TIDM95HX
RNS Number : 4249P
GFH Financial Group B.S.C
17 February 2021
GFH Financial Group BSC
CONSOLIDATED
FINANCIAL STATEMENTS
31 DECEMBER 2020
Commercial registration : 44136 (registered with Central Bank of Bahrain
as an Islamic wholesale Bank)
Registered Office : Bahrain Financial Harbour
Office: 2901, 29(th) Floor
Building 1398, East Tower
Block: 346, Road: 4626
Manama, Kingdom of Bahrain
Telephone +973 17538538
Directors : Jassim Al Seddiqi, Chairman
H.E. Shaikh Ahmed Bin Khalifa Al-Khalifa , Vice Chairman
Hisham Ahmed Alrayes
Rashid Nasser Al Kaabi
Mustafa Kheriba (till 24 December 2020)
Ghazi Faisal Ebrahim Alhajeri
Ali Murad (from 9 April 2020)
Ahmed Abdulhamid AlAhmadi (from 9 April 2020)
Alia Al Falasi (from 30 September 2020)
Fawaz Talal Al Tamimi (from 30 September 2020)
Amro Saad Omar Al Menhali (till 30 September 2020 )
Mazen Bin Mohammed Al Saeed (till 31 March 2020)
Mosabah Saif Al Mautairy (till 30 September 2020 )
Bashar Mohamed Al Mutawa (till 1 April 2020)
Edris Mohammed Rafi Alrafi (from 24 December 2020)
Chief Executive Officer : Hisham Ahmed Alrayes
Auditors : KPMG Fakhro
CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2020
CONTENTS Page
Chairman's report 1-3
Report of the Shari'a Supervisory Board 4-5
Independent auditors' report to the shareholders 6-11
Consolidated financial statements
Consolidated statement of financial position 12
Consolidated income statement 13
Consolidated statement of changes in owners' equity 14-15
Consolidated statement of cash flows
16
Consolidated statement of changes in restricted investment
accounts 17
Consolidated statement of sources and uses of zakah and charity
fund 18
Notes to the consolidated financial statements 19-100
Supplementary information (not audited) 101-103
CHAIRMAN'S REPORT
for the year ended 31 December 2020
Dear Shareholders,
On behalf of the Board of Directors of GFH Financial Group, I am
pleased to present the Group's financial results for the fiscal
year ended 31 December 2020. Unlike any other year, the COVID-19
pandemic has caused significant uncertainty and disruption around
the world. For us here at GFH, our top priority was the safety of
our people and their loved ones, while ensuring the effective
continuity of our operations and delivery of high quality services
for our clients and shareholders. Though 2020 had its hardships, we
are grateful to have achieved this continuity through the strength
of our partnerships - both internally as a team and collaboratively
with our partners across the globe. We are also grateful for the
market's continued confidence in our Group's financial position
despite 2020's economic turmoil.
Throughout the years, the Group continued to undergo an
effective transformation that was backed by a strategy of dynamic
diversification and the pursuit of value creation. In 2020, we
continued to build our global portfolio of income yielding real
estate assets capable of delivering solid returns for the Group and
our investors. We also maximized our value creation potential by
tapping into a widened range of asset classes, sectors and markets
- pursuing opportunities to expand our portfolio both in our home
markets in the GCC and beyond.
Consequently, 2020 represented another year for the Group
achieving gains on its financial position. The achievements of the
Group and its subsidiaries in 2020 continue to solidify our
position as one of the leading financial groups in the region,
while reinforcing our investors' and shareholders' trust in our
ability to deliver on their expectations - in spite of the
challenges spurred by the pandemic that have affected the overall
global market.
The Group's total consolidated revenue was US$323.4 million
compared with US$321.6 million in 2019, reflecting a year-on-year
increase of less than 1%. While the YoY increase may be minor
compared to prior years, we regard it nonetheless as a testament to
our Group's resilience in the face of extraordinary market
conditions. Achieving this growth is made possible through the
continued success of our business lines, as well as our pursuit of
investments and activities that facilitate steady income
generation. A notable example of this is our acquisition of Roebuck
Asset Management, a UK and European logistics and business space
focused real estate asset manager that boasts a total value of
managed assets of GBP1.4 billion. The acquisition will see us gain
strategic access to prime deal flow within the European market, and
leverage opportunities arising from the fast-growing logistics real
estate sector. In addition to investment management, real estate
and treasury activities have also recorded particularly positive
contributions to our revenues.
Furthermore, we were able to report strong results for 2020 -
made possible by our dedicated team's successful execution of the
Group's strategy. Through a keen-eyed and responsive evaluation of
2020's turbulent market conditions, they identified new income
yielding opportunities while building on and extracting value from
existing assets. For the year, the Group reported consolidated net
profit of US$49.3 million as compared with US$53.1 million from the
previous year, a decrease of 7.1%, and a net profit attributable to
shareholders of US$45.1 million compared with US$66.0 million for
the previous year, a decrease of 31.7%.
The Group's total assets for the year grew from US$5.95 billion
in 2019 to US$6.6 billion in 2020. The Group's Total Assets and
Funds Under Management (AUM) increased from US$10 billion in 2019
to over US$12 billion in 2020, marking a year-on-year increase of
20%.The Group also ended the year with a Capital Adequacy Ratio of
13.3% and Return on Equity (ROE) ratio of 4.9%, confirming our
sustained positive financial performance.
CHAIRMAN'S REPORT (continued)
for the year ended 31 December 2020
We are pleased to see that the results of our commitment to
realizing our strategy have strengthened market confidence in the
Group. This confidence was exemplified by our successful completion
of our US$500 million Sukuk issuance in June 2020 to regional and
international investors alike, demonstrating resounding trust in
our performance and future prospects. Additionally, Fitch Ratings,
the reputable international credit rating agency, reaffirmed our
Group's Long-and Short-Term Issuer Default Rating (IDR) at 'B' with
the Outlook on the Long-Term IDR as 'Stable'. Fitch Ratings took
into account the management's strategic objective of reshaping
GFH's business model towards more stable and recurring revenue
sources such as fee generation and lower-risk fixed income assets.
The report also cited the fact that GFH has continued to grow its
treasury activities and growth of our liquid assets accounting for
an average of 24.3% of assets in 2019, compared with 9.7% in
2018.
We are also pleased to have made steady progress in 2020,
despite the current challenges and the impact of COVID-19 on our
business and global markets. While the current conditions impacted
net profit for the first six months of the year, ongoing investor
and market confidence demonstrated our Group's strong financial
health and impactful operational performance. In that period, the
Group successfully raised more than US$1.5 billion across its
investment banking and treasury business lines. The continuation of
our financial performance and growth, combined with our dividend
policy, enabled the Board to recommend USD 42mn dividend 4.60%,
divided on of 1.86% cash amount of US$17 million and 2.74% stock
dividends of US$25 million for our shareholders. Additional board
recommendations were discussed and raised as part of the Group's
Ordinary General Meeting (OGM), which successfully concluded on
30(th) September 2020 with several key ratifications and
authorizations received from shareholders. One of these approvals
included a series of agreements made between the Group and Khaleeji
Commercial Bank, the Group's commercial banking subsidiary, in
accordance with Article (189) of the Bahraini Companies Law. These
included a swap agreement signed by the Group and the Bank for
financial and investment assets worth BD46.4 million and an
agreement signed by the Group with the Bank to underwrite the
issuance of BD60 million AT1 Sukuk at a premium of BD12 million and
for the receipt of BD12.1 million in subscription fees.
With 2020 marking a year of exceptional uncertainty, the path
forward will not be an easy one as we collectively wrestle with the
aftershock. Over the past year, we worked tirelessly to strengthen
our Group's operational resilience and business continuity planning
to ensure we weather this storm. As a result, we were fortunate to
have been able to continue supporting our clients and the growth of
their investment portfolios by steering them through the year's
challenges while identifying new opportunities for value creation
in the face of changing market conditions.
We are optimistic we will be able to continue to deliver on our
clients' expectations, and we remain encouraged by the resilient
nature of our Group's diverse business model. While our profits
were affected by the fallout of the COVID-19 pandemic, our Group's
ability to achieve stable income while delivering impactful results
exemplifies the strength of our strategy and the notable progress
we continue to make across each of our business lines.
The success of our strategy and the Group's continued progress
are made possible through the tireless efforts of the people who
power GFH. I want to thank our Board of Directors for their
constant support and guidance in steering the Group towards further
success. I would also like to thank our management team and staff
for their continued stellar performance, which allowed us to
overcome 2020's challenges while finding new ways to create value
for our investors and shareholders. Further, in the face of these
most uncertain and challenging times, I would also like to extend
our deepest appreciation to our shareholders and investors for
their continued trust and confidence in GFH, our strategy and our
ability to meet their expectations.
CHAIRMAN'S REPORT (continued)
for the year ended 31 December 2020
On behalf of the Group's Board of Directors, we would like to
extend our utmost gratitude and appreciation to the Central Bank of
Bahrain, the Government of the Kingdom of Bahrain and its visionary
leadership: His Majesty King Hamad bin Isa Al Khalifa and His Royal
Highness Prince Salman bin Hamad Al Khalifa the Prime Minister,
Deputy Supreme Commander and Crown Prince for their steadfast
leadership and progressive vision for the financial sector in
Bahrain.
Lastly, but imperatively, we would like to express our most
profound appreciation towards the frontliners in hospitals,
emergency services, and care facilities for their tremendous
efforts and crucial responses to COVID-19. We watch in collective
awe and gratitude as these dedicated individuals put themselves at
risk in service to others and their local communities globally.
Sincerely,
Jassim Alseddiqi
Chairman
1 5 February 2021
SHARI'A REPORT
for the year ended 31 December 2020
9 February 2021
27 Jumada II 1442 AH
SHARIA SUPERVISORY BOARD REPORT TO THE SHAREHOLDERS
Report on the activities of GFH Financial Group B.S.C.
for the financial year ending 31 December 2020
Prayers and Peace Upon the Last Apostle and Messenger, Our
prophet Mohammed, His comrades and Relatives.
The Sharia Supervisory Board of GFH Financial Group have
reviewed the Bank's investment activates and compared them with the
previously issued fatawa and rulings during the financial year 31st
December 2020.
Respective Responsibility of Sharia Supervisory Board
The Sharia Supervisory Board believes that as a general
principle and practice, the Bank Management is responsible for
ensuring that it conducts its business in accordance with Islamic
Sharia rules and principles. The Sharia Supervisory Board
responsibility is to express an independent opinion on the basis of
its control and review of the Bank's operations and to prepare this
report.
Basis of opinion
Based on Sharia Supervisory Board fatwas and decisions, AAOIFI
standards and Sharia Audit plan, the Sharia Supervisory Board
through its periodic meetings reviewed the Sharia Audit function
reports and examined the compliance of documents and transactions
in regards to Islamic Sharia rules and principles, in coordination
with Sharia Implementation & Coordination function.
Furthermore, the Bank's management explained and clarified the
contents of Consolidated Balance Sheet, Consolidated Income
Statement, Consolidated statement of Zakah and Charity fund, and
attached notes for the financial year ended on 31st December 2020
to our satisfaction.
Opinion
The Sharia Supervisory Board believes that,
-- The contracts, transactions and dealings entered into by the
Bank are in compliance with Islamic Sharia rules and principles
-- The distribution of profit and allocation of losses on
investments was in line with the basis and principles approved by
the Sharia Supervisory Board and in accordance to the Islamic
Sharia rules and principles
-- Any earnings resulted from sources or means prohibited by the
Islamic Sharia rules and principles, have been directed to the
Charity account.
-- Zakah was calculated according to the Islamic Sharia rules
and principles, by the net assets method. And the shareholders
should pay their portion of Zakah on their shares as stated in the
Zakah guide.
-- The Bank was committed to comply with Islamic Sharia rules
and principles, the Sharia Supervisory Board fatawa and guidelines,
Sharia related policies and procedures, AAOIFI's Sharia standards,
and Sharia directives issued by the CBB.
Praise be to Allah, Lord of the worlds.
Prayer on Prophet Mohammed (Peace Be Upon Him), all his family
and Companions.
Sheikh Nedham Yaqoubi Sheikh Abdulla Al Menai
Sheikh Abdulaziz Al Qassar Sheikh Fareed Hadi
SHARI'A REPORT (continued)
for the year ended 31 December 2020
INDEPENT AUDITORS' REPORT TO THE SHAREHOLDERS
GFH Financial Group B.S.C.
PO Box 10006
Manama
Kingdom of Bahrain
Report on the audit of the consolidated financial statements
Opinion
We have audited the accompanying consolidated financial
statements of GFH Financial Group B.S.C. (the "Bank"), and its
subsidiaries (together the "Group") which comprise the consolidated
statement of financial position as at 31 December 2020, the
consolidated statements of income, changes in owners' equity, cash
flows, changes in restricted investment accounts and sources and
uses of zakah and charity fund for the year then ended, and notes,
comprising significant accounting policies and other explanatory
information.
In our opinion, the accompanying consolidated financial
statements present fairly, in all material respects, the
consolidated financial position of the Group as at 31 December
2020, and consolidated results of its operations, changes in
owners' equity, cash flows, changes in restricted investment
accounts and sources and uses of Zakah and charity fund for the
year then ended in accordance with the Financial Accounting
Standards ("FAS") issued by the Accounting and Auditing
Organisation for Islamic Financial Institutions ("AAOIFI") as
modified by the Central Bank of Bahrain (the "CBB").
In our opinion, the Group has also complied with the Islamic
Shariah Principles and Rules as determined by the Group's Shariah
Supervisory Board during the year ended 31 December 2020.
Basis for opinion
We conducted our audit in accordance with Auditing Standards for
Islamic Financial Institutions ("ASIFIs") issued by AAOIFI. Our
responsibilities under those standards are further described in the
Auditors' responsibilities for the audit of the consolidated
financial statements section of our report. We are independent of
the Group in accordance with AAOIFI's Code of Ethics for
Accountants and Auditors of Islamic Financial Institutions (the
"Code"), together with the ethical requirements that are relevant
to our audit of the consolidated financial statements in the
Kingdom of Bahrain, and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the
Code. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters
Impairment allowance on financing assets and assets acquired for
leasing
(refer to accounting policy in Note 4(o), use of estimates and
judgments in Note 5 and management of credit risk in Note 38
(a).
Description How the matter was addressed in our audit
Our audit procedures included:
We focused on this area
because: Control testing
We performed walk throughs to identify
* of the significance of financing assets and assets the key systems, applications and controls
acquired for leasing representing 19 % of total used in the ECL processes.
assets.
Key aspects of our controls testing involved
the following:
* testing the design and operating effectiveness of the
key controls over the completion and accuracy of the
key inputs and assumptions into the ECL Model;
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INDEPENT AUDITORS' REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Description How the matter was addressed in our
audit
* The estimation of expected credit losses ("ECL") on * evaluating the design and operating effectiveness of
financing assets and assets acquired for leasing the key controls over the application of staging
involve significant judgment and estimates. The key criteria;
areas where we identified greater level of management
judgment and estimates are:
* Evaluating controls over validation, implementation
and model monitoring;
a. Use of complex models
Use of inherently judgmental * evaluating controls over authorization and
complex models to estimate calculation of post model adjustments and management
ECL which involves determining overlays; and
Probabilities of default
("PD"), Loss Given Default
("LGD") and Exposure At * testing key controls relating to selection and
default ("EAD"). The PD implementation of material macro-economic variables
models are considered and the controls over the scenario selection and
the drivers of the ECLs. probabilities.
b. Economic scenarios
The need to measure ECLs
on an unbiased forward-looking Tests of details
basis incorporating a a) Sample testing over key inputs and
range of economic conditions. assumptions impacting ECL calculations
Significant management to assess the reasonableness of economic
judgment is applied in forecast, weights, and PD assumptions
determining the economic applied; and
scenarios used and the b) Selecting a sample of post model
probability weightings adjustments to assess the reasonableness
applied to them. of the adjustments by challenging key
assumptions, inspecting the calculation
c. Management overlays methodology and tracing a sample of
Adjustments to the ECL the data used back to the source data.
model results are made
by management to address Use of specialists
known impairment model * We involved our information technology specialists in
limitations or emerging testing the relevant general IT and applications
trends or risks, including controls over the key systems used in the ECL
the potential impacts process;
of COVID-19. Such adjustments
are inherently uncertain
and significant management
judgment is involved in * We involved our credit risk specialists to assist us
estimating these amounts in:
especially in the current
COVID-19 environment.
a. evaluating the appropriateness of
the Groups' ECL methodologies (including
the staging criteria used);
b. on a test basis, re-performing the
calculation of certain components of
the ECL model (including the staging
criteria);
c. evaluating the appropriateness of
the Group's methodology for determining
the economic scenarios used and the
probability weighing applied to them;
and
d. evaluating the overall reasonableness
of the management economic forecast
by comparing it to external market data.
Disclosure s
* evaluating the adequacy of the Group's disclosures
related to ECL on financing assets and assets
acquired for leasing by reference to the relevant
accounting standards.
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INDEPENT AUDITORS' REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Valuation of unquoted equity investments
Refer to accounting policy in Note 4f(iv) and Note 36
Description How the matter was addressed in our
audit
Our audit procedures included:
We considered this as
a key audit area we focused * we involved our own valuation specialists to assist
on because the valuation us in:
of unquoted equity securities
held at fair value requires
the application of valuation * evaluating the appropriateness of the valuation
techniques which often methodologies used by comparing with observed
involve the exercise of industry practice;
significant judgment by
the Group and the use
of significant unobservable * evaluating the reasonableness of key input and
inputs and assumptions. assumptions used by using our knowledge of the
industries in which the investees operate and
industry norms.
* comparing the key underlying financial data inputs
used in the valuation to external sources, investee
company financial and management information, as
applicable;
* evaluating the adequacy of the Group's disclosures
related to valuation of unquoted equity instruments
by reference to the relevant accounting standards.
-----------------------------------------------------------
Carrying value of development properties
Refer to the accounting policy in note 4(l) and note 9 for
disclosures related to development properties.
Description How the matter was addressed in our
audit
Development projects comprise Our audit procedures included:
projects under construction
and long-term infrastructure * evaluating whether management's classification of
projects. Development real estate under development properties was
properties are stated appropriate;
at the lower of cost and
net realisable value.
We focused on this area * evaluating the qualifications and competence of the
due to: external valuers and reviewing the terms of their
* the significance of development property representing engagement to determine whether there were any
20% of total assets (by value); and matters that might have affected their objectivity or
limited their scope of work;
* and complexity associated with the accounting for
development properties under construction. The Group * for projects under construction, to evaluate
engages external valuers to assess the expected net appropriateness of carrying value of the work in
realisable values of these development properties. progress at the balance sheet date, on a sample basis
The assessment of net realisable value involves ,
significant judgment and estimation uncertainty we performed audit procedures over costs of
construction to date, surveyor reports on physical
completion and sub-developer contract arrangements;
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INDEPENT AUDITORS' REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Description How the matter was addressed in our audit
* we involved our valuation specialists, who used their
knowledge of the industry and available historical
data to assist in:
* evaluating the appropriateness of the valuation
methodologies used by the external valuers;
* evaluating the reasonableness of key inputs and
assumptions such as expected sale prices on
completion and estimates of costs to complete. Where
any component was out of our expected range, we
undertook additional procedures including sensitivity
analysis, to understand the effect on the assessed
values and carrying amounts in the consolidated
financial statements;
* on a sample basis, performed audit procedures to
assess whether the source data used for the
assessment of the net realisable values are
reasonable by comparing it to the underlying
supporting information to obtain insight into the
calculation model used to determine the net
realisable value; and
* Based on the outcome of our evaluation, we assessed
the adequacy of disclosures in the consolidated
financial statements.
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Other information
The board of directors is responsible for the other information.
The other information comprises the annual report but does not
include the consolidated financial statements and our auditors'
report thereon. Prior to the date of this auditors' report, we
obtained the Chairman's report and other sections which forms part
of the annual report.
Our opinion on the consolidated financial statements does not
cover the other information and we do not and will not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other
information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information
that we have obtained prior to the date of this auditors' report,
we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
Responsibilities of the board of directors for the consolidated
financial statements
The board of directors is responsible for the Group's
undertaking to operate in accordance with Islamic Sharia Rules and
Principles as determined by the Group's Shariah Supervisory
Board.
The board of directors is also responsible for the preparation
and fair presentation of the consolidated financial statements in
accordance with FAS as modified by CBB, and for such internal
control as the board of directors determines is necessary to enable
the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the board of
directors is responsible for assessing the Group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the board of directors either intends to
liquidate the Group or to cease operations, or has no realistic
alternative but to do so.
INDEPENT AUDITORS' REPORT TO THE SHAREHOLDERS (continued)
GFH Financial Group B.S.C.
Auditors' responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditors' report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ASIFIs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with ASIFIs, we exercise
professional judgment and maintain professional skepticism
throughout the audit. We also:
a) Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
b) Obtain an understanding of internal control relevant to the
audit 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 Group's internal control.
c) Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the board of directors.
d) Conclude on the appropriateness of the board of directors'
use of the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on
the Group's ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw
attention in our auditors' report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditors' report. However, future
events or conditions may cause the Bank to cease to continue as a
going concern.
e) Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation .
f) Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the Group audit. We remain solely responsible for
our audit opinion.
We communicate with the board of directors regarding, among
other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide the board of directors with a statement that we
have complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence,
and where applicable, actions taken to eliminate threats or
safeguards applied.
From the matters communicated with the board of directors, we
determine those matters that were of most significance in the audit
of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in
our auditors' report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
INDEPENT AUDITORS' REPORT TO THE SHAREHOLDERS (continued)
GFH Group B.S.C.
Report on other regulatory requirements
As required by the Commercial Companies Law and Volume 2 of the
Rulebook issued by the CBB, we report that:
-- the Bank has maintained proper accounting records and the
consolidated financial statements are in agreement therewith;
-- the financial information contained in the Chairman's report
is consistent with the consolidated financial statements;
-- we are not aware of any violations during the year of the
Commercial Companies Law, the CBB and Financial Institutions Law
No. 64 of 2006 (as amended), the CBB Rule Book (Volume 2,
applicable provisions of Volume 6 and CBB directives), the CBB
Capital Markets Regulations and associated resolutions, the Bahrain
Bourse rules and procedures or the terms of the Bank's memorandum
and articles of association that would have had a material adverse
effect on the business of the Bank or on its financial position;
and
-- satisfactory explanations and information have been provided
to us by management in response to all our requests.
The engagement partner on the audit resulting in this
independent auditors' report is Jalil AlAali.
KPMG Fakhro
Partner Registration No. 100
15 February 2021
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2020 US$ 000's
note 31 December 31 December
2020 2019
(restated
notes 4(a)
and (12)
ASSETS
Cash and bank balances 6 536,502 364,598
Treasury portfolio 7 1,838,546 1,588,661
Financing assets 8 1,267,266 1,272,777
Investment in real estate 9 1,812,315 1,806,009
Proprietary investments 10 256,108 268,175
Co-investments 11 126,319 96,507
Receivables and prepayments 13 605,658 444,689
Property and equipment 14 144,149 103,857
------------ ------------
Total assets 6,586,863 5,945,273
============ ============
LIABILITIES
Clients' funds 130,935 70,858
Placements from financial, non-financial
institutions and individuals 15 2,418,000 2,447,249
Customer current accounts 140,756 147,487
Term financing 16 1,089,077 301,411
Payables and accruals 17 465,038 466,852
------------ ------------
Total liabilities 4,243,806 3,433,857
------------ ------------
Total equity of investment account
holders 18 1,156,993 1,218,545
OWNERS' EQUITY
Share capital 19 975,638 975,638
Treasury shares 19 (63,979) (73,419)
Statutory reserve 19 19,548 125,312
Investment fair value reserve 5,593 9,244
Foreign currency translation reserve (46,947) (29,425)
Retained earnings 22,385 (4,005)
Share grant reserve 20 1,093 1,198
------------ ------------
Total equity attributable to shareholders
of Bank 913,331 1,004,543
Non-controlling interests 272,733 288,328
------------ ------------
Total owners' equity 1,186,064 1,292,871
------------ ------------
Total liabilities, equity of investment
account holders and owners' equity 6,586,863 5,945,273
============ ============
The consolidated financial statements were approved by the Board
of Directors on 15 February 2021 and signed on its behalf by:
Jassim Al Seddiqi H.E. Shaikh Ahmed Bin Khalifa
Al-Khalifa Hisham Alrayes
Chairman Vice Chairman Chief Executive
Officer
& Board member
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements.
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2020 US$ 000's
2020 2019
(restated)
note 4(a)(i)(2)
Continuing operations
Investment banking income
Asset management 4,895 2,880
Deal related income 75,736 92,971
80,631 95,851
----------
Commercial banking income
Income from financing 80,400 83,113
Treasury and investment income 42,864 27,924
Fee and other income 4,582 15,189
Less: Return to investment account
holders 18 (32,587) (40,018)
Less: Finance expense (29,946) (18,418)
65,313 67,790
----------
Income from proprietary and co-investments
Direct investment income, net 20,436 10,520
Restructuring related income - 29,406
Dividend from co-investments 8,854 1,959
29,290 41,885
----------
Real estate income
Development and sale 14,209 37,872
Rental and operating income 5,248 2,543
19,457 40,415
----------
Treasury and other income
Finance income 19,395 24,081
Dividend and net gain on treasury
investments 70,282 34,531
Other income, net 22 39,026 17,059
128,703 75,671
----------
Total income 323,394 321,612
---------- ----------------
Staff costs 23 47,072 50,590
Other operating expenses 24 65,186 51,845
Finance expense 134,994 111,330
Impairment allowances 25 26,799 54,264
Total expenses 274,051 268,029
----------
Profit from continuing operations 49,343 53,583
Loss from assets held-for-sale and
discontinued operations, net - (467)
Profit for the year 49,343 53,116
========== ================
Attributable to:
Shareholders of the Bank 45,095 66,033
Non-controlling interests 4,248 (12,917)
49,343 53,116
======= =============
Earnings per share
Basic and diluted earnings per share
(US cents) 1.35 1.96
----- -----
Earnings per share - continuing
operations
Basic and diluted earnings per share
(US cents) 1.35 1.96
----- -----
Jassim Al Seddiqi H.E. Shaikh Ahmed Bin Khalifa
Al-Khalifa Hisham Alrayes
Chairman Vice Chairman Chief Executive
Officer
& Board member
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements .
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY
for the year ended 31 December 2020
US$ 000's
Attributable to shareholders of the Bank Non Total
-controlling owners'
interests equity
Share Treasury Statutory Investment Foreign Retained Share Total
capital shares reserve fair value currency earnings grant
reserve translation reserve
2020 reserve
Balance at 1
January 2020 975,638 (73,419) 125,312 9,245 (29,425) (4,005) 1,198 1,004,544 288,327 1,292,871
Profit for
the year - - - - - 45,095 - 45,095 4,248 49,343
Fair value
changes
during the
year - - - 5,036 - - - 5,036 412 5,448
Reclassified
to income on
impairment
of quoted
equity
securities - - - 12,000 - - - 12,000 - 12,000
Reclassified
to income on
disposal of
sukuk - - - (20,688) - - - (20,688) - (20,688)
-------- ---------- ---------- ----------- ------------ --------- -------- ---------- ------------- ----------
Total
recognised
income and
expense - - - (3,652) - 45,095 - 41,443 4,660 46,103
-------- ---------- ---------- ----------- ------------ --------- -------- ---------- ------------- ----------
Additional
capital
contribution
to
subsidiary
(note 1) - - - - - (59,893) - (59,893) (14,311) (74,204)
Modification
loss on
financing
assets
(notes 2a,
8) - - - - - (13,893) - (13,893) (11,179) (25,072)
Government
grant (notes
2b, 26) - - - - - 3,690 - 3,690 1,267 4,957
Dividends
declared for
2019 - - - - - (30,000) - (30,000) - (30,000)
Transfer to
zakah and
charity fund - - - - - (1,388) - (1,388) (258) (1,646)
Transfer to
statutory
reserve - - 4,509 - - (4,509) - - - -
Purchase of
treasury
shares - (107,518) - - - - - (107,518) - (107,518)
Sale of
treasury
shares - 133,483 - - - (22,985) - 110,498 - 110,498
Treasury
shares
acquired for
share
incentive
scheme - (16,525) - - - - (105) (16,630) 130 (16,500)
Foreign
currency
translation
differences - - - - (17,522) - - (17,522) (3,084) (20,606)
NCI arising
from
acquisition
of a
subsidiary
(note 21) - - - - - - - - 64,147 64,147
Distribution
to NCI - - - - - - - - (56,966) (56,966)
Adjustment of
accumulated
losses
against
statutory
reserve
(note 19) - - (110,273) - - 110,273 - - - -
-------- ---------- ---------- ----------- ------------ --------- -------- ---------- ------------- ----------
Balance at
31 December
2020 975,638 (63,979) 19,548 5,593 (46,947) 22,385 1,093 913,331 272,733 1,186,064
======== ========== ========== =========== ============ ========= ======== ========== ============= ==========
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY
for the year ended 31 December 2020 (continued)
US$ 000's
Attributable to shareholders of the Bank
Foreign Non
Investment currency Share Non -controlling Total
Share Treasury Statutory fair value translation Retained grant -controlling interests owners'
2019 capital shares reserve reserve reserve earnings reserve Total interests held-for-sale equity
Balance at 1
January 2019 (as
previously
reported) 975,638 (85,424) 117,301 (4,725) (43,380) 98,318 1,086 1,058,814 323,408 40,556 1,422,778
Reclassification
of a subsidiary
held-for-sale to
held-for-use
(note 12) - - - - - - - - 25,396 (25,396) -
--------- ---------- ----------- ----------- ------------ --------- -------- ---------- ------------- -------------- ----------
Balance at 1
January 2019
(restated) 975,638 (85,424) 117,301 (4,725) (43,380) 98,318 1,086 1,058,814 348,804 15,160 1,422,778
Profit for the
year - - - - - 66,033 - 66,033 (12,917) - 53,116
Fair value
changes during
the year - - - 13,969 - - - 13,969 - - 13,969
Total recognised
income and
expense - - - 13,969 - 66,033 - 80,002 (12,917) - 67,085
Bonus shares
issued (note 19) 55,000 - - - - (55,000) - - - - -
Extinguishment of
treasury shares
(note 19) (55,000) 50,549 - - - 4,451 - - - - -
Dividends
declared (note
19) - - - - - (30,000) - (30,000) - - (30,000)
Transfer to zakah
and charity fund - - - - - (2,219) - (2,219) (223) - (2,442)
Issue of shares
under incentive
scheme - - - - - - 112 112 - - 112
Purchase of
treasury shares - (183,174) - - - - - (183,174) - - (183,174)
Sale of treasury
shares - 176,669 - - - (26,596) - 150,073 - - 150,073
Treasury shares
acquired for
share incentive
scheme (note 19) - (32,039) - - - - - (32,039) - - (32,039)
Acquisition of
NCI without a
change in
control (note
21) - - - - - (51,412) - (51,412) (40,588) - (92,000)
Transfer to
statutory
reserve - - 8,011 - - (8,011) - - - - -
Foreign currency
translation
differences - - - - 13,955 - - 13,955 (6,748) - 7,207
Disposal of
subsidiary
held-for-sale - - - - - 431 - 431 - (15,160) (14,729)
Balance at 31
December 2019 975,638 (73,419) 125,312 9,244 (29,425) (4,005) 1,198 1,004,543 288,328 - 1,292,871
========= ========== =========== =========== ============ ========= ======== ========== ============= ============== ==========
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2020 US$ 000's
31 December
31 December 2019
2020 (restated)
OPERATING ACTIVITIES
Profit for the year 49,34 3 53,116
Adjustments for:
Income from commercial banking (41,402) (22,133)
Income from proprietary investments (29,290) (12,344)
Income from treasury and other income (88,915) (34,531)
Foreign exchange (gain) / loss (1,329) 2,264
Restructuring related income - (29,406)
Finance expense 164,940 129,748
Impairment allowances 26,79 8 54,264
Depreciation and amortisation 6,150 2,173
86,295 143,151
Changes in:
Placements with financial institutions (original
maturities of more than 3 months) 450,752 (280,706)
Financing assets 5,511 (108,524)
Other assets (161,469) (306,240)
CBB Reserve and restricted bank balance 39,623 (27,176)
Clients' funds 60,077 24,218
Placements from financial and non-financial
institutions (29,250) 818,860
Customer current accounts (6,732) (30,421)
Equity of investment account holders (61,552) 321,635
Payables and accruals (30,204) (68,948)
--------------------
Net cash generated from operating activities 353,051 485,849
--------------------
INVESTING ACTIVITIES
Payments for purchase of equipment (674) (860)
Proceeds from sale of proprietary and co-investments,
net (39,230) 2,156
Purchase of treasury portfolio, net (621,110) (353,003)
Proceeds from sale of investment in real
estate 6,256 38,805
Dividends received from proprietary investments
and co-investments 11,936 5,426
Advance paid for development of real estate (19,751) (25,792)
Net cash flows from acquisition of subsidiaries 26,803 -
Net cash used in investing activities (635,770) (333,268)
FINANCING ACTIVITIES
Term financing, net 787,666 28,613
Finance expense paid (165,778) (106,078)
Dividends paid (37,433) (31,037)
Acquisition of NCI - (9,026)
Purchase of treasury shares, net (13,814) (65,140)
--------------------
Net cash generated from / (used in) financing
activities 570,641 (182,668)
--------------------
Net increase/(decrease) in cash and cash
equivalents during the year 287,922 (30,087)
Cash and cash equivalents at 1 January * 367,533 397,620
------------ --------------------
Cash and cash equivalents at 31 December 655,455 367,533
============ --------------------
Cash and cash equivalents comprise: *
Cash and balances with banks (excluding
CBB Reserve balance and restricted cash) 492,031 278,251
Placements with financial institutions (original
maturities of 3 months or less) 163,424 89,282
------------ --------------------
655,455 367,533
============ ====================
* net of expected credit loss of US$ 15 thousand (31 December
2019: US$ 1,098 thousand)
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements .
CONSOLIDATED STATEMENT OF CHANGES IN RESTRICTED INVESTMENT
ACCOUNTS
for the year ended 31 December 2020
31 December Balance at 1 January Balance at 31 December
2020 2020 Movements during the year 2020
Average Average
No. value Group's value
of per Investment/ Gross Dividends fees as Administration No. of per
units share Total (withdrawal) Revalua-tion income paid an agent expenses units share Total
Company (000) US$ US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's (000) US$ US$ 000's
----- ------- --------- ------------ ------------ --------- --------- --------- -------------- --------- ------- ---------
Mena Real
Estate
Company
KSCC 150 0.33 50 - - - - - - 150 0.33 50
Al Basha'er
Fund 13 7.91 103 (10) - - - - - 12 7.91 95
Safana
Investment
(RIA
1) (#) 6,254 2.65 16,573 - - - - - - 6,254 2.65 16,573
Shaden Real
Estate
Investment
WLL (RIA 5)
(#) 3,434 2.65 9,100 - - - - - - 3,434 2.65 9,100
Locata
Corporation
Pty
Ltd (RIA 6)
(#) 2,633 1.00 2,633 - - - - - - 2,633 1 2,633
--------- ---------
28,459 (10) - - - - - 28,451
========= ============ ============ ========= ========= ========= ============== =========
31 December Balance at 1 January Balance at 31 December
2019 2019 Movements during the year 2019
Average Average
No. value Group's value
of per Investment/ Gross Dividends fees as Administration No. of per
units share Total (withdrawal) Revalua-tion income paid an agent expenses units share Total
Company (000) US$ US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's US$ 000's (000) US$ US$ 000's
----- ------- --------------- ------------ ------------ --------- --------- --------- -------------- --------- ------- ---------------
Mena Real
Estate
Company
KSCC 150 0.33 50 - - - - - - 150 0.33 50
Al Basha'er
Fund 13 7.03 91 - 13 - - - - 13 8 104
Safana
Investment
(RIA
1) (#) 6,254 2.65 16,573 - - - - - - 6,254 2.65 16,573
Shaden Real
Estate
Investment
WLL (RIA 5)
(#) 3,434 2.65 9,100 - - - - - - 3,434 2.65 9,100
Locata
Corporation
Pty
Ltd (RIA 6)
(#) 2,633 1.00 2,633 - - - - - - 2,633 1.00 2,633
--------------- ---------------
28,447 - 13 - - - - 28,460
=============== ============ ============ ========= ========= ========= ============== ===============
(#) Represents restricted investment accounts of Khaleeji
Commercial Bank BSC, a consolidated subsidiary
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements .
CONSOLIDATED STATEMENT OF SOURCES AND USES OF ZAKAH AND CHARITY
FUND
for the year ended 31 December 2020 US$ 000's
2020 2019
Sources of zakah and charity fund
Contributions by the Group 1,646 2,437
Non-Islamic income (note 31) 129 336
Total sources 1,775 2,773
-------- --------
Uses of zakah and charity fund
Utilisation of zakah and charity fund (1,839) (2,001)
Total uses (1,839) (2,001)
-------- --------
Surplus of sources over uses (64) 772
Undistributed zakah and charity fund at
1 January 5,407 4,635
Undistributed zakah and charity fund at
31 December (note 17) 5,343 5,407
======== ========
Represented by:
Zakah payable 1,493 383
Charity fund 3,850 5,024
5,343 5,407
====== ======
The accompanying notes 1 to 40 form an integral part of these
consolidated financial statements .
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2020
1 REPORTING ENTITY
GFH Financial Group BSC ("the Bank") was incorporated as Gulf
Finance House BSC in 1999 in the Kingdom of Bahrain under
Commercial Registration No. 44136 and operates under an Islamic
Wholesale Investment Banking license issued by the Central Bank of
Bahrain ("CBB"). The Bank's shares are listed on the Bahrain,
Kuwait and Dubai Financial Market Stock Exchanges. The Bank's sukuk
certificates are listed on London Stock Exchange.
The Bank's activities are regulated by the CBB and supervised by
a Shari'a Supervisory Board. The principal activities of the Bank
include investment advisory services and investment transactions
which comply with Islamic rules and principles determined by the
Bank's Shari'a Supervisory Board.
The consolidated financial statements for the year comprise the
results of the Bank and its subsidiaries (together referred to as
"the Group"). The significant subsidiaries of the Bank which
consolidated in these financial statements are:
Effective
ownership
Country of interests
Investee name incorporation 2020 Activities
GFH Capital Limited United Arab 100% Investment management
Emirates
---------------- ----------- ------------------------
Khaleeji Commercial Bank BSC Kingdom of 55.41% Islamic retail
('KHCB') * Bahrain bank
---------------- ----------- ------------------------
Al Areen Project companies 100% Real estate development
---------------- ----------- ------------------------
Falcon Cement Company BSC (c) 51.72% Cement manufacturing
('FCC')
----------- ------------------------
GBCORP BSC (c) (GBCORP) (note 50.41% Islamic investment
21) firm
----------- ------------------------
Residential South Real Estate 100% Real estate development
Development Company (RSRED)
----------- ------------------------
Athena Private School for Special 100% Educational institution
Education WLL (note 21)
---------------- ----------- ------------------------
Morocco Gateway Investment Company Cayman Islands 90.27% Real estate development
('MGIC')
---------------- ----------- ------------------------
Tunis Bay Investment Company 82.97% Real estate development
('TBIC')
---------------- ----------- ------------------------
Energy City Navi Mumbai Investment 80.27% Real estate development
Company & Mumbai IT & Telecom
Technology Investment Company
(together "India Projects")
---------------- ----------- ------------------------
Gulf Holding Company KSCC State of Kuwait 51.18% Investment in
real estate
---------------- ----------- ------------------------
Roebuck A M LLP (note 21) United Kingdom 60% Property asset
management Company
---------------- ----------- ------------------------
The Bank has other SPE holding companies and subsidiaries, which
are set up to supplement the activities of the Bank and its
principal subsidiaries.
* During the year, KHCB issued Additional Tier 1 (AT1)
securities of US$ 191 million which were fully subscribed for by
the Bank in the form of cash and transfer of certain assets and led
to change in the Bank's share of net assets and attribution of
profits in KHCB.. As KHCB is an existing subsidiary, the
transaction is accounted for as transactions between equity holders
while retaining control (i.e. non-controlling interests of KHCB and
the Bank). Accordingly, the premium of US$ 59.8 million towards the
subscription of the AT1 securities (representing the excess of the
difference between contribution and parents share of net assets of
the subsidiary) is considered as an adjustment to retained earnings
and non-controlling interests of KHCB. The share of costs of the
AT1 issuance attributable to the non-controlling interests of KHCB
were charged to the non- controlling interests component in
equity.
2 STATEMENT OF COMPLIANCE
The consolidated financial statements have been prepared in
accordance with the Financial Accounting Standards ('FAS') issued
by the Accounting and Auditing Organisation for Islamic Financial
Institutions ("AAOIFI") and in conformity with Commercial Companies
Law. In line with the requirement of AAOIFI and the Rulebook issued
by CBB, for matters that are not covered by FAS, the Group uses
guidance from the relevant International Financial Reporting
Standards (IFRS), except for:
i) recognition of modification losses on financial assets
arising from payment holidays provided to customers impacted by
COVID-19 without charging additional profits, in equity instead of
profit or loss as required by FAS. Any other modification gain or
loss on financial assets are recognised in accordance with the
requirements of applicable FAS. (refer note 10).
The modification loss has been calculated as the difference
between the net present value of the modified cash flows calculated
using the original effective profit rate and the current carrying
value of the financial assets on the date of modification; and
ii) recognition of financial assistance received from the
government and/ or regulators as part of its COVID-19 support
measures that meets the government grant requirement, in equity,
instead of profit or loss as required by the statement on
"Accounting implications of the impact of COVID-19 pandemic" issued
by AAOIFI to the extent of any modification loss recognised in
equity as a result of (a) above. In case this exceeds the
modification loss amount, the balance amount is recognized in the
profit or loss account. Any other financial assistance is
recognised in accordance with the requirements of FAS. Please refer
to note 26 for further details.
The above framework for basis of preparation of the consolidated
financial statements is hereinafter referred to as 'Financial
Accounting Standards as modified by CBB'.
The modification to accounting policies have been applied
retrospectively and did not result in any change to the financial
information reported for the comparative period.
3 BASIS OF MEASUREMENT
The consolidated financial statements are prepared on the
historical cost basis except for the measurement at fair value of
investment securities.
The Group classifies its expenses in the consolidated income
statement by the nature of expense method. The consolidated
financial statements are presented in United States Dollars (US$),
which is also the functional currency of the Group's operations.
All financial information presented in US$ has been rounded to the
nearest thousands, except when otherwise indicated.
The preparation of consolidated financial statements requires
the use of certain critical accounting estimates. It also requires
management to exercise judgement in the process of applying the
Group's accounting policies. Estimates and underlying assumptions
are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised and
in any future periods affected. Management believes that the
underlying assumptions are appropriate and the Group's consolidated
financial statements therefore present the financial position and
results fairly. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements are disclosed
in note 5.
The below paragraphs and tables describe the Group's significant
lines of business and sources of revenue they are associated
with.
Activities:
The Group's primary activities include: a) to provide investment
opportunities and manage assets on behalf of its clients as an
agent, b) to provide commercial banking services , c) to undertake
targeted development and sale of infrastructure and real estate
projects for enhanced returns, d) to co-invest with clients and
hold strategic proprietary assets as a principal. In addition, the
Group also manages its treasury portfolio with the objective of
earning higher returns from capital and money market
opportunities.
3 Basis of measurement (continued)
Segments:
To undertake the above activities, the Group has organised
itself in the following operating segments units:
Investment banking Investment banking segment focuses on private
equity and asset management activities. Private
equity activities include acquisition of interests
in unlisted or listed businesses at prices lower
than anticipated values. The Group acts as both
a principal and an intermediary by acquiring,
managing and realizing investments in investment
assets for institutional and high net worth
clients. The asset management unit is responsible
for identifying and managing investments in
income yielding real estate and leased assets
in the target markets.
Investment banking activities focuses on acquiring,
managing and realizing investments to achieve
and exceed benchmark returns.
Investment banking activities produce fee-based,
activity-based and asset-based income for the
Group. Assets under this segment include proprietary
private equity, co-investments and strategic
non-banking investments.
Commercial banking This includes all sharia compliant corporate
banking and retail banking activities of the
Group provided through the Group's subsidiary,
Khaleeji Commercial Bank BSC. The subsidiary
also manages its own treasury and proprietary
investment book within this operating segment.
------------------------------------------------------
Real Estate development This business unit is primarily involved in
origination and management of large scale economic
infrastructure projects. The business unit also
covers the Group's investment in real estate
and related assets.
------------------------------------------------------
Corporate and All common costs and activities that are undertaken
treasury at the Group level, including treasury and residual
investment assets, is considered as part of
the Corporate and treasury activities of the
Group.
------------------------------------------------------
Each of the above operating segments, except commercial banking
which is a separate subsidiary has its own dedicated team of
professionals and are supported by a common placement team and
support units.
The strategic business units offer different products and
services and are managed separately because they require different
strategies for management and resource allocation within the Group.
For each of the strategic business units, the Group's Board of
Directors (chief operating decision makers) review internal
management reports on a quarterly basis.
The performance of each operating segment is measured based on
segment results and are reviewed by the management committee and
the Board of Directors on a quarterly basis. Segment results is
used to measure performance as management believes that such
information is most relevant in evaluating the results of certain
segments relative to other entities that operate within these
industries. Inter-segment pricing, if any is determined on an arm's
length basis.
The Group classifies directly attributable revenue and cost
relating to transactions originating from respective segments as
segment revenue and segment expenses respectively. Indirect costs
is allocated based on cost drivers/factors that can be identified
with the segment and/ or the related activities. The internal
management reports are designed to reflect revenue and cost for
respective segments which are measured against the budgeted
figures. The unallocated revenues, expenses, assets and liabilities
related to entity-wide corporate activities and treasury activities
at the Group level. Expenses are not allocated to the business
segment.
3 Basis of measurement (continued)
Sources of revenue:
The Group primarily earns its revenue from the following sources
and presents its statement of income accordingly:
Activity/ Source Products Types of revenue
Investment banking Deal-by-deal offerings Deal related income , earned
activity of private equity, income by the Group from investee
yielding asset opportunities companies in connection
with new acquisitions
Fee based income , in the
nature of management fees,
performance fee, acquisition
fee and exit fee which are
contractual in nature
-------------------------------- ------------------------------------
Commercial banking Islamic Shari'ah compliant Financing income, fees and
income corporate, institutional investment income (net of
and retail banking financing direct funding costs)
and cash management
products and services
-------------------------------- ------------------------------------
Proprietary investments Proprietary investments Includes dividends, gain
comprise the Group's / (loss) on sale and remeasurement
strategic and co-investment of proprietary investments,
exposure. This also co-investments and share
includes non-banking of profit / (loss) of equity
subsidiaries and equity accounted investees
-accounted investees
where the Bank has significant Income from restructuring
influence of liabilities and funding
arrangements are also considered
as income from proprietary
investments
-------------------------------- ------------------------------------
Co-investment Represent the Group's Dividends, gain / (loss)
co-investment along on co-investments of the
with its clients in Bank
the products promoted
by the Group
-------------------------------- ------------------------------------
Real estate Proprietary holdings Development and sale income
of real estate for direct , from development and sale
sale, development and of real estate projects
sale, and/ or rental of the Group based on percentage
yields. This also includes of completion (POC) method.
the group's holding
or participation in Rental and operating income
leisure and hospitality , from rental and other
assets. ancillary income from investment
in real estate.
-------------------------------- ------------------------------------
Treasury operations Represents the Bank's Income arising from the
liquidity management deployment of the Bank's
operations, including excess liquidity, through
its fund raising and but not limited to short
deployment activities term placements with bank
to earn a commercial and financial institutions,
profit margin. money market instruments,
capital market and other
related treasury investments.
-------------------------------- ------------------------------------
4 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the preparation
of these consolidated financial statements are set out below. These
accounting policies have been applied consistently to all periods
presented in the consolidated financial statements, and have been
consistently applied by the Group except as described in note 2
"statement of compliance" above and those arising from adoption of
the following standards and amendments to standards.
(a) Impact of new accounting standards and changes in accounting policies
(i) Early adoption of new standards issued but not yet
effective
1) FAS 31 - Investment Agency (Al-Wakala Bi Al-lstithmar)
The Group has early adopted FAS 31 as issued by AAOIFI in 2019
effective date of 1 January 2021. The objective of this standard is
to establish the principles of accounting and financial reporting
for investment agency (Al-Wakala Bi Al-Istithmar) instruments and
the related assets and obligations from both the principal
(investor) and the agent perspectives.
The Group uses Wakala structure to raises funds from interbank
market and from customers, and these were reported as liabilities
under placements from financial institutions and placements from
non-financial institutions and individuals, respectively as of 31
December 2019. All funds raised using Wakala structure, together
called "Wakala pool" are comingled with the Bank's jointly financed
pool of funds based on an underlying equivalent mudarba
arrangement.
This comingled pool of funds is invested in a common pool of
assets of in the manner which the Group deems appropriate without
any restrictions as to where, how and for what purpose the funds
should be invested. After adopting FAS 31 on 1 January 2020, the
Wakala pool is now classified as part of the Mudaraba pool of
funding under equity of investment account holders and the profit
paid on these contracts is reported as part of determination of
return on investment of equity of investment account holders.
As per the transitional provisions of FAS 31, the entity may
choose not to apply this standard on existing transactions executed
before 1 January 2020 and have an original contractual maturity
before
31 December 2020. The adoption of this standard has resulted in
a change in classification of all Wakala based funding contracts as
part of equity of investment accountholders and additional
associated disclosures (refer note 18)
2) FAS 33 Investment in sukuks, shares and similar instruments
The Group has early adopted FAS 33 as issued by AAOIFI effective
1 January 2021. The objective of this standard is to set out the
principles for the classification, recognition, measurement and
presentation and disclosure of investment in Sukuk, shares and
other similar instruments made by Islamic financial institutions.
This standard shall apply to an institution's investments whether
in the form of debt or equity securities. This standard replaces
FAS 25 Investment in Sukuk, shares and similar instruments.
The standard classifies investments into equity type, debt-type
and other investment instruments. Investment can be classified and
measured at amortized cost, fair value through equity or fair value
through the income statement. Classification categories are now
driven by business model tests and reclassification will be
permitted only on change of a business model and will be applied
prospectively. Investments in equity instruments must be at fair
value and those classified as fair value through equity will be
subject to impairment provisions as per FAS 30 "Impairment, Credit
Losses and Onerous Commitments". In limited circumstances, where
the institution is not able to determine a reliable measure of fair
value of equity investments, cost may be deemed to be best
approximation of fair value.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
The standard is effective 1 January 2021 with an option to early
adopt and is applicable on a retrospective basis. However, the
cumulative effect, if any, attributable to owners' equity, equity
of investment account holders relating to previous periods, shall
be adjusted with investments fair value pertaining to assets funded
by the relevant class of stakeholders.
The adoption of FAS 33 has resulted in changes in accounting
policies for recognition, classification and measurement of
investment in sukuks, shares and other similar instruments,
however, the adoption of FAS 33 had no significant impact on any
amounts previously reported in the consolidated financial statement
of the Group for the year ended 31 December 2019. Set out below are
the details of the specific FAS 33 accounting policies applied in
the year.
Changes in accounting policies
Categorization and classification
FAS 33 sets out classification and measurement approach for
investments in sukuk, shares and similar instruments that reflects
the business model in which such investments are managed and the
underlying cash flow characteristics. Under the standard, each
investment is to be categorized as either investment in:
i) equity-type instruments
ii) debt-type instruments, including:
-- monetary debt-type instruments; and
-- non-monetary debt-type instruments.
iii) other investment instruments
Unless irrevocable initial recognition choices as per the
standard are exercised, an institution shall classify investments
as subsequently measured at either of:
-- amortised cost;
-- fair value through equity (FVTE) or
-- fair value through income statement (FVTIS), on the basis of both:
Ø the Group's business model for managing the investments;
and
Ø the expected cash flow characteristics of the investment in
line with the nature of the underlying Islamic finance
contracts.
Reclassification of assets and liabilities
The adoption of FAS 33 has resulted in the following change in
the classification of investments based on the reassessment of
business model classification of the assets at 1 January 2020:
Original New Original New
classification classification carrying carrying
under FAS under amount amount
25 FAS 33 under under
FAS 25 FAS 33
Investment
in
sukuk FVTIS FVTE 284,904 284,904
---------------------- --------------------------- -------------------- --------------------
Amortised Amortised
cost cost 517,375 517,375
---------------------- --------------------------------------------------- -------------------- --------------------
Investment
in
equity
securities FVTIS FVTIS 239,807 239,807
----------------------- ---------------------- --------------------------- -------------------- --------------------
FVTIS FVTE 21,764 21,764
---------------------- --------------------------------------------------- -------------------- --------------------
FVTE FVTE 219,425 219,425
---------------------- --------------------------------------------------- -------------------- --------------------
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
The impact from the adoption of FAS 33 is given below:
Retained earnings Investment fair value reserve
US$ 000's US$ 000's
Balance as of 1 January 2019
(previously reported) 123,136 (4,725)
Effect on reclassification of
financial instruments - -
Balance as of 1 January 2019
(restated) 123,136 (4,725)
============================= =========================================
Retained Investment fair Profit for the
earnings value reserve year
US$ 000's US$ 000's US$ 000's
Balance as of 31
December 2019
(previously reported) 10,070 (4,831) 67,191
Effect on
reclassification of
financial instruments (14,075) 14,075 (14,075)
Balance as of 31
December 2019
(restated) (4,005) 9,244 53,116
============================ ============================ ============================
ii) New standards, amendments and interpretations issued but not
yet effective and not early adopted
FAS 32 - Ijarah
AAOIFI has issued FAS 32 "Ijarah" in 2020. This standard
supersedes the existing FAS 8 "Ijarah and Ijarah Muntahia
Bittamleek".
The objective of this standard is set out principles for the
classification, recognition, measurement, presentation and
disclosure for Ijarah (asset Ijarah, including different forms of
Ijarah Muntahia Bittamleek) transactions entered by the Islamic
Financial Institutions as a lessor and lessee. This new standard
aims to address the issues faced by the Islamic finance industry in
relation to accounting and financial reporting as well as to
improve the existing treatments in line with the global
practices.
This standard shall be effective for the financial periods
beginning on or after 1 January 2021 with early adoption permitted.
The Group is currently evaluating the impact of this standard.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Basis of consolidation
(i) Business combinations
Business combinations are accounted for using the acquisition
method as at the acquisition date, which is the date on which
control is transferred to the Group. Control is the power to govern
the financial and operating policies of an entity so as to obtain
benefits from its activities. In assessing control, the Group takes
into consideration potential voting rights that are currently
exercisable.
The Group measures goodwill at the acquisition date as:
-- the fair value of the consideration transferred; plus
-- the recognised amount of any non-controlling interest in the acquiree; plus
-- if the business combination achieved in stages, the fair
value of the pre-existing equity interest in the acquiree; less
-- the net recognised amount (generally fair value) of the
identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is
recognised immediately in the consolidated income statement.
The consideration transferred does not include amounts related
to settlement of pre-existing relationships. Such amounts are
generally recognised in the consolidated income statement.
Transaction costs, other than those associated with the issue of
debt or equity securities, that the Group incurs in connection with
a business combination are expensed as incurred.
Any contingent consideration payable is measured at fair value
at the acquisition date. If the contingent consideration is
classified as equity, then it is not re-measured and settlement is
accounted within equity. Otherwise subsequent changes in the fair
value of the contingent consideration are recognised in the
consolidated income statement.
(ii) Subsidiaries
Subsidiaries are those enterprises (including special purpose
entities) controlled by the Group. Control exists when the Group
has the power, directly or indirectly, to govern the financial and
operating policies of an enterprise so as to obtain benefits from
its activities. Subsidiaries are consolidated from the date on
which control commences until when control ceases.
(iii) Non-controlling interests (NCI)
NCI are measured at their proportionate share of the acquiree's
identifiable net assets at the date of acquisition.
If less than 100% of a subsidiary is acquired, then the Group
elects on a transaction-by-transaction basis to measure
non-controlling interests either at:
-- Fair value at the date of acquisition, which means that
goodwill, or the gain on a bargain purchase, includes a portion
attributable to ordinary non-controlling interests; or
-- the holders' proportionate interest in the recognised amount
of the identifiable net assets of the acquire, which means that
goodwill recognised, or the gain on a bargain purchase, relates
only to the controlling interest acquired.
Changes in the Group's interest in a subsidiary that do not
result in a loss of control are accounted for as equity
transactions.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(iv) Special purpose entities
The consolidated financial statements of the Group comprise the
financial statements of the Bank and its subsidiaries. Subsidiaries
are those enterprises (including special purpose entities)
controlled by the Bank. Control exists when the Group has the
power, directly or indirectly, to govern the financial and
operating policies of an enterprise so as to obtain benefits from
its activities. Subsidiaries are consolidated from the date on
which control is transferred to the Group and de-consolidated from
the date that control ceases. Control is presumed to exist, when
the Bank owns majority of voting rights in an investee.
Special purpose entities (SPEs) are entities that are created to
accomplish a narrow and well-defined objective such as the
securitisation of particular assets, or the execution of a specific
borrowing or investment transaction and usually voting rights are
relevant for the operating of such entities. An investor that has
decision-making power over an investee and exposure to variability
of returns determines whether it acts as a principal or as an agent
to determine whether there is a linkage between power and returns.
When the decision maker is an agent, the link between power and
returns is absent and the decision maker's delegated power does not
lead to a control conclusion. Where the Group's voluntary actions,
such as lending amounts in excess of existing liquidity facilities
or extending terms beyond those established originally, change the
relationship between the Group and an SPE, the Group performs a
reassessment of control over the SPE.
The Group in its fiduciary capacity manages and administers
assets held in trust and other investment vehicles on behalf of
investors. The financial statements of these entities are usually
not included in these consolidated financial statements.
Information about the Group's fiduciary assets under management is
set out in note 28.
(v) Loss of control
When the Group losses control over a subsidiary, it derecognises
the assets and liabilities of the subsidiary, any non-controlling
interests and the other components of equity. Any surplus or
deficit arising on the loss of control is recognised in
consolidated income statement. Any interest retained in the former
subsidiary, is measured at fair value when control is lost.
Subsequently it is accounted for as an equity-accounted investee or
in accordance with the Group's accounting policy for investment
securities depending on the level of influence retained.
(vi) Equity accounted investees
This comprise investment in associates and joint ventures.
Associates are those entities in which the Group has significant
influence, but not control or joint control, over the financial and
operating policies. Significant influence is presumed to exits when
the Group holds between 20% and 50% of the voting power of another
entity. A joint venture is an arrangement in which the Group has
joint control, where the Group has rights to the net assets of the
arrangement, rather than rights to its assets and obligations for
its liabilities.
Associates and Joint venters are accounted for under equity
method. These are initially recognised at cost and the carrying
amount is increased or decreased to recognise the investor's share
of the profit or loss of the investees after the date of
acquisition. Distributions received from an investees reduce the
carrying amount of the investment. Adjustments to the carrying
amount may also be necessary for changes in the investor's
proportionate interest in the investees arising from changes in the
investee's equity. When the Group's share of losses exceeds its
interest in an equity-accounted investees, the Group's carrying
amount is reduced to nil and recognition of further losses is
discontinued except to the extent that the Group has incurred legal
or constructive obligations or made payments on behalf of the
equity-accounted investees. Equity accounting is discontinued when
an associate is classified as held-for-sale.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(vii) Transactions eliminated on consolidation and equity
accounting
Intra-group balances and transactions, and any unrealised income
and expenses (except for foreign currency translation gains or
losses) from intra-group transactions with subsidiaries are
eliminated in preparing the consolidated financial statements.
Intra-group gains on transactions between the Group and its
equity-accounted investees are eliminated to the extent of the
Group's interest in the investees. Unrealised losses are also
eliminated in the same way as unrealised gains, but only to the
extent that there is no evidence of impairment. Accounting policies
of the subsidiaries and equity- accounted investees have been
changed where necessary to ensure consistency with the policies
adopted by the Group.
(c) Assets held-for-sale
Classification
Non-current assets, or disposal groups comprising assets and
liabilities, are classified as held-for-sale if it is highly
probable that they will be recovered primarily through sale rather
than through continuing use within twelve months. A subsidiary
acquired exclusively with a view to resale is classified as
disposal group held-for-sale and income and expense from its
operations are presented as part of discontinued operation.
Measurement
Such assets, or disposal groups, are generally measured at the
lower of their carrying amount and fair value less costs to sell.
Any impairment loss on a disposal group is allocated first to
goodwill, and then to the remaining assets and liabilities on a
pro-rata basis, except that no loss is allocated to inventories,
financial assets, deferred tax assets, employee benefit assets,
investment property or biological assets, which continue to be
measured in accordance with the Group's other accounting policies.
Impairment losses on initial classification as held-for-sale or
held-for-distribution and subsequent gains and losses on
re-measurement are recognised in profit or loss. Once classified as
held-for-sale, intangible assets and property, plant and equipment
are no longer amortised or depreciated, and any equity-accounted
investee is no longer equity accounted.
If the criteria for classification as held for sale are no
longer met, the entity shall cease to classify the asset (or
disposal group) as held for sale and shall measure the asset at the
lower of its carrying amount before the asset (or disposal group)
was classified as held-for-sale, adjusted for any depreciation,
amortisation or revaluations that would have been recognised had
the asset (or disposal group) not been classified as held-for-sale
and its recoverable amount at the date of the subsequent decision
not to sell.
(d) Foreign currency transactions
(i) Functional and presentation currency
Items included in the consolidated financial statements are
measured using the currency of the primary economic environment in
which the entity operates (the functional currency). The
consolidated financial statements are presented in US dollars,
which is the Group's functional and presentation currency.
(ii) Transactions and balances
Transactions in foreign currencies are translated into the
functional currency using the spot exchange rates prevailing at the
dates 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 the reporting date.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
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 transactions. 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 recognised in the
income statement. Translation differences on non-monetary items
carried at their fair value, such as certain equity securities
measured at fair value through equity, are included in investments
fair value reserve.
(iii) Foreign operations
The assets and liabilities of foreign operations, including
goodwill and fair value adjustments arising on acquisition are
translated into US$ at exchange rates at the reporting date. The
income and expenses of foreign operations are translated into US$
at the exchange rates at the date of the transactions. Foreign
currency differences are accumulated into foreign currency
translation reserve in owners' equity, except to the extent the
translation difference is allocated to NCI.
When foreign operation is disposed of in its entirety such that
control is lost, cumulative amount in the translation reserve is
reclassified to consolidated income statement as part of the gain
or loss on disposal.
(e) Offsetting of financing instruments
Financial assets and liabilities are offset and the net amount
presented in the consolidated statement of financial position when,
and only when, the Group has a legal right to set off the
recognised amounts and it intends either to settle on a net basis
or to realise the asset and settle the liability simultaneously.
Income and expense are presented on a net basis only when permitted
under AAOIFI, or for gains and losses arising from a group of
similar transactions.
(f) Investment securities
Investment securities are categorised as propritory investments,
co-investments and treasury portfolio.
(refer note 3 for categorisation)
Investment securities comprise debt type and equity type
instruments but exclude investment in subsidiaries and
equity-accounted investees (note 4 (b) (ii) and (vi)).
(i) Categorization and classification
Refer note 4 (a) (i) (2)
(ii) Recognition and de-recognition
Investment securities are recognised at the trade date i.e. the
date that the Group commits to purchase or sell the asset, at which
date the Group becomes party to the contractual provisions of the
instrument. Investment securities are derecognised when the rights
to receive cash flows from the financial assets have expired or
where the Group has transferred substantially all risk and rewards
of ownership.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(iii) Measurement
Investment securities are measured initially at fair value plus,
except for investment securities carried at FVTIS, transaction
costs that are directly attributable to its acquisition or
issue.
Subsequent to initial recognition, investments carried at FVTIS
and FVTE are re-measured to fair value. Gains and losses arising
from a change in the fair value of investments carried at FVTIS are
recognised in the consolidated income statement in the period in
which they arise. Gains and losses arising from a change in the
fair value of investments carried at FVTE are recognised in the
consolidated statement of changes in owners equity and presented in
a separate investment fair value reserve in equity.
The fair value gains / (losses) are recognised taking into
consideration the split between portions related to owners' equity
and equity of investment account holders. When the investments
carried at FVTE are sold, impaired, collected or otherwise disposed
of, the cumulative gain or loss previously recognised in the
statement of changes in owners' equity is transferred to the income
statement.
Investments at FVTE where the entity is unable to determine a
reliable measure of fair value on a continuing basis, such as
investments that do not have a quoted market price or there are no
other appropriate methods from which to derive reliable fair
values, are stated at cost less impairment allowances.
(iv) Measurement principles
Amortised cost measurement
The amortised cost of a financial asset or liability is the
amount at which the financial asset or liability is measured at
initial recognition, minus capital repayments, plus or minus the
cumulative amortisation using the effective profit method of any
difference between the initial amount recognised and the maturity
amount, minus any reduction (directly or through use of an
allowance account) for impairment or uncollectibility. The
calculation of the effective profit rate includes all fees and
points paid or received that are an integral part of the effective
profit rate.
Fair value measurement
Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in
an arm's length transaction on the measurement date. When
available, the Group measures the fair value of an instrument using
quoted prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly
available and represent actual and regularly occurring market
transactions on an arm's length basis.
The best evidence of the fair value of a financial instrument on
initial recognition is normally the transaction price - i.e. the
fair value of the consideration given or received.
If a market for a financial instrument is not active, the Group
establishes fair value using a valuation technique. Valuation
techniques include using recent arm's length transactions between
knowledgeable, willing parties (if available), discounted cash flow
analyses, price / earnings multiples and other valuation models
with accepted economic methodologies for pricing financial
instruments.
Some or all of the inputs into these models may not be market
observable, but are estimated based on assumptions. Inputs to
valuation techniques reasonably represent market expectations and
measures of the risk-return factors inherent in the financial
instrument.
4 SIGNIFICANT ACCOUNTING POLICIES (continued
Fair value estimates involve uncertainties and matters of
significant judgement and therefore, cannot be determined with
precision. There is no certainty about future events (such as
continued operating profits and financial strengths). It is
reasonably possible, based on existing knowledge, that outcomes
within the next financial year that are different from assumptions
could require a material adjustment to the carrying amount of the
investments.
The fair value of a financial liability with a demand feature
(e.g. a demand deposit) is not less than the amount payable on
demand, discounted from the first date on which the amount could be
required to be paid.
The Group recognises transfers between levels of the fair value
hierarchy as of the end of the reporting period during which the
change has occurred.
(g) Financing assets
Financing assets comprise Shari'a compliant financing contracts
with fixed or determinable payments. These include financing
provided through Murabaha, Musharaka, Istisna and Wakala contracts.
Financing assets are recognised on the date at which they are
originated and are carried at their amortised cost less impairment
allowances, if any.
(h) Assets acquired for leasing
Assets acquired for leasing (Ijarah Muntahia Bittamleek)
comprise finance lease assets which are stated at cost less
accumulated depreciation and any impairment in value. Under the
terms of lease, the legal title of the asset passes to the lessee
at the end of the lease term, provided that all lease instalments
are settled. Depreciation is calculated on a straight-line basis at
rates that systematically reduce the cost of the leased assets over
the period of the lease. The Group assesses at each reporting date
whether there is objective evidence that the assets acquired for
leasing are impaired. Impairment losses are measured as the
difference between the carrying amount of the asset (including
lease rental receivables) and the estimated recoverable amount.
Impairment losses, if any, are recognised in the consolidated
income statement.
(i) Placements with and from financial and other institutions
These comprise placements made with/ from financial and other
institutions under shari'a compliant contracts. Placements are
usually short term in nature and are stated at their amortised
cost.
(j) Cash and cash equivalents
For the purpose of consolidated statement of cash flows, cash
and cash equivalents comprise cash on hand, bank balances and
placements with financial institutions) with original maturities of
three months or less when acquired that 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. Bank
balances that are restricted and not available for day-to-day
operations of the Group are not included in cash and cash
equivalents.
(k) Investment property
Investment property comprise land plots and buildings.
Investment property is property held to earn rental income or for
capital appreciation or both but not for sale in the ordinary
course of business, use in the supply of services or for
administrative purposes. Investment property is measured initially
at cost, including directly attributable expenses. Subsequent to
initial recognition, investment property is carried at cost less
accumulated depreciation and accumulated impairment allowances (if
any). Land is not depreciated.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
A property is transferred to investment property when, there is
change in use, evidenced by:
-- end of owner-occupation, for a transfer from owner-occupied
property to investment property; or
-- commencement of an operating ijara to another party, for a
transfer from a development property to investment property.
Further, an investment property is transferred to development
property when, there is a change in use, evidenced by:
-- commencement of own use, for a transfer from investment
property to owner-occupied property;
-- commencement of development with a view to sale, for a
transfer from investment in real estate to development
property.
An investment property is derecognised upon disposal or when the
investment property is permanently withdrawn from use and no future
economic benefits are expected from the disposal. Any gain or loss
arising on derecognition of the property (calculated as the
difference between the net disposal proceeds and the carrying
amount of the asset) is included in the consolidated income
statement in the period in which the property is derecognised.
(l) Development properties
Development properties are properties held for sale or
development and sale in the ordinary course of business.
Development properties are measured at the lower of cost and net
realisable value.
(m) Property and equipment
Property and equipment is stated at cost less accumulated
depreciation and accumulated impairment losses, if any. Cost
includes the cost of replacing part of the property, plant and
equipment and borrowing costs for long-term construction projection
if the recognition criteria are met. All other repair and
maintenance costs are recognised in the consolidated income
statement as incurred.
Depreciation is calculated to write off the cost of items of
property, plant and equipment less their estimated residual values
using the straight line method over their estimated useful lives,
and is generally recognised in the consolidated income
statement.
The estimated useful lives of property and equipment of the
industrial business assets are as follows:
Buildings and infrastructure on lease hold 15 - 30 years
Machinery 8 - 40 years
Other equipment comprising:
Tools and dies 3 years
Computers 3 - 5 years
Furniture and fixtures 5 - 8 years
Motor vehicles 4 - 5 years
The carrying values of property and equipment are reviewed for
impairment when events or changes in circumstances indicate the
carrying values may not be recoverable. If any such indication
exists and where the carrying values exceed the estimated
recoverable amounts, the assets are written down to their
recoverable amounts, being the higher of the fair value less costs
to sell and their value in use.
An item of property and equipment is derecognised on disposal or
when no future economic benefits are expected from its use or
disposal. Any gain or loss arising on derecognition of the asset is
recognised in the consolidated statement of income in the year of
derecognition.
The assets' residual values, useful lives and methods of
depreciation are reviewed annually and adjusted prospectively if
appropriate.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(n) Intangible assets
Goodwill
Goodwill that arises on the acquisition of subsidiaries is
measured at cost less accumulated impairment losses.
Other Intangible assets
Intangible assets acquired separately are initially measured at
cost. The cost of intangible assets acquired in a business
combination are their fair values as at the date of acquisition.
Subsequently, intangible assets are recognised at cost less any
accumulated amortisation and accumulated impairment losses.
Internally generated intangible assets, excluding capitalised
development costs, are not capitalised and expenditure is
recognised in the consolidated income statement in the period in
which the expenditure is incurred. The useful lives of intangible
assets are assessed to be either finite or indefinite.
Intangible assets with finite lives are amortised over the
useful economic life of ten years and assessed for impairment
whenever there is an indication that the intangible asset may be
impaired. The amortisation period and the amortisation method for
an intangible asset with a finite useful life is reviewed at each
reporting date. Changes in the expected useful life or the expected
pattern of consumption of future economic benefits embodied in the
asset is accounted for by changing the amortisation period or
method, as appropriate, and are treated as changes in accounting
estimates.
The amortisation expense on intangible assets with finite lives
is recognised in the consolidated statement of income in the
expenses category consistent with the function if intangible
assets.
Intangible assets with indefinite useful lives are not
amortised, but are tested for impairment annually, either
individually or at the cash generating unit level. The assessment
of indefinite life is reviewed annually to determine whether the
indefinite life continues to be supportable. If not, the change in
useful life from indefinite to finite is made on a prospective
basis. Intangible assets with indefinite useful life consists of a
license to construct and operate a cement plant in the Kingdom of
Bahrain.
Gains or losses arising from de-recognition of an intangible
asset are measured as the difference between the net disposal
proceeds and the carrying amount of the asset and are recognised in
the consolidated statement of income when the asset is
derecognised.
(o) Impairment of exposures subject to credit risk
The Group recognises loss allowances for the expected credit
losses "ECLs" on:
-- Bank balances;
-- Placements with financial institutions;
-- Financing assets;
-- Lease rental receivables;
-- Investments in Sukuk (debt-type instruments carried at amortised cost);
-- Other receivables; and
-- Undrawn financing commitments and financial guarantee contracts issued.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
The Group measures loss allowances at an amount equal to
lifetime ECLs, except for the following, which are measured at
12-month ECLs:
-- Debt-type securities that are determined to have low credit risk at the reporting date; and
-- other debt-type securities and bank balances for which credit
risk (i.e. the risk of default occurring over the expected life of
the financial instrument) has not increased significantly since
initial recognition.
When determining whether the credit risk of an exposure subject
to credit risk has increased significantly since initial
recognition when estimating ECLs, the Group considers reasonable
and supportable information that is relevant and available without
undue cost or effort. This includes both quantitative and
qualitative information and analysis, based on the Group's
historical experience and informed credit assessment including
forward-looking information.
The Group assumes that the credit risk on exposure subject to
credit risk increased significantly if it is more than 30 days past
due. The Group considers an exposure subject to credit risk to be
in default when:
-- the borrower is unlikely to pay its credit obligations to the
Group in full, without recourse by the Group to actions such as
realising security, if any is held; or
-- the exposure is more than 90 days past due.
The Group considers a debt security to have low credit risk when
its credit risk rating is equivalent to the globally understood
definition of 'investment grade'. The Group considers this to be
BBB- or higher per S&P.
The Group applies a three-stage approach to measuring ECL.
Assets migrate through the following three stages based on the
change in credit quality since initial recognition.
Stage 1: 12-months ECL
Stage 1 includes exposures that are subject to credit risk on
initial recognition and that do not have a significant increase in
credit risk since initial recognition or that have low credit risk.
12-month ECL is the expected credit losses that result from default
events that are possible within 12 months after the reporting date.
It is not the expected cash shortfalls over the 12-month period but
the entire credit loss on an asset weighted by the probability that
the loss will occur in the next 12-months.
Stage 2: Lifetime ECL - not credit impaired
Stage 2 includes exposures that are subject to credit risk that
have had a significant increase in credit risk since initial
recognition but that do not have objective evidence of impairment.
For these assets, lifetime ECL are recognised. Lifetime ECL are the
expected credit losses that result from all possible default events
over the expected life of the financial instrument. Expected credit
losses are the weighted average credit losses with the life-time
probability of default ('PD').
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
Stage 3: Lifetime ECL - credit impaired
Stage 3 includes exposures that are subject to credit risk that
have objective evidence of impairment at the reporting date in
accordance with the indicators specified in the CBB's rule book.
For these assets, lifetime ECL is recognised.
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses. They
are measured as follows:
-- Exposures subject to credit risk that are not credit-impaired
at the reporting date: as the present value of all cash shortfalls
(i.e. the difference between the cash flows due to the entity in
accordance with the contract and the cash flows that the Group
expects to receive);
-- Exposures subject to credit risk that are credit-impaired at
the reporting date: as the difference between the gross carrying
amount and the present value of estimated future cash flows;
-- Undrawn financing commitment: as the present value of the
difference between the contractual cash flows that are due to the
Group if the commitment is drawn and the cash flows that the Group
expects to receive;
-- Financial guarantee contracts: the expected payments to
reimburse the holder less any amounts that the Group expects to
recover; and
-- ECLs are discounted at the effective profit rate of the exposure subject to credit risk.
Credit-impaired exposures
At each reporting date, the Group assesses whether exposures
subject to credit risk are credit impaired. An exposure subject to
credit risk is 'credit-impaired' when one or more events that have
a detrimental impact on the estimated future cash flows of the
financial asset have occurred. Evidence that an exposure is
credit-impaired includes the following observable data:
Ø significant financial difficulty of the borrower or
issuer;
Ø a breach of contract such as a default or being more than 90
days past due;
Ø the restructuring of a financing facility or advance by the
Bank on terms that the Bank would not consider otherwise;
Ø it is probable that the borrower will enter bankruptcy or
other financial reorganisation; or
Ø the disappearance of an active market for a security because
of financial difficulties.
Presentation of allowance for ECL in the statement of financial
position
Loss allowances for exposures subject to credit risk are
deducted from the gross carrying amount of the assets.
(p) Impairment of equity investments classified at fair value through equity (FVTE)
In the case of investments in equity securities classified as
FVTE. A significant or prolonged decline in the fair value of the
security below its cost is an objective evidence of impairment. The
Group considers a decline of 30% to be significant and a period of
nine months to be prolonged. If any such evidence exists, the
cumulative loss - measured as the difference between the
acquisition cost and the current fair value, less any impairment
loss on that investment previously recognised in income statement -
is removed from equity and recognised in the income statement.
Impairment losses recognised in the income statement on equity
instruments are subsequently reversed through equity.
(q) Impairment of non-financial assets
The carrying amount of the Group's non-financial assets (other
than those subject to credit risk covered above) are reviewed at
each reporting date to determine whether there is any indication of
impairment. If any such indication exists, the asset's recoverable
amount is estimated. The recoverable amount of an asset is the
greater of its value in use or fair value less costs to sell. An
impairment loss is recognised whenever the carrying amount of an
asset exceeds its estimated recoverable amount. Impairment losses
are recognised in the income statement. Impairment losses are
reversed only if there is an indication that the impairment loss
may no longer exist and there has been a change in the estimates
used to determine the recoverable amount.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
In assessing value in use, the estimated future cash flows are
discounted to their present value using a discount rate that
reflects current market assessments of the time value of money and
the risks specific to the asset or cash generating unit. An
impairment loss is recognised whenever the carrying amount of an
asset or its cash generating unit exceeds its estimated recoverable
amount. Impairment losses are recognised in the income statement.
Impairment losses are reversed only if there is an indication that
the impairment loss may no longer exist and there has been a change
in the estimates used to determine the recoverable amount.
Separately recognised goodwill is not amortised and is tested
annually for impairment and carried at cost less accumulated
impairment losses. Impairment losses on separately recognised
goodwill are not reversed.
(r) Clients' funds
These represent funds of projects set-up and promoted by the
Group and placed with the Group pending disbursement to the
projects concerned and carried at amortised cost.
(s) Customers' current accounts
Balances in current (non-investment) accounts are recognised
when received by the Group. The transactions are measured at the
cash equivalent amount received by the Group at the time of
contracting. At the end of the accounting period, the accounts are
measured at their book value.
(t) Term financing
Term financing represents facilities from financial
institutions, and financing raised through Sukuk. Term financing
are initially measured at fair value plus transaction costs, and
subsequently measured at their
amortised cost using the effective profit rate method. Financing
cost, dividends and losses relating to the term financing are
recognised in the consolidated income statement as finance expense.
The Group derecognises a financial liability when its contractual
obligations are discharged, cancelled or expire.
(u) Financial guarantees
Financial guarantees are contracts that require the Group to
make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due in
accordance with the terms of a debt instrument. A financial
guarantee contract is recognised from the date of its issue. The
liability arising from a financial guarantee contract is recognised
at the present value of any expected payment to settle the
liability, when a payment under the guarantee has become probable.
The Group has issued financial guarantees to support its
development projects (note 37).
(v) Dividends
Dividends to shareholders is recognised as liabilities in the
period in which they are declared.
(w) Share capital and reserves
The Group classifies capital instruments as financial
liabilities or equity instruments in accordance with the substance
of the contractual terms of the instruments. Equity instruments of
the group comprise ordinary shares and equity component of
share-based payments and convertible instruments. Incremental costs
directly attributable to the issue of an equity instrument are
deducted from the initial measurement of the equity
instruments.
Treasury shares
The amount of consideration paid including all directly
attributable costs incurred in connection with the acquisition of
the treasury shares are recognised in equity. Consideration
received on sale of treasury shares is presented in the financial
statements as a change in equity. No gain or loss is recognised on
the Group's consolidated income statement on the sale of treasury
shares.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
Statutory reserve
The Commercial Companies Law requires that 10 percent of the
annual net profit be appropriated to a statutory reserve which is
normally distributable only on dissolution. Appropriations may
cease when the reserve reaches 50 percent of the paid up share
capital. Appropriation to statutory reserve is made when approved
by the shareholders.
(x) Equity of investment account holders
Equity of investment account holders are funds held by the
Group, which it can invest at its own discretion. The investment
account holder authorises the Group to invest the account holders'
funds in a manner which the Group deems appropriate without laying
down any restrictions as to where, how and for what purpose the
funds should be invested. The Group charges management fee (Mudarib
fees) to investment account holders. Of the total income from
investment accounts, the income attributable to customers is
allocated to investment accounts after setting aside provisions,
reserves and deducting the Group's share of income. The allocation
of income is determined by the management of the Group within the
allowed profit sharing limits as per the terms and conditions of
the investment accounts. Administrative expenses incurred in
connection with the management of the funds are borne directly by
the Group and are not charged separately to investment accounts.
Equity of Investment account holders are carried at their book
values and include amounts retained towards profit equalisation and
investment risk reserves.
Profit equalisation reserve is the amount appropriated by the
Bank out of the Mudaraba income, before allocating the Mudarib
share, in order to maintain a certain level of return to the
deposit holders on the investments. Investment risk reserve is the
amount appropriated by the Bank out of the income of investment
account holders, after allocating the Mudarib share, in order to
cater against future losses for investment account holders.
Creation of these reserves results in an increase in the liability
towards the pool of investment accounts holders.
Restricted investment accounts
Restricted investment accounts represents assets acquired by
funds provided by holders of restricted investment accounts and
their equivalent and managed by the Group as an investment manager
based on either a Mudaraba contract or agency contract. The
restricted investment accounts are exclusively restricted for
investment in specified projects as directed by the investments
account holders. Assets that are held in such capacity are not
included as assets of the Group in the consolidated financial
statements.
(y) Revenue recognition
Revenue is measured at the fair value of consideration received
or receivable. Revenue is recognised to the extent that it is
probable that future economic benefits associated with the item of
revenue will flow to the Group, the revenue can be measured with
reliability and specific criteria have been met for each of the
Group's activities as described below:
Banking business
Income from investment banking activities is recognised when the
service is provided and income is earned. This is usually when the
Group has performed all significant acts in relation to a
transaction and it is highly probable that the economic benefits
from the transaction will flow to the Group. Significant acts in
relation to a transaction are determined based on the terms agreed
in the private placement memorandum/ contracts for each
transaction. The assessment of whether economic benefits from a
transaction will flow to the Group is determined when legally
binding commitments have been obtained from underwriters and
external investors for a substantial investment in the
transaction.
Income from placements with / from financial institutions are
recognised on a time-apportioned basis over the period of the
related contract using the effective profit rate.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
Dividend income from investment securities is recognised when
the right to receive is established. This is usually the
ex-dividend date for equity securities.
Finance income / expenses are recognised using the amortised
cost method at the effective profit rate of the financial asset /
liability.
Fees and commission income that are integral to the effective
profit rate on a financial asset carried at amortised cost are
included in the measurement of the effective profit rate of the
financial asset. Other fees and commission income, including
account servicing fees, sales commission, management fees,
placement and arrangement fees and syndication fees, are recognised
as the related services are performed.
Income from Murabaha and Wakala contracts are recognised on a
time-apportioned basis over the period of the contract using the
effective profit method.
Profit or losses in respect of the Bank's share in Musharaka
financing transaction that commence and end during a single
financial period is recognised in the income statement at the time
of liquidation (closure of the contract). Where the Musharaka
financing continues for more than one financial period, profit is
recognised to the extent that such profits are being distributed
during that period in accordance with profit sharing ratio as
stipulated in the Musharaka agreement.
Income from assets acquired for leasing (Ijarah Muntahia
Bittamleek) are recognised proportionately over the lease term
Income from sukuk and income / expenses on placements is
recognised at its effective profit rate over the term of the
instrument.
Non-banking business
Revenue from the sale of goods is recognised at a point in time
when customer takes possession. Revenue from rendering of services
is recognised when services are rendered.
(z) Earnings prohibited by Shari'a
The Group is committed to avoid recognising any income generated
from non-Islamic sources. Accordingly, all non-Islamic income is
credited to a charity account where the Group uses these funds for
charitable means.
(aa) Zakah
Zakah is calculated on the Zakah base of the Group in accordance
with FAS 9 issued by AAOIFI using the net assets method. Zakah is
paid by the Group based on the consolidated figures of statutory
reserve, general reserve and retained earning balances at the
beginning of the year. The remaining Zakah is payable by individual
shareholders. Payment of Zakah on equity of investment account
holders and other accounts is the responsibility of investment
account holders.
(bb) Employees benefits
Ø Short-term benefits
Short-term employee benefit obligations are measured on an
undiscounted basis and are expensed as the related service is
provided. A provision is recognised for the amount expected to be
paid under short-term cash bonus or profit-sharing plans if the
Group has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and the
obligation can be estimated reliably. Termination benefits are
recognised as an expense when the Group is committed demonstrably,
without realistic possibility of withdrawal, to a formal detailed
plan to either terminate employment before the normal retirement
date, or to provide termination benefits as a result of an offer
made to encourage voluntary redundancy.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
Ø Post employment benefits
Pensions and other social benefits for Bahraini employees are
covered by the Social Insurance Organisation scheme, which is a
"defined contribution scheme" in nature under, and to which
employees and employers contribute monthly on a
fixed-percentage-of-salaries basis. Contributions by the Bank are
recognised as an expense in consolidated income statement when they
are due.
Expatriate and certain Bahraini employees on fixed contracts are
entitled to leaving indemnities payable, based on length of service
and final remuneration. Provision for this unfunded commitment, has
been made by calculating the notional liability had all employees
left at the reporting date. These benefits are in the nature of a
"defined benefit scheme" and any increase or decrease in the
benefit obligation is recognised in the consolidated income
statement.
The Group also operates a voluntary employee saving scheme under
which the Group and the employee contribute monthly on a fixed
percentage of salaries basis. The scheme is managed and
administered by a board of trustees who are employees of the Group.
The scheme is in the nature of a defined contribution scheme and
contributions by the Group are recognised as an expense in the
consolidated income statement when they are due.
Ø Share-based employee incentive scheme
The Bank operates a share-based incentive scheme for its
employees (the "Scheme") whereby employee are granted the Bank's
shares as compensation on achievement of certain non-market based
performance conditions and service conditions (the 'vesting
conditions'). The grant date fair value of equity instruments
granted to employees is recognised as an employee expense, with a
corresponding increase in equity over the period in which the
employees become unconditionally entitled to the share awards.
Non-vesting conditions are taken into account when estimating
the fair value of the equity instrument but are not considered for
the purpose of estimating the number of equity instruments that
will vest. Service and non-market performance conditions attached
to the transactions are not taken into account in determining fair
value but are considered for the purpose of estimating the number
of equity instruments that will vest. The amount recognised as an
expense is adjusted to reflect the number of share awards for which
the related service and non-market performance vesting conditions
are expected to be met, such that the amount ultimately recognised
as an expense is based on the number of share awards that do meet
the related service and non-market performance conditions at the
vesting date. Amount recognised as expense are not trued-up for
failure to satisfy a market condition.
(cc) 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.
(dd) Onerous contracts
A provision for onerous contracts is recognised when the
expected benefits to be derived by the Group from the 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.
(ee) Trade date accounting
All "regular way" purchases and sales of financial assets are
recognised on the trade date, i.e. the date that the Group commits
to purchase or sell the asset.
(ff) Investment account holder protection scheme
Funds held with the Group in unrestricted investment accounts
and current accounts of its retail banking subsidiary are covered
by the Deposit Protection Scheme (the Scheme) established by the
Central Bank of Bahrain regulation in accordance with Resolution No
(34) of 2010.
4 SIGNIFICANT ACCOUNTING POLICIES (continued)
(gg) Income tax
The Group is exposed to taxation by virtue of operations of
subsidiaries in Morocco, Tunis and India. Income tax expense
comprises current and deferred tax. Income tax expense is
recognised in the income statement except to the extent that it
relates to items recognised directly in equity, in which case it is
recognised in equity. Current tax is the expected tax payable or
receivable on the taxable income or loss for the year, using tax
rates enacted or substantively enacted at the reporting date, and
any adjustment to tax payable in respect of previous years.
Deferred tax is recognised in respect of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is measured at the tax rates that are
expected to be applied to the temporary differences when they
reverse, based on the laws that have been enacted or substantively
enacted by the reporting date. A deferred tax asset is recognised
to the extent that it is probable that future taxable profits will
be available against which the temporary difference can be
realised. Deferred tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that
the related tax benefit will be realised.
Currently, the Group does not have any material current or
deferred tax exposure that requires recognition in the consolidated
financial statements.
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES
The Group makes estimates and assumptions that effect the
reported amounts of assets and liabilities within the next
financial year. Estimates and judgements are continually evaluated
and are based on historical experience and other factors, including
expectation of future events. However, the process of making the
required estimates and assumptions involved further challenges due
to the prevailing uncertainties arising from COVID-19 and required
use of management judgements.
a) Judgements
Establishing the criteria for determining whether credit risk on
an exposure subject to credit risk has increased significantly
since initial recognition, determining methodology for
incorporating forward looking information into measurement of ECL
and selection and approval of models used to measure ECL is set out
in Note 4(o) and Note 37(a)
Covid 19 impact
Covid 19 was declared a worldwide pandemic by the World Health
Organisation in March 2020. Covid 19 and related measures taken by
governments worldwide to slow the spread of the virus, have since
had a significant impact on the local and global economy, supply
chains and financial markets.
The Group has considered the impact of COVID-19 and related
market volatility in preparing these consolidated financial
statements. While the methodologies and assumptions applied in the
measurement of various items within the financial statements remain
unchanged from those applied in the 2020 consolidated financial
statements, the impact of COVID-19 has resulted in the application
of further judgement and the incorporation of
estimates and assumptions specific to the impact of COVID-19.
Principally this has resulted in updates to the Group's economic
assumptions used in determining expected credit losses (ECL) and
the impairment assessment for other non-financial assets.
The Group's risk and capital management framework continues to
be applied and the Group continues to monitor the impact of
COVID-19 on the Group's risk and capital profile. Non-financial
risks remerging from local and global movement restrictions, and
remote working by staff, counterparties, clients and suppliers, are
being identified, assessed, managed and governed through timely
application of the Group's Risk Management Framework.
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES
(continued)
a) Judgements (continued)
Financing portfolio
In accordance with the CBB relief measures, the Group has
introduced a number of support measures for customers impacted by
COVID-19, including the deferral of payments without profit for
retail and small business customers for an initial period of six
months without profit which was later extended by another 4 months
with profit.
Impairment allowance on financing portfolio at amortised
cost
In determining the appropriate level of expected credit losses
(ECLs) the Group considered the macro-economic outlook, customer
credit quality, the type of collateral held, exposure at default,
and the effect of payment deferral options as at the reporting
date.
The ECL methodology, significant increase in credit risk (SICR)
thresholds, and definition of default remain consistent with those
used as at 31 December 2019.
The model inputs, including forward-looking information,
scenarios and associated weightings, were revised to reflect the
current outlook. Noting the wide range of possible scenarios and
macroeconomic outcomes, and the relative uncertainty of how the
social and economic consequences of COVID-19 will materialize,
these scenarios represent reasonable and supportable
forward-looking views as at the reporting date.
Covid 19 impact (continued)
The Group's models are calibrated to consider past performance
and macrocosmic forward-looking variables as inputs. The global
regulators have issued guidance to consider the exceptional
circumstances of the Covid 19 pandemic. This includes consideration
of significant government support and the high degree of
uncertainty around historic long-term trends used in determining
reasonable and supportable forward-looking information as well as
the assessment of underlying credit deterioration and migration of
balances to progressive stages.
The Group considers both qualitative and quantitative
information in the assessment of significant increase in credit
risk. The utilisation of a payment deferral program was not
considered an immediate trigger for a significant increase in
credit risk ("SICR") or a staging migration for the purposes of
calculating ECL, given the purpose of these programs is to provide
temporary cash flow relief to the Group's customers affected by the
COVID-19.
The Group continues to assess borrowers for other indicators of
unlikeliness to pay, taking into consideration the underlying cause
of any financial difficulty and whether it is likely to be
temporary as a result of COVID-19 or longer term.
(i) Classification of investments
In the process of applying the Group's accounting policies,
management decides on acquisition of an investment whether it
should be classified as investments carried at fair value through
income statement or investments carried at fair value through
equity or investments carried at amortised cost. The classification
of each investment reflects the management's intention in relation
to each investment and is subject to different accounting
treatments based on such classification (note 4f(i)).
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES
(continued)
a) Judgements (continued)
(ii) Special purpose entities
The Group sponsors the formation of special purpose entities
(SPE's) primarily for the purpose of allowing clients to hold
investments. The Group provides corporate administration,
investment management and advisory services to these SPE's, which
involve the Group making decisions on behalf of such entities. The
Group administers and manages these entities on behalf of its
clients, who are by and large third parties and are the economic
beneficiaries of the underlying investments. The Group does not
consolidate SPE's that it does not have the power to control. In
determining whether the Group has the power to control an SPE,
judgements are made about the objectives of the SPE's activities,
its exposure to the risks and rewards, as well as about the Group
intention and ability to make operational decisions for the SPE and
whether the Group derives benefits from such decisions.
(iii) Impairment of equity investments at fair value through
equity - (refer to Note 4 (p))
b) Estimations
(i) Impairment of exposures subject to credit risk carried at amortised cost
Determining inputs into ECL measurement model including
incorporation of forward-looking information is set out in note
4(o) and note 38(a).
(ii) Measurement of fair value of unquoted equity investments - refer to 4f(vi) and Note 36
(iii) Impairment of investment property
The Group conducts impairment assessment of investment property
periodically using external independent property valuers to value
the property. The fair value is determined based on the market
value of the property using either sales comparable approach, the
residual value basis, replacement cost or the market value of the
property considering its current physical condition. The Group's
investment properties are situated in Bahrain, UAE and Morocco.
Given the dislocation in the property market and infrequent
property transactions, it is reasonably possible, based on existing
knowledge, that the current assessment of impairment could require
a material adjustment to the carrying amount of these assets within
the next financial year due to significant changes in assumptions
underlying such assessments.
(iv) Impairment of other non-financial assets and cash
generating units
Investment in associates and recognised goodwill are subject to
an impairment based on indicators of performance and market
conditions. Cash generating units include the Group's investments
in certain subsidiaries and equity-accounted investees and
investment property that generate cash flows that are largely
independent from other assets and activities of the Group. The
basis of impairment assessment for such cash generating units is
described in accounting policy note 4 (q). For equity-accounted
investees with indicators of impairment, the recoverable amounts is
determined based on higher of fair value less costs to sell
(FVLCTS); and value in use.
The recoverable amount for the equity-accounted investees was
determined using a combination of income and market approaches of
valuations. The objective of valuation techniques is to determine
whether the recoverable amount is greater than the carrying
amount.
5 JUDGEMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES
(continued)
b) Estimates (continued)
(v) Estimating net realisable value of development property
Development property is stated at lower of cost and net
realisable value. Net realisable value is the estimated selling
price in the ordinary course of business less estimated selling
expenses. The management has forecasted the cost of completion of
development property and has engaged independent valuers to
estimate the residual value of the development property based on
estimated market selling prices for similar properties. Net
realisable value estimates are made at a specific point in time,
based on market conditions and information about the expected use
of development property. These estimates involve uncertainties and
matters of significant judgement and therefore, cannot be
determined with precision. There is no certainty about future
events. It is reasonably possible, based on existing knowledge,
that outcomes within the next financial year that are different
from assumptions could require a material adjustment to the
carrying amount of the development property.
(vi) Consideration transferred and fair value of identifiable
assets acquired and liabilities assumed in a business
combination
The estimate in relation to consideration transferred and
determination of fair value of identifiable assets acquired and
liabilities assumed in a business combination are given in note
21.
6 CASH AND BANK BALANCES
31 December 31 December
2020 2019
Cash 13,339 14,067
Balances with banks 404,580 200,671
Balances with Central Bank of Bahrain:
* Current account 77,697 82,406
* Reserve account 40,886 67,454
------------ ------------
536,502 364,598
============ ============
The reserve account with the Central Bank of Bahrain of US$
40,886 thousand (2019: US$ 67,454 thousand) and balances with banks
of US$ 3,585 thousand (2019: US$ 16,640 thousand) are not available
for day-to-day operational purposes. The cash and bank balances are
net of ECL of US$ 15 thousand (2019: US$ 8 thousand).
7 TREASURY PORTFOLIO
31 December 31 December
2020 2019
Placements with financial institutions 169,998 546,575
Equity type investments
At fair value through income statement
* Structured notes 328,431 239,807
Debt type investments
At fair value through equity
* Quoted sukuk 648,991 284,904
At amortised cost
* Quoted sukuk * 693,737 517,403
* Unquoted sukuk 3,493 3,493
Less: Impairment allowances (6,104) (3,521)
1,838,546 1,588,661
============ =====================
* Includes quoted sukuk of US$ 282,740 thousand (31 December
2019: US$ 51,070 thousand) pledged against term-financing of US$
200,204 thousand (31 December 2019: US$ 215,326 thousand) (note
16).
a) Equity type investments - At fair value through income statement
2020 2019
At 1 January 239,807 -
Additions 687,496 598,725
Disposals during the year, at carrying
value (597,273) (359,248)
Fair value changes (1,599) 330
At 31 December 328,431 239,807
========== =========
8 FINANCING ASSETS
31 December 31 December
2020 2019
Murabaha 969,152 1,008,580
Musharaka 276 277
Wakala 239 13,280
Mudharaba 2,690 2,776
Istisnaa 3,565 4,597
Assets held-for-leasing 345,342 350,976
------------ ------------
1,321,264 1,380,486
Less: Impairment allowances (53,998) (107,709)
------------ ------------
1,267,266 1,272,777
============ ============
Murabaha financing receivables are net of deferred profits of
US$ 50,032 thousand
(2019: US$ 68,233 thousand).
8 FINANCING ASSETS (continued)
The movement on impairment allowances is as follows:
Impairment allowances Stage 1 Stage 2 Stage 3 Total
Balance at 1 January 2020 12,149 7,241 88,319 107,709
Net transfers 228 (4,512) 4,285 1
Net charge for the period
(note 25) 9,298 2,401 (2,542) 9,157
Write-offs - - (29,204) (29,204)
Disposal (286) - (33,379) (33,665)
At 31 December 2020 21,389 5,130 27,479 53,998
======= ======== ========= =========
9 INVESTMENT IN REAL ESTATE
31 December 31 December
2020 2019
Investment Property
* Land 481,315 490,412
* Building 63,757 40,841
------------ ------------
545,072 531,253
------------ ------------
Development Property
* Land 761,032 797,535
* Building 506,211 477,221
------------ ------------
1,267,243 1,274,756
------------ ------------
1,812,315 1,806,009
============ ============
(i) Investment property
Investment property includes land plots and buildings in
Bahrain, UAE and Morocco. Investment property of carrying amount of
US$ 40.84 million (2019: US$ 40.84 million) is pledged against
Wakala facilities and Ijarah facility (note 16).
The fair value of the Group's investment property at 31 December
2020 was US$ 686,913 thousand
(31 December 2019: US$ 543,850 thousand) based on a valuation
carried out by an independent external property valuers who have
recent experience in the location and category of the asset being
valued.
The 31 December 2020 valuation contains "material uncertainty"
clause due to the market disruption caused by the COVID-19
coronavirus pandemic. This does not invalidate the valuation but
implies that there is substantially more uncertainty than under
normal market conditions.
2020 2019
At 1 January 531,253 523,692
Additions during the year 21,035 8,360
Disposals (7,216) -
Impairment allowances (note 25) - (799)
At 31 December 545,072 531,253
======= =======
9 INVESTMENT IN REAL ESTATE (continued)
(ii) Development properties
This represent properties under development for sale in UAE,
Bahrain, North Africa and India.
2020 2019
At 1 January 1,274,756 1,316,318
Additions during the year 10,637 44,554
Disposals (22,109) (71,957)
Foreign currency translation difference 3,959 (14,159)
At 31 December 1,267,243 1,274,756
========= =========
10 PROPRIETARY INVESTMENTS
31 December 31 December
2020 2019
Equity type investments
At fair value through income statement
40,000
* Structured notes -
10,000
* Unlisted fund -
------------ ------------
50,000 -
------------ ------------
At fair value through equity
* Listed equity securities * 19,060 27,324
* Unquoted equity securities 108,998 125,234
------------ ------------
128,058 152,558
Equity-accounted investees 78,050 115,617
------------ ------------
256,108 268,175
============ ============
* Listed equity securities of US$ 19,060 thousand (2019: US$
26,216 thousand) are pledged against Murabaha facility (note
16).
(i) Equity type investments - At fair value through income statement
2020 2019
At 1 January - -
Additions during the year 50,000 -
Fair value changes during the year - -
At 31 December 50,000 -
======= =====
(ii) Listed equity securities at fair value through equity
2020 2019
At 1 January 27,324 29,093
Additions during the year - 26,282
Disposals during the year (1,095) (27,945)
Transfer from / (to) fair value reserve 4,831 (106)
Impairment during the year (12,000) -
At 31 December 19,060 27,324
======== ========
10 PROPRIETARY INVESTMENTS (continued)
(iii) Unquoted equity securities fair value through equity
2020 2019
At 1 January 125,234 137,955
Distributions during the year - (7,486)
Capital repayments during the year (7,874) -
Foreign exchange translation 989 -
Impairment during the year (1,476) -
Fair value changes (7,875) (5,235)
At 31 December 108,998 125,234
======== =======
(iv) Equity-accounted investees
Equity-accounted investees represents investments in the
following material associates:
Name Country of % holding Nature of business
incorporation
2020 2019
------- ------------------------
Capital Real Estate
Projects Company B.S.C. Kingdom of Real estate holding
(c) Bahrain 40% 40% and development
------- ------- ------------------------
Purchase and sale
of real estate in
Amlak II SPV Cayman Islands 23.51% 23.51% Bahrain
---------------- ------- ------- ------------------------
Bahrain Aluminium
Extrusion Company Kingdom of Extrusion and sale
B.S.C (c) ('Balexco') Bahrain 17.92% 17.92% of aluminium products
---------------- ------- ------- ------------------------
Enshaa Development
Real Estate B.S.C. Kingdom of Holding plot of land
(c) Bahrain 33.33% 33.33% in Kingdom of Bahrain.
---------------- ------- ------- ------------------------
Kingdom of
AlAreen Hotel SPC Bahrain 60% 60% Hospitality
---------------- ------- ------- ------------------------
Kingdom of Investment in Real
NS 12 Bahrain 28.41% 28.41% Estate
---------------- ------- ------- ------------------------
Lagoon Real Estate Kingdom of Real estate holding
Development Bahrain 23.01% 23.01% and development
---------------- ------- ------- ------------------------
2020 2019
At 1 January 115,617 66,964
De-recognition on acquiring a controlling
stake (note 22) (34,812) -
Additions during the year (note 21) 33,327 41,225
Disposals during the year (35,168) -
Share of (loss) / profit for the year, net (914) 7,428
At 31 December 78,050 115,617
======== =======
Equity-accounted investees includes the Group's investment of
less than 20% in Balexco. As the Group exercises significant
influence over the entity by way of its presence on the board of
directors, the investment is accounted for as an investment in
equity-accounted investee. The Group through shareholder's
agreement agreed to exercise joint control with 40% shareholding
over AlAreen Hotel SPC with another partner, hence, it is
considered as an equity-accounted investee.
10 PROPRIETARY INVESTMENTS (continued)
Summarised financial information of associates that have been
equity-accounted not adjusted for the percentage ownership held by
the Group (based on most recent management accounts):
2020 2019
Total assets 383,946 331,268
Total liabilities 23,553 29,621
Total revenues 10,384 88,292
Total profit / (loss) (7,799) 35,553
11 CO-INVESTMENTS
31 December 31 December
2020 2019
At fair value through equity
* Unquoted equity securities at fair value 126,319 96,507
------------ ------------
126,319 96,507
============ ============
Movement during the year
2020 2019
At 1 January 96,507 77,644
Additions during the year 41,858 29,513
Disposals during the year, at carrying
value (12,046) (1,680)
Impairment charge for the year (note 25) - (8,970)
At 31 December 126,319 96,507
========= =======
12 ASSETS HELD-FOR-SALE AND LIABILITIES RELATED TO IT
31 December 31 December
2020 2019
Assets - 101,213
Liabilities - 39,936
Non-controlling interests - 25,396
Assets and related liabilities held-for-sale represents the
assets and liabilities of Falcon Cement Company BSC (c) (' FCC'), a
subsidiary acquired in 2018.
Restatement
During the year, the Group had re-classified its investment in a
subsidiary, Falcon Cement Company BSC (c), from assets
held-for-sale to held-for-use because the investment no longer meet
the criteria to be classified as held-for-sale.
12 ASSETS HELD-FOR-SALE AND LIABILITIES RELATED TO IT (continued)
In accordance with IFRS 5 Non-current assets held-for-sale and
discontinued operations, upon reclassification as held-for-use, the
subsidiary was consolidated on a line by line basis including
earlier periods resulting in restatement of the prior year as if
the subsidiary had always been consolidated and reclassifying
'non-controlling interest held-for-sale' to 'non-controlling
interests'. The reclassification did not had any impact on the
previously reported profits or owners' equity.
The effect of restatement on the previously reported assets and
liabilities are given below:
31 December 2019
previously
restated reported
US$ 000's US$ 000's
ASSETS
Cash and bank balances 364,598 362,345
Treasury portfolio 1,588,661 1,588,661
Financing assets 1,272,777 1,272,777
Real estate Investments 1,806,009 1,806,009
Proprietary investments 268,175 268,175
Co-investments 96,507 96,507
Assets held-for-sale - 101,213
Receivables and prepayments 444,689 424,146
Property and equipment 103,857 25,440
----------
Total 5,945,273 5,945,273
========== ===========
LIABILITIES
Clients' funds 70,858 74,469
Placements from financial, non-financial
institutions and individuals 2,447,249 2,675,375
Customer current accounts 147,487 169,432
Term financing 301,411 268,016
Liabilities directly associated with assets
held-for-sale - 39,936
Payables and accruals 466,852 526,902
---------- -----------
Total 3,433,857 3,754,130
========== ===========
13 RECEIVABLES AND PREPAYMENTS
31 December 31 December
2020 2019
Investment banking receivables * 115,740 53,262
Financing to projects, net 40,803 27,202
Receivable on sale of development properties 59,733 32,547
Advances and deposits 69,163 73,625
Employee receivables 15,578 14,616
Profit on sukuk receivable 10,174 8,619
Lease rentals receivable 34,005 45,363
Receivable from sale of investments 46,635 46,000
Re-possessed assets 29,560 35,844
Prepayments and other receivables 184,267 107,611
------------
605,658 444,689
============ ============
* USD 100 million has subsequently been received
14 PROPERTY AND EQUIPMENT
31 December 31 December
2020 2019
Land 17,811 17,811
Buildings and other leased assets 46,936 2,191
Others including furniture, vehicles and
equipment 79,402 83,855
144,149 103,857
=========== ===========
Depreciation on property and equipment during the year was US$
thousand 6,150
(2019: US$ 4,786 thousand).
15 PLACEMENTS FROM FINANCIAL AND NON-FINANCIAL INSITUTIONS AND INDIVIDUALS
These comprise placements in the form of murabaha and wakala
contracts with financial, non-financial institutions, and
individuals part of the Group's treasury activities. This includes
US$ 84.3 million (2019: US$ 84 million) from a non-financial entity
which is currently subject to regulatory sanctions.
16 TERM FINANCING
31 December 31 December
2020 2019
Murabaha financing 748,265 249,435
Sukuk * 289,818 -
Ijarah financing 22,303 24,653
Other borrowings 28,691 27,323
1,089,077 301,411
=========== ===========
* During the year, the Group raised US$ 300 million through
issuance of sukuk certificates with a profit rate of 7.5% p.a.
repayable by 2025.
31 December 31 December
2020 2019
Current portion 466,812 240,721
Non-current portion 622,265 60,690
1,089,077 301,411
=========== ===========
Murabaha financing comprise:
a) US$ 14 million facility obtained for general corporate
purposes for a period of 5 years at a profit rate of 3 month LIBOR
plus margin of 6% p.a. (subject to a minimum of 7% p.a.). The
facility is secured by a pledge on Group's investment in shares of
KHCB and matures in 2022; and
b) Short-term and medium-term facilities of US$ 524,449 thousand
(2019: US$ 228,526 thousand) are secured by quoted sukuk of US$
282,740 thousand (2019: US$ 51,070 thousand), structured notes of
US$ 328,431 thousand (2019: US$ 239,807 thousand) (note 7) and
equity type investments of US$ 26,216 thousand (2019: US$ 26,216
thousand) (note 10).
Ijarah financing facility
This represents facility obtained from a financial institution
in 2016 to part finance the acquisition of an investment property
of US$ 40.84 million (note 9(i)), repayable over a period of 8
years at a profit rate of LIBOR plus margin of 5.7% p.a. (subject
to minimum of 7% p.a.).
16 TERM FINANCING (continued)
Other borrowings
These comprise financing availed by subsidiaries to fund project
development and working capital requirements. The financing is
secured against investment in real estate and are held through
special purpose vehicle that do not have any recourse to the Bank.
The Bank is not a party to these financing contracts and has not
guaranteed repayment in any form. These balances are reported in
the consolidated financial statements as a result of consolidation
of subsidiaries.
17 OTHER LIABILITIES
31 December 31 December
2020 2019
Employee related accruals 5,364 14,132
Board member allowances and accruals 499 1,799
Unclaimed dividends 5,150 12,608
Mudaraba profit accrual 14,805 23,637
Provision for employees' leaving indemnities 3,302 3,219
Zakah and Charity fund 5,344 5,407
Advance received from customers 71,547 114,704
Accounts payable 150,046 170,886
Other accrued expenses and payables 208,981 120,460
465,038 466,852
============ ============
18 EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH)
31 December 31 December
2020 2019
Placements and borrowings from financial
institutions - Wakala - 27,467
Mudaraba 1,156,993 1,191,078
1,156,993 1,218,545
============ ============
The funds received from investment account holders have been
commingled and jointly invested with the Group in the following
asset classes as at 31 December:
31 December 31 December
2020 2019
Balances with banks 88,294 111,792
CBB reserve account 40,886 67,454
Placements with financial institutions 76,950 173,761
Debt type instruments - sukuk 693,576 517,377
Financing assets 257,287 348,161
------------ ------------
1,156,993 1,218,545
============ ============
As at 31 December 2020, the balance of profit equalisation
reserve and investment risk reserve was Nil (2019: Nil).
The Group does not allocate non-performing assets to IAH pool.
All the impairment allowances are allocated to owners' equity.
Recoveries from non-performing financial assets are also not
allocated to IAH accountholders.
18 EQUITY OF INVESTMENT ACCOUNT HOLDERS (EIAH) (continued)
Only profits earned on pool of assets funded from IAH are
allocated between the owners' equity and IAH. The Group did not
charge any administration expenses to investment accounts.
Following is the average percentage for profit allocation
between owner's equity and investment accountholders.
2020 2019
Mudarib IAH shares Mudarib IAH shares
share share
1 month Mudharaba
* 87.96% 12.04% 80.61% 19.39%
3 months Mudharaba 75.35% 24.65% 65.38% 34.62%
6 months Mudharaba 71.57% 28.43% 60.00% 40.00%
12 months Mudharaba 62.50% 37.50% 42.96% 57.04%
18 months Mudharaba 60.09% 39.91% 38.65% 61.35%
24 months Mudharaba 67.35% 32.65% 43.11% 56.89%
36 months Mudharaba 55.72% 44.28% 32.37% 67.63%
-------- ----------- -------- -----------
* Includes savings, Al Waffer and Call Mudaraba accounts.
The investors' share of the return on jointly invested assets
and distribution to investment account holders were as follows:
2020 2019
Returns from jointly invested assets (57,401) (62,451)
Banks share as Mudarib 24,812 22,433
Return to investment account holders (32,589) (40,018)
========= =========
During the year, average mudarib share as a percentage of total
income allocated to IAH was 60.72% (2019: 46.56%) as against the
average mudarib share contractually agreed with IAH. Hence the
Group sacrificed average mudarib fees of 3.17% (2019: 12.83%).
The Group does not share profits resulting from the assets
funded through current accounts and other funds received on the
basis other than mudarba contract.
The funds raised from IAH are deployed in the assets on a
priority basis after setting aside certain amount in cash and
placement with Banks for liquidity management purposes
19 SHARE CAPITAL
31 December 31 December
Authorised: 2020 2019
9,433,962,264 shares of US$ 0.265 each
(2019: 9,433,962,264 shares of US$ 0.265
each) 2,500,000 2,500,000
Issued and fully paid up:
3,681,650,441 shares of US$ 0.265 each
(2019: 3,681,650,441 shares of US$ 0.265
each) 975,638 975,638
------------ ------------
The movement in the share capital during the year is as
follows:
2020 2019
At 1 January 975,638 975,638
Issue of bonus shares - 55,000
Extinguishment of treasury shares - (55,000)
At 31 December 975,638 975,638
======== =========
As at 31 December 2020, the Bank held 313,358,202 (31 December
2019: 296,537,880) of treasury shares. During the year, the Bank
purchased 124,427,651 shares for US$ 25.1 million in connection
with employee long term incentive plan which is included in
treasury shares. Furthermore, the bank had vested shares of
38,657,329 for US$ 8,533,101 (2019:Nil).
Additional information on shareholding pattern
(i) The Bank has only one class of equity shares and the holders
of these shares have equal voting rights.
(ii) Distribution schedule of equity shares, setting out the
number of holders and percentage in the following categories:
Categories* % of total
Number of Number of outstanding
shares shareholders shares
Less than 1% 2,248,583,791 7,744 61%
1% up to less than 5% 924,716,288 15 25%
5% to less than 10% (#) 508,350,362 2 14%
Total 3,681,650,441 7,761 100%
================ ============== =============
* Expressed as a percentage of total outstanding shares of the
Bank.
(#) Includes treasury shares held by the Bank.
(iii) As at 31 December 2020, the shareholders who hold more
than 5% of the total outstanding shares are as below:
Shareholder name % of total
Number of outstanding
shares shares
GFH Financial Group BSC (Treasury shares) 313,358,202 8.51%
Al Hilal Bank 194,992,160 5.30%
------------- -------------
19 SHARE CAPITAL (continued)
Appropriations and changes in capital structure
Appropriations, if any, are made when approved by the
shareholders.
i) In the shareholders meeting held on 6 April 2020, the
following were approved and effected during the year:
-- Cash dividend of 3.34% of the paid-up share capital amounting to US$ 30 million;
-- Appropriation of US$ 500 thousands towards charity for the year 2019;
-- Appropriation of US$ 568 thousand towards zakah for the year 2019; and
-- Transfer of US$ 8 million to statutory reserve.
ii) In the shareholder's meeting held on 30 September 2020, the
shareholders approved netting off accumulated losses of US$ 110,273
thousand against the statutory reserve.
Proposed appropriations
The Board of Directors proposes the following appropriations for
2020 subject to shareholders' and regulatory approval:
-- Cash dividend of 1.86% of the paid-up share capital amounting to US$ 17 million;
-- Stock dividend of 2.74% of the paid-up share capital amounting to US$ 25 million;
-- Transfer of US$ 4.51 million to statutory reserve; and
-- US$ 0.5 million towards charity and US$ 604 thousand towards zakah for the year.
20 SHARE GRANT RESERVE
2020 2019
At 1 January 1,198 1,086
Issue/disposal of share under incentive
scheme (105) 112
At 31 December 1,093 1,198
======= ======
21 ACQUISITION OF SUBSIDIARIES
(i) Acquisition of additional interests in an existing equity accounted investee
During the year, the Group acquired additional stake in GBCORP
BSC (c) (formerly known as Global Banking Corporation BSC (c))
(GBCORP), an equity-accounted investee resulting in the Group
obtaining control as at 30 June 2020.
The Group's existing stake and additional stake acquired are
given below:
Current Additional Total
Stake stake acquired Stake
GBCORP 28.69% 21.72% 50.41%
Consideration transferred and non-controlling interests
The consideration transferred for the acquisition was in the
form of investments held by the Group. The consideration
transferred is generally measured at fair value and the stake held
by shareholders other than the Group in the subsidiaries is
recognised in the consolidated financial statements under
"Non-controlling interests" based on the proportionate share of
non-controlling shareholders' in the recognised amounts of the
investee's net assets or fair value at the date of acquisition of
the investee on a transaction by transaction basis based on the
accounting policy choice of the Group.
21 Acquisition of subsidiaries (continued)
Identifiable assets acquired and liabilities assumed
All entities acquired were considered as businesses. The fair
value of assets, liabilities, equity interests have been reported
on a provisional basis. If new information, obtained within one
year from the acquisition date about facts and circumstances that
existed at the acquisition date, identifies adjustments to the
above amounts, or any additional provisions that existed at the
acquisition date, then the acquisition accounting will be revised.
Revisions to provisional acquisition accounting are required to be
done on a retrospective basis.
The reported amounts below represent the adjusted acquisition
carrying values of the acquired entities as at 30 June 2020, being
the effective date of acquisition, and have been reported on a
provisional basis as permitted by accounting standards.
30 June
2020
Cash and bank balances, placements with financial institutions 32,856
Investment securities 50,167
Investment property 42,477
Property and equipment 2,709
Receivables and prepayments 1,440
Total assets 129,649
Accruals and other liabilities 1,101
Total liabilities 1,101
Total net identifiable assets and liabilities (A) 128,548
Fair value of Group's previously held equity interest 34,812
Value of consideration transferred 21,571
Non-controlling interests recognised 63,747
Total consideration (B) 120,130
Negative goodwill (B-A) (provisional) 8,418
The acquisition of additional stake in GBCORP resulted in a
bargain purchase and the Group has recognised negative goodwill of
US$ 8,418 thousand which is included in the income statement under
'Income from proprietary and co-investments, Direct investment
income'. The bargain purchase was due to pressure on the sellers to
exit their holdings due to change in their business plans. The
acquisition resulted in net cash inflow of US$ 32,856 thousand.
21 Acquisition of subsidiaries (continued)
(ii) Acquisition of new subsidiaries
During the year, the Group acquired controlling stake in the
following subsidiaries.
% stake Place of Nature of activities
acquired incorporation
Roebuck Asset Management (RAM) 60% United Kingdom Property asset management
company
Athena Private School for Special 100% Kingdom of Educational institution
Education ("Athena") Bahrain
-------------- --------------------------
Consideration transferred and non-controlling interests
The consideration transferred for the acquisition was in the
form of cash and in-kind for the services rendered by the Group.
The consideration transferred is generally measured at fair value
and the stake held by shareholders other than the Group in the
subsidiaries is recognised in the consolidated financial statements
under "Non-controlling interests" based on the proportionate share
of non-controlling shareholders' in the recognised amounts of the
investee's net assets or fair value at the date of acquisition of
the investee on a transaction by transaction basis based on the
accounting policy choice of the Group. Where consideration includes
contingent consideration payable in future based on performance and
service obligations of continuing employees, these are accounted
under IFRS 2 - Share based payments
Identifiable assets acquired and liabilities assumed
All entities acquired were considered as businesses. The fair
value of assets, liabilities, equity interests have been reported
on a provisional basis. If new information, obtained within one
year from the acquisition date about facts and circumstances that
existed at the acquisition date, identifies adjustments to the
above amounts, or any additional provisions that existed at the
acquisition date, then the acquisition accounting will be revised.
Revisions to provisional acquisition accounting are required to be
done on a retrospective basis.
The reported amounts below represent the adjusted acquisition
carrying values of the acquired entities at the date of acquisition
reported on a provisional basis as permitted by accounting
standards.
RAM Athena
Property and equipment 22 43,235
Receivables 135 3,351
Cash and bank balances 951 405
Total assets 1,108 46,991
------
Accruals and other liabilities 109 40,991
Total liabilities 109 40,991
------
Total net identifiable assets and liabilities
(A) 999 6,000
------
21 Acquisition of subsidiaries (continued)
(ii) Acquisition of new subsidiaries (continued)
RAM Athena
Consideration 7,409 6,000
Non-controlling interests recognised 400 -
------
Total consideration (B) 7,809 6,000
------
Goodwill (A-B) 6,810 -
------
For the purpose of consolidated statement of cash flows, net
cash acquired on business combination is given below:
Total
Cash and bank balances acquired as part of business
combination 34,212
Less: Cash consideration (7,409)
Net cash flows from acquisition of subsidiaries 26,803
===============
(iii) Acquisition of additional stake in existing subsidiaries
During 2019, the Group acquired additional stake in the
following subsidiaries
Current Additional Total
Stake stake acquired stake
Tunis Bay Investment Company (TBIC) 51.41% 31.51% 82.92%
Residential South Real Estate
Development Company (RSRED) 51.18% 48.82% 100%
21 Acquisition of subsidiaries (continued)
The consideration transferred for the acquisition was in the
form of cash and non-cash assets held. The change in net assets
arising out of the acquisition of additional interests has the
following effect on the consolidated financial statements:
US$ 000's
Carrying amount of NCI acquired (based on historical
cost) 49,469
Consideration to NCI (based on transaction price) (100,881)
Decrease in equity attributable to shareholders of
the Bank (51,412)
=========
22 OTHER INCOME
Other income includes gain recognised from settlements and write
back of liabilities no longer required of US$ 23.2 million,
recoveries of expenses from project companies of US$ 8.4 million
and income of non-financial subsidiaries of US$ 2 million (2019:
US$ 17 million).
23 STAFF COST
2020 2019
Salaries and benefits 43,746 47,054
Social insurance expenses 3,326 3,536
47,072 50,590
As per the Group's Variable Incentive Policy, a portion of the
annual performance bonus is issued in the form of share awards to
its senior management employees. These awards include deferred
incentives in the form of shares, share purchase plans and
long-term incentive plans with different conditions. The terms of
the award, including the type of plan, extent of funding, pricing
and deferral period is determined for each year by the Board
Nomination, Remuneration and Governance Committee of the Bank.
Performance Nature of award Staff coverage Summary of deferral and
year vesting conditions
2014 Award Employee Share Covered persons Shares are released rateably
Purchase Plan in business and over the 3 year deferral
control functions period. The issue price
who exceed total is determined based on
compensation thresholds a defined adjustment to
as per CBB Remuneration market price on the date
Regulations and of the award. No future
Bank's Variable performance conditions
Remuneration policy or service conditions.
Shares are entitled for
dividends, if any, but
released over the deferral
period.
2015 - Employee Share
2019 * Purchase Plan
Awards & Deferred
Annual Bonus
2020 Awards Long term incentive Select Senior Management During 2020, under the
plan (LTIP) future performance awards
share awards structure of the Bank,
an LTIP scheme was introduced
where the employees are
compensated in form of
shares as a percentage
on
achievement of certain
pre-determined performance
conditions. The LTIP sets
performance and service
conditions and has a ratable
vesting schedule over
a period of six years.
The issue price is determined
based on a defined adjustment
to market price on the
date of the award. The
LTIP shares include leverage
features and are entitled
to dividends, if any,
released along with the
vested shares.
Share incentive scheme 2020 2019
No. of Shares USD 000's No. of Shares USD 000's
Opening balance 37,531,546 11,039 26,547,980 10,408
Awarded during the period
* Deferred Annual Bonus 5,316,072 1,259 24,531,867 6,259
* LTIP shares 257,715,531 26,860 - -
Bonus shares - - 2,893,887 -
Forfeiture and other adjustments - - (2,638,466) -
Transfer to employees
/ settlement (55,298,795) (9,395) (13,803,722) (5,628)
Closing balance 245,264,354 29,763 37,531,546 11,039
In case of the employee share purchase plans and LTIP, the
amounts reported in the table represents the vesting charge or
benefit which is charged to the income statement and not the gross
value of issued shares
.
24 OTHER OPERATING EXPENSES
2020 2019
Investment advisory expenses 13,091 14,186
Rent 4,002 4,976
Professional and consultancy fees 9,073 5,616
Legal expenses 4,379 3,502
Depreciation 2,268 2,172
Expenses relating to non-banking subsidiaries 17,428 4,562
Other operating expenses 14,945 16,831
65,186 51,845
25 IMPAIRMENT ALLOWANCES
2020 2019
Bank balances 5 (126)
Treasury portfolio
* Placements with financial institutions (1,077) 161
* Equity and debt type securities 2,556 19
Financing assets (note 8) 9,160 44,804
Investment property (note 9) - 799
Proprietary investments (note 10 (ii) and
(iii)) 13,476 -
Co-investments (note 11) - 8,970
Other receivables 2,761 (146)
Commitments and financial guarantees (82) (217)
26,799 54,264
26 GOVERNMENT ASSISTANCE AND SUBSIDIES
Due to Covid-19, the Government of Kingdom of Bahrain has
announced various economic stimulus programmes ("Packages") to
support businesses in these challenging times.
During the year, the Group received financial assistance of US$
4,954 thousands comprising reimbursement of staff costs and waiver
of utility and other charges and zero-cost repo funding from the
government of the Kingdom of Bahrain that has been recognised
directly in equity.
27 RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial and operating
decisions. Related parties include entities over which the Group
exercises significant influence, major shareholders, directors and
executive management of the Group. A significant portion of the
Group's management fees are from entities over which the Group
exercises influence (assets under management). Although these
entities are considered related parties, the Group administers and
manages these entities on behalf of its clients, who are by and
large third parties and are the economic beneficiaries of the
underlying investments. The transactions with these entities are
based on agreed terms.
27 RELATED PARTY TRANSACTIONS (continued)
The significant related party transactions during the year and
balances as at year end included in these consolidated financial
statements are as follows:
Related parties
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
Transactions venture personnel are interested entities Total
Sale of investment
banking products - - - 137,100 137,100
Related parties
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2020 venture personnel are interested entities Total
Assets
Treasury portfolio - - 35,000 - 35,000
Financing assets - 9,485 17,695 29,848 57,028
Proprietary investment 114,250 - 16,058 49,170 179,478
Co investment - - - 70,715 70,715
Receivables and
prepayments 4,622 - - 132,616 137,238
Liabilities
Customer current
account 358 225 17,995 3,212 21,790
Placements from
financial, non-financial
institutions and
individuals - 5,584 112,568 - 118,152
Payables and accruals - 500 2,732 74,242 77,474
Equity of investment
account holders 1,095 639 99,579 865 102,178
27 RELATED PARTY TRANSACTIONS (continued)
Related parties
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2020 venture personnel are interested entities Total
Income
Income from investment
banking - - - 73,266 73,266
Income from commercial
banking (886) (5) (7,342) (24) (8,257)
Income from proprietary
and co-investments (1,015) - - 8,854 7,839
Treasury and
other income - - - 5,159 5,159
Expenses
11,171
Operating expenses - * 385 66 11,622
* The amount presented excluded bonus to key management
personnel for 2020 as allocation has not been finalized at the date
of approval of these consolidated financial statements.
Related parties
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2019 venture personnel are interested entities Total
Assets
Financing assets - 5,350 15,146 60,752 81,248
Proprietary investment 115,617 - 6,058 47,881 169,556
Co investment - - - 51,950 51,950
Receivables and
prepayments 2,393 - 5,000 60,642 68,035
Liabilities
Clients' funds 72 - - 15,409 15,481
Customer current
account - 4,732 - - 4,732
Placements from
financial, non-financial
institutions and
individuals 515 162 14,193 3,202 18,072
Payables and accruals 1,133 1,800 11,679 11,679 26,291
Equity of investment
account holders 1,072 1,586 299,416 1,008 303,082
27 RELATED PARTY TRANSACTIONS (continued)
Related parties
Significant Assets under
shareholders management
/ entities including
Associates in which special purpose
/ Joint Key management directors and other
2019 venture personnel are interested entities Total
Income
Income from investment
banking - - - 95,771 95,771
Income from commercial
banking (151) 292 (10,027) (29) (9,915)
Income from proprietary
and co-investments 7,410 - - 2,358 9,768
Real estate income - 50 13,392 - 13,442
Treasury and
other income 313 - - 1,301 1,614
Expenses
Operating expenses - 16,718 - - 16,718
Finance expenses - - 623 - 623
Key management personnel
Key management personnel of the Group comprise of the Board of
Directors and key members of management having authority and
responsibility for planning, directing and controlling the
activities of the Group and its significant banking subsidiary.
During the year, there were no direct participation of directors
in investments promoted by the Group.
The key management personnel compensation is as follows:
2020 2019
Board members' remuneration, fees and allowance 1,673 3,213
Salaries, other short-term benefits and
expenses 9,222 13,289
Post-employment benefits 276 216
28 ASSETS UNDER MANAGEMENT AND CUSTODIAL ASSETS
i. The Group provides corporate administration, investment
management and advisory services to its project companies, which
involve the Group making decisions on behalf of such entities.
Assets that are held in such capacity are not included in these
consolidated financial statements. At the reporting date, the Group
had assets under management of US$ 3,012 million (31 December 2019:
US$ 1,975 million). During the year, the Group had charged
management fees amounting to US$ 4,895 thousand (31 December 2020:
US$ 2,880 thousand) to its assets under management.
ii. Custodial assets comprise discretionary portfolio management
('DPM') of US$ 453,937 thousand, of which US$ 129,166 thousand has
been invested in the Bank's investment products. Further, the Bank
is also holding Sukuk of US$ 41,611 thousand on behalf of
investors.
29 EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share is calculated by dividing the profit
for the year by the weighted average number of equity shares
outstanding during the year.
The weighted average number of ordinary equity shares for the
comparative periods presented are adjusted for the issue of shares
during the year without corresponding change in resources.
2020 2019
In thousands of shares
Weighted average number of shares for basic
and diluted earnings 3,341,730 3,343,148
Diluted earnings per share
Diluted earnings per share is calculated by adjusting the
weighted average number of ordinary shares outstanding to assume
conversion of all dilutive potential ordinary shares. Potential
ordinary shares are considered to be dilutive when, and only when,
their conversion to ordinary shares would decrease earnings per
share or increase the loss per share.
In case of the legacy share options granted to employees prior
to 2014, as the average market value of shares during the current
year was lower than the assumed issue price of shares under the
scheme, the share awards are not considered to be dilutive as at 31
December 2020. Accordingly, no adjustment for dilution has been
made for the purposes of computation of diluted earnings per share
except for those already discussed above. The Bank does not have
any other dilutive instruments.
30 ZAKAH AND SOCIAL RESPONSIBILITY
Zakah is directly borne by the shareholders on distributed
profits and investors in restricted investment accounts. The Bank
does not collect or pay Zakah on behalf of its shareholders and
investors in restricted investment accounts. Zakah payable by the
shareholders is computed by the Bank on the basis of the method
prescribed (net assets method) by the Bank's Shari'a Supervisory
Board and notified to shareholders annually. The zakah payable by
shareholders for 31 December 2019 is US$ 0.0001542/share and the
current year calculations for zakah are yet to be approved by the
Group's Shari'a Supervisory Board and will be provided for in the
Bank's website.
The Group discharges its social responsibilities through
donations to charitable causes and social organisations.
31 EARNINGS PROHIBITED BY SHARI'A
The Group is committed to avoid recognising any income generated
from non-Islamic sources. Accordingly, all non-Islamic income is
credited to a charity account where the Group uses these funds for
charitable means. Movements in non-Islamic funds are shown in the
statement of sources and uses of charity funds. The Group receives
interest from deposits placed with the CBB and other incidental or
required deposits. These earnings are utilised exclusively for
charitable purposes and amount to US$ 129 thousand (2019: US$ 336
thousand).
32 SHARI'A SUPERVISORY BOARD
The Group's Shari'a Supervisory Board comprise four Islamic
scholars who review the Group's compliance with general Shari'a
principles and specific fatwas, rulings and guidelines issued.
Their review includes examination of evidence relating to the
documentation and procedures adopted by the Group to ensure that
its activities are conducted in accordance with Islamic Shari'a
principles.
33 MATURITY PROFILE
The table below shows the maturity profile of the Group's assets
and unrecognised commitments on the basis of their contractual
maturity. Where such contractual maturity is not available, the
Group has considered expected realisation / settlement profile for
assets and liabilities respectively. For undiscounted contractual
maturity of financial liabilities, refer note 38.
6 months No
31 December Up to 3 to to 1 1 to Over stated
2020 3 months 6 months year 3 years 3 years maturity Total
Assets
Cash and bank
balances 515,867 4,973 10,393 5,269 - - 536,502
Treasury
portfolio 880,830 60,209 26,401 374,068 497,038 - 1,838,546
Financing assets 129,080 59,849 133,727 457,629 486,981 - 1,267,266
Real estate
investment - - - 871,993 940,322 - 1,812,315
Proprietary
investments - 2,448 56,273 110,131 87,256 - 256,108
Co-investments - 2,676 8,987 108,597 6,059 - 126,319
709
Receivables and
prepayments 128,512 23,874 43,250 410,022 - - 605,658
Property and
equipment - - - - 144,149 - 144,149
Total assets 1,654,289 154,029 279,031 2,337,709 2,161,805 - 6,586,863
Liabilities
Client's funds 103,517 - - 27,418 - - 130,935
Placements from
financial,
non-financial
institutions
and
individuals 1,001,195 634,641 491,597 214,101 76,466 - 2,418,000
Customer current
account 38,477 14,374 15,607 17,836 54,462 - 140,756
Term financing 307,241 53,340 143,357 271,774 313,365 - 1,089,077
Payables and
accruals 81,145 25,548 288,748 69,597 - - 465,038
Total
liabilities 1,531,575 727,903 939,309 600,726 444,293 - 4,243,806
Equity of
investment
account holders 283,905 194,080 285,764 193,745 199,499 - 1,156,993
Off-balance
sheet
items
Commitments 21,171 15,601 25,133 65,444 18,363 - 145,712
Restricted
investment
accounts - - - 28,451 - - 28,451
33 MATURITY PROFILE (continued)
6 months No
31 December Up to 3 to to 1 1 to Over stated
2019 3 months 6 months year 3 years 3 years maturity Total
Assets
Cash and bank
balances 328,004 12,538 14,553 9,503503 - - 364,598
Treasury
portfolio 841,711 33,826 240,602 224,091 248,431 - 1,588,661
Financing
assets 216,818 124,980 125,343 462,580 343,056 - 1,272,777
Real estate
investment - - 4,349 899,472 902,188 - 1,806,009
Proprietary
investments 2,451 - 18,718 115,505 131,501 - 268,175
Co-investments - 2,676 - 87,080 6,751 - 96,507
Receivables and
prepayments 115,841 113,598 77,342 133,584 4,324 - 444,689
Property and
equipment - - - - 103,857 - 103,857
Total assets 1,504,825 287,618 480,907 1,931,815 1,740,108 - 5,945,273
Liabilities
Client's funds 55,931 - - 14,927 - - 70,858
Placements from
financial,
non-financial
institutions
and
individuals 1,001,999 472,651 408,616 551,517 12,466 - 2,447,249
Customer
current
account 40,746 15,000 16,288 18,615 56,838 - 147,487
Term financing 47,649 30,888 164,059 45,424 13,391 - 301,411
Payables and
accruals 37,029 44,519 30,893 343,096 11,315 - 466,852
Total
liabilities 1,183,354 563,058 619,856 973,579 94,010 - 3,433,857
Equity of
investment
account
holders 180,250 228,942 334,522 228,844 245,987 - 1,218,545
Off-balance
sheet
items
Commitments 87,000 46,645 15,801 105,415 270 - 255,131
Restricted
investment
accounts 154 - - - 28,306 - 28,460
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2020 US$ 000's
34 CONCENTRATION OF ASSETS, LIABILITIES AND EQUITY OF INVESTMENT ACCOUNT HOLDERS
(a) Industry sector
Banks and financial
31 December 2020 institutions Real estate Others Total
Assets
Cash and bank balances 526,253 5,571 4,678 536,502
Treasury portfolio 1,140,276 56,184 642,086 1,838,546
Financing Assets 112,111 555,192 599,963 1,267,266
Real estate investments - 1,812,315 - 1,812,315
Proprietary investment 29,733 161,940 64,435 256,108
Co-investment - 103,837 22,482 126,319
Receivables and prepayments 458,794 36,820 110,044 605,658
Property and equipment 3,137 22,233 118,779 144,149
Total assets 2,270,304 2,754,092 1,562,467 6,586,863
Liabilities
Client's funds 3,152 - 127,783 130,935
Placements from financial, non-financial institutions
and individuals 1,533,003 113,523 771,474 2,418,000
Customer accounts 2,471 18,615 119,670 140,756
Term financing 1,045,797 19,919 23,361 1,089,077
Payables and accruals 188,460 174,676 101,902 465,038
Total liabilities 2,772,883 326,733 1,144,190 4,243,806
Equity of Investment account holders 82,707 156,952 917,334 1,156,993
Off-balance sheet items
Commitments - 65,102 80,610 145,712
Restricted investment accounts - 25,817 2,634 28,451
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2019 US$ 000's
34 Concentration of assets, liabilities and equity of investment
account holders (continued)
(a) Industry sector (continued)
Banks and financial
31 December 2019 institutions Real estate Others Total
Assets
Cash and bank balances 358,145 4,190 2,263 364,598
Treasury portfolio 1,525,963 - 62,698 1,588,661
Financing Assets 20,842 548,799 703,136 1,272,777
Real estate investments - 1,806,009 - 1,806,009
Proprietary investment 106,938 93,419 67,818 268,175
Co-investment - 96,507 - 96,507
Receivables and prepayments 148,905 169,645 126,139 444,689
Property and equipment - 20,155 83,702 103,857
Total assets 2,160,793 2,738,724 1,045,756 5,945,273
Liabilities
Client's funds 3,197 15,376 52,285 70,858
Placements from financial, non-financial institutions
and individuals 1,788,063 - 659,186 2,447,249
Customer accounts 5,725 19,687 122,075 147,487
Term financing 246,429 32,989 21,993 301,411
Payables and accruals 18,060 312,685 136,107 466,852
Total liabilities 2,061,474 380,737 991,646 3,433,857
Equity of Investment account holders 22,379 316,878 879,288 1,218,545
Off-balance sheet items
Commitments - 162,886 92,245 255,131
Restricted investment accounts 104 25,746 2,610 28,460
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2019 US$ 000's
34 Concentration of assets, liabilities and equity of investment
account holders (continued)
(b) Geographic region
31 December 2020 GCC countries MENA Asia North America Others Total
Assets
Cash and bank balances 451,512 4,105 1,349 32,788 46,748 536,502
Treasury portfolio 1,507,398 12 - 74,600 256,536 1,838,546
Financing assets 1,246,979 - 5,939 14,348 - 1,267,266
Real estate investment 982,767 490,031 339,517 - - 1,812,315
Proprietary investment 205,089 - - - 51,019 256,108
Co-investments 38,975 - 49,199 35,663 2,482 126,319
Receivables and prepayments 513,902 10,116 11,128 14,840 55,672 605,658
Property and equipment 139,794 4,333 - - 22 144,149
Total assets 5,086,416 508,597 407,132 172,239 412,479 6,586,863
Liabilities
Client's funds 115,817 - - 15,118 - 130,935
Placements from financial, non-financial
institutions and individuals 2,315,744 87,805 199 - 14,252 2,418,000
Customer accounts 142,812 (788) (1,958) - 690 140,756
Financing liabilities 717,236 - - - 371,841 1,089,077
Payables and accruals 290,972 90,852 65,104 2,987 15,123 465,038
Total liabilities 3,582,581 177,869 63,345 18,105 401,906 4,243,806
Equity of investment account holders 1,133,272 4,000 19,610 - 111 1,156,993
Off-balance sheet items
Commitments 113,141 2,879 10,558 19,134 - 145,712
Restricted investment accounts 25,817 - - - 2,634 28,451
Concentration by location for assets is measured based on the
location of the underlying operating assets, and not based on the
location of the investment (which is generally based in tax
efficient jurisdictions).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2019 US$ 000's
34 Concentration of assets, liabilities and equity of investment
account holders (continued)
(b) Geography sector (continued)
31 December 2019 GCC countries MENA Asia North America Others Total
Assets
Cash and bank balances 305,769 606 1,393 51,649 5,181 364,598
Treasury portfolio 1,338,826 10,028 - 29,900 209,907 1,588,661
Financing assets 1,242,257 - 37 14,307 16,176 1,272,777
Real estate investment 983,421 470,551 352,037 - - 1,806,009
Proprietary investment 267,078 - - - 1,097 268,175
Co-investments 18,942 - 49,198 18,452 9,915 96,507
Receivables and prepayments 278,091 30,825 25,730 41,363 68,680 444,689
Property and equipment 101,602 2,255 - - - 103,857
Total assets 4,535,986 514,265 428,395 155,671 310,956 5,945,273
Liabilities
Client's funds 55,409 521 - 14,928 - 70,858
Placements from financial, non-financial
institutions and individuals 2,342,735 102,496 - - 2,018 2,447,249
Customer accounts 145,165 - 1,639 - 683 147,487
Financing liabilities 119,205 - - - 182,206 301,411
Payables and accruals 263,952 123,157 65,701 13,408 634 466,852
Total liabilities 2,926,466 226,174 67,340 28,336 185,541 3,433,857
Equity of investment account holders 1,211,821 - 4,883 - 1,841 1,218,545
Off-balance sheet items
Commitments 255,131 - - - - 255,131
Restricted investment accounts 25,850 - - - 2,610 28,460
Concentration by location for assets is measured based on the
location of the underlying operating assets, and not based on the
location of the investment (which is generally based in tax
efficient jurisdictions).
35 OPERATING SEGMENTS
The Group has three distinct operating segments, Real Estate
Development, Investment Banking and Commercial Banking, which are
the Group's strategic business units. The strategic business units
offer different products and services, and are managed separately
because they require different strategies for management and
resource allocation within the Group. For each of the strategic
business units, the Group's Board of Directors (chief operating
decision makers) review internal management reports on a quarterly
basis.
The following summary describes the operations in each of the
Group's operating reportable segments:
-- Real Estate Development: This business unit primarily is
involved in origination and management of large-scale economic
infrastructure projects. The business unit also covers the Group's
investment in real estate and related assets.
-- Investment Banking: The Banking segment of the Group is
focused on private equity and asset management domains. The private
equity activities include acquisition of interests in unlisted or
listed businesses at prices lower than anticipated values. The
asset management unit is responsible for identifying and managing
investments in yielding real estate in the target markets of the
GCC. The investment banking activities focuses on providing
structuring capabilities in Islamic asset-backed and equity capital
markets, Islamic financial advisory and mid-sized mergers and
acquisition transactions.
-- Commercial Banking: These include commercial and corporate
banking, retail banking, wealth management, structured investment
products and project financing facilities of the Group's commercial
banking subsidiary.
-- Corporate and treasury - All common costs and activities
treasury and residual investment assets, excluding those that are
carried independently by the reportable segments which are included
within the respective segment, are considered as part of the
Corporate and treasury activities of the Group.
The performance of each operating segment is measured based on
segment results and are reviewed by the management committee and
the Board of Directors on a quarterly basis. Segment results is
used to measure performance as management believes that such
information is most relevant in evaluating the results of certain
segments relative to other entities that operate within these
industries. Inter-segment pricing, if any is determined on an arm's
length basis.
The Group classifies directly attributable revenue and cost
relating to transactions originating from respective segments as
segment revenue and segment expenses respectively. Indirect costs
is allocated based on cost drivers/factors that can be identified
with the segment and/ or the related activities. The internal
management reports are designed to reflect revenue and cost for
respective segments which are measured against the budgeted
figures. The unallocated revenues, expenses, assets and liabilities
related to entity-wide corporate activities and treasury activities
at the Group level. Segment revenue and expenses were net-off inter
segment revenue and expenses.
The Group has primary operations in Bahrain and the Group does
not have any significant independent overseas branches/divisions in
the banking business. The geographic concentration of assets and
liabilities is disclosed in note 33 (b) to the consolidated
financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2020 US$ 000's
35 OPERATING SEGMENTS (continued)
Information regarding the results of each reportable segment is
included below:
Real estate Investment Commercial Corporate
development banking banking and Treasury Total
31 December 2020
Segment revenue 19,457 80,631 65,313 157,993 323,394
Segment expenses (including impairment allowances) (21,628) (69,152) (44,343) (138,928) (274,051)
Segment result (2,071) 11,480 20,970 18,964 49,343
Segment assets 1,746,751 929,392 2,693,884 1,216,836 6,586,863
Segment liabilities 256,879 615,022 1,159,795 2,212,110 4,243,806
Other segment information
Impairment allowance 246 2,203 11,515 12,835 26,799
Equity accounted investees 5,702 18,335 54,013 - 78,050
Equity of investment account holders - - 858,057 298,936 1,156,993
Commitments 35,449 - 110,263 - 145,712
---------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2019 US$ 000's
35 OPERATING SEGMENTS (continued)
Real estate Investment Commercial Corporate
development banking banking and Treasury Total
31 December 2019
Segment revenue* 40,416 95,851 67,790 117,555 321,612
Segment expenses (including impairment allowances) (21,636) (52,709) (107,649) (86,035) (268,029)
Segment result 18,780 43,141 (39,859) 31,054 53,116
Segment assets 1,890,067 539,236 2,492,711 1,023,259 5,945,273
Segment liabilities 331,077 590,478 898,412 1,613,890 3,433,857
Other segment information
Impairment allowance 49 130 54,081 4 54,264
Equity accounted investees 46,300 57,317 12,000 - 115,617
Equity of investment account holders - - 1,217,950 595 1,218,545
Commitments 25,541 - 214,090 15,500 255,131
----------
* Includes segment result of discontinued operations, net.
36 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is an amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in
an arm's length transaction. This represents 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.
Underlying the definition of fair value is a presumption that an
enterprise is a going concern without any intention or need to
liquidate, curtail materially the scale of its operations or
undertake a transaction on adverse terms.
As at 31 December 2020 and 31 December 2019, the fair value of
bank balances, placements with financial institutions, other
financial assets, investors' fund, placements from financial and
other institutions and other financial liabilities are not expected
to be materially different from their carrying values as these are
short term in nature and are re-priced frequently to market rates,
where applicable. Investment securities carried at fair value
through income statement are carried at their fair values
determined using quoted market prices and internal valuation
models.
As at 31 December 2020, the fair value of term financing was
estimated at US$ 1,089,077 thousand (carrying value US$ 1,089,077
thousand) (31 December 2019: fair value US$ 301,411 thousand
(carrying value US$ 301,411 thousand)). These may not necessarily
represent active market quotes. In a normal (and not stressed)
scenario excluding adjustments for own credit risk, the carrying
values would approximate fair value of term financing as these are
largely floating rate instruments.
Fair value hierarchy
The table below analyses the financial instruments carried at
fair value, by valuation method. The different levels have been
defined as follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities
-- Level 2: inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e.as prices) or indirectly (i.e. derived from
prices)
-- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
36 FINANCIAL INSTRUMENTS (continued)
b) FAIR VALUE HIERARCHY (continued)
31 December 2020 Level Level Level Total
1 2 3
US$ 000's US$ 000's US$ 000's US$ 000's-
(i) Proprietary investments
Investment securities carried
at fair value through:
* income statement - 50,000 - 50,000
* equity 19,060 - 108,998 128,058
19,060 50,000 108,998 178,058
(ii) Treasury portfolio
Investment securities carried
at fair value through:
* income statement - 173,181 155,250 328,431
* equity 648,991 - - 648,991
648,991 173,181 155,250 977,422
iii) Co-investments
Investment securities carried
at fair value through equity - - 126,319 126,319
668,051 223,181 390,567 1,281,799
31 December 2019 Level Level Level Total
1 2 3
US$ 000's US$ 000's US$ 000's US$ 000's
i) Proprietary investments
Investment securities carried
at fair value through:
* equity 27,324 - 125,234 152,558
27,324 - 125,234 152,558
ii) Treasury portfolio
Investment securities carried
at fair value through:
* income statement - 239,807 - 239,807
* equity 284,904 - - 284,904
284,904 239,807 - 524,711
iii) Co-investments
Investment securities carried
at fair value through equity - - 96,507 96,507
312,228 239,807 221,741 773,776
36 FINANCIAL INSTRUMENTS (continued)
The table below shows the reconciliation of movements in value
of investments measured using Level 3 inputs:
2020 2019
At 1 January 221,741 208,113
Total gains / (losses) in income statement (1,326) (14,205)
Transfer from Level 2 155,250 -
Disposals at carrying value (41,685) (1,680)
Purchases 63,623 29,513
Fair value changes during the year (7,036) -
At 31 December 390,567 221,741
37 COMMITMENTS AND CONTINGENCIES
The commitments contracted in the normal course of business of
the Group are as follows:
31 December 31 December
2020 2019
Undrawn commitments to extend finance 83,260 182,695
Financial guarantees 27,003 31,395
Capital commitments for infrastructure development
projects 22,449 17,541
Commitment to lend 13,000 23,500
145,712 255,131
Performance obligations
During the ordinary course of business, the Group may enter into
performance obligations in respect of its infrastructure
development projects. It is the usual practice of the Group to pass
these performance obligations, wherever possible, on to the
companies that own the projects. In the opinion of the management,
no liabilities are expected to materialise on the Group as at 31
December 2020 due to the performance of any of its projects.
Litigations and claims
The Group has a number of claims and litigations filed against
it in connection with projects promoted by the Bank in the past and
with certain transactions. Further, claims against the Bank also
have been filed by former employees. Based on the advice of the
Bank's external legal counsel, the management is of the opinion
that the Bank has strong grounds to successfully defend itself
against these claims. Appropriate provision have been made in the
books of accounts. No further disclosures regarding contingent
liabilities arising from any such claims are being made by the Bank
as the directors of the Bank believe that such disclosures may be
prejudicial to the Bank's legal position.
38 FINANCIAL RISK MANAGEMENT
Overview
Financial assets of the Group comprise bank balances, placements
with financial and other institutions, investment securities and
other receivable balances. Financial liabilities of the Group
comprise investors' funds, placements from financial and other
institutions, term financing and other payable balances. Accounting
policies for financial assets and liabilities are set out in note
4.
The Group has exposure to the following risks from its use of
financial instruments:
-- credit risk;
-- liquidity risk;
-- market risks; and
-- operational risk
This note presents information about the Group's exposure to
each of the above risks, the Bank's objectives, policies and
processes for measuring and managing risk, and the Group's
management of capital. The material subsidiaries consolidated in
these financial statements have independent risk management
frameworks which is monitored by the respective Board of Directors
of the subsidiaries. Accordingly, such risk management policies,
procedures and practices are not included in these consolidated
financial statements.
Risk management framework
The key element of our risk management philosophy is for the
Risk Management Department ('RMD') to provide independent
monitoring and control while working closely with the business
units which ultimately own the risks. The Head of Risk Management
reports to the Board Audit and Risk Committee.
38 FINANCIAL RISK MANAGEMENT
The Board of Directors has overall responsibility for
establishing our risk culture and ensuring that an effective risk
management framework is in place. The Board has delegated its
authority to the Board Audit and Risk Committee (ARC), which is
responsible for implementing risk management policies, guidelines
and limits and ensuring that monitoring processes are in place. The
RMD, together with the Internal Audit and Compliance Departments,
provide independent assurance that all types of risk are being
measured and managed in accordance with the policies and guidelines
set by the Board of Directors.
The RMD submits a quarterly Risk Overview Report along with a
detailed Liquidity Risk Report to the Board of Directors. The Risk
Overview Report describes the potential issues for a wide range of
risk factors and classifies the risk factors from low to high. The
Liquidity Risk Report measure the Group's liquidity risk profile
against policy guidelines and regulatory benchmarks. An additional
report is prepared by the respective investment units that give
updated status and impairment assessment of each investment, a
description of significant developments on projects or issues as
well as an update on the strategy and exit plan for each
project.
a) Credit 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, placements with financial institutions, financing assets
and other receivables from project companies. For risk management
reporting purposes, the Group considers and consolidates all
elements of credit risk exposure (such as individual obligor
default risk, country, sector risk and sector concentration risk,
related party exposure, etc.).
The uncertainties due to COVID-19 and resultant economic
volatility has impacted the Group's financing operations and is
expected to affect most of the customers and sectors to some
degree. Although it is difficult to assess at this stage the degree
of impact faced by each sector, the main industries impacted are
hospitality, tourism, leisure, airlines/transportation and
retailers. In addition, some other industries are expected to be
indirectly impacted such as contracting, real estate and wholesale
trading. Also, the volatility in oil prices during the early part
of 2020, will have a regional impact due to its contribution to
regional economies.
Considering this evolving situation, the Group has taken
pre-emptive measures to mitigate credit risk by adopting more
cautious approach for credit approvals thereby tightening the
criteria for extending credit to impacted sectors.
Payment holidays have been extended to customers, including
private and SME sector, in line with the instructions of CBB. These
measures may lead to lower disbursement of financing facilities,
resulting in lower net financing income and decrease in of other
revenue.
In September 2020, the CBB issued another regulatory directive
to extend the concessionary measures, i.e. payment holiday to
customers till end of December 2020. However, customers will be
charged profits during this payment holiday extension period, and
hence the Group does not expect significant modification loss as a
result of the extension. This payment holiday is expected to
further delay expected contractual cash inflows of the Group for
four months. However, the management will take appropriate steps to
mitigate its impact on the liquidity position.
The Group has updated its inputs and assumptions for computation
of ECL (refer note 4 (o)).
38 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Management of investment and credit risk
The Board of Directors has delegated responsibility for the
management of credit risk to its Board Investment Committee (BIC).
This committee establishes operating guidelines and reviews and
endorses the Management Investment and Credit Committee
recommendations for investment strategies, products and services.
Its actions are in accordance with the investment policies adopted
by the Board of Directors.
The RMD is responsible for oversight of the Group's credit risk,
including:
-- Ensuring that the Group has in place investment and credit
policies, covering credit assessment, risk reporting, documentary
and legal procedures, whilst the Compliance Department is
responsible for ensuring compliance with regulatory and statutory
requirements.
-- Overseeing the establishment of the authorisation structure
for the approval and renewal of investment and credit facilities.
Authorisation limits are governed by the Board approved Delegated
Authority Limits (DAL) Matrix.
-- Reviewing and assessing credit risk. Risk Management
department assesses all investment and credit exposures in excess
of designated limits, prior to investments / facilities being
committed. Renewals and reviews of investments / facilities are
subject to the same review process.
-- Ongoing review of credit exposures. The risk assessment
approach is used in determining where impairment provisions may be
required against specific investment / credit exposures. The
current risk assessment process classifies credit exposures into
two broad categories "Unimpaired" and "Impaired", reflecting risk
of default and the availability of collateral or other credit risk
mitigation. Risk is assessed on an individual basis for each
investment / receivable and is reviewed at least once a year. The
Group does not perform a collective assessment of impairment for
its credit exposures as the credit characteristics of each exposure
is considered to be different. Risk profile of exposures are
subject to regular reviews.
-- Reviewing compliance of business units with agreed exposure
limits, including those for selected industries, country risk and
product types. Providing advice, guidance and specialist skills to
business units to promote best practice throughout the Group in the
management of investment / credit risk.
The Risk Management Department works alongside the Investment
Department at all stages of the deal cycle, from pre-investment due
diligence to exit, and provides an independent review of every
transaction. A fair evaluation of investments takes place
periodically with inputs from the Investment department. Quarterly
updates of investments are presented to the Board of Directors or
their respective committees. Regular audits of business units and
Group credit processes are undertaken by Internal Audit.
38 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Exposures subject to credit risk
Stage Stage Stage
31 December 2020 1 2 3 Total
Balances with banks and placements
with financial institutions
Grade 1 -6 Low-Fair Risk 693,121 - - 693,121
Gross carrying amount 693,121 - - 693,121
Less expected credit losses
Net carrying amount 693,121 - - 693,121
Financing facilities
Grade 8 -10 Impaired - - 106,040 106,040
Past due but not impaired
Grade 1-6 Low-Fair Risk 24,531 2,639 - 27,170
Grade 7 Watch list 69 43,875 - 43,944
Past due comprises :
Up to 30 days 22,804 41,981 - 64,785
30-60 days 218 3,334 - 3,552
60-90 days 1,578 1,199 - 2,777
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 641,851 27,748 - 669,599
Grade 7 Watch list 554 14,162 - 14,716
Gross carrying amount 667,005 88,424 106,040 861,469
Less expected credit losses 19,178 5,130 20,928 45,236
Net carrying amount 647,827 83,294 85,112 816,233
Assets acquired for leasing
Grade 8-10 impaired - - 40,342 40,342
Past due but not impaired
Grade 1-6 Low-Fair Risk 28,602 28,576 - 57,178
Grade 7 Watch list 3,337 849 - 4,186
Past due comprises :
Up to 30 days 7,377 955 - 8,332
30-60 days 5,347 295 - 5,642
60-90 days 19,215 28,175 - 47,390
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 221,814 28,061 - 249,875
Grade 7 Watch list 26,244 3,440 29,684
38 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Stage Stage Stage
31 December 2020 1 2 3 Total
Gross carrying amount 279,997 60,926 40,342 381,265
Less expected credit losses 1,446 1,127 7,995 10,568
Net carrying amount 278,551 59,799 32,347 370,697
Investment in Sukuk
Grade 8 -10 Impaired - - 3,493 3,493
Grade 1-6 Low-Fair Risk 1,299,047 45,210 - 1,344,257
Gross carrying amount 1,299,047 45,210 3,493 1,347,750
Less: expected credit losses 1,738 870 3,493 6,101
Net carrying amount 1,297,309 44,340 - 1,341,649
Commitments and financial
guarantees
Grade 8 -10 Impaired - - 1,928 1,928
Grade 1-6 Low-Fair Risk 136,532 6,968 - 143,500
Grade 7 Watch list - 284 - 284
Gross carrying amount (note
37) 136,532 7,252 1,928 145,712
Less: expected credit losses 411 13 202 626
Net carrying amount 136,121 7,239 1,726 145,086
Total net carrying amount 3,052,929 194,672 119,185 3,366,786
38 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Stage Stage Stage
31 December 2019 1 2 3 Total
Placements with financial
institutions
Grade 1 -6 Low-Fair Risk 547,684 - - 547,684
Gross carrying amount 547,684 - - 547,684
Less expected credit losses (1,109) - - (1,109)
Net carrying amount 546,575 - - 546,575
Financing facilities
Grade 8 -10 Impaired - 5,126 193,454 198,580
Past due but not impaired
Grade 1-6 Low-Fair Risk 89,188 18,011 149 107,348
Grade 7 Watch list 24 18,215 16 18,255
Past due comprises :
Up to 30 days 79,706 10,735 48 90,489
30-60 days 48 4,928 109 5,085
60-90 days 9,458 20,563 8 30,029
Neither past due nor impaired
Grade 1-6 Low-Fair Risk 666,548 32,141 1,683 700,372
Grade 7 Watch list 231 4,721 3 4,955
Gross carrying amount 755,991 78,214 195,305 1,029,510
Less expected credit losses -10,153 -7,487 -81,525 -99,165
Net carrying amount 745,838 70,727 113,780 930,345
Assets acquired for leasing
Grade 1-6 Low-Fair Risk - - 93,202 93,202
Past due but not impaired
Grade 1-6 Low-Fair Risk 33,549 19,896 2,040 55,485
Grade 7 Watch list - 8,679 - 8,679
Past due comprises :
Up to 30 days 29,761 19,793 279 49,833
30-60 days 3,788 6,920 1,761 12,469
60-90 days - 1,862 - 1,862
38 FINANCIAL RISK MANAGEMENT (continued)
a) Credit risk (continued)
Stage Stage Stage
31 December 2019 1 2 3 Total
Commitments and financial
guarantees
Grade 8 -10 Impaired - 15,500 4,406 19,906
Grade 1-6 Low-Fair Risk 230,915 5,077 - 235,992
Grade 7 Watch list - 32 - 32
Gross carrying amount (note
37) 230,915 20,609 4,406 255,930
Less: expected credit losses -464 -133 -202 -799
Net carrying amount 230,451 20,476 4,204 255,131
Total net carrying amount 2,915,487 128,516 206,337 3,250,340
Significant increase in credit risk
When determining whether the risk of default on an exposure
subject to credit risk has increased significantly since initial
recognition, the Bank considers reasonable and supportable
information that is relevant and available without undue cost or
effort. This includes both quantitative and qualitative information
and analysis, based on the Bank's historical experience and expert
credit assessment and including forward-looking information.
In determining whether credit risk has increased significantly
since initial recognition, the following criteria are
considered:
-- Downgrade in risk rating according to the approved ECL policy;
-- Facilities restructured during previous twelve months;
-- Qualitative indicators; and
-- Facilities overdue by 30 days as at the reporting date
subject to rebuttal in deserving circumstances.
Credit risk grades
The Group allocates each exposure to credit risk grade based on
a variety of data that is determined to be predictive of the risk
of default and applying experienced credit judgement. Credit risk
grades are defined using qualitative and quantitative factors that
are indicative of risk of default. These factors vary depending on
the nature of the exposure and the type of borrower.
Credit risk grades are defined and calibrated such that the risk
of default occurring increases exponentially as the credit risk
deteriorates so, for example, the difference in risk of default
between credit risk grades 1 and 2 is smaller than the difference
between credit risk grades 2 and 3.
Each exposure is allocated to a credit risk grade at initial
recognition based on available information about the borrower.
Exposures are subject to ongoing monitoring, which may result in an
exposure being moved to a different credit risk grade. Exposers are
rated 1 to 10 with 1 to being good and 7 being watch list and 8, 9
and 10 default grades. The monitoring typically involves use of the
following data.
38 FINANCIAL RISK MANAGEMENT (continued)
Corporate exposures
-- Information obtained during periodic review of customer
files- e.g. audited financial statements, management accounts,
budgets and projections. Examples of areas of particular focus are:
gross profit margins, financial leverage ratios, debt service
coverage, compliance with covenants, quality of management, senior
management changes
-- Data from credit reference agencies. press articles, changes in external credit ratings
-- Quoted bond and credit default swap (CDS) prices for the borrower where available
-- Actual and expected significant changes in the political,
regulatory and technological environment of the borrower or in its
business activities
Retail exposures
-- Internally collected data on customer behaviour -e.g. utilisation of credit card facilities
-- Affordability metrics
-- External data from credit reference agencies including industry-standard credit scores
All exposures
-- Payment record this includes overdue status as well as a
range of variables about payment ratios
-- Utilisation of the granted limit
-- Requests for and granting of forbearance
-- Existing and forecast changes in business, financial and economic conditions
Generating the term structure of PD
Credit risk grades are a primary input into the determination of
the term structure of PD for exposures. The Group collects
performance and default information about its credit risk exposures
analyzed by jurisdiction or region and by type of product and
borrower as well as by credit risk grading.
The Group employs statistical models to analyze the data
collected and generate estimates of the remaining lifetime PD of
exposures and how these are expected to change as a result of the
passage of time.
This analysis includes the identification and calibration of
relationships between changes in default rates and changes in key
macro-economic factors as well as in-depth analysis of the impact
of certain other factors (e.g. forbearance experience) on the risk
of default. For most exposures, key macro-economic indicators
include: GDP growth, benchmark profit rates and oil price. For
exposures to specific industries and/or regions. The analysis may
extend to relevant commodity and/or real estate prices.
Based on advice from the Group Market Risk Committee and
economic experts and consideration of a variety of external actual
and forecast information, the Group formulates a 'base case' view
of the future direction of relevant economic variables as well as a
representative range of other possible forecast scenarios (see
discussion below on incorporation of forward-looking information).
The Group then uses these forecasts to adjust its estimates of
PDs.
38 FINANCIAL RISK MANAGEMENT (continued)
Determining whether credit risk has increased significantly
The criteria for determining whether credit risk has increased
significantly vary by portfolio and include quantitative changes in
PDs and qualitative factors, including a backstop based on
delinquency. Using its expert credit judgement and, where possible,
relevant historical experience, the Group may determine that an
exposure has undergone a significant increase in credit risk based
on particular qualitative indicators that it considers are
indicative of such and whose effect may not otherwise be fully
reflected in its quantitative analysis on a timely basis.
Qualitative indicators, including different criteria used for
different portfolios credit cards, commercial real estate etc.
As a backstop, the Group considers that a significant increase
in credit risk occurs no later than when an asset is more than 30
days past due. Days past due are determined by counting the number
of days since the earliest elapsed due date in respect of which
full payment has not been received. Due dates are determined
without considering any grace period that might be available to the
borrower. For the purpose of calculating ECL for the year ended 31
December 2020, the Bank has applied the backstop of 74 days as
against 30 days, in line with the CBB concessionary measures.
The Group monitors the effectiveness of the criteria used to
identify significant increases in credit risk by regular reviews to
confirm that:
-- the criteria are capable of identifying significant increases
in credit risk before an exposure is in default;
-- the criteria do not align with the point in time when an
asset becomes 30 days past due; and
-- there is no unwarranted volatility in loss allowance from transfers between 12-month PD (stage 1) and lifetime PD (stage 2).
Definition of default
The Group considers an exposure subject to credit risk to be in
default when:
-- the borrower is unlikely to pay its credit obligations to the
Group in full, without recourse by the Group to actions such as
realising security (if any is held);
-- the borrower is more than 90 days past due on any material obligation to the Group; or
-- It is becoming probable that the borrower will restructure
the asset as a result of bankruptcy due to the borrower's inability
to pay its credit obligation.
In assessing whether the borrower is in default, the Group
considers qualitative and quantitative indicators. The definition
of default aligns with that applied by the Group for regulatory
capital purposes.
Incorporation of forward-looking information
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of an instrument has
increased significantly since its initial recognition and its
measurement of ECL. Based on advice from the Group Market Risk
Committee and economic experts and consideration of a variety of
external actual and forecast information. The Group formulates a
'base case' view of the future direction of relevant economic
variables as well as a representative range of other possible
forecast scenarios. This process involves developing two or more
additional economic scenarios and considering the relative
probabilities of each outcome.
38 FINANCIAL RISK MANAGEMENT (continued)
External information includes economic data and forecasts
published by governmental bodies and monetary authorities in the
countries where the Group operates, supranational organisations
such as the OECD and the International Monetary Fund, and selected
private-sector and academic forecasters.
The base case represents a most-likely outcome and is aligned
with information used by the Group for other purposes such as
strategic planning and budgeting. The other scenarios represent
more optimistic and more pessimistic outcomes. Periodically, the
Group carries out stress testing of more extreme shocks to
calibrate its determination of these other representative
scenarios.
The Group has identified and documented key drivers of credit
risk and credit losses for each portfolio of financial instruments
and, using an analysis of historical data, has estimated
relationships between macro-economic variables and credit risk and
credit losses. The economic scenarios used as at 31 December 2020
included the key indicators for the selected countries such as the
unemployment rates, profit rates and the GDP growth.
Modified exposures subject to credit risk
The contractual terms of an exposure subject to credit risk may
be modified for a number of reasons, including changing market
conditions, customer retention and other factors not related to a
current or potential credit deterioration of the customer.
When the terms of a financial asset are modified and the
modification does not result in de-recognition, the determination
of whether the asset's credit risk has increased significantly
reflects comparison of:
-- Its remaining lifetime PD at the reporting date based on the modified terms; with
-- The remaining lifetime PD estimated based on data at initial
recognition and the original contractual terms.
The Group renegotiates financing to customers in financial
difficulties (referred to as 'forbearance activities') to maximise
collection opportunities and minimise the risk of default. Under
the Group's forbearance policy, forbearance of financing assets is
granted on a selective basis if the debtor is currently in default
on its debt or if there is a high risk of default, there is
evidence that the debtor made all reasonable efforts to pay under
the original contractual terms and the debtor is expected to be
able to meet the revised terms.
The revised terms usually include extending the maturity,
changing the timing of profit payments and amending the terms of
loan covenants. Both retail and corporate loans are subject to the
forbearance policy.
Generally, forbearance is a qualitative indicator of a
significant increase in credit risk and an expectation of
forbearance may constitute evidence that an exposure is
credit-impaired / in default (refer note 4). A customer needs to
demonstrate consistently good payment behaviour over a period of
time (12 months) before the exposure is no longer considered to be
credit-impaired/ in default or the PD is considered to have
decreased such that the loss allowance reverts to being measured at
an amount equal to 12-month ECL. For the purpose of calculating ECL
on the commercial bank's financial assets and assets acquired for
leasing for the year ended 31 December 2020, the Group has applied
the 3 months as against 12 months, in order to assess consistent
good payment behaviour of customer this is in line with the CBB
concessionary measures.
38 FINANCIAL RISK MANAGEMENT (continued)
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses.
Credit losses are measured as the present value of all cash
shortfalls (i.e. the difference between the cash flows due to the
entity in accordance with the contract and the cash flows that the
Group expects to receive). ECLs are discounted at the effective
profit rate of the exposure subject to credit risk.
The key inputs into the measurement of ECL are the term
structure of the following variables:
-- probability of default (PD);
-- loss given default (LGD); and
-- exposure at default (EAD).
These parameters are generally derived from internally developed
statistical models and other historical data. They are adjusted to
reflect forward-looking information as described above.
PD estimates are estimates at a certain date, which are
calculated based on statistical rating models, and assessed using
rating tools tailored to the various categories of counterparties
and exposures. These statistical models are based on internally
compiled data comprising both quantitative and qualitative factors.
Where it is available, market data may also be used to derive the
PD for large corporate counterparties. If a counterparty or
exposure migrates between rating classes, then this will lead to a
change in the estimate of the associated PD. PDs are estimated
considering the contractual maturities of exposures and estimated
prepayment rates.
LGD is the magnitude of the likely loss if there is a default.
The Group estimates LGD parameters based on the history of recovery
rates of claims against defaulted counterparties. The LGD models
consider the structure, collateral, seniority of the claim,
counterparty industry and recovery costs of any collateral that is
integral to the financial asset. For financing assets secured by
retail property, LTV ratios are a key parameter in determining LGD.
They are calculated on a discounted cash flow basis using the
effective profit rate as the discounting factor.
EAD represents the expected exposure in the event of a default.
The Group derives the EAD from the current exposure to the
counterparty and potential changes to the current amount allowed
under the contract including amortisation. The EAD of a financial
asset is its gross carrying amount. For lending commitments and
financial guarantees, the EAD includes the amount drawn, as well as
potential future amounts that may be drawn under the contract,
which are estimated based on historical observations.
The following tables show reconciliations from the opening to
the closing balance of the loss allowance: 12-month ECL, lifetime
ECL and credit-impaired.
38 FINANCIAL RISK MANAGEMENT (continued)
Lifetime Lifetime
12 month ECL not ECL credit
ECL (Stage credit impaired impaired
2020 1) (Stage 2) (Stage 3) Total 2020
Balance
at
1
January
2019 14,395 2,775 98,082 115,252
Transfer
to
12-month
ECL 3,793 (2,597) (1,196) -
Transfer
to
lifetime
ECL
non-credit-impaired (1,049) 6,585 (5,536) -
Transfer
to
lifetime
ECL
credit-impaired (2,629) (3,100) 5,729 -
Net
re-measurement
of
loss
allowance 8,552 2,728 6,080 17,360
Charge for the period (716) - (54,055) (54,771)
Balance at 31 December 22,346 6,391 49,104 77,841
Break down of ECL by category of assets in the consolidated
statement of financial position and off-balance sheet
commitments:
Lifetime Lifetime
12 month ECL not ECL credit
ECL (Stage credit impaired impaired
2020 1) (Stage 2) (Stage 3) Total 2020
Balances
with
banks 15 - - 15
Treasury
portfolio 1,109 120 4,994 6,223
Financing
assets 19,289 5,130 20,931 45,350
Other
financial
receivables 1,522 1,128 10,977 13,627
Proprietary
investments - - 12,000 12,000
Financing
commitments
and
financial
guarantees 411 13 202 626
Balance
at
31
December 22,346 6,391 49,104 77,841
Lifetime Lifetime
12 month ECL not ECL credit
ECL (Stage credit impaired impaired
2019 1) (Stage 2) (Stage 3) Total 2019
Balance at 1 January
2019 14,776 10,392 49,843 75,011
Transfer to 12-month
ECL 3,549 (2,966) (583) -
Transfer to lifetime
ECL non-credit-impaired (1,326) 1,602 (276) -
Transfer to lifetime
ECL credit-impaired (2,286) (2,273) 4,559 -
Net re-measurement
of loss allowance (63) (3,637) 3,700 -
Charge for the period (255) (343) 40,839 40,241
Balance at 31 December 14,395 2,775 98,082 115,252
38 FINANCIAL RISK MANAGEMENT (continued)
Break down of ECL by category of assets in the consolidated
statement of financial position and off-balance sheet
commitments:
Lifetime
ECL not Lifetime
credit ECL credit
12 month impaired impaired
ECL (Stage (Stage (Stage
2019 1) 2) 3) Total 2019
Balances with banks 8 - - 8
Treasury portfolio 1,138 - 3,493 4,631
Financing assets 10,525 8,484 88,700 107,709
Other financial receivables 2,260 (5,842) 5,687 2,105
Financing commitments
and financial guarantees 464 133 202 799
Balance at 31 December 14,395 2,775 98,082 115,252
Renegotiated facilities
During the year, facilities of US$ 52,191 thousands (2019: USD
100,576 thousand) were renegotiated, out of which US$ 16,064
thousand (2019: US$ 2,907 thousand) are classified as neither past
due nor impaired as of 31 December 2020. The renegotiated terms
usually require settlement of profits accrued till date on the
facility and/or part payment of the principal and/or obtaining of
additional collateral coverage. The renegotiated facilities are
subject to revised credit assessments and independent review by the
RMD. Of the total past due facilities of US$ 221,782 thousand
(2019: US$ 440,406 thousand) only instalments of US$ 112,878
thousand
(2019: US$ 97,149 thousand) are past due as at 31 December
2020.
Allowances for impairment
The Group makes provisions for impairment on individual assets
classified under grades 8,9 and 10. This is done on the basis of
the present value of projected future cash flows from the assets
themselves and consideration of the value of the collateral
securities available. On a collective basis, the Bank has provided
for impairment losses based on management's judgment of the extent
of losses incurred but not identified based on the current economic
and credit conditions.
Non-accrual basis
The Group classifies financing facility/Sukuk as non-accrual
status, if the facility/Sukuk is past due greater than 90 days or
there is reasonable doubt about the collectability of the
receivable amount. The profits on such facilities are not
recognized in the income statement until there are repayments from
the borrower or the exposure is upgraded to regular status.
Write-off policy
The gross carrying amount of a financial asset is written off
when the Group has no reasonable expectations of recovering a
financial asset in its entirety or a portion thereof. The Group
expects no significant recovery from the amount written off.
However, financial assets that are written off could still be
subject to enforcement activities in order to comply with the
Group's procedures for recovery of amounts due. During the year,
the Group has written off financing facilities amounting to US$
29,204 (2019: Nil thousand) which were fully impaired. The Bank has
recovered US$ 1,666 thousand from a financing facility written off
in previous years (2018: US$ 2,557 thousand).
38 FINANCIAL RISK MANAGEMENT (continued)
Collaterals
The Group holds collateral against financing assets and
receivables from assets acquired for leasing in the form of
mortgage/ pledge over property, listed securities, other assets and
guarantees. Estimates of fair value are based on the value of
collateral assessed at the time of borrowing. Valuation of
collateral is updated when the loan is put on a watch list and the
loan is monitored more closely. Collateral generally is not held
against exposure to other banks and financial institutions. An
estimate of the fair value of collateral and other security
enhancements held against financial assets is shown below. This
includes the value of financial guarantees from banks, but not
corporate and personal guarantees as the values thereof are not
readily quantifiable. The collateral values considered for
disclosure are restricted to the extent of the outstanding
exposures.
Concentration risk
Concentration risk arises when a number of counterparties are
engaged in similar economic activities or activities in the same
geographic region or have similar economic features that would
cause their ability to meet contractual obligations to be similarly
affected by changes in economic, political or other conditions. The
Group seeks to manage its concentration risk by establishing and
constantly monitoring geographic and industry wise concentration
limits.
The geographical and industry wise distribution of assets and
liabilities are set out in notes 33 (a) and (b).
31 December 2020 31 December 2019
Assets
acquired Assets
for leasing acquired
(including for leasing
lease (including
Financing rentals Financing lease rentals
assets receivable) Total assets receivable) Total
Against impaired
Property 45,141 31,401 76,542 53,531 86,111 139,642
Other 3,082 - 3,082 5,008 - 5,008
Against past
due but not
impaired
Property 61,987 60,894 122,881 93,952 63,525 157,477
Other 1,666 - 1,666 3,069 - 3,069
Against neither
past due
nor impaired
Property 373,642 278,973 652,615 256,578 237,881 494,459
Other 45,987 - 45,987 24,615 - 24,615
Total 531,505 371,268 902,773 436,753 387,517 824,270
The average collateral coverage ratio on secured facilities is
149.71% as at 31 December 2020
(31 December 2019: 130.5%).
38 FINANCIAL RISK MANAGEMENT (continued)
An analysis of concentrations of credit risk of financing assets
of the Group's business at the reporting date is shown below:
Concentration 31 December 2020 31 December 2019
by
Sector Financing Assets Total Financing Assets Total
assets acquired assets acquired
for leasing for leasing
Banking and
finance 11,725 - 11,725 20,841 - 20,841
Real estate 351,829 303,748 655,577 220,675 309,164 529,839
Construction 150,194 - 150,194 135,379 - 135,379
Trading 129,844 - 129,844 151,788 - 151,788
Manufacturing 38,772 - 38,772 37,016 - 37,016
Others 248,207 32,947 281,154 364,646 33,268 397,914
Total carrying
amount 930,571 336,695 1,267,266 930,345 342,432 1,272,777
b) Liquidity risk
Liquidity risk is defined as the risk that an entity will
encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or
another financial asset.
Management of liquidity risk
The effect of COVID-19 on the liquidity and funding risk profile
of the banking system is evolving and is subject to ongoing
monitoring and evaluation.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation.
Payment holidays have been extended to customers, including
private and SME sector, in line with the instructions of CBB from
March 2020 to 30 June 2021. This payment holiday is expected to
delay expected contractual cash inflows of the Group. However, the
management will take appropriate steps to mitigate its impact on
the liquidity position.
The CBB has announced various measures to combat the effects of
COVID-19 and to ease liquidity in the banking sector including,
concessionary repos at zero percent, reduction of cash reserve
ratio from 5% to 3%; and reduction in LCR and NSFR ratio from 100%
to 80%;
In response to COVID-19 outbreak, the Group continues to monitor
and respond to all liquidity and funding requirements that are
presented. The Group continues to calibrate stress testing
scenarios to current market conditions in order to assess the
impact on the Group in current extreme stress.
As at the reporting date, the liquidity and funding position of
the Group remains strong and is well placed to absorb and manage
the impacts of this disruption. Further information on the
regulatory liquidity and capital ratios as at 31 December 2020 have
been disclosed below.
Treasury receives information from other business units
regarding the liquidity profile of their financial assets and
liabilities and details of other projected cash flows arising from
projected future business. Treasury then aims to maintain a
portfolio of short-term liquid assets, largely made up of
short-term placements with financial and other institutions and
other inter-bank facilities, to ensure that sufficient liquidity is
maintained within the Group as a whole.
38 FINANCIAL RISK MANAGEMENT (continued)
The liquidity requirements of business units are met through
treasury to cover any short-term fluctuations and longer term
funding to address any structural liquidity requirements.
The daily liquidity position is monitored and regular liquidity
stress testing is conducted under a variety of scenarios covering
both normal and more severe market conditions. All liquidity
policies and procedures are subject to review and approval by the
Board of Directors. Daily reports cover the liquidity position of
the Bank and is circulated to Management Committee (MANCOM).
Moreover, quarterly reports are submitted to the Board of Directors
on the liquidity position by RMD.
The effects of COVID-19 on the liquidity and funding risk
profile of the banking system are evolving and are subject to
ongoing monitoring and evaluation. The CBB has announced various
measures to combat the effects of COVID-19 and to ease liquidity in
banking sector. Following are some of the significant measures that
have an impact on the liquidity risk and regulatory capital profile
of the Group:
-- concessionary repo to eligible banks at zero percent;
-- reduction of cash reserve ratio from 5% to 3%; and
-- reduction in LCR and NSFR ratio from 100% to 80%.
In response to COVID-19 outbreak, the Group invoked its
liquidity contingency plan and continues to monitor and respond to
all liquidity and funding requirements that are presented. The
Group continues to calibrate stress testing scenarios to current
market conditions in order to assess the impact on the Group in
current extreme stress. As at the reporting date the liquidity and
funding position of the Group remains strong and is well placed to
absorb and manage the impacts of this disruption. Further
information on the regulatory liquidity and capital ratios as at 31
December 2020 have been disclosed below.
The table below shows the undiscounted cash flows on the Group's
financial liabilities, including issued financial guarantee
contracts, and unrecognised financing commitments on the basis of
their earliest possible contractual maturity. For issued financial
guarantee contracts, the maximum amount of the guarantee is
allocated to the earliest period in which the guarantee could be
called. The Group's expected cash flows on these instruments vary
significantly from this analysis. Refer note 33 for the expected
maturity profile of assets and liabilities.
38 FINANCIAL RISK MANAGEMENT (continued)
Gross undiscounted cash flows
6 months
31 December 2020 Up to 3 to to 1 1 to Over Carrying
3 months 6 months year 3 years 3 years Total amount
Financial liabilities
Clients' funds 103,517 - - 27,418 - 130,935 130,935
Placements from
financial, non-financial
institutions and
individuals 972,171 565,735 544,618 358,306 84,380 2,525,210 2,418,000
Customer current
accounts 38,477 14,374 15,607 17,836 54,462 140,756 140,756
Term financing 308,917 65,516 168,124 324,314 328,747 1,195,618 1,089,077
Payables and accruals 81,145 25,548 288,748 69,597 - 465,038 465,038
Total liabilities 1,504,227 671,173 1,017,097 797,471 467,589 4,457,557 4,243,806
Equity of investment
account holders 762,918 194,080 285,764 193,745 199,499 1,636,006 1,156,993
Commitment and
contingencies 21,171 15,601 25,133 65,444 18,363 145,712 145,712
To manage the liquidity risk arising from financial liabilities,
the Group aims to hold liquid assets comprising cash and cash
equivalents, investment in managed funds and treasury shares for
which there is an active and liquid market. These assets can be
readily sold to meet liquidity requirements. Further, the Group is
focussed on developing a pipeline of steady revenues and has
undertaken cost reduction exercises that would improve its
operating cash flows.
Gross undiscounted cash flows
6 months
31 December 2019 Up to 3 to to 1 1 to Over Carrying
3 months 6 months year 3 years 3 years Total amount
Financial liabilities
Clients' funds 55,931 - - 14,926 - 70,857 70,858
Placements from
financial, non-financial
institutions and
individuals 1,061,149 579,770 469,679 386,881 4,859 2,502,338 2,447,249
Customer current
accounts 40,746 15,000 16,288 18,615 56,838 147,487 147,487
Term financing 47,744 31,377 206,902 19,899 21,212 327,134 301,411
Payables and accruals 36,729 44,519 30,894 343,395 11,315 466,852 466,852
Total liabilities 1,242,299 670,666 723,763 783,716 94,224 3,514,668 3,433,857
Equity of investment
account holders 186,358 236,726 345,896 236,624 254,350 1,259,954 1,218,545
Commitment and contingencies 87,000 46,645 15,801 105,415 270 255,131 255,131
38 FINANCIAL RISK MANAGEMENT (continued)
Measures of liquidity
Liquidity is managed at an entity level and is not a Group wide
measure. The Bank follows certain internal measures of liquidity.
These metrics are intended to better reflect the liquidity position
from a cash flow perspective and provide a target for the Group.
These are liquidity coverage ratio, net stable funding ratio and
stock of liquid assets.
For this purpose, the liquidity coverage ratio is based on an
internally defined management criteria which identifies the amount
of liquid assets (including inter- bank placements) the Bank holds
that can be used to offset the net cash outflows for 30, 60 and 90
days time horizon. The net stable funding ratio measures the amount
of long-term, stable sources of funding employed by an institution
relative to the liquidity profiles of the assets funded and the
potential for contingent calls on funding liquidity arising from
off-balance sheet commitments and obligations.
Details of the ratio of liquid assets to total assets at the
reporting date and during the year were as follows:
Liquid asset / Total
asset
2020 2019
At 31 December 36.35% 33.31%
Average for the year 35.62% 33.94%
Maximum for the year 36.35% 34.63%
Minimum for the year 34.48% 33.31%
The Central Bank of Bahrain introduced Liquidity Coverage Ratio
(LCR) and Net Stable Funding Ratio (NSFR) during 2019.
LCR has been developed to promote short-term resilience of a
bank's liquidity risk profile. The LCR requirements aim to ensure
that a bank has an adequate stock of unencumbered high quality
liquidity assets (HQLA) that consists of assets that can be
converted into cash immediately to meet its liquidity needs for a
30 calendar day stressed liquidity period. The stock of
unencumbered HQLA should enable the Bank to survive until day 30 of
the stress scenario, by which time appropriate corrective actions
would have been taken by management to find the necessary solutions
to the liquidity crisis.
LCR is computed as a ratio of Stock of HQLA over the Net cash
outflows over the next 30 calendar days. Until 31 December 2021,
the Bank is required to maintain LCR greater than 80%. As of 31
December 2020, the Bank had LCR ratio of 240 %.
NSFR is to promote the resilience of banks' liquidity risk
profiles and to incentivise a more resilient banking sector over a
longer time horizon. The NSFR will require banks to maintain a
stable funding profile in relation to the composition of their
assets and off-balance sheet activities. A sustainable funding
structure is intended to reduce the likelihood that disruptions to
a bank's regular sources of funding will erode its liquidity
position in a way that would increase the risk of its failure and
potentially lead to broader systemic stress. The NSFR limits
overreliance on short-term wholesale funding, encourages better
assessment of funding risk across all on-balance sheet and
off-balance sheet items, and promotes funding stability.
NSFR as a percentage is calculated as "Available stable funding"
divided by "Required stable funding". Until 31 December 2021, the
Bank is required to maintain NSFR ratio greater than 80%. As of 31
December 2020, the Bank had NSFR ratio of 97%.
38 FINANCIAL RISK MANAGEMENT (continued)
c) Market risks
Market risk is the risk that changes in market prices, such as
profit rate, equity prices, foreign exchange rates and credit
spreads (not relating to changes in the obligor's / issuer's credit
standing) will affect the Group's income, future cash flows or the
value of its holdings of financial instruments. The objective of
market risk management is to manage and control market risk
exposures within acceptable parameters, while optimising the return
on risk.
Management of market risks
As a matter of general policy, the Group shall not assume
trading positions on its assets and liabilities, and hence the
entire balance sheet is a non-trading portfolio. All foreign
exchange risk within the Group is transferred to Treasury. The
Group seeks to manage currency risk by continually monitoring
exchange rates. Profit rate risk is managed principally through
monitoring profit rate gaps and by having pre-approved limits for
repricing bands. Overall authority for market risk is vested in the
Board Audit and Risk Committee ('BARC'). RMD is responsible for the
development of detailed risk management policies (subject to review
and approval of the BARC).
Exposure to profit rate risk
The principal risk to which non-trading portfolios are exposed
is the risk of loss from fluctuations in the future cash flows or
fair values of financial instrument because of a change in market
profit rates. Majority of the Group's profit based asset and
liabilities are short term in nature, except for certain long term
liabilities which have been utilised to fund the Group's strategic
investments in its associates.
A summary of the Group's profit rate gap position on non-trading
portfolios is as follows:
31 December Up to 3 to 6 6 months 1 to 3 Over 3
2020 3 months months to 1 year years years Total
Assets
Treasury portfolio 880,830 60,209 26,401 374,068 497,038 1,838,546
Financing assets 129,080 59,849 133,727 457,629 486,981 1,267,266
Total assets 1,009,910 120,058 160,128 831,697 984,019 3,105,812
Liabilities
Client's fund 103,517 - - 27,418 - 130,935
Placements from
financial institutions,
non-financial
institutions
and individuals 1,001,195 634,641 491,597 214,101 76,466 2,418,000
Term financing 307,241 53,340 143,357 271,774 313,365 1,089,077
Total liabilities 1,411,953 687,981 634,954 513,293 389,831 3,638,012
Equity of investment
account holders 283,905 194,080 285,764 193,745 199,499 1,156,993
Profit rate
sensitivity
gap (685,948) (762,003) (760,590) 124,659 394,689 (1,689,193)
38 FINANCIAL RISK MANAGEMENT (continued)
31 December Up to 3 to 6 6 months 1 to 3 Over 3
2019 3 months months to 1 year years years Total
Assets
Treasury portfolio 841,711 33,826 240,602 224,091 248,431 1,588,661
Financing assets 216,818 124,980 125,343 462,580 343,056 1,272,777
Total assets 1,058,529 158,806 365,945 686,671 591,487 2,861,438
Liabilities
Client's fund 55,931 - - 14,927 - 70,858
Placements from
financial institutions,
non-financial
institutions
and individuals 1,001,999 472,651 408,616 551,517 12,466 2,447,249
Term financing 47,649 30,888 164,059 45,424 13,391 301,411
Total liabilities 1,105,579 503,539 572,675 611,868 25,857 2,819,518
Equity of investment
account holders 180,250 228,942 334,522 228,844 245,987 1,218,545
Profit rate
sensitivity
gap (227,300) (573,675) (541,252) (154,041) 319,643 (1,176,625)
The management of profit rate risk against profit rate gap
limits is supplemented by monitoring the sensitivity of the Group's
financial assets and liabilities to various standard and
non-standard profit rate scenarios. Standard scenarios that are
considered include a 100 basis point (bp) parallel fall or rise in
all yield curves worldwide. An analysis of the Group's sensitivity
to an increase or decrease in market profit rates (assuming no
asymmetrical movement in yield curves and a constant statement of
financial position) is as follows:
100 bps parallel increase / (decrease) 2020 2019
At 31 December +/- 16,892 +/- 11,766
Average for the year +/- 15,584 +/- 10,940
Maximum for the year +/- 16,892 +/- 11,766
Minimum for the year +/- 15,593 +/- 10,388
Overall, profit rate risk positions are managed by Treasury,
which uses placements from / with financial institutions to manage
the overall position arising from the Group's activities.
The effective average profit rates on the financial assets,
liabilities and unrestricted investment accounts are as
follows:
2020 2019
Placements with financial institutions 3.68% 3.27%
Financing assets 6.59% 6.71%
Debt type investments 6.57% 6.85%
Placements from financial institutions,
other entities and individuals 4.38% 4.02%
Term financing 6.80% 6.71%
Equity of investment account holders 3.55% 1.83%
38 FINANCIAL RISK MANAGEMENT (continued)
Exposure to foreign exchange risk
Currency risk is the risk that the value of a financial
instrument will fluctuate due to changes in foreign exchange rates.
The Groups major exposure is in GCC currencies, which are primarily
pegged to the US Dollar. The Group had the following significant
net exposures denominated in foreign currency as of 31 December
from its financial instruments:
2020 2019
US$ '000 US$ '000
Equivalent Equivalent
Sterling Pounds 1,449 9,511
Euro (2,654) (674)
Australian Dollars 13,528 12,223
Kuwaiti Dinar 39,887 41,867
Jordanian Dinar 6 6
Egyptian Pound - 22,458
Moroccan Dirham 150,263 150,263
Tunisian Dinar 292,333 309,800
Indian Rupee 306,555 306,004
Other GCC Currencies (*) (1,380,099) (1,679,101)
(*) These currencies are pegged to the US Dollar.
The management of foreign exchange risk against net exposure
limits is supplemented by monitoring the sensitivity of the Group's
financial assets and liabilities to various foreign exchange
scenarios. Standard scenarios that are considered include a 5% plus
/ minus increase in exchange rates, other than GCC pegged
currencies. An analysis of the Group's sensitivity to an increase
or decrease in foreign exchange rates (assuming all other
variables, primarily profit rates, remain constant) is as
follows:
2020 2019
US$ '000 US$ '000
Equivalent Equivalent
Sterling Pounds +/- 72 +/-476
Euros +/- 133 +/-34
Australian dollar +/- 676 +/-611
Kuwaiti dinar +/- 1,994 +/-2,093
Egyptian Pound +/- 0.32 +/-1,123
Jordanian Dinar - +/-0.32
Moroccan Dirham +/- 7,513 +/-7,513
Tunisian Dinar +/- 14,617 +/-15,490
Indian rupee +/- 15,328 +/-15,300
Exposure to other market risks
Equity price risk on quoted investments is subject to regular
monitoring by the Group. The price risk on managed funds is
monitored using specified limits (stop loss limit, stop loss
trigger and overall stop loss limit cap) set within the portfolio
management contract for fund managers. The Group's equity type
instruments carried at cost are exposed to risk of changes in
equity values. The significant estimates and judgements in relation
to impairment assessment of fair value through equity investments
carried at cost are included in note 5(ii). The Group manages
exposure to other price risks by actively monitoring the
performance of the equity securities.
38 FINANCIAL RISK MANAGEMENT (continued)
d) Operational risk
Operational risk is the risk of loss arising from systems and
control failures, fraud and human errors, which can result in
financial and reputation loss, and legal and regulatory
consequences. The Group manages operational risk through
appropriate controls, instituting segregation of duties and
internal checks and balances, including internal audit and
compliance. The Risk Management Department facilitates the
management of Operational Risk by way of assisting in the
identification of, monitoring and managing of operational risk in
the Group.
In response to COVID-19 outbreak, there were various changes in
the working model, interaction with customers, digital modes of
payment and settlement, customer acquisition and executing
contracts and carrying out transactions with and on behalf of the
customers. The management of the Group has enhanced its monitoring
to identify risk events arising out of the current situation and
the changes in the way business is conducted. The operational risk
department has carried out a review of the existing control
environment and has considered whether to update the risk registers
by identifying potential loss events based on their review of the
business processes in the current environment.
During 2020, the Group did not have any significant issues
relating to operational risks.
39 CAPITAL MANAGEMENT
The Group's regulator Central Bank of Bahrain (CBB) sets and
monitors capital requirements for the Group as a whole. In
implementing current capital requirements CBB requires the Group to
maintain a prescribed ratio of total capital to total risk-weighted
assets. The total regulatory capital base is net of prudential
deductions for large exposures based on specific limits agreed with
the regulator. Banking operations are categorised as either trading
book or banking book, and risk-weighted assets are determined
according to specified requirements that seek to reflect the
varying levels of risk attached to assets and off-balance sheet
exposures. The Group does not have a trading book.
The Group aims to maintain strong capital base so as to maintain
investor, creditor and market confidence and to sustain the future
development of the business.
The CBB sets and monitors capital requirements for the Bank as a
whole. In implementing current capital requirements CBB requires
the Bank to maintain a prescribed ratio of total capital to total
risk-weighted assets. Capital adequacy regulations of CBB is based
on the principles of Basel III and the IFSB guidelines.
The Bank's regulatory capital is analysed into two tiers:
Tier 1 capital: includes CET1 and AT1.
CET1 comprise of ordinary share capital that meet the
classification as common shares for regulatory purposes, disclosed
reserves including share premium, general reserves, legal /
statutory reserve, common shares issued by consolidated banking
subsidiaries of the Bank and held by third parties, retained
earnings after regulatory adjustments relating to goodwill and
items that are included in equity which are treated differently for
capital adequacy purposes.
AT1 comprise of instruments that meet the criteria for inclusion
in AT1, instruments issued by consolidated banking subsidiaries of
the Bank held by third parties which meet the criteria of AT1, and
regulatory adjustments applied in calculation of AT1.
39 CAPITAL MANAGEMENT (continued)
Tier 2 capital
This includes instruments issued by the Bank that meet the
criteria for inclusion in Tier 2 capital, stock surplus resulting
from issue of Tier 2 capital, instruments issued by consolidated
banking subsidiaries of the Bank held by third parties that meet
the criteria for inclusion in Tier 2, general provisions held
against unidentified losses on financing and qualify for inclusion
within Tier 2, asset revaluation reserve from revaluation of fixed
assets and instruments purposes and regulatory adjustments applied
in the calculation of Tier 2 capital
The regulatory adjustments are subject to limits prescribed by
the CBB requirements, these deductions would be effective in a
phased manner through transitional arrangements from 2015 to 2018.
The regulations prescribe higher risk weights for certain exposures
that exceeds materiality thresholds. These regulatory adjustments
required for certain items such as goodwill on mortgage service
right, deferred tax assets, cash flow hedge reserve, gain on sale
of related securitization transactions, defined benefit pension
fund assets and liabilities, investment in own shares and
reciprocal cross holdings in the capital of Banking and financial
entities, investment in the capital of Banking and financial
entities that are outside the scope of regulatory consolidation and
where the Bank does not own more than 10% of issued common shares
capital of the entity and significant investments in the capital of
banking and financial entities that are outside the scope of
regulatory consolidation.
Banking operations are categorised as either trading book or
banking book, and risk-weighted assets are determined according to
specified requirements that seek to reflect the varying levels of
risk attached to assets and off-balance sheet exposures.
To combined the effect of Covid 19, the CBB has allowed the
Aggregate of modification loss and incremental ECL provision for
stage 1 and stage 2 for the period from March to December 2020 to
be added back to Tier 1 capital for the two years ending 31
December 2020 and 31 December 2021. And to deduct this amount
proportionately from Tier 1 capital on an annual basis for three
years ending 31 December 2022, 31 December 2023 and 31 December
2024.
The Bank's regulatory capital position was as follows:
31 December 31 December
2020 2019
CET 1 Capital before regulatory adjustments 1,025,835 1,078,079
Less: regulatory adjustments - -
CET 1 Capital after regulatory adjustments 1,025,835 1,078,079
T 2 Capital adjustments 76,062 36,008
Regulatory Capital 1,115,945 1,122,871
Risk weighted exposure:
Credit Risk Weighted Assets 7,647,064 7,776,802
Market Risk Weighted Assets 72,038 79,231
Operational Risk Weighted Assets 552,821 474,052
Total Regulatory Risk Weighted Assets 8,271,923 8,330,085
Investment risk reserve (30% only) 2 2
Profit equalization reserve (30%
only) 3 3
Total Adjusted Risk Weighted Exposures 8,271,918 8,330,080
Capital Adequacy Ratio 13.49% 13.49%
Tier 1 Capital Adequacy Ratio 12.57% 13.06%
Minimum required by CBB 12.50% 12.50%
39 CAPITAL MANAGEMENT (continued)
The allocation of capital between specific operations and
activities is primarily driven by regulatory requirements. The
Group's capital management policy seeks to maximise return on risk
adjusted capital while satisfying all the regulatory requirements.
The Group's policy on capital allocation is subject to regular
review by the Board of Directors. The Group has complied with the
externally imposed capital requirements set by the regulator for
its consolidated capital adequacy ratio throughout the year.
40 COMPARATIVES
Certain prior year amounts have been regrouped to conform to the
current year's presentation. Such regrouping did not affect
previously reported profit for the year or total owners' equity
except to extent disclosed in notes 4 (a) and 12.
(The attached information do not form part of the consolidated
financial statement)
On 11 March 2020, the Coronavirus (COVID-19) outbreak was
declared, a pandemic by the World Health Organization (WHO) and has
rapidly evolved globally. This has resulted in a global slowdown
with uncertainties in the economic environment. This included
disruption to capital markets, deteriorating credit markets and
liquidity concerns. Authorities have taken various measures to
contain the spread including implementation of travel restrictions
and quarantine measures.
The pandemic as well as the resulting measures have had a
significant knock-on impact on the Bank and its principal
subsidiaries and its associates (collectively the "Group"). The
Group is actively monitoring the COVID-19 situation, and in
response to this outbreak, has activated its business continuity
plan and various other risk management practices to manage the
potential business disruption on its operations and financial
performance.
The Central Bank of Bahrain (CBB) announced various measures to
combat the effect of COVID- 19 to ease liquidity conditions in the
economy as well as to assist banks in complying with regulatory
requirements. Theses measure include the following:
1) Payment holiday for 6 months to eligible customers without any additional profits;
2) Concessionary repo to eligible retail banks at zero Percent;
3) Reduction of cash reserve ratio from 5% to 3%;
4) Reductions of liquidity coverage ratio (LCR) and net stable
funding ratio (NSFR) from 100% to 80%;
5) Aggregate of modification loss and incremental expected
credit losses (ECL) provisions for stage 1 and stage 2 from March
to December 2020 to be added to Tier 1 capital for two years ending
31 December 2020 and 31 December 2021. And to deduct this amount
proportionality from Tier 1 capital on an annual basis for three
years ending December 2022, 31 December 2023 and 31 December
2024.
The onset of COVID-19 and the aforementioned measures resulted
in the following significant effects to the financial position and
operations of the Group:
6) The CBB mandated 6-month payment holiday required the retail
banking subsidiary of the Group to recognize a one-off modification
loss directly in equity. The modification loss has been calculated
as the difference between the net present value of the modified
cash flows calculated using the original effective profit rate and
the carrying value of the financial assets on the date of
modification.
7) The Government of Kingdom of Bahrain has announced various
economic stimulus programmes ("Packages") to support businesses in
these challenging times. The Group received various forms of
financial assistance representing specified reimbursement of a
portion of staff costs, waives of fees, levies and utility charges
and zero cost funding received from the government and/or
regulators, in response to its COVID-19 support measures.
8) The mandated 6 months payments holiday also included the
requirement to suspend minimum payments and service fees on credit
card balances and reduction in transaction related charges, this
resulted in a significant decline in the Group's fees income from
its retail banking operations.
9) The strain caused by COVID-19 on the local economy resulted
in a slow-down in the sale of new asset management products and
booking of new corporate financing assets by the Group. During the
nine months ended 31 December 2020, placements of AuM were lower by
19.0% and financing assets bookings were lower by 30.8% than the
same period of the previous year.
a. Decreased consumer spending caused by the economic slow-down
in the booking of new consumer financing assets by the Bank,
whereas, deposit balances decreased compared to the same period of
the previous year. These effects partly alleviated the liquidity
stress faced by the Group due to the mandated 6 months payments
holiday. The Group's liquidity ratios and regulatory CAR were
impacted but it continues to meet the revised regulatory
requirement. The consolidated CAR, LCR and NSFR as of 31 December
2020 was 13.81%, 240% and 97% respectively.
b. The stressed economic situation resulted in the Bank
recognizing incremental ECL on its financing exposures.
c. The overall economic effect of the pandemic was also
reflected in the displacement and volatility in global debt and
capital markets in YTD 2020 due to which the group had to recognize
valuation losses on its Sukuk and investment portfolios.
In addition to the above areas of impact, due to the overall
economic situation certain strategic business and investment
initiatives have been postponed until there is further clarity on
the recovery indicators and its impact on the business environment.
Overall, for the period, the Bank achieved a net profit of USD 45.1
million, which is lower than USD 66.0 million in the same period of
the previous year, registering a drop of 31.7%.
A summary of the significant areas of financial impact described
above is as follows:
Net Impact Net Impact Net Impact
recognized on the Group's recognized
in the Group's consolidated in the Group's
consolidated financial consolidated
income statement position owners' equity
Average reduction of cash reserve - 22,828 -
Concessionary repo at 0% - 129,676 -
Modification loss - (25,292) (25,292)
Investment portfolio decline (19,193) (31,576) (20,643)
Modification loss amortization 17,475 17,475 -
Incremental ECL provisions (1,547) (1,547) -
Government grants - - 4,953
Lower fee income (retail banking) (830) - -
Information reported in the table above only include components
or line items in the financial statements where impact was
quantifiable and material. Some of the amounts reported above
include notional loss of income or incremental costs and hence may
not necessarily reconcile with amounts reported in the interim
financial information for 31 December 2020.
The above supplementary information is provided to comply with
CBB circular number OG/259/2020 (reporting of Financial Impact of
COVID-19), dated 14 July 2020. This information should not be
considered as indication of the results if the entire year or
relied upon for any other purposes. Since the situation of COVID-19
is uncertain and is still evolving, the above impact is as of date
of preparation of this information. Circumstances may change which
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