AHLI UNITED BANK-EGYPT (S.A.E) CONSOLIDATED FINANCIAL STATEMENTS 1
CONSOLIDATED INCOME STATEMENT For the year ended Notes From 1 January to 31 December From 1 January to 31 December EGP 000 EGP 000 Interest income 809,408 610,746 Interest expenses (487,180) (330,538) Net interest income 5 322,228 280,208 Fees and commission income 97,736 70,267 Fees and commission expenses (1,306) (2,201) Net fees and commission income 6 96,430 68,066 Dividend income 893 356 Net trading Income 7 24,158 13,976 Gain on sale of financial investments 17 2,509 19,889 Impairment losses 10 (47,689) (35,318) Administrative and general expenses and depreciation 8 (159,908) (162,939) Other operating revenue 9 11,544 3,944 Profit before income tax 250,165 188,182 Income tax expenses (54,230) (23,805) Net profit for the year 195,935 164,377 Attributable to: Bank's equity shareholders Non-controlling interest Earnings per share 11 195,868 67 195,935 2.35 164,348 29 164,377 1.97 The accompanying notes, from 1 to 30 form an integral part of these consolidated financial statements. 3
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended EGP 000 Paid up capital Legal reserves Reserve of General Bank Risk Retained earnings Capital reserve Fair value reserve for AFS investment Special reserve Net profit for the year Noncontrolling interests Total Balances at 1January 600,000 84,826 3,458 91,469 2,098 20,000 3,087 128,763 9,388 943,089 Transferred to reserves - 8,112 - - 255 - - (8,367) - - Transferred to retained earnings - - 5,334 39,650 - - - (44,984) - - Transferred to dividend - - - - - - - (75,412) - (75,412) Cumulative changes in fair value of available-forsale investments - - - - - (5,131) - - - (5,131) Non-controlling interest - - - - - - - - 29 29 Net profit for the year - - - - - - - 164,348-164,348 Balances at 600,000 92,938 8,792 131,119 2,353 14,869 3,087 164,348 9,417 1,026,923 Balance at 1 January 600,000 92,938 8,792 131,119 2,353 14,869 3,087 164,348 9,417 1,026,923 Transferred to reserves - 8,190 - - 415 - - (8,605) - - Transferred to retained earnings - - - 79,362 - - - (79,362) - - Transferred to dividend - - - - - - - (76,381) - (76,381) Bonus shares 150,000 - - (150,000) - - - - - - Cumulative changes in fair value of available-forsale investments - - - - - (40,671) - - - (40,671) Non-controlling interest - - - - - - - - 67 67 Net profit for the year - - - - - - - 195,868-195,868 Balances at 750,000 101,128 8,792 60,481 2,768 (25,802) 3,087 195,868 9,484 1,105,806 The accompanying notes, from 1 to 30 form an integral part of these consolidated financial statements. 4
CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended From 1 January to 31 December From 1 January to 31 December Notes EGP 000 EGP 000 Operating activities Profit before tax 250,165 188,182 Adjustments: Depreciation and amortization 19 22,533 20,804 Impairment losses 10 47,689 35,318 Adjustment to other provisions 24 (675) (6,611) Other provisions 1,324 10,609 Foreign currency loans loss provision revaluation 15 3,127 4,169 Differences in revaluation of other provisions in foreign currencies 24 445 344 Amortization of discount - Investment HTM 16 39 21 Amortization of discount - Investment AFS 16 362 299 Investment revaluation 16 (3,405) (4,792) Write back of excess provision 24 (9,517) - Loss from impairment of available for sale investment 16 277 - Profits from sale of financial investments in foreign currency - (19,749) Collected from selling of fixed assets - 843 Profit from selling of fixed assets - 415 Financial derivatives - (265) Operating profits before changes in operating assets and 312,364 228,583 liabilities Net decrease (increase) in operating assets and liabilities Due from banks (1,395,903) 235,882 Certificates deposits 13/B (60,330) - Treasury bills and other government notes (more than 3 months) 232,560 (704,151) Investments for trading - 1,311 Loans to customers and banks (431,174) (1,064,897) Other assets (44,161) (106,140) Due to banks 166,587 87,690 Customers' deposits 2,559,634 2,261,301 Other liabilities 21,103 (4,455) Income tax (54,230) (23,805) Net cash flows from operating activities 1,306,450 911,493 Investing activities Purchase of fixed assets (52,040) (61,453) Proceeds from sale of investment other than held for trading 16 6,176 (31,016) Payments to purchase investment other than held for trading 16 (794,408) (903,641) Net cash flows used in investing activities (840,272) (996,099) Financing activities Dividends paid (77,218) (75,413) Net cash flows used in financing activities (77,218) (75,413) Increase in cash and cash equivalents during the year 388,960 (158,091) Cash and cash equivalents at the beginning of the year 518,073 628,628 Cash and cash equivalents at the end of the year 907,033 470,538 5
CONSOLIDATED STATEMENT OF CASH FLOWS (Cont d) For the year ended From 1 January to From 1 January to 31 December Notes EGP 000 EGP 000 Cash and cash equivalents at the end of the year are as follows: Cash and balance with Central Bank of Egypt 12 769,483 345,475 Due from banks 13/A 2,483,808 1,075,533 Treasury bills and other government notes 14 886,328 1,118,773 Deposits with banks 13 (2,356,034) (960,131) Treasury bills and other government notes with maturities more than 3 month (876,552) (1,109,112) Cash and cash equivalents at the end of the year 907,033 470,538 The accompanying notes, from 1 to 30 form an integral part of these consolidated financial statements. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General information Ahli United Bank- Egypt S.A.E ( the Bank ) provides institutional, retail banking and investment banking services within the Arab Republic of Egypt through head office and 28 branches with more than 689 employees at the date of this balance sheet. The Bank has been incorporated (under its former -name) on 8 August 1977 in accordance with Law No. 43 of 1974 and its Executive Regulations within the Arab Republic of Egypt, having its Head Office located in 1191 Kournish El Nile of the Governorate of Cairo. On 14 July the Bank s shares have been voluntarily delisted from the Cairo and Alexandria stock exchanges. The board has approved the bank s financial statements in XX/XXX/201X 2. Summary of the significant accounting policies The significant accounting policies for the preparation of these financial statements of the Bank are as follows and these policies have been followed consistently for all presented years unless otherwise disclosed: A- Basis of preparation of the financial statements These consolidated financial statements are prepared in accordance with the Egyptian accounting standards issued in 2006 as amended and in accordance with the Central Bank of Egypt (CBE) rules approved by its Board of Directors on 16 December 2008 which are in compliance with the mentioned standards. These financial statements have been prepared under the historical cost convention except in the revaluation of financial assets and financial liabilities held at fair value through the profit or loss, available for sale financial assets and all derivative contracts. The Bank has prepared the consolidated financial statements of the Bank and its subsidiary in accordance with Egyptian accounting standards and has completely consolidated those subsidiary companies in which the Bank has, directly or indirectly, more than half of the voting rights or has the ability to control the financial and operating policies of the subsidiary company, regardless of the type of the activity. The financial statements of the subsidiary are prepared for the same reporting period as the Bank, using consistent accounting policies. All material intra group balances, transactions, income and expenses and profits and losses resulting from intra-group balances are eliminated on consolidation. 7
2) Summary of the significant accounting policies (continued) The Published Amendments to the Instructions of the Central Bank of Egypt effective as of 1 January The management has applied the Central Bank of Egypt instructions concerning the rules of preparation and presentation of the financial statements of banks and basis of the recognition and measurement relating to the activities of the bank, which differ in certain aspects to the Egyptian Accounting Standards. Following is a summary of the most significant changes to the accounting policies and the financial statements due to application of these accounting adjustments: The disclosure requirements have been amended, specifically relating to the objectives and policies and methods of financial risk management and capital adequacy management and some other explanatory notes. The Bank has reassessed the fixed assets residual value to determine the effect on the amortizable value; the resultant effect on the financial statements was immaterial. The Bank identified the related parties in accordance with the requirements of the new standards and added certain disclosures to these related parties. The provision for impairment loss is measured as the difference between the book value and the present value of the expected future cash flows, such cash flows should be discounted using the original effective rate of return of the financial asset. The provision does not include the future credit losses that have not been incurred. The book value of the asset is to be reduced with the impairment loss provision. The impairment loss is recognized in the income statement. The method of measuring impairment of loans and advances and other debt instruments at amortized cost has been changed, which in turn resulted in cancellation of the General Provisions component of loans and advances and instead total provision for groups of assets that carry similar credit risk and characteristics or individual provision was provided. The outstanding provision balance as of the 1of January 2009 had been transferred to a special reserve in owner's equity according to the new method and the effects of the new policy are reflected in the statement of changes in equity. When determining an actual rate of return for applying the amortized cost method to calculate the income and cost of the return on debt instruments, commissions and fees associated with the acquisition or issuance of debt instruments and added to or deducted from the value of the acquisition / release as part of the cost of instruments which lead to change to the actual rate of return of those tools. 8
2) Summary of the significant accounting policies (continued) The Bank has examined the assets whose ownership has been transferred to the Bank as a settlement of defaulted loans to ensure these assets qualify for being classified as non-current assets held for sale under the other assets. Such examination did not result in a difference in classification or value at which such assets are measured. B- Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Bank has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Bank has the ability to control the entity. C- Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns different from those of segments operating in other economic environments. D- Translation of foreign currencies D.1 Functional and presentation currency: The financial statements are presented in Thousand Egyptian pounds, which is the functional and presentation currency of the Bank. D.2 Transactions and balances in foreign currencies The Bank maintains its accounting records in Egyptian pounds. Foreign currency transactions are translated in to Egyptian pounds using the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities in foreign currency are translated at the end of financial period on the basis of prevailing exchange rates at that date. Foreign exchange gains and losses resulting from the settlement of such transactions are taken to net trading income in the consolidated statement of income. 9
2) Summary of the significant accounting policies (continued) D. Translation of foreign currencies (continued) D.2 Transactions and balances in foreign currencies (continued) Non-monetary items that are measured in terms of historical cost in foreign currency are translated using the exchange rate of the date of the initial transactions. Non-monetary available for sale items measured at faire value in foreign currency are translated using the exchange rates at the date when the fair value was determined and the differences are included in equity as part of the fair value adjustments of the respective items E- Financial assets Financial assets are classified at fair value through profit or loss; loans and receivables; heldto-maturity investments; and available-for-sale financial assets. The management determines the classification of its investments at initial recognition. E.1 Financial assets at fair value through profit or loss This category includes two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated as hedging instruments. Financial assets are designated at fair value through profit or loss when: Significant reduction in measurement inconsistencies would arise if the related derivatives were treated as held for trading and the underlying financial instruments were carried at amortized cost in relation to loans and advances to customers or banks and debt securities in issue. Certain investments, such as equity investments, are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis are designated at fair value through profit and loss. 10
2) Summary of the significant accounting policies (continued) E. Financial assets (continued) E.1 Financial assets at fair value through profit or loss (continued) Financial instruments, such as debt securities held, containing one or more embedded derivatives significantly modify the cash flows, are designated at fair value through profit and loss. Profits and loss resulting from change in the fair value of the financial derivatives which are managed along with financial assets and liabilities classified at initial recognition at the fair value through profits and loss in the income statement are accounted under "net income from financial instruments at fair value through profits and loss". No financial derivative from the category of fair value through profit or loss shall be reclassified throughout it s life in addition, no financial instrument shall be reclassified by transfer from the category of financial instruments at the fair value through profits and losses if such instrument is designated by the Bank at initial recognition as an instrument to be valued at the fair value through profits and loss. In all cases, the Bank does not reclassify any financial instruments by designated as fair value through profit or loss to the held for trading category. E.2 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: Those that the Bank intends to sell immediately or in the short term, which are classified as held for trading, or those that the Bank upon initial recognition designates as at fair value through profit or loss. Those that the Bank upon initial recognition designates as available for sale. Those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. E.3 Held-to-maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank's management has the positive intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount of heldto-maturity assets, the entire category would be reclassified as available for sale. 11
2) Summary of the significant accounting policies (continued) E.4 Available for sale investments Available-for-sale investments are those intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices The following applies to financial assets: Purchases or sales of financial assets classified at fair value through profit and loss, held to maturity financial investments, and available for sale financial investments are recognized on the trading date which is the date when the bank is committed to purchase or sell the financial asset. Financial assets that are not classified upon initial recognition at fair value through profit and loss are recognized at fair value plus the transaction costs. While financial assets classified at initial recognition at fair value through profit and loss are recognized at fair value only and the transaction costs are recorded in the income statement under the caption net trading income. Financial assets are derecognized when the contractual rights to receive cash flows from the asset expires or the when the Bank transfers most of the risks and rewards of ownership thereof to another party. Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or expires. Available for sale financial investments and financial assets classified at fair value through profit and loss are subsequently measured at fair value. Held to maturity financial investments and loans and debts are subsequently measured at amortized cost. Profits and losses arising from changes in the fair value of financial assets classified at fair value through profit and loss are recognized in the income statement during the year in which they arise. Profits and losses arising from changes in the fair value of available for sale financial investments are directly recognized in equity until the asset is disposed of or impaired. At this time the cumulative profits and losses previously recognized in equity are recognized in the income statement. Interest calculated based on the amortized cost method and foreign exchange profits or losses related to monetary assets classified as available for sale are recognized in the income statement. Dividends arising from available for sale equity instruments are recognized in the income statement when the Bank's right to receive payments is established. The fair value of quoted investments is based on current bid price. However, when no active market exists, or quoted prices are available, the fair value is determined by the Bank using valuation techniques including discounted cash flows analysis, modern neutral transactions, option pricing models, or other valuation methods commonly used by the market dealers. If the Bank is unable to assess the fair value of equity instruments classified as available for sale, the value thereof is measured at cost less any impairment losses. 12
2) Summary of the significant accounting policies (continued) E.4 Available for sale investments (continued) The Bank reclassifies the financial asset previously classified as available for sale to which the definition of loans- debts (debentures or loans) applies by means of transferring the category of the instruments available for sale to the category of loans and debts or the financial assets held to maturity, once the Bank has the intention and ability to hold such financial assets in the near future or up to the maturity date, such reclassification is made at fair value as on that date. Any profits or losses related to such assets which have been previously recognized within equity shall be treated as follows: I. In case of reclassified financial asset, which has a fixed maturity gains or losses are amortized over the remaining life of the investment using the effective yield, any differences between the amortized cost and value based on discounted cash flow is expensed over the life of the financial asset using the effective yield method, and in the case of impairment of the value of the financial asset any gain or loss previously recognized in equity is subsequently recognized in profit and loss. II. In the case of financial asset which has no fixed maturity, gain or loss remain in equity, whereas, recognition in profit and loss is upon the sale of the asset or disposal, in the case of impairment of the financial asset any gain or loss previously recognized directly within equity is subsequently recognized in profit and loss. If the Bank adjusts its estimates of repayment schedule, the carrying amount of the financial asset (or group of financial assets) is amended to reflect the actual cash inflows. The adjusted estimates are used to recalculate the book value and calculate the present value of estimated future cash flows at the effective yield of the financial instrument and the difference is recognized as income or expense in the profit and loss. Due to the current trend of loan recoveries from cash receipts the Bank reclassifies it s estimate of the future cash receipts whereas, the impact of this increase is recognised as a restatement of effective interest rate from the date of the change in estimate and not a settlement of the balance of the original net book value of the asset at the date of the change in estimate. F- Netting of financial assets and financial liabilities Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Repos and reverse repos agreements related to treasury bills are netted on the balance sheet and disclosed under treasury bills and other government notes caption of the balance sheet. 13
2) Summary of the significant accounting policies (continued) G- Financial derivatives instruments Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in statement of income under Net income from trading. Changes in fair value of derivatives that are managed in conjunction with the financial assets and liabilities classified at inception as fair value through profit and loss are recognised in the statement of income as Net income from financial instrument at fair value through profit and losses. H- Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within interest income and interest expense in the income statement using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation method includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate. The transaction costs include all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. When it is collected and this is after redeeming all dues of consumer loans and personnel mortgages also small loans for economic activities. 14
2) Summary of the significant accounting policies (continued) H- Interest income and expense (continued) For loans granted to the institutions the cash basis is followed when calculating the return according to the new terms of the schedule of the loan until payment of 25% from the rescheduled loan and consistent repayment for a year. If the customer is paying regularly upon the due date the interest calculated is added to the loan balance on the balance sheet (loan interest on rescheduling without suspending the interest). All the suspended interest prior to rescheduling will not be transferred to income statement until the entire rescheduled loan has been repaid. I- Fees and commissions Accrued fees for loan or facility service are recognized as revenues at the time service is provided. Fees and commissions relating to the non-performing or impaired loans or debts are suspended and are carried off-balance sheet and are recognized under the revenues on cash basis. Fees that are associated with the effective return of the financial asset are adjusted at the actual interest rate. The interest income is recognized according to the provisions of as for the fees that represent a complementary part of the actual interest on the financial asset in general are treated as adjustment to the actual interest rate. Commitment fees on loans granted are deferred if there is a possibility that such loans shall be drawn, since the commitment fees received by the Bank are deemed to be a compensation for the ongoing intervention to acquire the financial instrument; subsequently, they are recognized by adjusting the actual interest rate on the loan. In the event of expiry of the commitment period without issuing the loan by the Bank, the fees are recognized as revenues at the expiry of the commitment period. Fees related to debt instruments which are measured at fair value are recognized under revenue at initial recognition. The fees for promotion of joint loans are recognized as revenues upon completing the promotion process without retaining any part of the loan by the Bank, or if the Bank maintains a part thereof with the actual interest rate available to other participants. Fees and commissions from negotiation or participation in negotiation in transaction in favor of a third party, such as arrangement for purchase of shares or other financial instruments, or acquisition or sale of entities is recognized in the income statement upon completion of the transaction. Fees from administrative consultations and other services are recognized over the period of performance of the service. Fees from financial planning and maintenance services provided are recognized throughout the period of service provided. 15
2) Summary of the significant accounting policies (continued) J- Dividend income Dividends are recognized in the income statement when the Bank s right to receive payment is established. K- Sales and repurchase agreements Financial instruments sold under repurchase agreements are presented as part of treasury bills and other government notes in the balance sheet while the liability (purchase and resale agreements) is shown as deduction from treasury bills and other government notes in the balance sheet. The difference between the sale and repurchase prices is recognized as a return due through the tenure of the agreement using the effective interest rate method. L- Impairment of financial assets L.1 Financial assets measured at amortized cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Cash flow difficulties experienced by the borrower or debtor. Breach of loan covenants or conditions (such as non-payment/default). Initiation of bankruptcy proceedings or entering in dissolution lawsuit or rescheduling the client s facility. Deterioration of the borrower s competitive position; The Bank grants privileges or concessions to the borrower on economic or legal grounds, which not be granted under normal conditions, taking in consideration the instructions by the Central Bank Egypt dated 14 April specifically detailing the treatment of retail and corporate loans during the financial crisis. Deterioration in the value of collateral. Downgrading credit grade. 16
2) Summary of the significant accounting policies (continued) L. Impairment of financial assets (continued) L.1 Financial assets measured at amortized cost (continued) A substantive proof for impairment loss of the financial assets is the existence of clear information indicating a measurable decline in the expected future cash flows of such category since initial recognition including such decline that cannot be Separately determined for each individual asset, such as the increase of default cases with respect to a banking product. The estimated period between loss occurrence and its identification is determined by local management for each identified portfolio. In general, the periods used vary between three months and 12 months; in exceptional cases, longer periods are warranted. The Bank first assesses whether there is an objective evidence on the impairment of each financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. In this respect, the following criteria would be considered: If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment according to historical default ratios. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is no impairment losses result from the previous assessment, those assets are included in a collective assessment of impairment. If the loan or investment held to maturity has a variable interest rate, the discount rate used to measure any impairment losses is the original effective contractual interest rate. Where practicable, the Bank measures the impairment losses based on the fair value of the instrument using declared market prices. In the case of collateralized financial assets, the addition of the present value of the expected future cash flows that may originate from the execution of and sale of the collateral after deducting the related expenses must be observed. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Group s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. 17
2) Summary of the significant accounting policies (continued) L.1 Financial assets measured at amortized cost (continued) For the purposes of evaluation of impairment for a group of a financial assets according to historical default ratios future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. L.2 Financial assets available for sale The Bank assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets classify under available for sale or held to maturity is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. During periods starting from 1 January 2009, the decline in the value is considered as significant if it is 10% of the book value cost, and shall be considered prolonged if it extends for more than nine months. If the indicated evidences are available then the accumulated loss to be post from the equity and disclosed at the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement if an increase occurs later in the fair value. If the fair value of a debt instrument classified as available for sale increases, where it is possible to objectively relate that increase to an event occurred following the recognition of the impairment in the income statement, the impairment loss is reversed through the income statement. M- Fixed assets Land and buildings comprise mainly branches and offices. All property, plant and equipment are stated at historical cost less depreciation & impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. 18
2) Summary of the significant accounting policies (continued) M- Fixed assets (continued) Subsequent costs are included in the asset s carrying amount or are recognized as a Separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred. Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings Improvements to the leased assets Machinery and equipment Other Assets 40 years 10 years 10 years 5-10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 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 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. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. The recoverable amount represents the net realizable value of the asset or the usage amount of the asset whichever is higher. The profits and losses on disposal of fixed assets are determined by comparing the net proceeds with the net book value. Gains (losses) are recorded in other operating income (expenses) in the income statement. N- Lending cost Lending cost disclosed directly as funding expenses while the lending cost related to acquiring assets are considered as a part of the asset cost. O- Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and nonrestricted balances with central banks, cash with banks, treasury bills and short-term government securities. 19
2) Summary of the significant accounting policies (continued) P- Other provisions Provisions for restructuring costs and legal claims are recognized when the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions which negated the purpose of wholly or partly repaid within the item other operating income (expense). Provisions are measured at the present value of the expenditures expected to be required to settle the obligation which become due after one year from the financial statement date using appropriate rate for the due date (without being affected by effective tax rate) which reflect time value of money, and if the due date is less than one year we calculate the estimated value of obligation but if it have significant impact then it calculated using the current value. Q- Income taxes Income tax on the profit or loss for the year includes each of year tax and deferred tax and they are recognized in the income statement except for income tax relating to items of equity which is recognized directly in equity. Income tax is recognized based on net taxable profit as per the effective tax rates applicable on the balance sheet date, in addition to tax adjustments related to the previous years. The deferred taxes arising from temporary time differences between the book value of assets and liabilities are recognized in accordance with the principles of accounting and value according to the foundations of the tax, this is determining the value of deferred tax on the expected manner to realize or settle the values of assets and liabilities, using tax rates applicable at the date of the balance sheet. The deferred tax assets of the Bank are recognized if its probable that sufficient taxable profits be realised in future whereby such asset can be utilised and the value of the deferred tax assets would be reduced by the value of the portion not yielding the expected tax benefit from following years. However, in the case tax benefit is highly expected, deferred tax assets will increase within the limits of the above reduced. 20
2) Summary of the significant accounting policies (continued) R- Borrowing Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. S- Dividends Dividends are recorded as deduction from equity when they are approved by the General Assembly of shareholders. Dividends include employees profit share and Board of Director s benefits established by the Bank s Articles of Association and the Law. T- Fiduciary activities The Bank carries out fiduciary activities that result in ownerships or management of assets on behalf of individuals. These assets and income arising thereon are excluded from the Bank s financial statements as they are not assets of the Bank. U- Comparing figures Comparing figures are restated if necessary to comply with the changes in the current period 3. Management of financial risks The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The most important types of financial risks are credit risk, market risk, liquidity risk and other operating risks. Further, market risk includes exchange rate risk, rate of return risk and other risks. The Bank s risk management policies are designed to identify and analyze 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 Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. 21
3) Management of financial risk (continued) Risk management is carried out by a risk management department under policies approved by the board of directors. Risk management department identifies, evaluates and hedges financial risks in close co-operation with the Bank s operating units. The board of directors provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments. In addition, credit risk management is responsible for the independent review of risk management and the control environment. A- Credit risk The Bank takes on exposure to credit risk, which is the risk that counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in loans and advances, debt securities and other bills. There is also credit risk in off balance sheet financial arrangements such as loan commitments. The credit risk management and control are centralized in a credit risk management team in the Bank s risk management department and reported to the board of directors and head of each business unit regularly. A.1 Measuring the credit risk Loans and advances to banks and customer In measuring credit risk of loan and advances to customers and to banks at a counterparty level, the Bank takes three components into consideration: The probability of default by the customer or counterparty on its contractual obligations; Current exposures to the counterparty and its likely future development, from which the Bank derive the (exposure at default) and The likely recovery ratio on the defaulted obligations (the loss given default). The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Customers of the Bank are segmented into four rating classes. The Bank s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. 22
3) Management of financial risk (continued) A - Credit risk (continued) A.1 Measuring the credit risk (continued) The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the rating and their anticipated future outcomes with regard to default events. The Bank s internal ratings classification Rating Classification 1 Performing loans 2 Regular watch 3 Special watch 4 Non-performing loans The loans expose to default depend on the Bank s expectation for the outstanding amounts when default occur. Loss given default or loss severity represents the Bank expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. Debt instruments, treasury bills and other notes For debt securities and other bills, external rating such as Standard & Poor s rating or their equivalents are used by the Bank s risk department for managing of the credit risk exposures, and if this rating is not available, then methods similar to those applying to the credit customers are used. The investments in those securities and bills are viewed as a method to obtain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time. 23
3) Management of financial risk (continued) A - Credit risk (continued) A.2 Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified in particular, to individual counterparties and banks, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by individual, counterparties, product, and industry sector and by country are approved quarterly by the board of directors. The exposure to any one borrower including banks and brokers is further restricted by sublimits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Some other specific control and mitigation measures are outlined below. Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: Mortgages over residential properties; Mortgage business assets such as premises, inventory and accounts receivable. Mortgage financial instruments such as debt securities and equities. Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimize the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other governmental securities are generally unsecured, with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial instruments. 24
3) Management of financial risk (continued) A - Credit risk (continued) A.2 Risk limit control and mitigation policies (continued) Derivatives The Bank maintains strict control limits on net open derivative positions (i.e., the difference between purchase and sale contracts), by both amount and term. At any time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Bank (i.e., assets where their fair value is positive), which in relation to derivatives is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except where the Bank requires margin deposits from counterparties. Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank market transactions on any given day. Master netting arrangements The Bank further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Bank overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement. Commitments related to credit The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letter of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. 25