portion of the Group s total assets and liabilities. The international segment represents the operations of the Group that originate from its presence in Kazakhstan. As the size of these operations and exposures is not significant, no further geographical analysis of segment revenues, expenses, assets and liabilities is presented. 8. Capital Management PBG A) Regulatory Capital The Group s lead regulator, the Central Bank of the UAE, sets and monitors capital requirements for the Group as a whole. The Group is required to comply with the provisions of the Central Bank of the UAE in respect of regulatory capital. WBG TBG IBG Others External revenues 850, , ,643 28,269 (60,594) 1,625,261 Inter segment revenues (243,962) 52,156 (53,417) (746) 245,969 - Net segment revenues 606, ,142 52,226 27, ,375 1,625,261 PBG WBG TBG IBG Others External revenues 790, ,024 69,567 12,268 10,788 1,441,010 Inter segment revenues (180,482) 70,850 (36,609) (737) 146,978 - Net segment revenues 609, ,874 32,958 11, ,766 1,441,010 capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory requirements do not reflect fully the varying degree of risk associated with different activities. In such cases the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation. Although maximization of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Group to particular operations or activities, it is not the sole basis used for decision-making. Account also is taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Group s longer term strategic objectives. Reportable segment information for the year ended 31 December : PBG WBG TBG IBG Others Segment revenues, net 609, ,874 32,958 11, ,766 1,441,010 Operating expenses (471,620) (119,920) (29,734) (16,150) (142,596) (780,020) Net operating income /(loss) 138, ,954 3,224 (4,619) 15, ,990 Impairment charges, net (125,698) (84,513) (9,050) - 58 (219,203) Reportable segment profit /(loss) 12, ,441 (5,826) (4,619) 15, ,787 Reportable segment assets 10,097,236 16,709,908 8,834,631 71,570 2,991,920 38,705,265 Reportable segment liabilities 5,993,497 20,421,035 5,033,505-3,323,493 34,771,530 The Group s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on return is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Group has complied with all externally imposed capital requirements throughout the year. b) Capital Allocation The allocation of capital between specific operations and activities is, to a large extent, driven by optimization of the return achieved on the During, the Group s capital strategy, which was unchanged from the previous year is to: maintain capital adequacy ratios above the minimum specified by the Central Bank of the UAE and Basel accord guidelines; and Efficiently allocate capital to various business units. In implementing current capital requirements, the Group calculates its risk asset ratio in accordance with capital adequacy guidelines established by the Central Bank of the UAE prescribing the ratio of total capital to total risk-weighted assets. Further, the Group also calculates its capital adequacy ratio in accordance with Basel II Accord which was adopted by the Central Bank of the UAE. 107 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 108

56 The Group s capital adequacy ratio as per effective regulatory framework, Basel II, at the minimum level is analysed into two tiers as follows: Tier 1 capital 9. Cash and Balances with Banks Basel II Basel II Share capital 3,090,000 3,090,000 Legal reserve 117, ,203 Retained earnings 733, ,344 Tier 1 Sukuk 1,836,250 - Deduction for Tier 1 capital (48,883) (48,877) Tier 1 5,728,875 3,933,670 Tier 2 capital Basel II Basel II Tier 2 capital Cumulative changes in fair value (65,311) (15,134) Collective impairment provision for financing assets 402, ,789 Deduction for Tier 2 capital (48,883) (48,877) Tier 2 288, ,778 capital base 6,017,594 4,230,448 Risk weighted assets Basel II Basel II Credit risk 32,233,054 28,863,106 Market risk 21,160 29,186 Operational risk 2,369,721 1,339,196 risk weighted assets 34,623,935 30,231,488 Capital ratios regulatory capital expressed as a percentage of total risk weighted assets Tier 1 capital expressed as a percentage of total risk weighted assets Basel II Basel II 17.38% 13.99% 16.55% 13.01% Cash in hand 268, ,977 Current account with Central Banks 368, ,661 Islamic certificates of deposit with Central Bank 1,000, ,432 Current account with Banks 302, ,831 Cash reserve deposits with Central Banks 1,192,138 1,128,277 3,132,950 2,837,178 Cash reserve deposits with Central Banks are not available for the operations of the Group and are non-profit bearing. 10. Wakala Deposits with Banks and other Financial Institutions 11. Receivables from Islamic Financing Activities Wakala deposits 1,862,954 3,165,215 Collective allowance for impairment (note 26) (6,707) (15,680) 1,856,247 3,149,535 As at 31 December, the Group held Wakala placement outside UAE in the amount of nil (: nil). The distribution of the gross Murabaha, Musawama and other Islamic financing by industry sector and geographic region was as follows: Corporate commodity Murabaha 14,738,353 13,510,820 Retail Musawama and Murabaha 10,073,977 8,091,853 Islamic credit card receivable 108,050 80,700 Other Islamic financings 184, ,854 25,104,486 21,867,227 Allowance for impairment (note 26) Specific allowance (856,407) (169,406) Collective allowance (546,069) (578,097) 23,702,010 21,119,724 Industry sector: Agriculture and Allied Activities 314, ,582 Mining & Quarrying 216, ,535 Manufacturing 683, ,695 Electricity, Gas and Water 1,595,961 1,885,534 Construction & Real Estate 1,977,624 1,219,755 Trade 4,180,396 3,873,109 Transport, Storage & Communication 382, ,578 Financial Institutions 2,695,831 2,315,965 Other Services 513, ,519 Government - - Finances to Individuals/HNIs/Others 12,544,053 10,146,955 25,104,486 21,867,227 Geographic region: UAE 22,498,181 20,687,600 Kazakhstan 592, ,221 Others 2,014, ,406 25,104,486 21,867, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 110

57 31 December 31 December Impaired and non-performing: Corporate Retail Substandard 28,331 25,985 54,316 Doubtful 1,047,287 32,438 1,079,725 Legal and loss 61, , ,702 Impaired and non-performing: Corporate Retail Substandard 7,329 13,710 21,039 Doubtful - 18,766 18,766 Legal and loss 8, , ,381 Outstanding 1,137, ,154 1,430,743 Specific allowance for impairment (593,054) (263,353) (856,407) Outstanding 15, , ,186 Specific allowance for impairment (9,690) (159,716) (169,406) Carrying amount 544,535 29, ,336 Carrying amount 5,752 18,028 23,780 Performing: Regular 13,433,758 9,721,267 23,155,025 Past due but not impaired 1-29 days 1,257 73,827 75, days 261,479 59, , days 16,861 33,876 50,737 Above 90 days 71,515-71,515 Performing: Regular 12,756,405 7,751,402 20,507,807 Past due but not impaired 1-29 days 248, , , days 31,747 37,884 69, days - 32,010 32,010 Above 90 days 643, ,059 Outstanding 13,784,870 9,888,873 23,673,743 Collective allowance for impairment (381,804) (164,265) (546,069) Outstanding 13,679,232 7,994,809 21,674,041 Collective allowance for impairment (446,899) (131,198) (578,097) Carrying amount 13,403,066 9,724,608 23,127,674 Carrying amount 13,232,333 7,863,611 21,095,944 outstanding 14,922,459 10,182,027 25,104,486 allowance for impairment (974,858) (427,618) (1,402,476) outstanding 13,694,674 8,172,553 21,867,227 allowance for impairment (456,589) (290,914) (747,503) carrying amount 13,947,601 9,754,409 23,702,010 carrying amount 13,238,085 7,881,639 21,119, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 112

58 12. Ijara 31 December Ijara assets represent net investment in assets leased for periods which either approximate or cover majority of the estimated useful lives of such assets. The lease agreements stipulate that the lessor undertakes to transfer the leased assets to the lessee upon receiving the final rental payment. The distribution of the gross Ijara by industry sector and geographic region was as follows: Corporate Ijara Mawsufa Fi-aldhimma 36, ,519 Corporate standard Ijara 3,672,970 3,411,169 Corporate Musharaka 1,342, ,141 Retail Ijara Mawsufa Fi-aldhimma 73, ,966 Retail standard Ijara 2,241,103 2,143,061 7,366,252 6,125,856 Allowance for impairment (note 26) Specific allowance (50,719) (54,000) Collective allowance (122,682) (88,415) 7,192,851 5,983,441 Industry sector: Mining & Quarrying 9,697 - Manufacturing 967, ,306 Electricity, Gas and Water 182, ,912 Construction & Real Estate 1,892, ,817 Trade ,729 Transport, Storage & Communication 1,310,943 1,294,291 Financial Institutions 27,213 20,491 Other Services 313,331 6,800 Government 156, ,928 Finances to Individuals/HNIs/Others 2,504,913 2,733,582 7,366,252 6,125,856 Impaired and non-performing: Corporate Retail Substandard - 7,257 7,257 Doubtful - 20,856 20,856 Legal and loss 8, , ,244 Outstanding 8, , ,357 Specific allowance for impairment (2,929) (47,790) (50,719) Carrying amount 5,514 86,124 91,638 Performing: Regular 4,914,574 2,136,017 7,050,591 Past due but not impaired 1-29 days - 7,353 7, days - 32,744 32, days 2,838 4,807 7,645 Above 90 days 125, ,562 Outstanding 5,042,974 2,180,921 7,223,895 Collective allowance for impairment (99,858) (22,824) (122,682) Carrying amount 4,943,116 2,158,097 7,101,213 outstanding 5,051,417 2,314,835 7,366,252 allowance for impairment (102,787) (70,614) (173,401) carrying amount 4,948,630 2,244,221 7,192,851 Geographic region: UAE 7,193,123 5,943,826 Kazakhstan 27,213 20,491 Others 145, ,539 7,366,252 6,125, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 114

59 31 December Impaired and non-performing: Corporate Retail Substandard 15,164 6,126 21,290 Doubtful - 8,356 8,356 Legal and loss 2, , , Investment Securities Financial assets at fair value: Through profit and loss Quoted equity securities - 15,896 Sukuk securities 45,730 18,657 Outstanding 18, , ,223 Specific allowance for impairment (6,696) (47,304) (54,000) Carrying amount 11,432 81,791 93,223 Performing: Regular 3,738,243 2,015,440 5,753,683 Past due but not impaired 1-29 days 16, , , days 21,145 13,370 34, days - 17,650 17,650 Above 90 days 54,460-54,460 Outstanding 3,830,701 2,147,932 5,978,633 Collective allowance for impairment (48,941) (39,474) (88,415) Carrying amount 3,781,760 2,108,458 5,890,218 outstanding 3,848,829 2,277,027 6,125,856 allowance for impairment (55,637) (86,778) (142,415) carrying amount 3,793,192 2,190,249 5,983,441 Through other comprehensive income Quoted equity securities 397,856 18,288 Sukuk fund 42,527 41,094 Financial assets at amortised cost: Sukuk securities 2,597,324 2,841,798 Collective allowance for impairment (note 26) (17,549) (7,537) investment securities 3,065,888 2,928,196 The investment security risk grade analysis based on external ratings is shown below: S&P Fitch Moody's A+ to A- A+ to A- A1 to A3 483, ,908 BBB+ to BBB- BBB+ to BBB- Baa1 to Baa3 799, ,397 BB+ to BB- BB+ to BB- Ba1 to Ba3 533,601 - B+ to B- B+ to B- B1 to B3 111, ,688 Unrated Unrated Unrated 1,154,937 2,295,740 3,083,437 2,935,733 Unrated Sukuk includes sovereign exposures to a local government in the UAE amounting to AED 697,517 thousand (: AED 2,080,891 thousand). Investment income Income from Sukuk 138, ,001 Dividend income 14,386 1,813 Realised gain on sale of investments 38,233 23,321 Unrealised (loss) / gain on investments (220) 2,043 Loss from other investment assets (31,950) - 159, , Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 116

60 14. Property and Equipment Property and equipment at 31 December comprise: Cost Land and building Leasehold improvements Computer systems Furniture and fixtures Capital work in progress At 1 January 978, , ,819 62, ,074 1,705,916 Additions 7,444 (1,699) 11,857 2, , ,721 Transfers - 7,276 16, (24,079) - Disposal of fixed assets - (7,582) (4,123) (2,791) - (14,496) At 31 December 986, , ,793 62, ,858 1,822,141 Accumulated depreciation At 1 January 13,895 68, ,571 53, ,970 Charge for the year 35,748 17,322 37,903 5,551-96,524 Disposal of fixed assets 675 (7,067) (4,138) (2,650) - (13,180) At 31 December 50,318 78, ,336 56, ,314 Net book value At 31 December 935,974 38,393 81,457 6, ,858 1,492,827 Included in land and building two plots of land granted to the Bank with each having a carrying value of AED 1 (31 December : AED 1). Property and equipment at 31 December comprise: Cost Land and building Leasehold improvements Computer systems Furniture and fixtures Capital work in progress At 1 January - 187, ,717 67,252 1,175,150 1,600,731 Additions 346 3,664 13,683 1, , ,080 Transfers 978,502 (34,253) 32, (977,019) - Disposal of fixed assets - (38,116) (15,231) (6,548) - (59,895) At 31 December 978, , ,819 62, ,074 1,705,916 Accumulated depreciation At 1 January - 88,129 92,091 50, ,990 Charge for the year 13,895 18,241 33,554 9,028-74,718 Disposal of fixed assets - (38,116) (15,074) (6,548) - (59,738) At 31 December 13,895 68, ,571 53, ,970 Net book value At 31 December 964,953 50,653 91,248 9, ,074 1,459, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 118

61 15. Other Assets Financial assets Others include promises to buy and sell foreign currencies which are carried at fair value and presented within other assets and other liabilities respectively. The notional amounts of these contracts are disclosed in note 30 of these consolidated financial statements. The fair value of the Group s investment property is categorised into level 3 of the fair value hierarchy. The fair value of the investment property was determined by an external, independent property valuer having appropriate recognised professional qualifications and recent 16. Customers Accounts Acceptances 340, ,264 Takaful receivable 138, ,685 Income receivable 33,817 23,209 Others 166, , , ,903 Non financial assets Murabaha inventory 164, ,663 Prepaid expenses 57,208 55,029 Investment property 41,154 39,128 Prepaid staff allowances 22,500 22, , , ,099 1,227,245 experience in the location and category of the property being valued. The valuation was done using residual valuation methodology. The Residual Valuation Method determines the current value of the property by deducting the estimated costs to complete the development from the estimated value on completion. This method entails estimating the gross development value of the project. From this is deducted the estimated cost to complete the development, including a developer s margin, to arrive at a residual value. 17. Sukuk Financing Instrument On 08 October, the Bank through a Shariah compliant Sukuk arrangement raised medium term Sukuk amounting to AED 1,836,250 thousand (USD 500,000 thousand) under a USD 2,500,000 thousand programme. The Sukuk is listed on the Ireland Stock Exchange. The issuance has a contractual maturity of five years and bears an expected fixed profit rate of 3.267%. Terms of Arrangement The terms of the arrangement include transfer of the ownership of certain assets ( the Co-Owned Assets ), including original Ijara assets of the Bank, to a Sukuk company, AHB Sukuk Company Ltd Other Liabilities Financial liabilities the Issuer, a subsidiary of the Bank, specially formed for the Sukuk transaction. The assets are owned by the investors; however the assets are controlled by the Bank and shall continue to be serviced by the Bank as the managing agent. The issuer will pay the semi-annual distribution amount from returns received in respect of the Co-Owned Assets. Such proceeds are expected to be sufficient to cover the semi annual amount payable to the Sukuk holders on the distribution dates. Upon maturity of the Sukuk, the Issuer will have the right to require the Bank to purchase all of the co-owned Assets for payment of the relevant dissolution distribution amount under Sukuk which includes the outstanding face amount of Sukuks and any accrued but unpaid periodic distribution. Accounts payable 251, ,320 Acceptances 340, ,264 Takaful liabilities 171, ,490 Others 148, ,005 Charity payable 2,523 2, ,879 1,142,616 Non financial liabilities Accrued expenses 307, ,774 Advance administrative fees 84,498 87, , ,147 1,307,308 1,576,763 By account: Wakala deposits 21,596,386 19,215,013 Current accounts 3,719,843 3,581,715 Savings accounts 3,657,058 3,499,186 Time deposits 2,171,024 1,882,393 31,144,311 28,178,307 By sector: Government 6,116,613 9,872,190 Public 8,442,283 5,706,475 Corporate / private 10,013,762 6,706,401 Retail 6,571,653 5,893,241 31,144,311 28,178,307 Others include promises to buy and sell foreign currencies which are carried at fair value and presented within other assets and other liabilities respectively. The notional amounts of these contracts are disclosed in note 30 of these consolidated financial statements. Others also include an amount of AED 28,443 thousand (: AED 24,463 thousand) of depositors profit reserve and the zakat due on these reserves. The Group is discharging this Zakat on behalf of the depositors. Charity payable represents profits forfeited by the Fatwa and Shariah Supervisory Board, late payment fees and over limit fees. 19. Share Capital and Statutory Reserve Share capital The authorized share capital of the Bank comprise of 4,000,000 thousand ordinary shares of AED 1 each. The issued and fully paid up share capital at 31 December comprise of 3,090,000 thousand ordinary shares of AED 1 each (: 3,090,000 thousand ordinary shares of AED 1 each). Abu Dhabi Investment Council holds 100% of the issued and paid share capital. The Bank s shares are not listed on a recognised stock exchange. Directors remuneration amounting to AED 2,990 thousand (31 December : AED 2,831 thousand) has been charged to the statement of comprehensive income in accordance with the Ministry of Economy and Commerce interpretation of Article 119 of Federal Law No. 8 of 1984 (as amended). Had directors remuneration been presented through the consolidated statement of income, the profit for the year attributable to the equity holder of the Bank would have been reduced by AED 2,990 thousand (: AED 2,831 thousand). Statutory Reserve The UAE Commercial Companies Law No. (8) of 1984 (as amended) and the Bank s Articles of Association require that 10% of the annual 119 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 120

62 net profit to be transferred to a statutory reserve until it equals 50% of the paid-up share capital. The statutory reserve is not available for distribution. During the year, AED 9,116 thousand (: 44,111 thousand) has been transferred to the statutory reserve. 20. Tier 1 Sukuk On 30 June, the Bank through a Shariah compliant Sukuk arrangement issued Tier 1 Sukuk at face value of AED 1,836,250 thousand (USD 500,000 thousand) listed on Irish Stock Exchange. Tier 1 Sukuk is a perpetual security in respect of which there is no fixed redemption date and constitutes direct, unsecured, subordinated obligations of the Bank subject to the terms and conditions of the Mudaraba agreement. It is callable by the Bank on 30 June 2019 (the First Call Date ) or any profit payment date thereafter subject to certain conditions. It bears an expected Mudaraba profit rate of 5.50% payable semiannually in arrears until the First Call Date. On the First Call Date and every five years thereafter it is reset to a new expected Mudaraba profit rate equal to the five-year US dollar mid swap rate plus a margin of 3.73% per annum. The Bank may, at its sole discretion, elect not to make any Mudaraba profit distributions as expected and the event is not considered an event of default. Additionally, any periodic distribution amount not paid as aforesaid will not accumulate and neither the Trustee nor the Certificate holders shall have any claim in respect thereof. In the case of a non-payment election or a non-payment event, from the date of such non-payment, the Bank will not (a) declare or pay any distribution or dividend or make any other payment on, and will procure that no distribution or dividend or other payment is made on; and (b) directly or indirectly redeem, purchase, cancel, reduce or otherwise acquire any class of shares issued by the Bank or any securities of the Bank ranking pari passu with or junior to the Tier 1 Sukuk except securities, the term of which stipulate a mandatory redemption or conversion into equity, in each case unless or until the occurrence of next following expected Mudaraba profit distribution. 23. Income from Islamic Financing Activities and Ijara, Net Income from Murabaha corporate 625, ,141 Income from Ijara corporate 140, ,584 Income from Musharaka corporate 23,348 1,990 Income from Musawama and Murabaha retail 716, ,457 Income from Ijara retail 138, ,396 Other Islamic financing 2, ,647,056 1,527,797 During the year, the Group did not recognise in the Consolidated Statement of Income any profit income on the impaired finances (31 December : AED nil). 24. Commission, Fees and Foreign Exchange Income, Net 21. Other Reserves Cumulative changes in fair value Foreign currency translation reserve 1 January (4,705) (6,747) (11,452) Net gain on investment in equity instrument designated at fair value through other comprehensive income 6,145-6,145 Foreign currency translation difference for foreign operations - (8,387) (8,387) Fee and commission income 188, ,973 Foreign exchange gains 10,952 7,167 Foreign exchange losses (2,344) (956) Other income , , ,225 Commission, fees and foreign exchange income constitute part of profit distributable to the Shareholder. Fees and commission income include AED 4,058 thousand from fund management and fiduciary activities (: AED 2,532 thousand) (note 36). 1 January 1,440 (15,134) (13,694) Net gain on investment in equity instrument designated at fair value through other comprehensive income (8,820) - (8,820) Foreign currency translation difference for foreign (42,797) (42,797) - operations 31 December (7,380) (57,931) (65,311) 22. Non-controlling Interest Non-controlling interest represents the minority shareholder s proportionate share in the aggregate value of the net assets of subsidiaries; the disposal of which during is disclosed in note General and Administrative Expenses Rent expenses 69,692 83,306 Marketing and advertising expenses 20,382 24,144 Consultancy fees 7,526 9,412 Repair and maintenance 14,772 12,194 Communication 13,562 14,389 Other expenses 175, , , , Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 122

63 26. Impairment Charges on Financial Assets Wakala deposits with banks and other financial institutions Ijara Receivables from Islamic financing activities Investment securities At 1 January 15,680 11, , , , ,176 7,537 2, , ,680 Charge for the year (8,973) 4,450 35,173 31, , ,311 10,012 4, , ,203 Write offs and recoveries - - (4,187) (764) (26,485) (22,623) - - (30,672) (23,387) Unwinding on renegotiated financings (22,388) (9,361) - - (22,388) (9,361) At 31 December 6,707 15, , ,415 1,402, ,503 17,549 7,537 1,600, , Profit Distribution 29. Commitments and Contingencies The profit distribution for the year has been supported by the Shareholder and is authorized by the Bank s Fatwa and Shariah Supervisory Board. Profit rate swap expense is set off by profit rate swap revenue of AED 49,617 (31 December AED 61,999) The Bank invests all of its investment deposits including saving accounts, adjusted for UAE Central Bank reserve requirements and the Group s liquidity requirements. With respect to investment deposits, the Bank is liable only in case of willful misconduct, negligence or breach of contract otherwise it is on the account of the fund s provider (Rab Al Mal) or the principal (the Muwakkil). 28. Cash and Cash Equivalents Cash and cash equivalents included in the consolidated statement of cash flows comprise the following amounts with original contractual maturities of less than three months: Wakala 256, ,952 Profit rate swap 82,736 79,943 Mudaraba 43,317 44,572 Sukuk financing instrument 62,780 14, , ,941 Cash and balances with banks 2,132,077 2,037,746 Wakala deposits with banks and other financial institutions 1,953,636 2,495,509 Wakala deposits from banks (1,238,473) (2,977,688) 2,847,240 1,555, Islamic Derivative Financial Instruments In the ordinary course of business, the Group enters into various types of transactions that involve Islamic derivative financial instruments. Islamic derivative financial instruments include Islamic promises to exchange currency and / or cash flows. Islamic derivatives are measured at fair value by reference to published price quotations in an active market, counterparty prices or valuation techniques such as discounted cash flows. Letters of credit 840, ,604 Letters of guarantee 6,386,560 6,769,795 Irrevocable commitments to extend credit 349, ,907 Revocable commitments to extend credit 8,506,399 4,700,876 Capital commitments 90, ,000 Operating lease commitments 102, ,868 Islamic derivatives sold to banks customers are covered back to back from other banks as reflected in zero net marked to market value. The table below shows the positive and negative fair values of Islamic derivative financial instruments together with the notional amounts. The notional amounts indicate the volume of transactions outstanding at year end and are neither indicative of the market risk nor credit risk. 123 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 124

64 31 December Islamic Derivatives to counterparties Positive market value Negative market value Notional amount Less than 3 months 3 12 months Profit rate swaps 62,450 (62,450) 1,479, ,479,639 1,479,639 Promises to sell foreign currencies 1,260 (1,379) 2,617,589 1,937, , ,604 2,617,58 63,710 (63,829) 4,097,228 1,937, ,968 1,603,243 4,097, years Islamic Derivatives covering Banking Book: Profit rate swaps - (36,458) 3,195, ,195,646 3,195,646 63,710 (100,287) 7,292,874 1,937, ,968 4,798,889 7,292, December Islamic Derivatives to counterparties Positive market value Negative market value Notional amount Less than 3 months 3 12 months Profit rate swaps 81,066 (81,066) 1,712, ,712,636 1,712,636 Promises to sell foreign currencies 3,457 (63) 1,134,457 1,070,941 38,606 24,910 1,134,457 84,523 (81,129) 2,847,093 1,070,941 38,606 1,737,546 2,847, years Islamic Derivatives covering Banking Book: Profit rate swaps - (19,218) 2,334, ,334,055 2,334,055 84,523 (100,347) 5,181,148 1,070,941 38,606 4,071,601 5,181,148 Unrealised valuation losses on Islamic derivatives covering the banking book are matched by unrealised valuation gains on hedged items amounting to AED 36,458 thousand (: AED 19,218 thousand). 31. Disposal of Subsidiary On 31 March, the Group disposed of its entire interest in Al Wataniya Development Fund Limited for a cash consideration of AED 23,528 thousand. The effects of the disposal on the cash flows of the Group were: The aggregate cash flows arising from the disposal of Al Wataniya Development were: Carrying amount of assets and liabilities disposed off: Cash and cash equivalent 50,697 Trade and other payables (84) Net assets disposed-off 23,907 Loss on disposal (379) Net assets derecognised 50,613 Less: Non-controlling interest (26,706) Cash proceeds from disposal 23,528 Less: Cash and cash equivalent in subsidiary disposed of (50,613) Net assets disposed of 23,907 Net cash (outflow) on disposal (27,085) 125 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 126

65 32. Group Entities 33. Related Parties Subsidiaries Country of incorporation Ownership Al Hilal Takaful PSC UAE 100% 100% Al Hilal Auto LLC UAE 100% 100% Al Hilal Islamic Bank PJSC Kazakhstan 100% 100% Al Hilal Leasing LLP Kazakhstan 100% 100% Al Hilal Al Mariah Development LLC UAE 100% 100% Al Wataniya Development Fund Limited* Cayman - 47% AHB Sukuk Company Limited Cayman 0% 0% AHB Tier 1 Sukuk Limited Cayman 0% 0% *Disposed in, see note 31. The Group does not have direct holding in AHB Sukuk Company Limited or AHB Tier 1 Sukuk Limited which are considered to be a subsidiary by virtue of control. The following table summarises the information related to Group s subsidiary which has a non-controlling interest, which was disposed in : Financial position assets 26,750 liabilities (44) equity 26,706 Income statement Income for the year 426 Expenses for the year - Net profit for the year 426 Identity of Related Parties Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Related parties comprise major shareholders, directors and key management personal of the Group. The terms of these transactions are approved by the Group s management and are made on terms agreed by the Board of Directors or management. Parent and Ultimate Controlling Party Abu Dhabi Investment Council holds 100% of the issued and fully paid share capital. The Bank s shares are not listed on a recognised stock exchange. Compensation of Directors and Key Management personnel Key management remuneration for the years ended 31 December and 31 December comprise: Short term employment benefits 18,770 16,873 Post employment benefits 2, Directors remuneration 2,990 2,831 Terms and Conditions Islamic financing and deposits are granted and accepted in various currency denominations and for various time periods from related parties. Profit rates earned on Murabaha financing facilities extended to related parties during the year have ranged from 0.25% to 5.0% per annum (: 0.5% to 6.0%). Profit distribution rates paid on customers accounts placed by related parties during the year have ranged from 0.25% to 5.0% per annum (: 0.2% to 5.0%). Fees and commissions earned on transactions with related parties during the year have ranged from 0.4% to 3.0% per annum (: 0.2% to 1.2%). Collaterals against financing to related parties range from being unsecured to fully secure. Save for transactions carried out with the ultimate Parent and its group of companies, all transactions with the government and its related concerns are deemed to occur within the normal course of business. 127 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 128

66 Particulars of transactions with related parties, disclosed pursuant to the requirements of IAS 24, are shown below. The balances and transactions with related parties comprise: Balances: 31 December Parent Directors and key Management Parent s Subsidiaries Receivables from Islamic financing activities and Ijara - 32, , ,139 Wakala deposits with banks - - 1,551,237-1,551,237 Investment securities ,330-55,330 Customers accounts - 35, ,832 Wakala deposits - - 2,284,572 3,126,158 5,410,730 Contingent liabilities - 3,241 1,265-4,506 Undrawn facilities commitments - 11, ,655 Guarantees - - 6,548-6,548 Others Balances: 31 December Parent Directors and key Management Parent s Subsidiaries Receivables from Islamic financing activities and Ijara - 61, , ,556 Wakala deposits with banks - - 2,115,323-2,115,323 Investment securities ,330-55,330 Customers accounts - 18,989 1,331,336-1,350,325 Wakala deposits 4,254, ,927,170 5,683,669 11,865,167 Contingent liabilities - 3, ,637 Undrawn facilities commitments - 4, ,003 Guarantees - - 3,419-3,419 Others Transactions: 31 December Parent Directors and key Management Parent s Subsidiaries Financing income - 2, ,235 6,032 Commission, fees and foreign exchange income, net - 56 *(1,392) - (1,336) Income from Wakala investments - - 8,388-8,388 Investment income - - 2,274-2,274 Profit distribution 23, , , ,799 Others Transactions: 31 December Parent Directors and key Management Parent s Subsidiaries Financing income - 2, ,836 6,559 Commission, fees and foreign exchange income, net - 8 1,205-1,213 Income from Wakala investments ,152-18,152 Investment income - - 2,243-2,243 Profit distribution 78, , , ,033 *The Bank entered into a foreign exchange swap, where the loss was with a related party and the gain with a non-related party. During the year no specific provisions were booked with respect to balances due from the related parties (31 December : AED nil). Others 129 Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 130

67 34. Accounting Classification and Fair Values The table below sets out the Group s classification of each class of financial assets and liabilities, and their fair values. 31 December Financial assets 31 December FVTPL FVTOCI Amortised cost Cash and balances with banks - - 3,132,950 3,132,950 Cash and balances with banks and other financial institutions - - 1,856,247 1,856,247 Receivables from Islamic financing activities ,702,010 23,702,010 Ijara - - 7,192,851 7,192,851 Investment securities 45, ,383 2,579,775 3,065,888 Other assets , ,697 45, ,383 39,143,530 39,629,643 Financial liabilities Financial assets FVTPL FVTPL FVTOCI FVTOCI Amortised cost Amortised cost Customers accounts ,144,311 31,144,311 Wakala deposits from banks - - 1,406,096 1,406,096 Sukuk financing instrument - - 1,836,250 1,836,250 Other liabilities , , ,301,536 35,301,536 Cash and balances with banks - - 2,837,178 2,837,178 Wakala deposits with banks and other financial institutions - - 3,149,535 3,149,535 Receivables from Islamic financing activities ,119,724 21,119,724 Ijara - - 5,983,441 5,983,441 Investment securities 34,553 59,382 2,834,261 2,928,196 Other assets , ,903 34,553 59,382 36,907,042 37,000, Involvement with Unconsolidated Structured Entities 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 the aggregate economic interests of the Group in the fund (refer note 5). The Group s interest in investment funds is set out below: Name and type of entity Nature and purpose Interest held by the Group Al Hilal GCC Equity Fund Al Hilal Global Sukuk Fund Al Hilal Global Balance Fund 36. Fund Management and Fiduciary Activities The Group manages and administers assets held in trust or in fiduciary capacity on behalf of its customers. The underlying assets held in a custodial or fiduciary capacity are excluded from the consolidated financial statements of the Group. The table below outlines the fair value of the funds and assets under management at the respective reporting dates. Non financial liabilities 37. Zakat The Articles of Association of the Bank do not require the Bank to pay Zakat on behalf of the Shareholder. Consequently, the Zakat obligation is to be assessed and discharged by the Shareholder. 38. Comparative Notes Mutual funds managed to generate fee income on behalf of third-party investors Comparative figures have been reclassified to conform with the presentation for the current year. Investments in units issued by the funds amounting to AED 89,601 thousand (31 December : AED 64,487 thousand Al Hilal Global Sukuk Fund 200, ,906 Al Hilal GCC Equity Fund 48,649 32,038 Al Hilal Global Balance Fund 130,891 - Financial liabilities FVTPL FVTOCI Amortised cost Customers accounts ,178,307 28,178,307 Wakala deposits from banks - - 3,180,210 3,180,210 Sukuk financing instrument - - 1,836,250 1,836,250 Other liabilities - - 1,142,616 1,142, ,337,383 34,337, Consolidated Financial Statements Al Hilal Bank Annual Report Al Hilal Bank Annual Report Consolidated Financial Statements 132

68 Supplementary Information 1. Risk Overview The Group s activities are subject to risks that can adversely impact its business, operations and financial condition. These activities expose it to a variety of financial risks and involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Financial instruments are fundamental to the Group s business, constituting the core element of its operations. Accordingly, the risks associated with financial instruments are a significant component of the risks faced by the Group. Financial instruments create, modify or reduce the credit, market (including traded or fair value risks and nontraded or profit rate and foreign currency related risks) and liquidity risks of the Group s balance sheet. Risk taking is core to the banking business and operational risks are an inevitable consequence of such activities. The Group s aim is, therefore, to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Group s financial performance. The Group s risk management function is an integral part of managing risks across the Group s business activities. It is through Group Risk Management that policies are designed and implemented to identify and analyze risks, to set appropriate risk limits and controls, to monitor risks with adherence to limits by means of reliable and up-to-date information systems. The Group regularly reviews its risk management policies and systems to reflect changes in regulations, markets, products and emerging best practice, in order to keep financial risk at a prudent and acceptable level within agreed risk appetite parameters. One of the major risks incurred by the Group arises from extending credit to customers through trading and financing operations. Beyond credit risk, the Group is also exposed to other risk types such as market risk, operational risk, liquidity risk, concentration risk, profit rate risk in the banking book and other risks that are inherent to the Group s strategy and product range. 2. Credit Rating The Group s credit rating has a significant impact on both its access to and cost of, capital and wholesale funding. Credit ratings may be withdrawn, subject to qualifiers, revised, or suspended by the relevant credit rating agency at any time and the methodologies by which they are determined may be revised. A downgrade or potential downgrade of the Groups credit rating may reduce access to capital and wholesale debt markets, potentially leading to an increase in funding costs, as well as affecting the willingness of counterparties to transact with it. In addition, the ratings of individual securities (including, but not limited to, Tier 1 Capital and Tier 2 Capital securities) issued by the Group (and banks globally) could be impacted from time to time by changes in the ratings methodologies used by rating agencies. Ratings agencies may revise their methodologies in response to legal or regulatory changes or other market developments. The Group is in compliance with Basel II Accord and Regulations as published by the Central Bank of U.A.E. (CBUAE) As at December 31,, the minimum regulatory requirement set by the CBUAE is for Banks to maintain a Capital Adequacy ratio (CAR) of 12%. The Group has adopted the Standardized Approach for Credit Risk and Market Risk and Basic Indicator Approach for Operational Risk. As of December, the Group s Capital Adequacy Ratio is 17.38% which is well above the minimum regulatory requirement defined by the CBUAE. During, the Group also made a number of enhancements in ensuring greater levels of risk, control and oversight; The most important of these was the implementation of new specialized credit rating models for wholesale banking group including large & mid corporate, commercial real estate, High Net Worth Individuals (HNWI), contracting, banks and Financial Institutions (FIs) models. These not only provide quantitative analysis (i.e. calculating the current ratios, 3 year average turnovers, debt to equity ratios, etc.) but also assessments from a qualitative perspective. The enhanced rating methodology for existing models is compliant with IRB standards and best international practices. In addition to this the Group has also implemented RAROC (risk adjusted return on capital) model for optimizing the return on risk. During, the implementation of retail application score cards was undertaken and retail behavioral scorecards for Credit Card, Auto Finance, Personal Finance, and Home Finance were developed. These enhancements allow for improved credit decisions and enable the Group to move towards IRB standards and improved portfolio management. In, both Moody s and Fitch performed their regular annual review of the Group s rating and the Group maintained an A1/A+ rating respectively with a stable outlook. During, the Group issued a Basel II/ III Compliant Tier 1 note of USD 500 million. These notes strengthened the Group s Capital Adequacy Ratio to above the market average and helped diversify the Group s funding and liquidity profile. System developments were made to improve the monitoring and management of risk exposures & collateral. Action plans in the Operational Risk Management System (ORMS) including enhancements of the risk and control self-assessment process were developed and subsequently implemented whereby report extraction is now automated and incident management process flow enhanced. 3. Risk Management Framework, Objectives & Policies The Group Risk Management structure ensures identification, measurement, monitoring and controlling risk in accordance with the Group s Risk Management Framework and Policies as well as regulatory guidelines provided by the CBUAE. The Group s risk management philosophy revolves around Five pillars of Risk Management : Strong Corporate Governance Robust Risk Architecture Adherence to Globally accepted Risk Standards Skilled & Seasoned Manpower Robust Risk Culture The Basel II framework has also been implemented in the Group as per the guideline. The framework is based upon three Pillars: Pillar 1 Minimum capital requirements: defines rules for the calculation of credit, market and operational risk; Pillar 2 Supervisory review process: requires Banks to undertake an Internal Capital Adequacy Assessment Process (ICAAP) for other risks; and Pillar 3 Market discipline: requires expanded disclosures to allow Investors and other market participants to understand the risk profiles of individual Banks. 3 rd Line of Defence Board Risk Oversight Fatwa and Shariah Board Board of Directors Corporate Governance Committee Human Resource Committee Risk Committee Audit Committee Management Executive Committee 4. Risk Management Framework The Risk Management Framework is integral to the operations and culture of the Group. Risks are proactively managed within the Group, while the framework is flexible to incorporate new activities the Group undertakes. The framework is comprehensive and has been communicated from the Board of Directors down to individual Business lines. The Group s business strategy is to achieve the objective of being a strong financial player with insight and transparency in risk-taking. The risk governance framework supports this objective and promotes the transparency in the Group. 5. Risk Governance The overall responsibility of risk management rests with the Board of Directors (BOD). To ensure effective governance, controls and oversight, the BOD has formed some key committees which are Board Audit Committee, Board Human Resource Committee, Board Corporate Governance Committee, and Board Risk Committee. In addition, there is also the Fatwa and Shariah Supervisory Board. It is through Group Risk Management and various Board Committees that guide and assist with overall management of the Group s risks. Group Risk Management has firmly embedded, through its existing policies, the risk governance structure used to control, manage and mitigate risk. In addition to Board Committee s, there are also Management Committees that review, monitor and provide oversight of the risk profile of the Group on a periodic basis. The chart below conveys the risk governance structure within the group: 2 nd Line of Defence 1 st Line of Defence Management Risk Oversight Management Investment Committee Asset & Liability Committee Management Risk Committee Management Credit Risk Committee Management Finance Committee Management Procurement Committee Liability Management Committee Management Operational Risk Committee Remedial Management Committee Independent Assurance Compliance Internal Audit Shariah Supervision Management Transformation Committee Daily risk Management Grass root level Business & Support Units 133 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 134

69 The ultimate responsibility for setting the Group s risk appetite and the effective management of risk rests with the Board. Board Risk Committee (BRC) acts within its authority delegated by the Board. The BRC, whose membership is comprised of non-executive directors of the Group, has the responsibility for oversight and review of risks including but not limited to, credit risk, market risk, liquidity risk and operational risk. BRC also reviews the overall risk appetite and makes recommendation thereon to the Board. The BRC receives regular comprehensive reports on key risks vis-avis the achievement of strategic objectives of the Group, credit risk profile, market and liquidity risk profile, capital adequacy profile and operational risk profile. The Management Credit Risk Committee (MCRC) provides management and oversight of credit risk in the Group. It approves credit limits and obligor limits within its authority levels as delegated by the Board and reviews credit approval cases beyond its delegated authorities for onward recommendation to the Board Risk Committee. The approval of credit policies and changes to these policies, within the framework as approved by BRC, are also remommended by the Board committee. The Remedial Managment Committee reviews all debt restructuring and write-off cases thereby making decisions regarding the reclassifications of credit assets and also assess the adequacy of its Charter as required and recommend any proposed changes to the BRC for ultimate approval by the Board of Directors. The Management Risk Committee (MRC) has the responsibility of risk oversight by appraising and assessing the evolving risk profile of the Group. They review the Risk Management Framework and recommend the same to the Board Risk Committee for approval by the Board. The committee ensures that specific limits/ tolerance levels are implemented and are aligned with overall limits set by the Board. Furthermore, the committee identifies and considers various ways the Group can respond to the risks identified during the risk assessment process. Such risks are not only identified for their potential negative impact, but also the positive business opportunities that they may present. In terms of the Group s business strategy, a key component of the Group is for risk management to support the objective of being a strong financial partner with insight and transparency in risk-taking. The Group s vision is to adopt best international standards and practices in risk management and to translate this into comprehensive risk infrastructure that supports this vision. Managing risk is a process operated independently of the business units of the Group. It aims to promote a strong risk management culture through a comprehensive set of policies, processes and tools that are designed to effectively identify, measure, monitor and control risk exposures. The Board of Directors and senior management are involved in the establishment of the risk infrastructure and the periodic oversight and guidance of the risk management function. The processes are subject to additional scrutiny by an independent Shariah Board, as well as, internal and external auditors and the regulators, which help further strengthen the risk management practices within the Group. The Group has adopted a risk management and internal control structure referred to as the three lines of defense to ensure the Group achieves its commercial aims while meeting regulatory and legal requirements. It is a key part of the Group s risk management framework. In terms of the lines of defense, the first line of defence is the operational managers that own and manage risks. They are also responsible for implementing corrective actions to address process and control deficiencies: Functions that own and manage risks. Functions that oversee risks. Management establishes various risk management and compliance functions to help build and/or monitor the first line-of-defense controls. The specific functions will vary by organization and industry, but typical functions in this second line of defence include: A risk management function (and/or committee) that facilitates and monitors the implementation of effective risk management practices by operational management and assists risk owners in defining the target risk exposure and reporting adequate riskrelated information throughout the organization. Board Audit Committee (and Other Board Committees) is the third line of defence, provides assurance on the effectiveness of governance, risk management, and internal controls, including the manner in which the first and second lines of defense achieve risk management and control objectives. The scope of this assurance, which is reported to Board and to the governing body, usually covers: A broad range of objectives, including efficiency and effectiveness of operations; safeguarding of assets; reliability and integrity of reporting processes; and compliance with laws, regulations, policies, procedures, and contracts. All elements of the risk management and internal control framework, which includes: internal control environment; all elements of an organization s risk management framework (i.e., risk identification, risk assessment, and response); information and communication; and monitoring. The overall entity, divisions, subsidiaries, operating units, and functions - including business processes, such as sales, production, marketing, safety, customer functions, and operations as well as supporting functions (e.g., revenue and expenditure accounting, human resources, purchasing, payroll, budgeting, infrastructure and asset management, inventory, and information technology). Compliance, Internal Audit and Shariah Supervision departments provide independent assurance to monitor various specific risks such as noncompliance with applicable laws, regulations or Group policies and procedures. These departments reports directly to the Board and in some business sectors, directly to the governing body and/or Board. 135 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 136

70 6. Risk Management Group Risk Management Division (GRMD) is responsible for the overall risk management framework of the Group. In this respect, the GRMD is responsible to ensure that the risk organizational structure of the Group is equipped with the right skills, policies and processes, which enable it to perform efficiently and effectively. GRMD is responsible for reviewing, monitoring and managing the risk emanating at an enterprise level in conjunction with the respective business heads The Group has exposure to many risks and the key risks faced by the Group are; Credit risk - The risk of financial loss where a customer or counterparty fails to meet their financial obligations; Market risk - The risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, profit rates, commodity prices and equity prices. Market risk arises in both trading and banking book activities; Liquidity risk - The risk that the Group will be unable to fund assets and meet obligations as they become due; Operational risk - The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events including legal risk but excluding strategic or reputation risk Risk Profile The overall risk profile of the Group remains stable and low risk: The Group showed significant improvement in its Capital adequacy from 13.99% in FY-13 to 17.38% in FY-14 and its leverage ratios improved from 13.27x in FY-13 to 9.97x in FY-14. The liquid asset ratio showed considerable improvement from 14.9% in FY-13 to 16.1% in FY-14. From a market risk perspective, the Expected change in NPI/Net Profit Income (EAR) improved from 10.68% in FY-13 to 5.53% in FY-14. Operational risk management has improved as a result of system enhancements, improved risk awareness and engagement across the business. Al Hilal Group The Group further endeavors to identify all material risks that may affect it. Identification is a continuous and pro-active process. It covers all the current activities of the organization as well as new products and initiatives. This process, which is informed by analysis of the Group s risk factors and the results of the Group s stress testing programme, gives rise to the classification, mitigation and management of key risks Risk Appetite The Risk appetite of the Group is defined as the amount of risk it is willing to accept to achieve its stated objectives and achieve expected returns to its shareholder, while safeguarding against key sources of risk. The risk appetite measures have been developed and integrated into the strategic planning process of the Group and have been set at a level expected for an investment grade bank. Currently, the Group s risk appetite can be summarized across the following dimensions (but not limited to): The minimum financial outcomes under various macroeconomic scenarios, Portfolio Credit Quality desired by the Group, Measures to ensure sufficient liquidity in the Group, Maintaining capital adequacy above Group s defined minimum level. Risk Severity () Low Risk Moderate Risk High Risk Future Trend Stable Quantitative Measures Capital Ratios Credit Risk For Credit Portfolio Liquidity Risk Market Risk Operational Risk Qualitative Measures Reputational Regulation / Compliance Governance Risk Appetite Common Equity Ratio Capital Adequacy Ratio Leverage Ratio Non Performing Financings Ratio Gross Credit Charge based on total provision Net Credit Charge Based on specific provision NPF Coverage Ratio Impaired Ratio Credit Restructured Ratio Top 20 Credit Concentration Ratio Target Portfolio Rating ASSR 1 month Liquid Asset Ratio Liquid Coverage Ratio Deposit Concentration Expected change in NPI/Net Profit Income (EAR) Economic Value of Equity as % of Capital VAR-FX to Trading Book Capital VAR- Invest Subs to Invested Capital Sukuk Trading Book Sensitivity- Trading Book Capital Target Investment Grade Rating (Sukuk Portfolio) Maximum Investment in Sub-Investment Grade Entity Operational Risk Loss Ratio Open High Risk Issues Open Issues more than 90 days past due from the target date Zero tolerance for any events that lead to a damage of the Group s Reputation Zero tolerance for intentional regulatory / compliance breach Zero tolerance for breach of policies. Ensure that the Group continues to follow all policies and procedures at all times 137 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 138

71 6.3. Stress Testing The GRMD conducted stress-testing based on several stress scenarios across the Group on an enterprise-wide basis, reflecting the Group s business strategy and resultant risk exposures. The results of the stress tests are used to assess potential unplanned demand for regulatory capital under the various scenarios. The GRMD tested several scenarios in the course of and The results of these stress tests demonstrated that the Group would remain satisfactorily capitalized after taking account of assumed management actions to mitigate the effect of the scenarios in question. Scenario Severity Idiosyncratic Stress Stress Test Mild Moderate Severe 3 Additional Corporate Obligors Default Top 5 Additional Corporate Obligors Default Reverse Stress * based on banking industry historical stress conditions. The primary risks faced by the Group and their effective management is described below: 6.4. Credit Risk Credit risk arises from the potential that an obligor is either unwilling to perform on an obligation or its ability to perform such obligations is impaired resulting in economic loss to the Group. This credit risk arises mainly from both direct financing activities as well as contingent liabilities. In a bank s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to financing, trading, settlement and other financial transactions. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. Credit risk emanates from a bank s dealing with individuals, corporate, financial institutions or a sovereign. For most banks, financing facilities are the largest and most obvious source of credit risk; however, credit risk could stem from activities both on and off balance sheet. The following was the change in RWAs from that of the previous year: In terms of Asset classes the Credit Risk Weighted Assets increased by 12%, as a result of increases on claims on the corporate portfolio and regulatory retail portfolio by 10% and 22% respectively whilst claims on sovereigns decreased by 56%. In addition to direct accounting loss, credit risk should be viewed in the context of economic exposures. This encompasses opportunity costs, transaction costs and expenses associated with a nonperforming asset over and above the accounting loss. Credit risk can be further sub-categorized on the basis of reasons of Conditions Non Performing Financing (NPF) were increased based on the percentage increase in historical default rates by 14.75%* and new NPF at 75% provision. NPF were increased based on the percentage increase in historical default rates by 40.47%* and new NPF at 75% provision. NPF were increased based on the percentage increase in historical default rates by %* and new NPF at 75% provision. NPF were increased by 3 additional corporate obligor defaults and new NPF at 100% provision. NPF were increased by 5 additional corporate obligor defaults and new NPF at 100% provision. With the reverse stress test scenario, the Group assessed the current portfolio and examined the level of non-performing financing that will result in the CBUAE minimum capital ratio to come down to 12% (Pillar 1). default. For instance the default could be due to the country in which there is exposure or problems in settlement of a transaction. Credit risk does not necessarily occur in isolation. The same consequence that results in credit risk for the Group may also expose it to other risks. For instance a bad portfolio may also impact the Group liquidity and funding profile Credit Risk Management The Group manages credit risk through an effective and comprehensive credit appraisal mechanism, governance structure with approving and reviewing authorities; limit structures; internal credit risk rating system and models. The Group ensures that appropriate collateral for financing is taken in order to assess the borrower's credit worthiness and to ensure that the interest of the Group is safeguarded not only in terms of pre disbursement collateral management but also ensure post disbursement monitoring is conducted on a regular basis so that prudent financing activities and sound financing portfolio is managed as specified under the umbrella of a comprehensive Group Credit Risk Policy approved by the Board of Directors. In light of the Credit Risk Policy, the Group considers acceptable collaterals whereby these collaterals help reduce the credit risk associated with its financing portfolio. The two types of collateral acceptable to the Group are the financial collateral and non-financial collaterals. Financial collaterals include cash margins typically used for Letter of Credit and Bank Guarantee transactions by the Group, Cash collateral for extending credit or as a protection for obligor default, cash equivalents such as Shariah compliant Certificate of Deposits. Non-financial collaterals may include real estate (both commercial and residential), Vehicles, Aircrafts and Marine Vessels. The GRMD has developed and maintains an IRB compliant internal risk grading framework in order to categorize exposures according to the degree of risk probability of financial loss. There is a risk rating framework for the corporate portfolio that consists of twenty-two grades. Each customer is rated using a portfolio specific rating model (Large Corporate, Middle Market, Small Business, Contracting, Commercial Real Estate, Project Finance and High Net Worth Individuals) which in turn assigns a risk rating and corresponding probability of default. The responsibility for assigning risk grades lies with the concerned business unit and is independently vetted by the GRMD. The table defines the risk grading along with percentage mix for whole sale banking group: AED '000 WBG Funded Exposure Grade Exposure Funded % % Investment 2 2,354, % 3 4,205, % 4 5,381, % 5 4,790, % Non - Investment 6 964, % 7 1,130, % 8 28, % Classified 9 1,047, % 10 70, % 19,973, % For the Retail portfolio, customers are reviewed and approved by Retail Financing & Credit team and Retail Risk Management team in line with the approved policies, delegated approval authorities and risk acceptance criteria. Credit policies for the Personal Banking Group, asset products, are reviewed by the Retail Risk Management team to ensure that the associated risks against asset financing are minimized. Four application and behavioral scorecards have been developed for each specific financing product and a small business rating model to assist in the credit decision process. Credit Administration, Monitoring and Control Division (CAMC) ensures that approved credit facilities are accurately entered into the limit system and relevant documentation is prepared and executed. CAMC is responsible for all custodianship arrangements and ensuring expiry/renewal dates of credit limits are closely monitored and due intimation is given to Business. From a Credit Portfolio Management perspective inputs are provided to Board and Executive Management for business planning and budgeting along with Risk Appetite Statements, based on portfolio analysis and trends. Industry reviews are conducted for all the significant industry exposures recommendations are provided to the MCRC regarding the establishment of portfolio limits by rating, industry sector and country, establishing/refining the target market and risk acceptance criteria for different segments. Exceptions are also monitored with respect to Target Markets & Risk Acceptance Criteria at portfolio level from a reporting perspective to the senior management. Furthermore, benchmarking is done against other banks in the local jurisdiction as regards portfolio growth and quality trends (e.g. profitability, loss provisions and concentration). 139 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 140

72 The Group also ensures diversification of its portfolio into different business segments, products and sectors. Further, to avoid risk concentration; counterparty limits, counterparty group limits and industry concentration limits are also established, monitored and assessed in the light of changing counterparty and market conditions. A watch list procedure also exists which identifies financings with early warning indicators. The GRMD also monitors the nonperforming financing portfolio of the Group and reports all significant matters to the MCRC and RMC. Asset Quality Breakup 0.19% 3.39% 2.13% 1.27% Further assurance is also provided by an independent review of the credit portfolio that is undertaken by an independent credit review team within GRMD which is separate from both the business unit and Credit Risk Management. To facilitate recoveries of long dated past due & classified accounts, the Remedial and Special Credit Department negotiates with client for recovery and where necessary restructuring, rescheduling, foreclosures, enforce collaterals or recommend write off (post approval from Board in case all efforts have been exhausted). Cases are sent to Legal Department for filing recovery suit should there be a need to recover amounts due through the courts. Status is tracked and progress reports are submitted to Remedial Management Committee detailing past due & defaulted customers. The Group also takes in to account the following risk types for measurement and classification of credit risk: Default / Counterparty risk - Creditors defaulting on their credit obligations with default defined as non-payment in excess of 90 days. Country / Transfer risk - The inability or unwillingness of a country to provide foreign exchange for profit and principal payments. The model measures the total of Group s assets by country and their likelihood to default. Overseas Asset Distribution KAZ 2% UAE 92% Other 6% Substandard Legal and loss 93.02% Doubtful Regular Past due but not impaired Wholesale Banking Group portfolio review and monitoring is performed on a regular basis through risk appetite measures, concentration report, LEC monitoring and other internal reports for management. A number of industry research reports are prepared and circulated by the credit portfolio team to ensure that management is aware about the outlook of industries and fundamentals of the economy. Certain targeted reviews are also conducted by the risk management team. Credit portfolio review is conducted on a quarterly basis and the report is presented and discussed in MRC and BRC. Settlement and Transaction risk - for the failure of the counterparty to complete the agreed upon transaction. Asset transformation risk - when the Group ceases to be a co-owner of the asset and instead has a purely creditor relationship. When it has co-ownership of the asset, this is treated under residual risk. Concentration risk - Overly large exposure and hence concentration dependency on one obligor, sector, or industry. The Group measures the risk of the largest corporate customers and the concentration in the economic sectors classified as per CBUAE. Concentration risk can arise from uneven distribution of exposures (or finance) to its borrowers. Such risks are called Name Concentration risk. Another type is Sectorial Concentration Risk which can arise from uneven distribution of exposures to particular sectors, regions, industries or products. Residual Risk - The inability of the lender to realize the full value of the residential mortgage collateral taken in case of default. Includes Asset transformation risk, when the Group is a co-owner of the asset held in a financing relationship. When it ceases to become a co-owner, the risk transfers fully under Default / Counterparty risk. Finance to Value (FTV) Ratio 23% 30% Regular/ Annual reviews of Personal Banking Group policies are undertaken to ensure credit quality is maintained and is based on an Less than 50% 51-70% 71-90% on-going portfolio review and prevailing market conditions. Product Policies are realigned through deep dive analysis on the portfolio % More than 100% which includes monthly and quarterly reviews of the portfolio. As is evident from the FTV ratios pie chart, more than 85% of the outstanding portfolio is sufficiently covered by residential real 141 Supplementary Information Al Hilal Bank Annual Report estate. Al Hilal Bank Annual Report Supplementary Information 142 7% 15% 26%

73 6.5. Liquidity Risk Liquidity risk is the potential for loss to the Group arising from either its inability to meet its obligations or to fund increases in assets as they fall due without incurring an unacceptable cost or losses. It arises when the cushion provided by the liquid assets are not sufficient enough to meet its obligation. In such a situation banks often meet their liquidity requirements from market. However, conditions of funding through market depend upon liquidity in the market and borrowing institution s perceived financial strength. Accordingly, a bank short of liquidity may have to undertake a transaction at heavy cost resulting in a loss of earnings or in worst case scenario the liquidity risk could result in bankruptcy of the institution if it is unable to undertake the transaction even at current market prices. Banks with large off-balance sheet exposures or the banks, which rely heavily on large corporate deposits, have relatively high level of liquidity risk. Further the banks experiencing a rapid growth in assets could also be exposed to more than average levels of liquidity risk. The Asset and Liability Committee (ALCO) manages the liquidity position of the Group on a regular basis and is primarily responsible for the formulation of the overall strategy and oversight of the asset / liability mix of the Group. The Liability Management Committee (LICO) is a sub-committee of ALCO and reports the Group s liquidity exposures (liquidity risk) to the ALCO monthly, as well as develop, review and modify the primary liability strategy of the Group. Moreover, as core deposits form a considerable part of the Group's overall funding mix, significant importance is being given to the stability and growth of these deposits. The ALCO Committee informs the BRC/ Board of the Group s financial risk exposures (profit rate risk, liquidity risk and other market risks) and compares the Group s current positions against the policy/ risk appetite limits Liquidity Risk Management Liquidity risk management involves not only analyzing the Group s on and off-balance sheet positions to forecast future cash flows but also how the funding requirement would be met. The later involves identifying the funding market the Group has access to, understanding the nature of those markets, evaluating Group current and future use of this market and monitor signs of confidence erosion. As part of its strategic liquidity management, contingency funding planning in the Group ensures that the liquidity management center (Treasury) is well equipped to tap contingent funding sources during periods of market stress. The Group then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities and inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The liquidity requirements of business units and subsidiaries are met through short-term financing from the Treasury Department to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The daily liquidity position is monitored by Market and Liquidity Risk Department within GRMD and regular stress testing is conducted under a variety of scenarios covering the normal and more severe market conditions in order to assess the viability of the contingency funding plan. All liquidity policies and procedures are subject to regular/ annual review and approval by ALCO and the BRC/ Board. Daily reports are produced covering the liquidity position of both the Group and operating subsidiaries. A summary report, including any exceptions and remedial action taken, is submitted regularly to ALCO. Under liquidity risk, The Group considers the following three main risk types for measurement and classification of liquidity risk: Term Liquidity and Call Risk: Arises due to a mismatch between incoming and outgoing payments. There may be unexpected delays in repayments (term liquidity risk) or unexpectedly high payment outflows (withdrawal/call risk). Measures the difference between inflows and outflows and identifies where there are large gaps, and the expected cost to cover those gaps (i.e. through borrowing in the market). Rating Downgrade Risk: Is the cost of closing a liquidity gap if refinancing becomes more expensive due to a decline in the Group's creditworthiness. Market Liquidity Risk: Arises when a position cannot be sold within a desired time period or only at a discount. This is especially the case with securities / derivatives in illiquid markets. The Group has very little exposu re at this time to these types of assets The Group s liquidity position is supported by its capital and its comfortable liquidity position in the 1 month and 3 month buckets that remain within the allowable limits. The funding required for growth during FY was mainly met through an increase in customer deposits and additional capital as detailed on next page: Funding Mix Balance as at Balance as at Increase / Decrease Growth (%) Dec 31, (AED mn) Dec 31, (AED 000) FY 13 - FY 14 Current accounts 3,582 3, % Savings Accounts 3,499 3, % Time Deposits 1,882 2, % Wakala Deposit 19,215 21, % Deposits From Banks and 3,180 1,406 (1,804) -56% FI's Sukuk- EMTN 1,836 1, % Equity 3,907 5,714 1,807 46% 6.6. Market Risk The Group is exposed to market risk which is the risk that the value of on and off balance sheet exposure of the Group will be adversely affected by movements in market rates or prices such as benchmark rates, profit rates, foreign exchange rates, equity prices and market conditions resulting in a loss to earnings and capital. In general, a bank can be exposed to Market Risk in variety of ways. Market risk exposure may be explicit in portfolios of securities / equities and instruments that are actively traded. Conversely it may be implicit such as profit rate risk due to mismatch of financing and deposits. Besides, market risk may also arise from activities categorized as off-balance sheet item. Therefore market risk is potential for loss resulting from adverse movement in market risk factors such as profit rates, forex rates, equity and commodity prices Market Risk Management The Market and Liquidity Risk Department within GRMD monitors, controls and provides an assessment of market, profit rate, liquidity and concentration risks. These included enhanced levels of reporting at management and ALCO level, as well as the implementation of more sophisticated limit reporting. The Group considers the following four risk types under Market Risk for classification and measurement: Profit Rate Risk - Profit rate risk is the risk that a financial asset or financial liability value will change due to a change in the absolute level of market interest rates, in the spread between two rates or in the shape of the yield curve, Term Structure of Profit Rates (TSIR) Risk - TSIR can move up or down because of prevalent economic conditions. TSIR risk refers to parallel shift in yield curve in either direction. The bank is exposed to TSIR risk when there are differences in timing of asset and liability repricing, also called gap or repricing risk. Basis Risk - Basis Risk is the risk that spreads between two different types of instruments or product Groups will change due to changes in level of profit rates. Yield Curve Risk - Yield curve risk is the risk associated with changes in shape of yield curve. Change in shape of yield curve will not affect the prices or yields of the same instruments in exactly equal amounts for each available term. Option Risk - The risk that a change in volatility of prevailing profit rates will lead to an adverse impact on earnings or capital caused by changes in mark to market value of the instrument. Commodity Risk - This is caused by the volatility in commodity exposure. There is no active trading activities allowed in commodities for the Group s own use (for profit) and there is a set contract with agents based on which all commodities bought for Corporate and Retail customers are sold on the pre-agreed price, therefore the chance of either credit or operational risk occurring in the event of default of the agent is nil as all buy / sell trades are confirmed by all parties before any transaction / trade is executed. Foreign Exchange Risk - Risk due to volatility in foreign exchange exposure (i.e. change in price of Foreign exchange portfolio of the Group s assets). There is no active trading of foreign currencies for the Group s own use (for profit) and all trades are on the behalf of Corporate and Retail customers. As the majority of transactions and currency held by the Group are in USD and pegged currencies (GCC), the level of price volatility is minimal and not material for the Group. Equity Price Risk - Equity price risk is the risk that the value of a security or portfolio of securities will decline in the future. Basically, it's the risk of losing money due to a fall in the market price of a security that you own. It results from changes in the marked-to-market value of securities in a portfolio that occur either due to company specific factors or factors that causes stock market to fluctuate Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition is aligned to the regulatory (Based II) definition, including legal and regulatory risk but excluding strategic and reputation risk. Operational risk event types that have the potential to result in substantial losses includes internal fraud, external fraud, employment practices and workplace safety, clients, products and business practices, business disruption and system failures, damage 143 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 144

74 to physical assets, and finally execution, delivery and process management. The objective of operational risk management is to find out the extent of the Group s operational risk exposure; to understand what drives it, to allocate capital against it and identify trends internally and externally that would help predicting it. The management of specific operational risks is not a new practice; it has always been important for banks to prevent fraud, maintain the integrity of internal controls, and reduce errors in transactions processing, and so on. However, what is relatively new is the view of operational risk management as a comprehensive practice comparable to the management of credit and market risks in principles. Failure to understand and manage operational risk, which is present in virtually all the Group's transactions and activities, may greatly increase the likelihood that some risks will go unrecognized and uncontrolled Operational Risk Management Assessment & Quantification The Group identifies and assesses the operational risk inherent in all material products, activities, processes and systems and its vulnerability to these risks and also ensures that before new products, activities, processes and systems are introduced or undertaken, the operational risk inherent in them is subject to adequate assessment procedures. While a number of techniques are evolving, operating risk remains the most difficult risk category to quantify. The systematic track and recording of frequency, severity and other information on individual loss events provides meaningful information for assessing the Group s exposure to operational risk and developing a policy to mitigate / control that risk. Risk Management and Mitigation of Risks The day-to-day management of operational risk is executed through a strong second line of defense within business lines and control functions. Risk and Control Self Assessments (RCSAs), Key Risk Indicators (KRIs) and Incident Management (IM) form the core of the framework. A Group level Operational Risk function provides assistance in the implementation of the framework as-well as providing independent reporting vis-a-vis the effectiveness of the implementation of the framework by risk and control owners. The framework is implemented within business and control functions through the Operational Risk Community. This consists of Business Unit Operational Risk Managers ( BORMs ) who are tasked with embedding the framework into the organization. The Group evaluates the adequacy of countermeasures, both in terms of their effectiveness in reducing the probability of a given operational risk and their effectiveness in reducing the impact should it occur. Where necessary, steps are taken in designing and implementing cost-effective solutions to reduce operational risks to an acceptable level, it is ensured that ownership for these actions are assigned to ensure that they are initiated. Risk Management and internal control procedures are established by the business units, through guidance from GRMD in order to address any possible gaps. While the extent and nature of the controls adopted by each Unit/Department are different, very often such measures encompass areas such as code of conduct, delegation of authority, segregation of duties, audit coverage, compliance, succession planning, mandatory leave, staff compensation, recruitment and training, dealing with customers, complaint handling, record keeping, MIS, physical controls, etc. Risk Monitoring An effective monitoring process is essential for adequately managing operational risk. Regular monitoring activities offer the advantage of quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational risk. Prompt detection and addressing these deficiencies substantially reduce the potential frequency and/or severity of a loss. It is also to ensure that regular reporting of pertinent information to senior management is done and the board of directors that supports the proactive management of operational risk. Management ensures that information is received by the appropriate people, on a timely basis, in a form and format that will aid in the monitoring and control of the business. It is also ensured that the reporting process should include information such as: 1. Critical operational risks facing, or potentially facing, the Group; 2. Risk events and issues together with intended remedial actions; 3. The effectiveness of actions taken; 4. Details of plans formulated to address any exposures where appropriate; 5. Areas of stress where crystallization of operational risks is imminent; and 6. The status of steps taken to address such operational risks. Establishing Control Mechanism Although a framework of formal, written policies and procedures is critical, it still needs to be reinforced through a strong control culture that promotes sound risk management practices. The Group has policies, processes and procedures to control or mitigate material operational risks but also assesses the feasibility of alternative risk limitations and control strategies and to adjust the operational risk profile using appropriate strategies, in light of their overall risk appetite and profile. To be effective, such control activities are an integral part of the regular activities of a bank. Contingency planning Banks, in general, should have in place contingency and business continuity plans to ensure their ability to operate as going concerns and minimize losses in the event of severe business disruption. The Group s Business Continuity Plan (BCP) has respective responsibilities assigned to departmental coordinators as the focal point should the BCP be invoked. As part of the BCP policy, a dedicated department ensures regular testing of the BCP which is conducted across all departments at least once for non-critical areas and at a minimum three times on an annual basis for critical functions. A Disaster Recovery site has been defined and entire Group operations can resume from this backup location. Based on such contingency measures, the Group has been ISO22301 certified whereby the organization demonstrates a matured level of resiliency across all services provided. In terms of data security standards, the Group is PCI-DSS v3.0 compliant on the Credit & Debit Card portfolio whereby systems are secured with high standards, sound processes and procedures, thereby providing customers sound and secure data protection. It is also through this standard that international best practices are incorporated for securing card related data. As part of the Group s Disaster Recovery (DR) plan, it has a fully functional secondary Data center in a different city that is tested twice a year and can to be used during IT DR invocation where the entire operations can resume from the backup location. Furthermore, The Group strongly believes in Health, Safety, Environment & Sustainability (HSE) and has an established policy & framework along with dedicated HSE officers on board. On a specified frequency, a hazards risk assessment of all locations and emergency response planning is conducted to ensure regular and timely performance in case of an actual event occurring Legal Risk The risk of financial or reputational loss arising from regulatory or legal action, disputes for or against the Group, failure to correctly document, enforce or adhere to contractual arrangements, inadequate management of non-contractual rights or failure to meet non-contractual obligations Legal Risk Management Legal risk is managed by the Legal Department that has primary responsibility for identifying and interpreting laws and rules of the UAE (and various Local / Federal authorities), liaison with relevant external bodies and regulators on legal matters and exercising any specific legal responsibilities for the Group. Attending and lodging all court / case related information on behalf of the Group and representing the Group in all legal matters. Other responsibilities include advising the Group on documentation, contractual and service agreements Compliance Risk The risk of loss as a result of failure to comply with applicable laws, regulation, code of ethics and includes regulatory sanctions, financial or reputational loss arising from failure to abide by the compliance obligations of the Group Compliance Risk Management The compliance function of the Group has primary responsibility for identifying and interpreting laws and rules in UAE and for providing assistance in drafting policies and procedures and provides the Group with the assurance that it complies with all laws and regulations governing its operations, such as those concerning anti money laundering, combating terrorism financing, fraud and financial crime risk, information security, sanctions and fraud prevention. As part of the development of strong foundation in risk culture, the Group continues to make further enhancements to the framework for a comprehensive training and awareness program in compliance, Know-Your Customer (KYC) and Anti-Money Laundering (AML). The Group also embedded a cards monitoring desk on 24 hours 7 days a week basis in order to meet the Card Association requirement for transaction monitoring. The unit monitors transaction, activities, merchants and works closely with customers in terms of spreading awareness, handling disputes, e government related frauds, skimming etc. The unit s focus also covers other areas such as internal as well as external frauds. MIS and market intelligence are gathered and the drivers for enhanced approaches to mitigate potential risks Shariah Risk Shariah Risk is the risk that the Group or some of its operations/ activities/procedures are found not to be in line with Shariah principles as interpreted by the Group s Fatwa and Shariah Supervisory Board (FSSB). The result could be an adverse financial impact due to a transaction or operation being deemed as non-shariah complaint or through adverse reputational impact Shariah Risk Management At the Group, the FSSB has been mandated to provide independent assurance on Group activities. This is being achieved by making sure through management that any new transaction or agreement is reviewed by Shariah before it is executed. The Shariah Coordination Department which directly reports to the FSSB, is responsible to review all such documents/agreements or activities before execution. The Shariah Audit team periodically reviews all Group activities post execution including comments over the control environment in place and reports them to FSSB for final opinion (if needed) before sharing the same to the auditor with perceived Shariah compliance ratings. 7. Emerging Risks/ Trends Emerging market financial systems have proved to be less resilient than the banking systems of developed countries. Views differ about the reasons for this. Some argue that an unstable macroeconomic environment is the main culprit. Others blame poor risk management. In light of the above, emerging risks need not only need to be identified but the potential threats be defined in order to mitigate the risks as much as possible and devise management strategy to minimize the losses that may arise. As such, Identifying and monitoring top and emerging risks are integral to the Groups approach to Risk Management. The Group defines top risks as being current or emerging risks which have arisen across any of the Group s risk categories and has the potential to have a material impact on the Group s financial results or reputation. 145 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 146

75 The Group considers an emerging risk to be one with potentially significant but uncertain outcomes which may form and crystallize beyond a one-year time horizon, in the event of which it could have a material effect on the Group s ability to achieve our medium to long-term strategy. Examples of top and emerging risks of the Group are highlighted below: Economic and Geopolitical Risk Regulatory and Legal Risks Operational Risks E E Sustained Low Oil Price Regulatory Direction Cyber-Attacks & Information Security Risk E The CBUAE and other international regulators continue to develop policies which may T impose new requirements in the areas of capital and liquidity management and Basel or other legislation such as FATCA. There is a risk that the Group fails to meet agreed deadlines or is found to have gaps in plans or implementation of these new requirements. The direct impact of lower oil prices on the UAE is more muted than for GCC peers in the near term. If oil remains low for an extended period, its indirect impact will be more pronounced on real estate and household debt. However, the Group believes the UAE is better equipped to cope with potentially prolonged weakness in oil prices given its diversified economy and substantial reserves. Oil slump is likely to lead to some budgetary impacts if continued for a longer period besides leading to a pressure on export revenues. T Cybercrime is now the second most reported economic crime in the Middle East (PwC, ). Fundamentally in this region and globally businesses are struggling to understand, and keep pace with, cybercrime risks. Many local governments in the Middle East are now taking action, led by the UAE s Cyber Crimes Law 2012 in a bid to combat the growing threat. The rising number of penetration attacks against and incidents of data leakages from financial institutions is leading to assessment of cybercrime and information security as high operational risk areas. T E Rising Inflation Legal Risk Level of Automation Rising profit rates in the US will trigger an increase in inflation expectations and subsequent flow on effect to asset values. Pegging of the AED to USD effectively imports US-driven inflation to the UAE. The withdrawal of subsidies on utilities by Abu Dhabi, rising rentals for both residential and commercial properties, and rising education costs are the leading factors putting pressure on household incomes. This may generate a spiral of bridge financing that could eventually lead to more economic pressure across various consumer classes. T In case of any regulatory or legal action/disputes for or against the Group; failure to correctly document, enforce or adhere to contractual arrangements; inadequate management of non-contractual rights; or failure to meet non-contractual obligations leading to financial loss and significant reputational damage. E The pace of rapid technological development across banking domains places a challenge in terms of adequate levels of automation in core processes and products. Existing level of automation and system implementation of these new requirements to meet agreed deadlines or, reporting of error/ delays and the inability to identify breaches. Given the regulatory direction, indirect financial impact can be envisaged in terms of regulatory fines. Geopolitical Risk Countries within GCC have been relatively unaffected by the general turbulence and uncertainties in the wider Middle East. However, geopolitical shifts, combined with revolutionary breakthrough in the nonconventional hydrocarbon energy sector are threatening to challenge the importance of the Arabian Gulf as the world s leading suppliers of energy, putting their economies under potential fiscal stress. Corporate Governance & Sustainability Challenges faced by organizations in light of increasing customer expectation with regards to effective corporate governance and ongoing sustainability objectives demand continued focus. T E T Top Risk E Emerging Risk 147 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 148

76 Basel II Pillar III Disclosures 1. Introduction This report is prepared in accordance with Basel II Accord and regulations published and approved by the CBUAE. It presents information on the Group s capital adequacy and Risk Weighted Asset (RWA) calculations for credit risk, market risk, profit rate risk and operational risk. The Group has adopted the Standardized Approach for Credit Risk and Market Risk and Basic Indicator Approach for Operational Risk. The details of disclosure required under the regulations are in this report. As of December 31, the minimum regulatory requirement set by the CBUAE is for Banks to maintain a Capital Adequacy ratio (CAR) of 12%. The Group continued to maintain its strong capital position and the Groups tier 1 ratio and capital adequacy ratio as measured by the CBUAE as at 31 December is 16.55% and 17.38% respectively. The Group regularly benchmarks and aligns its policy framework against existing regulatory standards. Potential developments in UAE, GCC and international standards, and global best practice are also considered. As on December 31, The Group continues to monitor and take actions to enhance its strong risk culture. This includes a risk appetite framework and the risk accountability (Three Lines of Defence) model. The risk appetite framework creates clear obligations and transparency over risk management and strategy decisions; and the Three Lines of Defence model requires business management to operate responsibly by taking well understood and managed risks. The strength and robustness of the Group s risk management framework has been reflected in the Group s overall asset quality and capital position. In particular, the Group remains in a select group of Islamic banking institutions with an A+ equivalent credit rating. To maintain this strength, the Group continues to invest in its risk systems and management processes. The Group s capital forecasting process ensures pro-active actions and plans are in place to ensure a sufficient capital buffer above minimum capital levels is in place at all times. The Group manages its capital by regularly and simultaneously considering regulatory capital requirements, rating agency views on the capital required to maintain the Group s credit rating, the market response to capital and stress testing. These views then cascade into considerations on what capital level is targeted. The Group s management of its capital adequacy is supported by robust capital management processes applied across the entity. AED(000) Tier 1 Capital (after deduction) 3,933,670 5,728,875 Tier 2 Capital (after deduction) 296, ,719 Regulatory Capital 4,230,448 6,017,595 Risk Weighted Assets 30,231,488 34,623,935 Tier 1 ratio 13.01% 16.55% Capital Adequacy Ratio 13.99% 17.38% 2. Scope of Application 2.1. Information On Subsidiaries & Significant Investments As on December 31, Country of Incorporation % Ownership Description Accounting Treatment Subsidiaries: Al Hilal Takaful PSC Al Hilal Auto LLC Al Hilal Islamic Bank PJSC Al Hilal Leasing LLP Al Hilal Al Mariah Development LLC AHB Sukuk Company Limited AHB Tier 1 Sukuk Limited UAE 100% UAE 100% Kazakhstan 100% Kazakhstan 100% UAE 100% Cayman 0% Cayman 0% Equity Investment in Insurance Commercial Subsidiaries Financial Subsidiaries Financial Subsidiaries Commercial Subsidiaries Financial & Commercial entities Financial & Commercial entities The Pillar III Disclosure has been prepared in accordance with Circular Number 27/2009 dated 17/11/2009 from CBUAE and applies to Al Hilal Bank PJSC. The Group and all of the subsidiaries of the Group are adequately capitalized. There are no restrictions or other major impediments on the transfer of funds within the Group. There are no capital deficiencies in non-consolidated subsidiaries in the Group. 3. Capital In December 2010, the Basel Committee on Banking Supervision (BCBS) published a discussion paper on banking reforms ( Basel III ) to address issues which led to the Global Financial Crisis and to position banks for future crises. The objectives of the capital reforms are to increase the quality, consistency and transparency of capital, to enhance the risk coverage framework, and to reduce systemic and pro-cyclical risk. The major reforms are being implemented on a phased approach to 1 January Fully Consolidated Fully Consolidated Fully Consolidated Fully Consolidated Fully Consolidated Neither Consolidated Nor Deducted Neither Consolidated Nor Deducted Surplus Capital Capital Deficiencies AED(000) Profit Nil Nil 266 Nil Nil 741 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil At present, the CBUAE has not issued any guidance on Basel III. Consequently, the Group has prepared this report in accordance with Basel II Accord and regulations published and approved by the CBUAE. To support the groups funding and capital strategy, during the course of, the group went through its annual review of its external rating process with Moody s and Fitch rating agencies and maintained an A1 rating by Moody s and an A+ rating by Fitch with a stable outlook. During the Group issued a Basel II / III compliant Tier 1 Note of USD 500 million. These notes strengthened the Group s capital adequacy position to above the market average and also helped to diversify the Groups funding and liquidity profile. 149 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 150

77 3.1. Consolidated Capital Structure As on December 31, AED (000) Tier 1 Capital Details 1. Paid up share Capital/common stock 2. Reserves Summary terms and conditions of main features of all capital instruments The authorized share capital of the Group comprises of 4,000,000 thousand ordinary shares of AED 1 each. The issued and fully paid up share capital at 31 December comprise of 3,090,000 thousand ordinary shares of AED 1 each. The paid up capital is not available for distribution & the Group shares are not listed on a recognized stock exchange. Amount 3,090,000 The UAE Commercial Companies Law No. (8) of 1984 (as amended) and 117,728 the Bank s Articles of Association require that 10% of the annual net profit a. Statutory reserve to be transferred to a statutory reserve until it equals 50% of the paid-up share capital. The statutory reserve is not available for distribution b. Special reserve - c. General reserve Includes Retained Earnings, Other Reserves, Net Profit for the Year 733, Minority interests in the equity of subsidiaries 4. Other capital instruments Non-controlling interest are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Tier 1 Sukuk is a perpetual security in respect of which there is no fixed redemption date and constitutes direct, unsecured, subordinated obligations of the Group subject to the terms and conditions of the Mudaraba agreement. It is callable by the Group on 30 June 2019 (the First Call Date ) or any profit payment date thereafter subject to certain conditions. - 1,836, Surplus capital from insurance - companies Tier 1 Capital (before deductions) 5,777,758 Less: Investment in unconsolidated financial institutions According to CBUAE Basel II, 50% of insurance company capital amount should be deducted from Tier 1 capital Tier 1 Capital (after deductions) 5,728,875 Tier 2 capital (before deductions) Finance Loss reserve and Translation reserve, which is kept for unseen 337,602 future circumstances (Financing Deterioration) Less: Investment in unconsolidated According to CBUAE Basel II, 50% of insurance company capital amount 48,883 financial institutions should be deducted from Tier 2 capital Tier 2 capital (after deductions) 288,719 Eligible Capital 6,017,594 Capital of the Group consists of the following instruments: Eligible Paid-up Share Capital The Group is a wholly owned subsidiary of the Abu Dhabi Investment Council (ADIC), which is wholly owned by the Government of Abu Dhabi. Eligible Reserves Eligible reserves are created by accumulated appropriations of profit and are maintained for future growth. 48,883 4.Pillar-I Pillar I - deals with the computation of the Regulatory Capital ratio. It involves criteria- based assessment of risk for various asset classes and calculation of Risk Weighted Assets (RWAs) for credit, market and operational risk, to derive the required regulatory capital. All UAE Banks are subject to a minimum capital adequacy ratio of 12%. This is significantly higher than the global required minimum of 8% under Basel II. The Group management aims to ensure the efficient use of capital to meet its overall capital targets. Since the incorporation of the Group, it has applied Basel II capital adequacy rules. The Group s risk profile considers both capital targets as well as the sufficiency of capital to cover both current and future growth requirements of the Group. The Board of Directors define risk and capital targets, whilst Management is responsible for ensuring that these targets are met Capital Adequacy Position As on December 31, AED (000) Capital Charge Capital Ratio (%) Capital Requirements Credit Risk - - a. Standardized Approach 3,867,966 - b. Foundation IRB - - c. Advanced IRB Market Risk - a. Standardized Approach 2,539 - b. Models Approach Operational Risk - - a. Basic Indicator Approach 284,367 - b. Standardized Approach/ASA - c. Advanced Measurement Approach - Capital requirements 4,154,872 Capital Ratio a. for Top consolidated Group 17.38% b. Tier 1 ratio only for top consolidated Group 16.55% 5. Credit Risk Credit risk constitutes the largest part of the Group s risk exposures. The Group measures and manages its credit risk by adhering to the following principles: Consistent standards are applied across the bank in the respective credit decision process through the use of IRB compliant rating models for corporate financing customers which also includes specialized rating models. The approval of credit limits for counterparties and the management of its individual credit exposures must fit within the Group's target portfolio guidelines and credit risk strategies, and each decision also involves a risk-versus-return analysis. Every extension of credit or material change to a credit facility (such as its tenor, collateral structure or major covenants) to any counterparty requires credit approval at Management Credit Risk Committee level. The Group currently assigns credit approval authorities for corporate transactions to Management Credit Risk Committee and Board Risk Committee. In addition, for retail transactions, credit approval authorities are vested with named delegates within Personal Banking Group and Retail Risk Management. Any excess to the authorities for Retail transactions will adjudicated by MCRC or BRC respectively. 151 Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 152

78 The Group envisages maintaining a credit risk profile which is line with its risk strategy and long term strategic growth and vision. The Group has allocated credit risk capital on the basis of standardized approach for year. The Group is in the process of establishing the foundation and implementation of IRB compliance in the coming years Gross Credit Exposures By Currency Type As on December 31, AED (000) Gross Financing Investment Securities Funded 5.2. Gross Credit Exposures By Geography Commitments Hedge Instrument Other Off- Balance Sheet exposures Non- Funded Foreign Currency 6,602,862 3,054,196 9,657, ,343 5,011,222 3,884,225 9,102,790 18,759,848 AED 25,867,876 29,241 25,897,117 8,649,037 2,281,652 3,343,266 14,273,955 40,171,072 32,470,738 3,083,437 35,554,175 8,856,380 7,292,874 7,227,491 23,376,745 58,930,920 As on December 31, AED (000) Geographic Distribution Gross Financing Investment Securities Funded Commitments Hedge Instrument Other Off- Balance Sheet Exposures Non- Funded United Arab Emirates 29,696,944 2,896,580 32,593,524 7,746,387 6,598,898 5,577,180 19,922,465 52,515,989 GCC excluding UAE 1,158, ,437 1,268, , ,193 1,161,941 2,430,096 Arab League (excluding GCC) 219, , , , ,596 Asia 1,395,757 77,420 1,473, ,245 18,805 1,051,923 1,278,973 2,752,150 Africa North America South America Caribbean Europe , , , ,039 Australia Others ,470,738 3,083,437 35,554,175 8,856,380 7,292,874 7,227,491 23,376,745 58,930, Gross Credit Exposures By Industry Segment As on December 31, AED (000) Industry Segment Gross Financing Investment Securities Funded 5.4. Gross Credit Exposures By Residual Maturity Commitments Hedge Instrument Other Off- Balance Sheet Exposures Non- Funded Agriculture, Fishing & related 314, ,528 90,116-57, , ,859 activities Crude Oil, Gas, Mining & 226, ,509 1,126, ,992 1,272,881 1,499,390 Quarrying Manufacturing 1,650,827-1,650, , ,715 1,134,274 2,785,101 Electricity& Water 1,778, ,109 2,211,587 81,920-49, ,513 2,343,100 Construction & Real estate 3,870, ,638 4,700,862 1,652, ,166 4,982,399 7,079,072 11,779,934 Trade 4,181,159-4,181,159 1,186,430 12, ,126 1,514,958 5,696,117 Transport, Storage & 1,693, ,551 1,856, , ,005 1,137,324 2,993,345 Communication Financial Institutions 2,723, ,633 3,359,677 1,348,544 6,540, ,270 8,569,466 11,929,143 Services 826, ,607 1,269,243 79, ,879 1,594,615 2,421,222 Government 156,926 1,020,506 1,177,432 28, ,685 1,206,117 Retail/Consumer banking/ 14,106,813-14,106, , , ,921 14,637,734 individual All Others 942, , ,161 19, ,705 1,177,858 32,470,738 3,083,437 35,554,175 8,856,380 7,292,874 7,227,491 23,376,745 58,930,920 As on December 31, AED (000) Residual Maturity Gross Financing Investment Securities Funded Commitments Hedge Instrument Other Off- Balance Sheet Exposures Gross Non- Funded Less than 3 months 4,677, ,382 5,118, ,730 1,937,017 2,250,929 4,925,676 3 months to one year 5,306,242-5,306, , ,878 1,423,236 2,782,405 One to five years 12,314,240 1,665,134 13,979,374 3,644,584 2,444,412 1,300,395 7,389,391 Over five years 10,172, ,921 11,150,211 3,684,775 2,341,567 2,252,931 8,279,273 32,470,738 3,083,437 35,554,175 8,856,380 7,292,874 7,227,491 23,376, Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 154

79 5.5. Impaired Financing By Industry Segment As on December 31, AED (000) Industry Segment Regular Overdue Gross Financing Provisions Adjustments Impaired Asset Less Than 90 days 90 days & above Specific General Write-offs Write-backs Agriculture, Fishing & related activities 281,065 33,463-33, ,528-5, ,463 Crude Oil, Gas, Mining & Quarrying 226, ,509-4, Manufacturing 1,633,698 3,492 13,637 17,129 1,650,827 11,448 26, ,681 Electricity& Water 1,778, ,778,478-3, Construction 3,719,761 16, , ,463 3,870,224 2, , ,390 Trade 2,810, ,912 1,116,810 1,370,722 4,181, ,845 45, ,877 Transport, Storage & Communication 1,683,146 9, ,324 1,693, , ,058 Financial Institutions 2,723, ,723,044-62, Services 756,006 8,427 62,174 70, , , ,606 Government 156, , Retail/ Consumer Banking/ Individual 13,528, , , ,875 14,106, , ,345 (30,672) - 247,028 All Others 907,608 5,258 29,287 34, ,153 9,324 9, ,221 30,205, ,945 1,770,177 2,265,122 32,470, , ,751 (30,672) - 1,327, Impaired Financing By Geographic Distribution As on December 31, AED (000) Geographic Region Regular Overdue Gross Financing Provisions Adjustments Impaired Asset Less than 90 Days 90 days & above Specific General Write-offs Write -back United Arab Emirates 27,648, ,719 1,770,177 2,048,896 29,696, , ,550 (30,672) - 1,111,098 GCC (excluding UAE) 1,158, ,158,718-16, Arab League (excluding GCC) 2, , , ,158-5, ,226 Asia 1,395,757-1,395,757 15, Africa North America South America Caribbean Europe , Australia Others ,205, ,945 1,770,177 2,265,122 32,470, , ,751 (30,672) - 1,327, Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 156

80 5.7. Reconciliation Of Changes In Provision For Impaired Financing For the period of December 31, AED (000) 5.8. Financing Portfolio As Per Standardized Approach Description Amount Opening Balance of Provisions for Impaired Financing 889,918 Add: Charge for the year - Specific provisions 687,653 General provisions 51,366 Add: Write-off of impaired finance to income statement (30,672) Less: Recovery of finance loss provisions - Less: Recovery of finance previously written-off - Less: Write-back of provisions for finance - Adjustments of finance loss provisions (22,388) Closing Balance of Provisions for Impaired finances 1,575,877 As on December 31, AED (000) Asset Classes On & Off Balance Sheet Gross Outstanding Credit Risk Mitigation (CRM) Exposure Before CRM CRM On & Off Balance Sheet Net Exposure After Credit Conversion Factors (CCF) Risk Weighted Assets Claims on Sovereigns 4,372,762 4,372,762-4,062,494 66,346 Claims on Non- Commercial Public Sector Enterprises (PSEs) 2,003,539 2,003,539-2,003,539 - Claims on Multilateral Development Banks Claims on Banks 3,645,069 3,645,069-3,586,741 1,307,200 Claims on Securities Firms Claims on Government Related Enterprises (GRE with >50 % Govt. 30,780,342 30,780,342 3,167,140 17,635,245 16,581,091 Ownership) and Other Corporates Claims Included in the Regulatory Retail Portfolio 9,839,607 9,839,607-9,839,607 8,003,022 Claims Secured By Residential Property 1,824,924 1,824,924-1,815, ,122 Claims Secured by Commercial Real Estate 1,711,289 1,711,289-1,711,289 1,711,289 Past Due finances 1,837, , , ,826 Higher-Risk Categories Other Assets 2,984,112 2,983,763-2,983,763 2,633,158 Securitization Exposures Credit Derivatives (Banks Selling protection) Claims 58,999,288 58,023,971 3,167,245 44,493,436 32,233, Financing Portfolio As Per Standardized Approach As on December 31, AED (000) On & Off Balance Sheet On & Off Balance Sheet Gross Credit Exposures Asset Classes Net Credit Exposures Rated Unrated Post CRM RWA Claims on Sovereigns 871,301 3,501,461 4,372,762 4,062,494 66,346 Claims on Non- Commercial Public Sector Enterprises (PSEs) 407,573 1,595,966 2,003,539 2,003,539 - Claims on Multilateral Development Banks Claims on Banks 3,364, ,451 3,645,069 3,586,741 1,307,200 Claims on Securities Firms Claims on Government Related Enterprises (GRE with >50 % Govt. 1,214,212 29,566,131 30,780,343 17,635,245 16,581,091 Ownership) and Other Corporates Claims Included in the Regulatory Retail Portfolio - 9,839,607 9,839,607 9,839,607 8,003,022 Claims Secured By Residential Property - 1,824,924 1,824,924 1,815, ,122 Claims Secured by Commercial Real Estate - 1,711,289 1,711,289 1,711,289 1,711,289 Past Due finances - 1,837,644 1,837, , ,826 Higher-Risk Categories Other Assets 26,275 2,957,837 2,984,112 2,983,763 2,633,158 Securitization Exposures Credit Derivatives (Banks Selling protection) Claims 5,883,979 53,115,310 58,999,289 44,493,436 32,233, Credit Risk Mitigation: Discosure For Standardized Approach As on December 31, AED (000) Quantitative Disclosures Exposures Risk Weighted Assets Gross Exposure prior to Credit Risk Mitigation 58,999,288 34,763,256 Less: Exposure covered by on-balance sheet netting - - Less: Exposures covered by Eligible Financial Collateral 1,237,879 1,237,879 Less: Exposures covered by Guarantees - 1,292,323 Less: Exposures covered by Credit Derivatives - - Net Exposures after Credit Risk Mitigation 57,761,409 32,233, Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 158

81 6. Market Risk Market risk is defined as exposure to adverse changes in the market value of portfolios and positions in financial instruments caused by changes in market factors such as currency rates, equity prices or profit rates. Foreign Exchange Exposures This arises as a result of volatility in foreign exchange exposure. While the Group does not currently trade in foreign currencies for its own profit, it does have exposure to losses from open exposure to currencies it maintains to enable customer transactions. Capital allocation for market risk under pillar 1 is on the basis of standardized approach Capital Requirement For Market Risk Under Standardized Approach 6.2. Quantitative Details Of Equity Position 6.3. Realized, Unrealized & Latent Revaluation Gains (losses) During the year Equity Exposures It may arise as a result of price volatility in various asset classes held by the Group. This includes equities, mutual funds, and other tradable assets. Under Pillar 1, the Group has calculated the capital charge for equity risk on the basis of standardized approach. Profit Rate Risk Exposures The Profit Rate Risk exposure consists of exposure to profit rate movement due to mismatches in time periods its assets and liabilities. This risk is measured and monitored through limits and impact on earnings. As on December 31, AED (000) Market Risk Amount Profit Rate Risk 2,276 Equity Position Risk - Foreign Exchange Risk 264 Commodity Risk - Capital Requirement 2,540 As on December 31, AED (000) Type Current Year Previous Year Publicly Traded Privately Held Publicly Traded Privately Held Equities 440,383-75,278 - Collective investment schemes Any other investment ,383-75,278 - As on December 31, AED (000) Gains (Losses) Amount Realized gains (losses) from sales and liquidations 4,064 Unrealized gains (losses) recognized in the balance sheet but not through profit and loss account (200) Latent revaluation gains (losses) for investment recorded at cost but not recognized in balance sheet or profit and loss account - 3, Inclusion In Tier 1/ Tier2 Capital As on December 31, AED (000) Tier Capital Amount Amount included in Tier I capital 4,064 Amount included in Tier II capital - 4, Capital Requirements By Equity Grouping As on December 31, AED (000) Grouping Amount Strategic investments - Available for Sale (Fair Value Through statement of other Comprehensive Income) 440,383 Held for Trading (Fair Value Through Statement of Income) - capital requirement 440, Profit Rate Risk In The Banking Book (PRBB) As on December 31, AED (000) Shift in Yield Curves Net Profit Income Regulatory Capital +200 basis point (75,229) (687,272) -200 basis point 70,352 1,114, Operational Risk Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Group s exposure to operational risk arises as a consequence of the Group s Business activities. It is the objective to minimize exposure to operational risk. The Group computes the capital charge for operational risk by using the Basic Indicator Approach as per the guideline. However, it is strengthening its policy, processes and tools to ensure a gradual transition to more advanced approaches. The governance structure of operational risk management at the Group level is through the Management Operational Risk Committee 7.1. Operational Risk Basic Indicator Approach (MORC), which is responsible for overseeing all material operational risks, responses to risk issues and the adequacy and effectiveness of controls. The primary responsibility for the management of operational risk rests with the business and support functions as an integral component of their first line risk management responsibilities. They are assisted in their responsibilities by embedding unit operational risk managers at the grass roots level within the Group. A key risk indicator framework has been implemented across the Group, acting as an early warning trigger to identify potential risks of activities and projects in the Group and assist in reducing any likely loss or help in improving controls. As on December 31, AED (000) Approach Gross Income Average of Last Basel Capital CBUAE Capital Beta Factor Year 3 Year 2 Last Year 3 years Charge Charge Basic Indicator Approach 1,095,119 1,255,424 1,441,011 1,263,851 15% 189, , Supplementary Information Al Hilal Bank Annual Report Al Hilal Bank Annual Report Supplementary Information 160

82 8. Liquidity Risk The risk that a bank may not be able to meet its obligations when due, at an acceptable market cost, is termed liquidity risk. Liquidity risk is measured by slotting all assets and liabilities with respect to cash inflow and cash outflow in predefined maturity buckets commonly known as liquidity gap analysis. Liquidity risk is defined as the risk of losses that may arise because; A bank's funding costs increase disproportionately; Lack of funding prevents a Bank from establishing new business; or Lack of funding will ultimately prevent a bank from meeting its obligations. Liquidity management at the Group is based on monitoring and managing liquidity risks in various scenarios. It is a natural element of the Group's business strategy to assume risks in the management of the liquidity profile of the Group. The Group s policies have been defined with respect to the maximum tolerance negative gap the Group wishes to accept and the funding that is required closing and managing this gap respectively. The management of liquidity risk aims primarily at ensuring that the negative gap in each maturity bucket does not exceed internally set limits which are set in line with the Group s risk appetite. In order to meet negative cash flows during ordinary course of business as well as during the stress condition, the Group keeps a liquidity buffer in the form of liquid assets comprising of Central Bank Reserves and Other Marketable Securities; these are sufficient to meet obligations and ensure the availability of cash or collateral to fulfill those needs at the appropriate time. Contingency plans have been implemented aiming to ensure that the Group is sufficiently prepared to take remedial action if an unfavorable liquidity situation should arise. GRMD has set limits for liquidity risks, which are applicable on a maximum cumulative cash outflow that the Group can allow within a specific time band. The key business & support unit stakeholders receive reports on the Group liquidity risks regularly. The ALCO continuously assesses developments in the Group s liquidity position and approves longterm funding plans Liquidity Gap / Maturity Profile As on December 31, AED (000) Assets Carrying Amount Gross nominal inflows (outflows) Less than 3 months 3 12 months 1 5 years Greater than 5 years Cash and balances with 3,132,950 3,136,105 2,132,078 1,001,127 2,900-3,136,105 banks Wakala deposits with 1,856,247 1,863,115 1,857,296 1,239 4,580-1,863,115 banks and other financial institutions Financing 30,894,861 39,723,760 4,962,630 6,343,929 15,840,572 12,576,629 39,723,760 Investment securities 3,065,888 4,263, , ,977 2,453,510 1,170,017 4,263,966 Other assets 679, , , ,697 assets 39,629,643 49,666,643 9,420,466 7,518,272 18,301,562 14,426,343 49,666,643 Liabilities Customers accounts 31,144,311 31,300,077 18,968,839 11,828, ,828 85,462 31,300,077 Wakala deposits from 1,406,096 1,417,221 1,319,150 93,080 4,991-1,417,221 banks Sukuk financing 1,836,250 2,066,935 16,490 30,599 2,019,846-2,066,935 instrument Other liabilities 914, , , ,879 liabilities 35,301,536 35,699,112 20,304,479 11,952,627 2,441,665 1,000,341 35,699,112 Net position 4,328,107 13,967,531-10,884,013-4,434,355 15,859,897 13,426,002 13,967, Supplementary Information Al Hilal Bank Annual Report