National Commercial Bank: Consolidated Financial Statements - 31 December 2017

Transcription

1. THE NATIONAL COMMERCIAL BANK (A Saudi Joint Stock Company) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 AND AUDITORS' REPORT Ernst & Young KPMG Al Fozan & Partners
2. CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS Note No . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Page No. AUDITORS' REPORT Consolidated statement of financial position Consolidated statement of income Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows 1 2 3 4 5 Notes to the Consolidated Financial Statements: General Basis of preparation Summary of significant accounting policies Cash and balances with SAMA Due from banks and other financial institutions Investments, net Financing and advances, net Investment in associates, net Other real estate, net Property, equipment and software, net Goodwill Other assets Derivatives Due to banks and other financial institutions Customers' deposits Debt securities issued Other liabilities Share capital Statutory reserve Other reserves (cumulative changes in fair values) Commitments and contingencies Net special commission income Fee income from banking services, net Trading income, net Gains on non-trading financial instruments, net Other non-operating (expenses) income, net Share Based Payment Reserve Employee benefit obligation Basic and diluted earnings per share Tier 1 Sukuk Dividend Cash and cash equivalents Operating segments Collateral and offsetting Credit risk Market risk Liquidity risk Geographical concentration of assets, liabilities, commitments and contingencies and credit exposure Fair values of financial assets and liabilities Determination of fair value and fair value hierarchy Related party transactions Group's staff compensation Capital adequacy Group's interest in other entities Investment services Comparative figures Prospective changes in accounting policies Board of directors' approval 6 9 13 29 29 30 33 40 41 42 43 44 44 48 48 49 50 50 50 50 51 52 53 53 53 53 54 54 55 55 56 56 57 59 60 62 68 72 74 75 77 78 79 44 82 82 82 86
14. The National Commercial Bank (A Saudi Joint Stock Company) CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017 AND 2016 2017 SAR ’000 2016 SAR ’000 37,969,234 21,966,218 114,577,825 249,234,246 2,688,458 450,048 861,523 5,280,672 303,037 10,534,606 ──────── 443,865,867 ════════ 43,441,291 19,213,063 111,508,971 253,592,141 2,666,249 431,156 849,180 4,819,409 325,733 5,809,924 ──────── 14 15 16 13 17 48,557,941 308,942,120 10,250,310 1,945,440 9,894,458 ──────── 379,590,269 ──────── 45,474,074 315,617,891 9,917,765 2,635,190 9,086,479 ──────── 382,731,399 ──────── 18 27 19 20 27 20,000,000 (226,011) 20,266,514 142,449 96,886 18,158,718 1,196,879 (3,594,886) ──────── 56,040,549 ──────── 7,000,000 ──────── 63,040,549 ──────── 1,235,049 ──────── 64,275,598 ──────── 443,865,867 ════════ 20,000,000 (121,011) 20,230,366 730,088 34,443 13,549,488 1,996,904 (3,382,663) ──────── 53,037,615 ──────── 5,700,000 ──────── 58,737,615 ──────── 1,188,103 ──────── 59,925,718 ──────── 442,657,117 ════════ Notes ASSETS Cash and balances with SAMA Due from banks and other financial institutions Investments, net Financing and advances, net Positive fair value of derivatives, net Investments in associates, net Other real estate, net Property, equipment and software, net Goodwill Other assets 4 5 6 7 13 8 9 10 11 12 Total assets 442,657,117 ════════ LIABILITIES AND EQUITY LIABILITIES Due to banks and other financial institutions Customers’ deposits Debt securities issued Negative fair value of derivatives, net Other liabilities Total liabilities EQUITY EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK Share capital Treasury shares Statutory reserve Other reserves (cumulative changes in fair values) Employees' share based payments reserve Retained earnings Proposed dividend Foreign currency translation reserve 31 3.4(b) Equity attributable to shareholders of the Bank Tier 1 Sukuk 30 Equity attributable to equity holders of the Bank NON-CONTROLLING INTERESTS Total equity Total liabilities and equity 44 ________________________________________________________________________________________________ The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 1
15. The National Commercial Bank (A Saudi Joint Stock Company) CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED 31 DECEMBER 2017 AND 2016 2017 SAR ’000 2016 SAR ’000 22 22 17,144,621 (3,483,643) ─────── 13,660,978 17,518,944 (3,969,366) ─────── 13,549,578 23 3,205,251 1,156,067 83,346 220,694 15,837 482,048 (478,993) ─────── 18,345,228 ─────── 3,362,995 1,143,200 (14,123) 396,620 101,454 540,206 (432,551) ─────── 18,647,379 ─────── 3,266,060 771,259 654,281 1,761,357 1,863,623 75,846 ─────── 8,392,426 ─────── 9,952,802 3,432,698 774,323 686,330 74,969 2,070,015 1,930,965 205,720 ─────── 9,175,020 ─────── 9,472,359 11,855 ─────── 11,855 ─────── 9,964,657 ═══════ (56,526) ─────── (56,526) ─────── 9,415,833 ═══════ 9,801,982 162,675 ─────── 9,964,657 ═══════ 4.74 ═══════ 4.73 ═══════ 9,316,857 98,976 ─────── 9,415,833 ═══════ 4.51 ═══════ 4.51 ═══════ Notes Special commission income Special commission expense Net special commission income Fee income from banking services, net Exchange income, net Income (loss) from FVIS investments, net Trading income, net Dividend income Gains on non-trading financial instruments, net Other operating (expenses), net 24 25 Total operating income Salaries and employee-related expenses Rent and premises-related expenses Depreciation/amortisation of property, equipment and software Amortisation of other intangible assets Other general and administrative expenses Impairment charge for financing and advances losses, net Impairment charge on investments, net 10 7.3 6.7 Total operating expenses Income from operations, net Other income/(expenses), net Other non-operating income/(expenses), net 26 Other income/(expenses), net Net income for the year Net income for the year attributable to: Equity holders of the Bank Non-controlling interests Net income for the year Basic earnings per share (expressed in SAR per share) 29 Diluted earnings per share (expressed in SAR per share) 29 ________________________________________________________________________________________________ The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 2
16. The National Commercial Bank (A Saudi Joint Stock Company) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2017 AND 2016 2017 SAR ’000 2016 SAR ’000 9,964,657 ─────── 9,415,833 ─────── (305,449) (855,313) - Net change in fair values (207,598) 90,857 - Transfers to consolidated statement of income (443,296) (329,850) 66,170 193,736 (93,797) (13,462) 100,092 ─────── (883,878) ─────── 9,080,779 ═══════ 34,539 ─────── (879,493) ─────── 8,536,340 ═══════ 9,002,120 8,724,736 78,659 ─────── 9,080,779 ═══════ (188,396) ─────── 8,536,340 ═══════ Notes Net income for the year Other comprehensive (loss) income items that are or may be reclassified to the consolidated statement of income in subsequent periods: Foreign currency translation reserve - (losses) Available for sale financial assets: - Impairment charge on available for sale investments 6.7 Cash flow hedges: - Effective portion of change in fair values - Net transfers to consolidated statement of income Total other comprehensive (loss) Total comprehensive income for the year Attributable to: Equity holders of the Bank Non-controlling interests Total comprehensive income for the year ________________________________________________________________________________________________ The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 3
17. The National Commercial Bank (A Saudi Joint Stock Company) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2017 AND 2016 Attributable to equity holders of the Bank Other reserves Notes SAR’ 000 Tier 1 Sukuk SAR’ 000 Equity attributable to equity holders of the Bank SAR’ 000 Noncontrolling interests SAR’ 000 Total equity SAR’ 000 (3,382,663) 53,037,615 5,700,000 58,737,615 1,188,103 59,925,718 (212,223) ─────── (212,223) (45,202) (211,285) (331,152) 9,801,982 ─────── ─────── (212,223) (45,202) (211,285) (331,152) 9,801,982 ─────── (93,226) (48,595) 3,687 54,118 162,675 ─────── (305,449) (93,797) (207,598) (277,034) 9,964,657 ─────── 9,002,120 9,002,120 78,659 9,080,779 Share capital SAR’ 000 Treasury shares SAR’ 000 Statutory reserve SAR’ 000 Available for sale financial assets reserve SAR’ 000 Cash flow hedge reserves SAR’ 000 Employees' share based payments reserve SAR’ 000 Retained earnings SAR’ 000 Proposed dividend SAR’ 000 Foreign currency translation reserve SAR’ 000 Total equity attributable to shareholders of the Bank 20,000,000 (121,011) 20,230,366 720,507 9,581 34,443 13,549,488 1,996,904 ────── ────── ─────── (211,285) (377,126) ─────── (45,202) 45,974 ─────── ─────── 9,801,982 ─────── ─────── 772 2017 Balance as at 1 January 2017 Total comprehensive income/(loss) for the year Foreign currency translation reserve - losses Net changes in fair value of cash flow hedges Net changes in fair values of available for sale investments Net transfers to consolidated statement of income Net income for the year Transfer to statutory reserve 19 Adjustments in non-controlling interests - - - (588,411) - - 36,148 - - - - - - 9,801,982 - (212,223) - - - (36,148) - - - - - - - - - 24,814 - - 24,814 - 24,814 (2,576) 22,238 Tier 1 Sukuk issuance 30 - - - - - - - - - - 1,300,000 - 1,300,000 Tier 1 Sukuk related costs 30 - - - - - - (334,163) - - (334,163) - (334,163) - (334,163) Purchase of treasury shares for employee's based payment plan 27 - (105,000) - - - - - - - (105,000) - (105,000) - (105,000) Employees' share based payments reserve - charged to consolidated statement of income 27 - - - - - 62,443 - - - 62,443 - 62,443 - Zakat and tax 17 - - - - - - - - (1,453,782) - (1,453,782) (29,137) (1,482,919) Final dividend paid for 2016 31 - - - - - - - (1,996,904) - (1,996,904) - (1,996,904) Interim dividend paid for 2017 31 - - - - - - - (2,196,594) - (2,196,594) - Proposed final dividend for 2017 31 Balance as at 31 December 2017 (1,453,782) (2,196,594) (1,996,904) - 1,300,000 62,443 (2,196,594) ────── ────── ─────── ─────── ─────── ─────── (1,196,879) ─────── 1,196,879 ─────── ─────── ─────── ─────── ─────── ─────── ─────── 20,000,000 ══════ (226,011) ══════ 20,266,514 ═══════ 132,096 ═══════ 10,353 ═══════ 96,886 ═══════ 18,158,718 ═══════ 1,196,879 ═══════ (3,594,886) ═══════ 56,040,549 ═══════ 7,000,000 ═══════ 63,040,549 ═══════ 1,235,049 ═══════ 64,275,598 ═══════ 20,000,000 (190,510) 19,383,697 729,083 (2,537) 9,833,777 1,495,975 (2,787,000) 48,462,485 5,700,000 54,162,485 1,383,071 55,545,556 ────── ────── ─────── 127,538 (136,114) ─────── (22,421) 34,539 ─────── 9,316,857 ─────── ─────── (595,663) ─────── (595,663) (22,421) 127,538 (101,575) 9,316,857 ─────── ─────── (595,663) (22,421) 127,538 (101,575) 9,316,857 ─────── (259,650) 8,959 (36,681) 98,976 ─────── (855,313) (13,462) 90,857 (101,575) 9,415,833 ─────── (8,576) 12,118 (595,663) 8,724,736 8,724,736 (188,396) 8,536,340 2016 Balance as at 1 January 2016 Total comprehensive income/(loss) for the year Foreign currency translation reserve - losses Net changes in fair value of cash flow hedges Net changes in fair values of available for sale investments Net transfers to consolidated statement of income Net income for the year Transfer to statutory reserve 19 Adjustments in non-controlling interests - - - - - 846,669 - - - - - - ─────── - 9,316,857 - - - (846,669) - - - - 7,893 - - 7,893 - 7,893 (6,572) 1,321 Tier 1 Sukuk issuance 30 - - - - - - - - - - - - - - Tier 1 Sukuk related costs 30 - - - - - - (288,096) - - (288,096) - (288,096) - (288,096) - - - - - - (4,025) - - - - - - 27 - 190,510 - - - - - - 190,510 - 190,510 - 190,510 - - - - - - Purchase of treasury shares for employee's based payment plan 27 - (121,011) - - - - Employees' share based payments reserve - charged to consolidated statement of income 27 - - - - - 34,443 Zakat 17 - - - - - - - - - - - - - - - - - - Adjustment in proposed final dividend for 2015 Disposal of treasury shares Gain on disposal of treasury shares Final dividend paid for 2015 Interim dividend paid for 2016 31 Proposed final dividend for 2016 31 Balance as at 31 December 2016 8,717 4,025 - - 8,717 - 8,717 - 8,717 - - - (121,011) - (121,011) - (121,011) - - - 34,443 - 34,443 - 34,443 - - (1,282,062) - (1,282,062) - (1,282,062) - (1,500,000) - (1,500,000) - (1,500,000) - (1,200,000) - (1,200,000) - (1,200,000) (1,282,062) (1,200,000) (1,500,000) - ────── ────── ─────── ─────── ─────── ─────── (1,996,904) ─────── 1,996,904 ─────── ─────── ─────── ─────── ─────── ─────── ─────── 20,000,000 ══════ ══════ (121,011) ══════ ══════ 20,230,366 ═══════ ═══════ 720,507 ═══════ ═══════ 9,581 ═══════ ═══════ 34,443 ═══════ ═══════ 13,549,488 ═══════ ═══════ 1,996,904 ═══════ ═══════ (3,382,663) ═══════ ═══════ 53,037,615 ═══════ ═══════ 5,700,000 ═══════ ═══════ 58,737,615 ═══════ ═══════ 1,188,103 ═══════ ═══════ 59,925,718 ═══════ ═══════ The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. ______________________________________________________________________________________________________________________________________________ 4
18. The National Commercial Bank (A Saudi Joint Stock Company) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 2016 Notes OPERATING ACTIVITIES Net income for the year Adjustments to reconcile net income to net cash from operating activities: Amortisation of premium on non-trading financial instruments, net (Gains) on non-trading financial instruments, net (Gains) on disposal of property, equipment and software, net (Gains) on disposal of other real estate, net Loss on disposal of other repossessed assets Depreciation/amortisation of property, equipment and software Amortisation of other intangible assets Impairment charge for financing and advances, net Impairment charge on investments, net Impairment charge on other real estate Share of results of associates Share based payment expense 25 26 10 7.3 6.7 26 Net decrease (increase) in operating assets: Statutory deposits with SAMA Due from banks and other financial institutions with original maturity of more than three months, net Held as fair value through income statement (FVIS) investments Financing and advances, net Positive fair value of derivatives, net Other real estate Other assets Net increase (decrease) in operating liabilities: Due to banks and other financial institutions Customers’ deposits Negative fair value of derivatives, net Other liabilities Net cash from operating activities INVESTING ACTIVITIES Proceeds from sale and maturities of non-trading / non-FVIS investments Purchase of non-trading / non-FVIS investments Purchase of property, equipment and software Proceeds from disposal of property, equipment and software Dividends from associates 10 Net cash (used in) from investing activities FINANCING ACTIVITIES Net movement in debt securities Net movement in non-controlling interests Tier 1 Sukuk issuance Tier 1 Sukuk related costs Purchase of treasury shares for employees' share based payment plan Proceeds from sale of treasury shares Final dividend paid for 2016 Interim dividend paid for 2017 16 27 Net cash (used in) financing activities Net (decrease) increase in cash and cash equivalents Foreign currency translation reserve - net movement on cash and cash equivalents at the beginning of the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Special commission income received during the year Special commission expense paid during the year Supplemental non-cash information Movement in other reserve and transfers to consolidated statement of income 32 2017 SAR’ 000 2016 SAR’ 000 9,964,657 9,415,833 310,447 (482,048) (13,835) (25,271) 182,564 654,281 1,863,623 75,846 34,745 (21,392) 62,443 ─────── 12,606,060 431,990 (540,206) (45,495) (5,388) 107,328 686,330 74,969 1,930,965 205,720 1,384 (7,416) 34,443 ─────── 12,290,457 285,714 650,265 (4,723,991) 3,499,492 548,596 74,746 (37,312) 64,492 (4,048,845) 313,946 (8,883,233) (3,820) 205,788 (92,448) 3,598,506 (5,117,649) (661,188) (635,129) ─────── 1,954,000 ─────── (1,169,220) (2,869,851) 94,432 (1,734,608) ─────── 2,301,200 ─────── 43,599,031 (48,001,477) (1,179,112) 28,536 2,500 ─────── (5,550,522) ─────── 63,151,411 (41,631,228) (1,347,656) 58,003 ─────── 20,230,530 ─────── 263,900 5,038 1,300,000 (334,163) (105,000) (1,996,904) (2,196,594) ─────── (3,063,723) ─────── (6,660,245) 53,048 273 (288,096) (121,011) 199,227 (1,200,000) (1,500,000) ─────── (2,856,559) ─────── 19,675,169 (199,049) (548,650) 35,661,453 ─────── 28,802,159 ═══════ 16,637,299 3,638,793 ═══════ 16,534,934 ─────── 35,661,453 ═══════ 17,705,558 3,639,142 ═══════ (24,180) (578,429) ═══════ ═══════ ________________________________________________________________________________________________ The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 5
19. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 1. GENERAL (1.1) Introduction The financial statements comprise the consolidated financial statements of The National Commercial Bank (the Bank) and its subsidiaries (the Group). The National Commercial Bank is a Saudi Joint Stock Company formed pursuant to Cabinet Resolution No. 186 on 22 Dhul Qida 1417H (30 March 1997) and Royal Decree No. M/19 on 23 Dhul Qida 1417H (31 March 1997), approving the Bank’s conversion from a General Partnership to a Saudi Joint Stock Company. The Bank commenced business as a partnership under registration certificate authenticated by a Royal Decree on 28 Rajab 1369H (15 May 1950) and registered under commercial registration No. 4030001588 issued on 27 Dhul Hijjah 1376H (24 July 1957). The Bank initiated business in the name of “The National Commercial Bank” under Royal Decree No. 3737 on 20 Rabi Thani 1373H (26 December 1953). The date of 1 July 1997 was determined to be the effective date of the Bank’s conversion from a General Partnership to a Saudi Joint Stock Company. In 2014, the shareholders approved to offer 25% of the Bank's share capital (after capital increase) to the general public under an Initial Public Offering (IPO). The Bank became listed and its shares have been trading on Saudi Stock Exchange (Tadawul) since 12 November 2014. The Bank operates through its 400 branches (2016: 374 branches), 20 retail service centers (2016: 19 centers), 9 corporate service centers (2016: 9 centers) and 150 QuickPay remittance centers (2016: 148 centers) in the Kingdom of Saudi Arabia and one overseas branch in the Kingdom of Bahrain. The Board of Directors in their meeting dated 23 November 2015 resolved to close the Bank's branch operations domiciled in Beirut, Lebanon (the "branch"). The required regulatory approvals have been received and the legal formalities in respect of closure of branch are in progress. The Bank's Head Office is located at the following address: The National Commercial Bank Head Office King Abdul Aziz Street P.O. Box 3555, Jeddah 21481 Kingdom of Saudi Arabia www.alahli.com The objective of the Group is to provide a full range of banking services. The Group also provides non-special commission based banking products in compliance with Shariah rules, which are approved and supervised by an independent Shariah Board. (1.2) Group's subsidiaries The details of the Group's significant subsidiaries are as follows: Name of subsidiaries NCB Capital Company (NCBC) Ownership % 2017 2016 97.34% Description 97.85% A Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia to manage the Bank's investment services and asset management activitives. The Bank has a 90.71% (2016: 90.71%) direct ownership interest in NCBC and an indirect ownership of 6.63% (2016: 7.14%) (the indirect ownership is held via an intermediary trust for future grant to NCBC employees). _____________________________________________________________________________________________________ 6
20. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 1. GENERAL (continued) (1.2) Group's subsidiaries (continued) Name of subsidiaries NCB Capital Dubai Inc. (formerly Eastgate Capital Holdings Inc.) NCBC Investment Management Umbrella Company Plc Ownership % Description 2017 2016 97.85% An exempt company with limited liability incorporated in the 97.34% Cayman Islands to source, structure and invest in private equity and real estate development opportunities across emerging markets, with a particular focus on the MENA region. 97.34% 97.85% A company incorporated in Ireland under the provisions of the European Communities (Undertakings for Collective Investment in Transferable Securities “UCITS”) Regulation 2011. The authorization certificate for the commencement of operations of the Umbrella Company was received in November 2012 from the Central Bank of Ireland, pursuant to which it launched two funds (“NCB Capital Saudi Arabian Equity Fund” and “NCB Capital GCC Equity Fund”), which were registered in Dublin and pre-approved by the Capital Markets Authority through its letter dated May 6, 2010 to carry out their activities in the Kingdom of Saudi Arabia. On 29 August 2016, the Company resolved to voluntarily liquidate the operations of Umbrella Company with immediate effect. As at 31 December 2017 the liquidation of the Company is under process. Türkiye Finans Katılım Bankası A.Ş. (TFKB) 67.03% 67.03% A participant bank that collects funds through current accounts, profit sharing accounts and lends funds to consumer and corporate customers, through finance leases and profit/loss sharing partnerships. As at 31 December 2017, TFKB fully owns the issued share capital of TF Varlık Kiralama AŞ, (TFVK) and TFKB Varlik Kiralama A.Ş., which are special purpose entities (SPEs) established in connection with issuance of sukuks by TFKB. Real Estate Development Company (REDCO) 100% 100% A Limited Liability Company registered in the Kingdom of Saudi Arabia. REDCO is engaged in keeping and managing title deeds and collateralised real estate properties on behalf of the Bank. Alahli Insurance Service Marketing Company 100% 100% A Limited Liability Company, engaged as an insurance agent for distribution and marketing of Islamic insurance products in Saudi Arabia. _____________________________________________________________________________________________________ 7
21. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 1. GENERAL (continued) (1.2) Group's subsidiaries (continued) 2. Ownership % 2016 Description 100% A Limited Liability Company registered in the Cayman Islands, engaged in trading in derivatives and Repos/Reverse Repos on behalf of the Bank. Name of subsidiaries Saudi NCB Markets Limited 2017 100% Eastgate MENA Direct Equity L.P. 100% AlAhli Esnad Company 100% - A Limited Liability Company registered in the Kingdom of Saudi Arabia, engaged in recruitment services within the Kingdom of Saudi Arabia. Peregrine Aviation Topco Limited 100% - A special purpose vehicle for the purpose of investing in a company which will acquire, lease and sell aircrafts located and registered in the Cayman Islands. 100% A private equity fund domiciled in the Cayman Islands and managed by NCB Capital Dubai. The Fund’s investment objective is to generate returns via investments in Shari’ah compliant direct private equity opportunities in high growth businesses in countries within the Middle East and North Africa. BASIS OF PREPARATION (2.1) Statement of compliance The consolidated financial statements of the Group have been prepared: a) In accordance with ‘International Financial Reporting Standards (IFRS) as modified by the Saudi Arabian Monetary Authority (“SAMA”) for the accounting of zakat and income tax’, which requires, adoption of all IFRSs as issued by the International Accounting Standards Board (“IASB”). As per the SAMA Circular no. 381000074519 dated April 11, 2017 instead of International Accounting Standard (IAS) 12 - “Income Taxes” and IFRIC 21 - “Levies” and subsequent amendments through certain clarifications relating to the accounting for zakat and income tax (“SAMA Circular”), the Zakat and Income tax are to be accrued on a quarterly basis through shareholders equity under retained earnings. b) In compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and the By-Laws of the Bank. Further, the above SAMA Circular has also repealed the existing Accounting Standards for Commercial Banks, as promulgated by SAMA, and are no longer applicable from 1 January 2017. Until 2016, the consolidated financial statements of the Group were prepared in accordance with the Accounting Standards for Commercial Banks promulgated by SAMA and International Financial Reporting Standards (IFRS), the Banking Control Law, the provision of Regulations for Companies in the Kingdom of Saudi Arabia and the Bank’s bylaws. This change in framework did not have any material impact on the consolidated financial statements of the Group. Please refer note 3.20 for the accounting policy of Zakat and income tax. (2.2) Basis of measurement The consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of derivatives, financial assets held for trading and held at Fair Value through Income Statement (FVIS) and available for sale investments. In addition, financial assets and liabilities that are carried at cost but are hedged in a fair value hedging relationship are carried at fair value to the extent of the risk being hedged. (2.3) Functional and presentation currency These consolidated financial statements are presented in Saudi Arabian Riyals (SAR) which is the Bank's functional currency and have been rounded off to the nearest thousand Saudi Arabian Riyals, except as otherwise indicated. _____________________________________________________________________________________________________ 8
22. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 2. BASIS OF PREPARATION (continued) (2.4) Basis of consolidation The consolidated financial statements comprise the financial statements of "The National Commercial Bank" and its subsidiaries (see note 1.2). The financial statements of the subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the group are eliminated in full on consolidation. (2.5) Critical accounting judgements, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS and SAMA guidance on accounting for Zakat and Tax requires the use of certain critical accounting judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. Such judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Revisions to accounting estimates are recognised in the period in which the estimate is revised and any future period affected. In preparing these consolidated financial statements, the critical accounting judgments, estimates and assumptions made by management are the same as those that applied to the annual consolidated financial statements for the year ended 31 December 2016, except for change in the estimated useful lives of certain equipment and software. This revision of the useful life was based on the operational efficiency review of these equipment and software. As a result, the corresponding equipment and software which were previously depreciated over a period from 4 to 6 years, are now estimated to be in use for a period of 8 to 10 years. This change has been accounted for prospectively commencing from 1 April 2017. The impact of the change in the useful life of the equipment and software did not have a material impact on the consolidated financial statements of the Group. Significant areas where management has used estimates, assumptions or exercised judgments are as follows: (a) Impairment charge for financing and advances losses The Group reviews its non-performing financing and advances at each reporting date to assess whether a specific allowance for financing losses should be recorded in the consolidated statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the specific allowance. The Group reviews its financing and advances portfolios to assess an additional portfolio (collective) allowance on a periodic basis. In determining whether an impairment loss should be recorded, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating its cash flows. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (b) Fair value of financial instruments that are not quoted in an active market Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability, or • In the absence of a principal market, in the most advantageous market for the asset or liability _____________________________________________________________________________________________________ 9
23. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 2. BASIS OF PREPARATION (continued) (2.5) Critical accounting judgements, estimates and assumptions (continued) The fair value of an asset or a liability is measured using assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Financial instruments for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy (see note 40). For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of their nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy. (c) Impairment of available for sale investments The Group exercises judgment to consider impairment on the available for sale investments at each reporting date. This includes determination of a significant or prolonged decline in the fair value of equity securities below cost. The determination of what is 'significant' or 'prolonged' requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in share prices. In addition, the Group considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The Group considers 30% or more, as a reasonable measure for significant decline below its cost, irrespective of the duration of the decline, and is recognised in the consolidated statement of income as impairment charge on investments. Prolonged decline represents decline below cost that persists for 1 year or longer irrespective of the amount and is, thus, recognised in the consolidated statement of income as impairment charge on investments. The previously recognised impairment loss in respect of equity investments cannot be reversed through the consolidated statement of income. The Group reviews its debt securities classified as available for sale at each reporting date to assess whether they are impaired. This requires similar judgement as applied to individual assessment of financing and advances (see note 3.13). (d) Classification of held to maturity investments The Group follows the guidance of IAS 39 "Financial Instruments Recognition and Measurement" on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. (e) Going concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. _____________________________________________________________________________________________________ 10
24. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 2. BASIS OF PREPARATION (continued) (2.5) Critical accounting judgments and estimates and assumptions (continued) (f) Impairment of non-financial assets The carrying amounts of the non-financial assets are reviewed at each reporting date or more frequently to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGUs. The fair value less cost to sell is based on observable market prices or, if no observable market prices exist, estimated prices for similar assets or if no estimated prices for similar assets are available, then based on discounted future cash flow calculations. For the purpose of impairment testing (see note 11), goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. The subsidiaries are regarded as a cash-generating unit for the purpose of impairment testing of their respective goodwill. Impairment losses are recognised in the consolidated statement of income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of other assets including the intangible assets in the unit (group of units) on a pro rata basis on condition that the carrying amount of other assets should not be reduced below their fair values. Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal off the operation. Goodwill disposed off in this circumstance is measured based on the relative values of the operation disposed off and the portion of the cash-generating unit retained. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative foreign currency translation reserve and unimpaired goodwill is recognised in the consolidated statement of income. The previously recognised impairment loss in respect of goodwill cannot be reversed through the consolidated statement of income. Non-financial assets held under Murabaha arrangements are measured at their lower of cost and net realizable value. Net realizable value is the estimated selling price, less selling expenses. Any impairment loss arising as a result of carrying these assets at their net realizable values is recognised in the consolidated statement of income under other operating (expense), net. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. _____________________________________________________________________________________________________ 11
25. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 2. BASIS OF PREPARATION (continued) (2.5) Critical accounting judgments and estimates and assumptions (continued) (g) Determination of control over investment funds The Group acts as a Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the Fund (comprising any carried interests and expected management fees) and the investors rights to remove the Fund Manager. The Group consolidates the structured entities that it controls. When making this judgement, the Group also considers voting and similar rights available to itself and other parties, that may limit the Group’s ability to control, appoint, reassign or remove members of key management personnel who have the ability to direct the relevant activities of these structured entities. (h) Provisions for liabilities and charges The Group receives legal claims in the ordinary course of business. Management makes judgments in assigning the risk that might exists in such claims. It also sets appropriate provisions against probable losses. The claims are recorded or disclosed, as appropriate, in the consolidated financial statements based on the best estimate of the amount required to settle the claim. (i) Measurment of defined benefits obligation The Group maintains an end of service benefit plan for its employees and to arrive at the estimated obligation as at the reporting date, the Group uses assumptions such as the discount rate, expected rate of salary increase and normal retirement age. (j) Useful lives of property, equipment and other software The management determines the estimated useful lives of its property, equipment and other software for calculating depreciation / amortisation. This estimate is determined after considering the expected usage of the asset or its physical wear and tear. The residual value, useful lives and future depreciation / amortisation charges are reviewed by the management where they believe the useful lives differ from previous estimates. _____________________________________________________________________________________________________ 12
26. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of these consolidated financial statements, and changes therein, are set out below: (3.1) Changes in accounting policies The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the preparation of the consolidated financial statements for the year ended 31 December 2016 except for the adoption of SAMA guidance for the accounting of Zakat and income tax (note 2.1) and the following amendments to existing standards mentioned below which has had no material impact on the consolidated financial statements of the Group on the current or prior periods and is expected to have insignificant effect in future periods: - Amendments to IAS 7, Statement of cash flows on disclosure initiative: Applicable for annual periods beginning on or after 1 January 2017. These amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. This amendment is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. These adoptions have no material impact on the consolidated financial statements other than certain additional disclosures. - Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to IFRS 12 Disclosure of Interests in Other Entities): The amendments clarify that the disclosure requirements in IFRS 12 apply to an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale or distribution. These amendments apply retrospectively. The Bank has chosen not to early adopt the amendments and revisions to the International Financial Reporting Standards which have been published and are mandatory for compliance by the banks for the accounting years beginning on or after 1 January 2018 (refer note 47). (3.2) Settlement date accounting All regular way purchases and sales of financial assets are recognised and derecognised on the settlement date, i.e. the date on which the asset is delivered to the counterparty. When settlement date accounting is applied, the Group accounts for any change in fair value between the trade date and the settlement date in the same way as it accounts for the acquired asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (3.3) Derivative financial instruments and hedge accounting Derivative financial instruments including foreign exchange contracts, special commission rate futures, forward rate agreements, currency and special commission rate swaps, swaptions, currency and special commission rate options (both written and purchased) are measured at fair value. Fair values are obtained by reference to quoted market prices and/or valuation models as appropriate. (3.3.1) Derivatives held for trading Any changes in the fair value of derivatives that are held for trading purposes are taken directly to the consolidated statement of income for the year and are disclosed in trading income. Derivatives held for trading also include those derivatives, which do not qualify for hedge accounting as described below. _____________________________________________________________________________________________________ 13
27. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.3) Derivative financial instruments and hedge accounting (continued) (3.3.2) Embedded derivatives Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through statement of income. The embedded derivatives separated from the host are carried at fair value in the trading book with changes in fair value recognised in the consolidated statement of income. (3.3.3) Hedge accounting The Group designates certain derivatives as hedging instruments in qualifying hedging relationships to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from highly probable forecast transactions and firm commitments. In order to manage particular risk, the Group applies hedge accounting for transactions that meet specific criteria. For the purpose of hedge accounting, hedges are classified into two categories: (a) Fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability, or an unrecognised firm commitment or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect the reported net gain or loss; and (b) Cash flow hedges which hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or to a highly probable forecasted transaction that will affect the reported net gain or loss. In order to qualify for hedge accounting, the hedge should be expected to be "highly effective", i.e. the changes in fair value or cash flows of the hedging instrument should effectively offset corresponding changes in the hedged item, and should be reliably measurable. At inception of the hedge, the risk management objective and strategy is documented including the identification of the hedging instrument, the related hedged item, the nature of risk being hedged, and how the Group will assess the effectiveness of the hedging relationship. Subsequently, the hedge is required to be assessed and determined to be an effective hedge on an ongoing basis. At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. A formal assessment is undertaken by comparing the hedging instrument’s effectiveness in offsetting the changes in fair value or cash flows attributable to the hedged risk in the hedged item, both at inception and at each quarter end on an ongoing basis. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated were offset by the hedging instrument and were expected to achieve such offset in future periods. Hedge ineffectiveness is recognised in the consolidated statement of income in ‘trading income, net’. For situations where the hedged item is a forecast transaction, the Group also assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated statement of income. (3.3.4) Fair value hedges In relation to fair value hedges, which meet the criteria for hedge accounting, any gain or loss from remeasuring the hedging instruments to fair value is recognised immediately in the consolidated statement of income. Any gain or loss on the hedged item attributable to fair value changes relating to the risks being hedged is adjusted against the carrying amount of the hedged item and recognised in the consolidated statement of income (in the same line item as the hedging instrument). Where the fair value hedge of a special commission bearing financial instrument ceases to meet the criteria for hedge accounting, the adjustment in the carrying value is amortised to the consolidated statement of income over the remaining life of the instrument. _____________________________________________________________________________________________________ 14
28. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.3) Derivative financial instruments and hedge accounting (continued) (3.3.5) Cash flow hedges In relation to cash flow hedges which meet the criteria for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised initially in other reserves under equity and the ineffective portion, if any, is recognised in the consolidated statement of income. For cash flow hedges affecting future transactions, the gains or losses recognised in other reserves, are transferred to the consolidated statement of income in the same period in which the hedged transaction affects the consolidated statement of income. However, if the Group expects that all or a portion of a loss recognised in consolidated statement of other comprehensive income will not be recovered in one or more future periods, it shall reclassify into the consolifated statement of income as a reclassification adjustment the amount that is not to be recognised. Hedge accounting is discontinued when the hedging instrument is expired or sold, terminated or exercised, or no longer qualifies for hedge accounting, or the forecast transaction is no longer expected to occur or the Group revokes the designation then hedge accounting is discontinued prospectively. At that point of time, any cumulative gain or loss on the cash flow hedging instrument that was recognised in other reserves from the period when the hedge was effective is transferred from equity to the consolidated statement of income when the forecasted transaction occurs. Where the hedged forecasted transaction is no longer expected to occur and affect the consolidated statement of income, the net cumulative gain or loss recognised in other reserves is transferred immediately to the consolidated statement of income. (3.4) Foreign currencies Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currency of NCB, NCBC, Alahli Insurance Service Marketing Company, and Redco is Saudi Riyals. The functional currency for the TFKB is Turkish Lira and the functional currency of NCB Capital Dubai Inc., NCBC Investment Management Umbrella Company Plc and Saudi NCB Markets Limited is U.S. Dollars. (a) Transactions and balances of the Bank Transactions in foreign currencies are translated into the functional currency at the spot exchange rates prevailing at transaction dates. Monetary assets and liabilities at the year-end (other than monetary items that form part of the net investment in a foreign operation), denominated in foreign currencies, are retranslated into the functional currency at the exchange rates prevailing at the reporting date. Foreign exchange gains or losses on translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income. Non-monetary assets measured at fair value in a foreign currency are translated using the exchange rates prevailing at the date when the fair value was determined. (b) Foreign operations As at the reporting date, the assets and liabilities of the foreign operations are translated into the Group's presentation currency (Saudi Riyals) at the rate of exchange ruling at the statement of financial position date, equity (pre-acquisition) is translated at historical exchange rate at the date of acquisition and income and expenses of the statement of income are translated at the spot exchange rates prevailing at transaction dates on daily basis. Exchange differences arising on translation are taken directly to a separate component of equity (foreign currency translation reserve) and are recognised in consolidated statement of comprehensive income. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the foreign exchange translation reserve is allocated to the non-controlling interest. The deferred cumulative amount of exchange differences recognised in equity will be reclassified in the consolidated statement of income in ‘Other operating expenses’ or ‘Other operating income’ at the time of any future disposal or partial disposal with loss of control. Goodwill and intangible assets arising on the acquisition of the foreign operations and fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at the closing rate. _____________________________________________________________________________________________________ 15
29. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.5) Offsetting financial instruments Financial assets and financial liabilities are offset and reported net in the consolidated statement of financial position when there is a current legally enforceable right to set off the recognised amounts and when the Group intends to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. (3.6) Revenue / expenses recognition Special commission income and expenses for all special commission-bearing financial instruments, except for those classified as held for trading or designated at fair value through income statement (FVIS), including fees which are considered an integral part of the effective yield of a financial instrument, are recognised in the consolidated statement of income using the effective special commission rate basis including premiums amortised and discounts accreted during the year. The effective special commission rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability to the carrying amount of the financial asset or financial liability. When calculating the effective special commission rate, the Group estimates future cash flows considering all contractual terms of the financial instrument but excluding future financing losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective special commission rate and the change in carrying amount is recorded as special commission income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, special commission income continues to be recognised using the rate of special commission used to discount the future cash flows for the purpose of measuring the impairment loss. The calculation of the effective special commission rate includes all fees paid or received, transaction costs and discounts or premiums that are an integral part of the effective special commission rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. Income from FVIS financial instruments relates to financial assets designated as FVIS and includes all realised and unrealised fair value changes. Net trading income subsumes results arising from trading activities and includes all realised and unrealised gains and losses from changes in fair value and related special commission income or expense, dividends for financial assets held for trading and foreign exchange differences on open positions. Exchange income from banking services are recognised when earned. Dividend income is recognised when the right to receive dividend income is established. Fees income and expenses are recognised on an accrual basis as the service is provided. Financing commitment fees for financing arrangement that are likely to be drawn down are deferred and recognised as an adjustment to the effective yield on the financing arrangement, if material. Portfolio and other management advisory and service fee income are recognised based on the applicable service contracts, usually on a time-proportionate basis. Fee income received on other services that are provided over an extended period of time, are recognised rateably over the period when the service is being provided, if material. Other fee expenses mainly relate to transaction and services fee, which are expensed as related services are provided. _____________________________________________________________________________________________________ 16
30. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.7) Sale and repurchase agreements (including securities lending and borrowings) Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognised in the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. These assets continue to be measured in accordance with related accounting policies for investments held for trading, available for sale, held to maturity and other investments held at amortised cost. The counterparty liability for amounts received under these agreements is included in "due to banks and other financial institutions", as appropriate. The difference between sale and repurchase price is treated as special commission expense which is accrued over the life of the repo agreement using the effective special commission rate. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repo) are not recognised in the consolidated statement of financial position, as the Group does not obtain control over the assets. Amounts paid under these agreements are included in "cash and balances with SAMA", "due from banks and other financial institutions" or "financing and advances", as appropriate. The difference between purchase and resale price is treated as special commission income which is accrued over the life of the reverse repo agreement using the effective yield basis. Securities borrowing and lending transactions are typically secured; collateral takes the form of securities or cash advanced or received. Securities lent to counterparties are retained on the consolidated statement of financial position. Securities borrowed are not recognised on the consolidated statement of financial position, unless these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability. Cash collateral given or received is treated as a loan and receivable or customer deposit. (3.8) Business combinations Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition, being total consideration of the acquisition, is measured as the fair value of the assets given and liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition that occured prior to 1 January 2010. For any subsequent acquisitions, the cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition related costs are expensed as incurred and are included in administrative expenses. Identifiable assets acquired (including previously unrecognised intangible assets) and liabilities (including contingent liabilities) in an acquisition are measured initially at fair values at the date of acquisition, irrespective of the extent of any non-controlling interest. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Upon loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising from the loss of control is recognised in the consolidated statement of income. If the Group retains any interest in the former subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investment or other categories of investment in accordance with the Group’s relevant accounting policy. _____________________________________________________________________________________________________ 17
31. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.8) Business combinations (continued) (a) Subsidiaries Subsidiaries are entities which are controlled by the Group. To meet the definition of control, all three criteria must be met: i) The Group has power over the entity; ii) The Group has exposure, or rights, to variable returns from its involvement with the entity; and iii) The Group has the ability to use its power over the entity to affect the amount of the entity’s returns. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which the control is transferred from the Group. The results of subsidiaries acquired or disposed of during the year, if any, are included in the consolidated statement of income from the date of the acquisition or up to the date of disposal, as appropriate. (b) Non-controlling interests Non-controlling interests represent the portion of net income and net assets of subsidiaries not owned, directly or indirectly, by the Bank in its subsidiaries and are presented separately in the consolidated statement of income and within equity in the consolidated statement of financial position, separately from the Bank's equity. Any losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the noncontrolling interests to have a deficit balance. (c) Associates Associates are enterprises over which the Group exercises significant influence. Investments in associates are initially recognised at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at the lower of the equity-accounted value or the recoverable amount. Equity-accounted value represents the cost plus post-acquisition changes in the Group's share of net assets of the associate (share of the results, reserves and accumulated gains/losses based on latest available financial statements) less impairment, if any. The previously recognised impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of investment in the consolidated statement of financial position remains at the lower of the equity-accounted (before allowance for impairment) or the recoverable amount. (d) Transactions eliminated on consolidation Inter-group balances, income and expenses (except for foreign currency transaction gains or losses) arising from intergroup transactions are eliminated, as appropriate, in preparing the consolidated financial statements. (3.9) Goodwill and other intangible assets (a) Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses; impairment loss of goodwill is charged to the consolidated statement of income. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. (b) Other intangible assets Intangible assets in the consolidated statement of financial position comprise of customer deposits relationships, the value of the TFKB's brands, and other banking relationships. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. _____________________________________________________________________________________________________ 18
32. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.10) Investments All investment securities are financial assets which are initially recognised at cost, being the fair value of the consideration given, including incremental direct transaction costs except for those transaction charges related to investments held as FVIS or for trading, which are not added to the cost at initial recognition and are charged to the consolidated statement of income. Premiums are amortised and discounts accreted using the effective yield basis and are taken to special commission income. For securities that are traded in organised financial markets, the fair value is determined by reference to exchange quoted market bid prices at the close of business on the consolidated statement of financial position date. Fair values of managed assets and investments in mutual funds are determined by reference to declared net asset values which approximate the fair value. For securities where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same, or is based on the expected cash flows of the security. Where the fair values cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values with non-observable market data. Following initial recognition, subsequent transfers between the various classes of investments are not ordinarily permissible. The subsequent period-end accounting treatment for each class of investment is determined on the basis as set out in the following paragraphs: (a) Held for trading Investments classified as held for trading are acquired principally for the purpose of selling or repurchasing in the short term. Securities which are held for trading are subsequently measured at fair value and any gains or losses arising from a change in fair value are included in the consolidated statement of income in the period in which it arises and are disclosed as trading income. (b) Held at fair value through income statement (FVIS) Investments in this category are classified as FVIS on initial recognition. An investment may be designated as FVIS by the management if it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as “an accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on different basis; or a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Group’s key management personnel. These include all hedge fund and mutual fund investments that are managed by the Group, directly or indirectly, and whose performance is evaluated on a fair value basis. Equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are not classified under this category. After initial recognition, investments at FVIS are measured at fair value and any change in the fair value is recognised in the consolidated statement of income for the period in which it arises and are disclosed as income from FVIS investments. _____________________________________________________________________________________________________ 19
33. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.10) Investments (continued) (c) Available for sale (AFS) Available for sale investments are non-derivative investments that are designated as AFS or not classified as another category of financial assets, and are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as available for sale are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Any unrealised gains or losses arising from changes in fair value are recognised through the consolidated statement of comprehensive income in "other reserves" under equity until the investments are derecognised or impaired whereupon any cumulative gains or losses previously recognised in equity are reclassified to consolidated statement of income for the period and are disclosed as gains/(losses) on non-trading financial instruments. For impairment of available for sale investments, see note 3.13(b). (d) Held to maturity Investments having fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at amortised cost, less allowance for impairment in their value. Amortised cost is calculated by taking into account any discount or premium on acquisition using the effective yield method. Any gain or loss on such investments is recognised in the consolidated statement of income when the investment is derecognised or impaired. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Group's ability to use this classification and cannot be designated as a hedged item with respect to special commission rate or prepayment risk, reflecting the intention to hold them to maturity. (e) Other investments held at amortised cost Investments having fixed or determinable payments that are not quoted in an active market are classified as other investments held at amortised cost. Such investments whose fair values have not been hedged are stated at amortised cost using an effective yield basis, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition using effective yield method. Any gain or loss is recognised in the consolidated statement of income when the investment is derecognised and are disclosed as gains/(losses) on non-trading financial instruments. (3.11) Financing and advances Financing and advances are non-derivative financial assets originated or acquired by the Group with fixed or determinable payments. Financing and advances are recognised when cash is advanced to borrowers. They are derecognised when either the borrower repays their obligations, or the financing and advances are sold or written off, or substantially all the risks and rewards of ownership are transferred. Financing and advances are initially measured at fair value of the consideration given. Following initial recognition, financing and advances for which fair value has not been hedged are stated at amortised cost less any amount written off and specific and portfolio (collective) allowances for impairment. For presentation purposes, allowance for financing losses is deducted from financing and advances. _____________________________________________________________________________________________________ 20
34. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.12) Due from banks and other financial institutions Due from banks and other financial institutions are financial assets which are mainly money market placements with fixed or determinable payments and fixed maturities that are not quoted in an active market. Money market placements are not entered into with the intention of immediate or short-term resale. Due from banks and other financial institutions are initially measured at cost, being the fair value of the consideration given. Following initial recognition, due from banks and other financial institutions are stated at cost less any amount written-off and specific allowances for impairment, if any, and a portfolio (collective) allowance for counterparty risk. (3.13) Impairment of financial assets An assessment is made at the date of each consolidated statement of financial position to determine whether there is objective evidence that a financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss is recognised for changes in its carrying amount as follows: (a) Impairment of financial assets held at amortised cost A financial asset is classified as impaired when there is an objective evidence of credit-related impairment as a result of one or more loss event(s) that occurred after the initial recognition of the asset and those loss events have an impact on the estimated future cash flows of the financial asset or group of financial assets and can be reliably estimated. A specific allowance for financing losses, due to impairment of a financing or any other financial asset held at amortised cost, is established if there is objective evidence that the Group will not be able to collect all amounts due. The amount of the specific allowance is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective yield basis. In addition to a specific allowance for financing losses of corporate financing, an additional portfolio allowance for collective impairment is made on a portfolio basis for financing losses where there is an objective evidence that unidentified losses exist at the reporting date. These are based on any deterioration in the risk rating (i.e. downward migration of risk ratings) of the financial assets since they were originally granted. This allowance is estimated based on various factors including credit ratings allocated to a borrower or group of borrowers, the current economic conditions, the experience the Group has had in dealing with a borrower or group of borrowers and available historical default information. Financing and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a revised rate of commission to genuinely distressed borrowers. This may result in the asset continuing to be overdue and individually impaired as the renegotiated payments of commission and principal do not recover the original carrying amount of the financing. In other cases, renegotiation leads to a new agreement, which is treated as a new financing. Restructuring policies and practices are based on indicators or criteria which, indicate that payment will most likely continue. The financings continue to be subject to an individual or collective impairment assessment, calculated using the financing’s original effective yield rate. _____________________________________________________________________________________________________ 21
35. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.13) Impairment of financial assets (continued) (a) Impairment of financial assets held at amortised cost (continued) Corporate financings are written off when they are determined to be uncollectible. This determination is reached after considering information such as the number of days for which the financing has been past due, significant changes in the borrowers' financial position such that the borrower can no longer settle their obligations, or to the extent that proceeds from collateral held are insufficient to cover the obligations. Consumer financings are considered to be impaired when a payment is overdue by 90 days or more. Since the risk metrics for consumer financings are based on a collective “pool” basis, rather than on individual financings, the allowances for consumer financings are also computed on a “pool basis” using the ‘flow rate” methodology. The allowance coverage is 100% for such non-performing financings which reach the “write-off point”. The carrying amount of the asset is adjusted through the use of an allowance for impairment account and the amount of the adjustment is included in the consolidated statement of income. (b) Impairment of financial assets held at fair value In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is an objective evidence of impairment based on the same criteria as financial assets held at amortised cost. The amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated statement of income. If, in a subsequent period, the amount of the impairment loss on debt instruments decreases upon subsequent increase in the fair value and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the issuer's credit rating), the previously recognised impairment loss is reversed by adjusting the provision account. The amount of the reversal is recognised in the consolidated statement of income as a reversal of allowance for impairment on investment. Where a loss has been recognised directly under equity, the cumulative net loss balance recognised in equity is transferred to the consolidated statement of income as impairment loss when the asset is considered to be impaired. For equity investments held as available for sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment [also see note 2.5(c)]. Unlike debt securities, the previously recognised impairment loss of equity investments cannot be reversed through the consolidated statement of income as long as the asset continues to be recognised, that is, any increase in fair value, after impairment has been recorded, can only be recognised in equity. The Group writes off its financial assets when the respective business units together with Risk Management determine that the financial assets are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer's financial position such that the borrower/issuer can no longer pay the obligations, or that proceeds from collateral will not be sufficient to pay back the entire exposure. The financial assets are, then, written off only in circumstances where effectively all possible means of recovery have been exhausted. For consumer financings, write off decisions are generally based on a product specific past due status. When a financial asset is uncollectible, it is written off against the related allowance for impairment, if any, and any amounts in excess of available allowance are directly charged to the consolidated statement of income. For impairment of non-financial assets, see note [2.5(f)]. _____________________________________________________________________________________________________ 22
36. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.14) Other real estate and repossessed assets The Group, in the ordinary course of business, acquires certain real estate and other assets against settlement of due financing and advances. These are considered as assets held for sale and are initially stated at the lower of net realizable value of due financing and advances or the current fair value of such related assets, less any costs to sell (if material). No depreciation is charged on such assets. Subsequent to the initial recognition, such assets are revalued on a periodic basis and adjusted for any subsequent provision for unrealised revaluation losses. Previously recognised unrealised revaluation losses of such assets can be reversed through the consolidated statement of income on an individual basis upon subsequent increase in fair value. Any unrealised losses on revaluation (or reversal), realised losses or gains on disposal and net rental income are recognised in the consolidated statement of income as other operating income expense, net. The other real estate assets are disclosed in note 9 while other repossessed assets are included in other assets. Gain/loss on disposal of repossessed assets are included in other operating income, net. (3.15) Property, equipment and software Property and equipment are measured at cost less accumulated depreciation and accumulated impairment loss, if any. Freehold land is not depreciated. Changes in the expected useful lives are accounted for by changing the period or method, as appropriate, and treated as changes in accounting estimates. Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the group. Ongoing repairs and maintenance are expensed as incurred. The depreciable amount of other property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets as follows: Buildings 40 years Leasehold improvements Over the lease period or useful economic life whichever is shorter Furniture, equipment, vehicles and software 4-10 years The assets’ residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at the date of each consolidated statement of financial position. Software are recognised only when their cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to them will flow to the Group. Software are amortised over the useful economic life and assessed for impairment whenever there is an indication that the software may be impaired. The amortisation period and the amortisation method for software assets are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the assets are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on software is recognised in the consolidated statement of income. All such assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. (3.16) Financial liabilities All money market deposits, customers’ deposits and debt securities issued are initially recognised at cost, net of transaction charges, being the fair value of the consideration received. Subsequently, all commission bearing financial liabilities, are measured at amortised cost by taking into account any discount or premium. Premiums are amortised and discounts are accreted on an effective yield basis to maturity and taken to special commission expense. _____________________________________________________________________________________________________ 23
37. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.17) Financial guarantees and financing commitments In the ordinary course of business, the Group issues letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value on the date the guarantee was given; typically the premium received. Subsequent to the initial recognition, the Group's liability under such guarantees are measured at the higher of their amortised amount and the best estimate of the expenditure required to settle any financial obligation arising at the statement of financial position date. These estimates are determined based on experience of similar transactions and history of past losses net of any cash margin. Any increase in the liability relating to the financial guarantee is taken to the consolidated statement of income as impairment charge for financing and advances losses, net. The premium received is recognised in the consolidated statement of income as fee income from banking services on a straight line basis over the life of the guarantee, if material. Financing commitments are commitments to provide credit under pre-specified terms and conditions. (3.18) Impairment loss and provisions Provisions are recognised when a reliable estimate can be made by the Group for a present legal or constructive obligation as a result of past events where it is more likely that an outflow of resources will be required to settle the obligation. Provision balance are presented under other liabilities. (3.19) Accounting for leases (a) Where the Group is the lessee All leases entered into by the Group are operating leases. Payments made under operating leases are charged to the consolidated statement of income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty, net of anticipated rental income (if any), is recognised as an expense in the period in which termination takes place. (b) Where the Group is the lessor When assets are transferred under a finance lease, including assets under a lease arrangement in compliance with Shariah rules (Ijara), the present value of the lease payments is recognised as a receivable and disclosed under financing and advances. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return and is disclosed as special commission income. (3.20) Zakat and overseas income tax Zakat is the liability of the shareholders. Zakat is computed on the higher of net adjusted income or adjusted shareholders' equity using the basis defined under the Saudi Zakat Regulations. In accordance with SAMA guidance on zakat and income tax, Zakat is paid by the Bank on the shareholders' behalf and is not charged to the consolidated statement of income but is deducted from the gross dividend paid to the shareholders or charged to retained earnings as an appropriation of net income if no dividend has been distributed. Overseas branches and subsidiaries are subject to income tax as per rules and regulations of the country in which they are incorporated and such taxes are charged to retained earnings in accordance with the SAMA guidance on Zakat and income tax. (3.21) Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents are defined as those amounts included in cash, balances with SAMA, excluding statutory deposits, and due from banks and other financial institutions with original maturity of three months or less which are subject to insignificant risk of changes in their fair value. _____________________________________________________________________________________________________ 24
38. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.22) Derecognition of financial instruments A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognised, when the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for derecognition. In instances where the Group is assessed to have transferred a financial asset, the asset is derecognised if the Group has transferred substantially all the risks and rewards of ownership. Where the Group has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognised only if the Group has not retained control of the financial asset. The Group recognises separately as assets or liabilities any rights and obligations created or retained in the process. A financial liability (or a part of a financial liability) can only be derecognised when it is extinguished, that is, when the obligation specified in the contract is either discharged, cancelled or expired. (3.23) Investment management services The financial statements of investment management funds are not included in the consolidated financial statements of the Group. Transactions with the funds are disclosed under related party transactions; the Group’s share of these funds is included in held for trading investments. Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in these consolidated financial statements. (3.24) Financing products in compliance with Shariah rules In addition to conventional banking products, the Group offers its customers certain non-special commission based financing products that comply with Shariah rules. These are approved and overseen by the Bank's Shariah Board. (3.24.1) Murabaha Murabaha is a Shariah-compliant form of financing where the Group, based on requests from its customers, purchases specific commodities and sells them to the customers at an agreed-upon price equal to the Group’s cost plus a specified profit margin, which is payable on a deferred basis in agreed-upon installments. The main uses of Murabaha are in residential, commercial real estate, and trade finance. (3.24.2) Tayseer Tayseer Alahli is a Shariah-compliant financing instrument introduced by the Group for customers in need of cash financing. It involves the Group buying commodities from international or local markets and selling them to customers at agreed-upon deferred installment terms. Customers, on their own, or by appointing an agent, resell the commodities to third parties for cash. The main uses of Tayseer are in personal finance, credit cards, corporate finance, structured finance, syndications, project finance, as well as interbank transactions. (3.24.3) Ijara with a promise to transfer ownership Ijara is a Shariah-compliant form of financing where the Group, based on requests from customers, purchases assets with agreed-upon specifications on a cash basis and leases them to customers for an agreed-upon rent to be settled in agreed-upon installments. If the assets are in existance then it is considered to be a specified Ijara, while if the assets are not in existance then it is considered to be a forward Ijara in which case it remains a liability on the Group to deliver the agreed upon usufruct. In the Ijara contract, the Group promises to transfer ownership of the assets to its customers at the end of the lease period, either by sale at nominal prices or in the form of grants. The main uses of Ijara are in auto lease, residential finance, commercial real estate finance, and structured finance. The main uses of forward Ijara are in project finance as well as structured finance. _____________________________________________________________________________________________________ 25
39. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.24) Financing products in compliance with Shariah rules (continued) (3.24.4) Istisna’a Istisna’a is a contract for the acquisition of assets to be manufactured in accordance with the specifications of the one who requests the assets to be manufactured/procured. In this product the Group can either be the manufacturer/procurer (Saani) or the party who is seeking the assets to be manufactured/procured (Mustasni). In project finance , the Group takes the role of Mustasni and agrees with the customer to deliver specified assets for an agreed upon price. The Group pays for the asset in staged payments. At the same time, the Group enters into a forward Ijara and leases the assets to be constructured to the customer with promise to transfer ownership. The main use of Istisna'a is in project finance combined with forward Ijara to finance the construction of new projects. All the above Shariah-compliant financing products are accounted for in conformity with the accounting policies described in these consolidated financial statements. They are included in financing and advances. (3.25) Shariah-compliant deposit products The Group offers its customers certain deposit products that comply with Shariah rules. These are approved and overseen by the Bank’s Shariah Board. (3.25.1) AlKhairaat AlKhairaat is a Shariah-compliant product based on commodity Murabaha. The Group acts as an agent for its customers in purchasing commodities on their behalf with their funds and then purchases these commodities for its own account from customers at agreed-upon price and deferred maturities (3,6,9 or 12 months). Being a retail product, customers are allowed to choose the investment amount, tenure, and currency. Since the Group purchases commodities from its customers, it is liable to them for the capital they invested plus a profit. (3.25.2) Structured AlKhairaat This product is an enhanced deposit product which provides a Shariah compliant alternative to structured deposits. It combines a AlKhairaat placement with a promise to enter into a secondary Murabaha transaction for the benefit of the customer where the profit will be linked to a predetermined index. These are capital protected up to a specified percentage (typically 95-100%). These Shariah-compliant deposit products are accounted for in conformity with the accounting policies described in these consolidated financial statements. They are included in customers' deposit. (3.26) Shariah-compliant treasury products The Group offers its customers certain treasury products that comply with Shariah rules. These are approved and overseen by the Bank’s Shariah Board and Shariah advisor. (3.26.1) Structured Hedging Products These products are offered to clients to hedge their existing exposure to foreign currencies. It is based on the concept of Waad (binding promise) where the Group promises to buy/sell a particular amount of foreign currency at an agreed upon price. It may include only one Waad or a combination of Waads. (3.26.2) Structured Investment Products These products are offered to clients to offer them a return that is typically higher than a standard AlKhairaat. There are based on the Structured AlKhairaat product and are designed to give the customers exposure to a number of indexes including foreign currencies, precious metals and Shariah compliant equity indexes. (3.26.3) Rates Products These products are offered to clients who have exposure to fixed/floating rates and need hedging solutions. The products are designed around the concept of Waad to enter into Murabaha where the profit is based on a rates index or formula. It may include only one Waad or a combination of Waads. (3.26.4) Commodity Products These products are offered to clients who have exposure to commodity prices and need hedging solutions. These products are designed around the concept of Waad to enter into Murabaha where the profit is based on a commodity price index. It may include only one Waad or a combination of Waads. _____________________________________________________________________________________________________ 26
40. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.27) Treasury shares Treasury shares are recorded at acquisition cost and presented as a deduction from equity. Any gains or losses on disposal of such shares are reflected under equity and are not recognised in the consolidated statement of income. (3.28) End of service benefits The provision for end of service benefits is based on the rules stated under the Saudi Arabian Labor and Workmen Law and in accordance with the local statutory requirements of the foreign branches and subsidiaries. The provision for the Group is also in line with independent actuarial valuation. Benefits payable to the employees of the Group at the end of their services are accrued based on actuarial valuation in accordance with Saudi Arabian Labor laws. These are included in other liabilities in the consolidated statement of financial position. (3.29) Staff compensation The Bank’s Board of Directors and its Nomination, Compensation and Governance Committee oversee the design and implementation of the Bank's Compensation System in accordance with SAMA’s Compensation Rules and Financial Stability Board (FSB) Principles and Standards of Sound Compensation Practice. The Nomination, Compensation and Governance Committee was established by the Board of Directors and is composed of four non-executive members including the Chairman of the Committee. The Committee's role and responsibilities are in line with SAMA’s Compensation Rules. The Committee is responsible for the development and implementation of the compensation system and oversight of its execution, with the objective of preventing excessive risk-taking and promoting corporate financial soundness. The Committee submits its recommendations, resolutions and reports to the Board of Directors for approval. Key elements of compensation in the Bank: (3.29.1) Fixed Compensation The fixed compensation includes salaries, allowances and benefits. Salaries are set in relation to market rates to attract, retain and motivate talented individuals. Salary administration is based on key processes such as job evaluation, performance appraisal and pay scales structure. The competitiveness of pay scales is monitored and maintained through participation in regular market pay surveys. (3.29.2) Variable Compensation Variable compensation aims at driving performance and limiting excessive risk taking. The Group operates three plans under variable compensation: (a) Short Term Incentive Plan (Annual Performance Bonus) The annual performance bonus aims at supporting the achievement of a set of annual financial and non-financial objectives. The financial objectives relate to the economic performance of the Group's is business, while the nonfinancial objectives relate to some other critical objectives relating, for example, to complying with risk and control measures, employees development, teamwork, staff morale etc. The Group has established a regular performance appraisal process aimed at assessing employees’ performance and contribution. Annual performance bonus payments are based on employee contributions, business performance and the Group’s overall results. The overall annual performance bonus pool is set as a percentage of the Group’s net income, adjusted to reflect the core performance of the employees. The Group does not operate a guaranteed bonus plan. The cost of this plan is recognised in the consolidated statement of income of the year to which it relates and is normally paid during the 1st quarter of the following year. _____________________________________________________________________________________________________ 27
41. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (3.29) Staff compensation (continued) (3.29.2) Variable Compensation (continued) (b) Long Term Performance Plan This plan aims at driving and rewarding achievements that lead to long term corporate success, measured on the basis of return on net income attributable to the equity holders of the Bank. The plan is rolled out in 3-year cycles. The Bank's actual performance is assessed at the end of each cycle for determining actual payout amounts. Although all executives whose roles and accountabilities are likely to influence the Bank's long term success are eligible to participate in this plan, their actual selection to participate in the plan is made through a vetting process to ensure their meeting of some mission critical criteria. The cost of the plan is estimated by reference to a set of expected net income forecasts at the beginning of each cycle and is reviewed annually. The estimated plan cycle cost is apportioned and charged equally to the annual statements of income of the plan years. The estimate is revised annually and the difference between the latter and former estimate is apportioned and charged equally over the balance of the plan cycle. (c) Share Based Payment Arrangements The Bank maintain an equity-settled share based payment plan for its key management. The grant-date fair value of such share-based payment arrangement granted to employees is recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. If the employees are not entitled to dividends declared during the vesting period, then the fair value of these equity instruments is reduced by the present value of dividends expected to be paid compared with the fair value of equity instruments that are entitled to dividends. If the employees are entitled to dividends declared during the vesting period, then the accounting treatment depends on whether the dividends are forfeitable. Forfeitable dividends are treated as dividend entitlements during the vesting period. If the vesting conditions are not met, then any true-up of the share-based payment would recognise the profit or loss effect of the forfeiture of the dividend automatically because the dividend entitlements are reflected in the grant-date fair value of the award. In cases, where an award is forfeited (i.e. when the vesting conditions relating to award are not satisfied), the Bank reverses the expense relating to such awards previously recognised in the consolidated statement of income. Where an equity-settled award is cancelled (other than forfeiture), it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. The Group acquires its own shares in connection with the anticipated grant of shares to the key management in future. Until such time as the beneficial ownership of such shares in the Bank passes to the employees, the unallocated / non-vested shares are treated as treasury shares. (3.30) Tier 1 sukuk The Group classifies Sukuk issued with no fixed redemption/maturity dates (Perpetual Sukuk) and not obliging the Group for payment of profit as part of equity. The related initial costs and distributions thereon are recognised directly in the consolidated statement of changes in equity under retained earnings. _____________________________________________________________________________________________________ 28
42. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 4. CASH AND BALANCES WITH SAMA Cash in hand Balances with SAMA: Statutory deposit Money market placements and current accounts Cash and balances with SAMA 2017 SAR ’000 2016 SAR ’000 10,529,175 10,057,750 18,045,112 18,330,826 9,394,947 15,052,715 ─────── ─────── 37,969,234 43,441,291 ═══════ ═══════ In accordance with article (7) of the Banking Control Law and regulations issued by Saudi Arabian Monetary Authority (SAMA), the Bank is required to maintain a statutory deposit with SAMA at stipulated percentages of its demand, savings, time and other deposits calculated at the end of each Gregorian month (see note 37). The statutory deposits with SAMA are not available to finance the Bank’s day-to-day operations and therefore are not part of cash and cash equivalents (see note 32). 5. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Current accounts Money market placements Reverse repos (note 34e) Due from banks and other financial institutions 2017 SAR ’000 2016 SAR ’000 4,711,135 16,206,414 1,048,669 ─────── 21,966,218 ═══════ 5,139,244 13,136,484 937,335 ────── 19,213,063 ══════ The credit quality of due from banks and other financial institutions is broadly monitored using reputable external credit rating agencies, the table below shows the credit quality of the counter party by class of asset: Investment grade (credit rating (AAA to BBB-)) Non-investment grade (credit rating (BB+ to C)) Unrated Due from banks and other financial institutions 2017 SAR ’000 2016 SAR ’000 15,260,753 5,915,284 790,181 ─────── 21,966,218 ═══════ 17,166,530 1,406,789 639,744 ────── 19,213,063 ══════ _____________________________________________________________________________________________________ 29
43. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 6. INVESTMENTS, NET (6.1) Investments are classified as follows: Domestic ─────────────── 2016 2017 SAR ’000 SAR ’000 International ─────────────── 2016 2017 SAR ’000 SAR ’000 Total ─────────────── 2016 2017 SAR ’000 SAR ’000 Mutual funds Held for trading 646,652 ─────── 646,652 708,352 ─────── 708,352 ─────── - ─────── - 646,652 ─────── 646,652 708,352 ─────── 708,352 Hedge funds ─────── - ─────── - 1,332,121 ─────── 1,332,121 1,819,017 ─────── 1,819,017 1,332,121 ─────── 1,332,121 1,819,017 ─────── 1,819,017 12,072,914 2,776,746 15,858,775 1,929,212 12,072,914 2,776,746 15,858,775 1,929,212 Held as FVIS Fixed rate securities Floating rate securities Equity instruments, Mutual Funds, Hedge Funds and Others Impairment Available for sale, net Fixed rate securities Floating rate securities Held to maturity Fixed rate securities Floating rate securities Impairment Other investments held at amortised cost, net Investments, net - - 22,402 ─────── 22,402 684,339 (145,662) ─────── 538,677 3,407,479 (906,906) ─────── 17,350,233 2,843,931 (735,093) ─────── 19,896,825 3,429,881 (906,906) ─────── 17,372,635 3,528,270 (880,755) ─────── 20,435,502 33,861 ─────── 33,861 20,044 ─────── 20,044 663,420 ─────── 663,420 1,412,388 ────── 1,412,388 663,420 33,861 ─────── 697,281 1,412,388 20,044 ────── 1,432,432 28,230,029 32,803,224 (6,542) ─────── 61,026,711 19,737,340 22,064,603 (6,315) 34,294,773 11,038,927 (15,660) 54,353,875 40,206,912 (31,651) 54,032,113 33,103,530 (21,975) ─────── 41,795,628 26,123,846 7,403,688 (25,109) ─────── 33,502,425 ────── 45,318,040 ─────── 94,529,136 ────── 87,113,668 ─────── 61,729,626 ═══════ ─────── 43,062,701 ═══════ ─────── 52,848,199 ═══════ ────── 68,446,270 ═══════ ─────── 114,577,825 ═══════ ─────── 111,508,971 ═══════ (6.2) The analysis of the composition of investments is as follows: 2017 SAR '000 ──────────────────────── Quoted Unquoted Total Fixed rate securities Floating rate securities Equity instruments, Mutual Funds, Hedge Funds and Others Impairment Investments, net 2016 SAR '000 ─────────────────────── Quoted Unquoted Total 48,987,269 17,627,296 18,102,940 25,390,223 67,090,209 43,017,519 56,213,754 8,323,577 15,089,522 26,729,209 71,303,276 35,052,786 1,791,348 (171,558) ─────── 68,234,355 ═══════ 3,617,306 (766,999) ─────── 46,343,470 ═══════ 5,408,654 (938,557) ─────── 114,577,825 ═══════ 2,933,795 (219,573) ─────── 67,251,553 ═══════ 3,121,844 (683,157) ─────── 44,257,418 ═══════ 6,055,639 (902,730) ─────── 111,508,971 ═══════ ____________________________________________________________________________________________________ 30
44. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 6. INVESTMENTS, NET (continued) (6.2) The analysis of the composition of investments is as follows (continued): Unquoted instruments mainly comprise of fixed and floating rate Saudi Government Securities, Foreign Government and Foreign Quasi Government Bonds. Other investments held at amortised cost include investments having an amortised cost of SAR 13,200 million (2016: SAR 4,207 million) which are held under a fair value hedge relationship. As at 31 December 2017, the fair value of these investments amount to SAR 13,031 million (2016: SAR 4,239 million). Investments, net, include securities that are issued by the Ministry of Finance of Saudi Arabia amounting to SAR 44,126 million, (2016: SAR 25,549 million) and also include investment in sukuks amounting to SAR 24,283 million, (2016: SAR 28,979 million). (6.3) Securities lending transactions The Bank pledges financial assets for the securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts. As at 31 December 2017, securities amounting to SAR 370 million (2016: SAR 1,205 million) have been lent to counterparties under securities lending transactions. (6.4) The analysis of unrealised revaluation gains/(losses) and fair values of held to maturity investments and other investments 2017 SAR '000 ────────────────────────────── Carrying value Gross unrealised gain Gross unrealised loss - (11,017) Fair value 2016 SAR '000 ────────────────────────────── Carrying value Gross unrealised gain Gross unrealised loss Fair value (a) Held to maturity Fixed rate securities Floating rate securities Total held to maturity 663,420 33,861 ─────── ────── - 697,281 - ────── (11,017) 652,403 1,412,388 20,044 33,861 ────── ─────── 686,264 1,432,432 4,840 - ────── 4,840 - ────── 1,417,228 20,044 ────── - 1,437,272 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ (b) Other investments held at amortised cost Fixed rate securities Floating rate securities Impairment Total other investments held at amortised cost, net (325,005) (58,755) 420,221 (629,113) 54,128,511 54,032,113 374,281 (286,542) 40,493,550 33,103,530 (31,651) (21,975) ────── ────── ─────── ─────── ────── 54,127,329 33,419,056 (21,975) ────── (915,655) 94,590,410 87,113,668 (383,760) 87,524,410 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ 54,353,875 40,206,912 (31,651) ─────── 403,749 573,180 ────── 94,529,136 976,929 - 794,502 - (6.5) Counterparty analysis of the Group's investments, net of impairment 2017 SAR '000 2016 SAR '000 100,441,301 93,316,676 8,471,232 12,019,220 5,665,292 6,173,075 ─────── ─────── Total 114,577,825 111,508,971 ═══════ ═══════ _______________________________________________________________________________________________________________ 31 Government and Quasi Government Corporate Banks and other financial institutions
45. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 6. INVESTMENTS, NET (continued) (6.6) Credit quality of investments The credit quality of investments (excluding investments in equities, hedge funds and mutual funds) is monitored using reputable external credit rating agencies. The table below shows the credit quality by class of asset. SAR '000 2017 Available for sale Held to maturity Other investments held at amortised cost Total 3,774 44,126,495 44,130,269 693,507 46,620,822 60,206,309 3,813,470 5,748,646 ─────── 94,560,787 ─────── 110,085,224 Performing: Saudi Government Bonds, Sukuk and Treasury Bills Investment grade Non-investment grade 12,891,980 1,935,176 - ─────── 14,827,156 ─────── 697,281 Less: Impairment (collective) (139) ─────── ─────── (31,651) ─────── (31,790) ─────── Net performing 14,827,017 ═══════ 697,281 ═══════ 94,529,136 ═══════ 110,053,434 ═══════ Other investments held at amortised cost Total 25,539,514 25,539,514 57,605,928 76,783,430 3,990,197 3,990,429 ─────── 87,135,639 20,044 ─────── 106,333,417 Unrated Total performing - SAR '000 2016 Available for sale Held to maturity Performing: Saudi Government Bonds, Sukuk and Treasury Bills Investment grade Non-investment grade - 17,765,114 232 1,412,388 - ─────── 17,765,346 20,044 ─────── 1,432,432 Less: Impairment (collective) (139) ─────── ─────── (21,976) ─────── (22,115) ─────── Net performing 17,765,207 ═══════ 1,432,432 ═══════ 87,113,663 ═══════ 106,311,302 ═══════ Unrated Total performing - Investments classified under investment grade above comprise of credit exposures equivalent to Aaa to Baa3 ratings determined by reputable rating agencies. (6.7) Details of impairment charge on investments are as follows: Available for sale 2017 2016 SAR '000 SAR '000 66,170 193,736 9,676 11,984 ─────── ─────── Total 205,720 75,846 ═══════ ═══════ _____________________________________________________________________________________________________ 32 Other investments held at amortised cost
46. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (7.1) Financing and advances SAR ’000 Consumer & Credit card Performing financing and advances Non-performing financing and advances Total financing and advances Allowance for financing losses (specific and collective) (note 7.2) Financing and advances, net Corporate International - - 89,927,400 125,440,573 25,977,050 2017 Others Total - 89,927,400 9,921,127 251,266,150 530,515 2,836,678 ─────── ─────── 90,457,915 128,277,251 1,399,993 1,806 4,768,992 ─────── ─────── ─────── 27,377,043 9,922,933 256,035,142 (1,298,874) (4,182,616) ─────── ─────── 89,159,041 124,094,635 ═══════ ═══════ (1,261,038) (58,368) (6,800,896) ─────── ─────── ─────── 26,116,005 9,864,565 249,234,246 ═══════ ═══════ ═══════ SAR ’000 Consumer & Credit card - 2016 Performing financing and advances Non-performing financing and advances Total financing and advances Allowance for financing losses (specific and collective) (note 7.2) Financing and advances, net Corporate International Others Total - - - - 85,314,630 133,159,751 524,214 1,916,800 ─────── ─────── 85,838,844 135,076,551 28,174,761 8,945,924 255,595,066 1,482,864 1,604 3,925,482 ─────── ─────── ─────── 29,657,625 8,947,528 259,520,548 (1,227,003) (3,397,588) ─────── ─────── 84,611,841 131,678,963 ═══════ ═══════ (1,263,422) (40,394) (5,928,407) ─────── ─────── ─────── 28,394,203 8,907,134 253,592,141 ═══════ ═══════ ═══════ Others include private banking customers and bank loans. Financing and advances, net, include financing products in compliance with Shariah rules mainly Murabaha, Tayseer and Ijara amounting to SAR 210,751 million (2016: SAR 208,918 million). Allowance for financing losses related to financing products in compliance with Shariah rules is SAR 5,601 million (2016: SAR 5,047 million). Special commission relating to non-performing financing and advances at December 31, 2017 is SAR 140 million (2016: SAR 91 million). _____________________________________________________________________________________________________ 33
47. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.2) Movements in the allowance for financing losses The accumulated allowance for financing losses is as follows: SAR ’000 Consumer & Credit card Balance at the end of the year Others Total - - - - - 1,227,003 3,397,588 40,394 - - 1,263,422 (102,615) 549,649 (239,066) (210,352) ────── 1,261,038 ══════ 5,928,407 (102,615) 2,981,015 (1,722,278) (280,548) (3,085) ────── 6,800,896 ══════ 2017 Balance at beginning of the year Foreign currency translation adjustment Provided during the year Bad debts (written off) (Recoveries) of amounts previously provided Other adjustments Corporate International 1,155,185 (1,080,229) - 1,258,207 (402,983) (70,196) (3,085) ────── 1,298,874 ══════ ────── 4,182,616 ══════ - - - 17,974 - ────── 58,368 ══════ - - - SAR ’000 Consumer & Credit card Corporate International Others Total 1,484,023 2,728,401 1,318,805 (339,660) 1,147,083 (629,658) (233,148) 32,395 5,563,624 (339,660) 3,028,709 (2,048,311) (310,966) 35,011 ────── 5,928,407 ══════ 2016 Balance at beginning of the year Foreign currency translation adjustment Provided during the year Bad debts (written off) (Recoveries) of amounts previously provided Other adjustments Balance at the end of the year 1,040,703 (1,332,458) (276) 35,011 ────── 1,227,003 ══════ - 832,924 (86,195) (77,542) - ────── 3,397,588 ══════ - - ────── 1,263,422 ══════ - 7,999 - ────── 40,394 ══════ - - _____________________________________________________________________________________________________ 34
48. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.3) Impairment charge for financing losses in the consolidated statement of income represents: SAR ’000 2017 Additions during the year (Recoveries) of amounts previously provided Consumer & Credit card 1,155,185 ────── 1,155,185 Corporate International Total 1,258,207 549,649 17,974 2,981,015 (70,194) ────── 1,188,013 (210,352) ────── 339,297 ────── 17,974 (280,546) ────── 2,700,469 (17,974) (44,441) Charge/(reversal) against indirect facilities (included in other liabilities) - (29,766) 3,299 (Recoveries) of debts previously written-off (721,247) (31,246) (41,236) Direct write-off 1,324 ────── ────── ────── 435,262 1,127,001 301,360 ══════ ══════ ══════ Net charge for the year (impairment charge for financing and advances losses, net) Others - (793,729) 1,324 ────── - ────── 1,863,623 ══════ ══════ Total SAR ’000 2016 Additions during the year (Recoveries) of amounts previously provided Charge/(reversal) against indirect facilities (included in other liabilities) (Recoveries) of debts previously written-off Direct write-off Net charge for the year (impairment charge for financing and advances losses, net) Consumer & Credit card Corporate International Others 1,040,703 832,924 1,147,083 7,999 (276) ────── 1,040,427 (77,542) ────── 755,382 (233,148) ────── 913,935 (29,544) (117,117) 14,786 (115,560) (539,614) - - ────── 7,999 - 3,028,709 (310,966) ────── 2,717,743 (14,758) (772,291) 271 271 ────── ────── ────── ────── ────── 501,084 608,721 813,161 7,999 1,930,965 ══════ ══════ ══════ ══════ ══════ - - - - - _____________________________________________________________________________________________________ 35
49. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.4) Credit quality of financing and advances The Group employs an internally developed risk evaluation framework based on risk ratings for assessment of its corporate obligors. The associated rating models are managed by a specialised unit that ensure the end to end robustness of the involved processes. Risk assessment is conducted using a rating scale consisting of 17 risk rating grades, of which sixteen grades are related to the performing portfolio as follows: • Investment Grade is composed of Very Strong Credit Quality (AAA to BBB-) • Non-Investment Grade is composed of: Good and satisfactory Credit Quality (BB+ to C) The lowest rating grade (Default) relates to the non-performing portfolio. a) The table below details the credit quality of financing and advances, net by asset class. SAR '000 Loans and advances Consumer & Credit card Corporate International Others Total 2017 Performing: Investment Grade Non-Investment Grade Unrated Sub total Less: portfolio (collective) allowance Net performing Non-performing: Total non-performing Less: specific allowance Net non-performing Total financing and advances, net - 52,400,428 69,170,085 3,870,060 ─────── 125,440,573 ─────── 1,675,437 1,450,264 55,526,129 20,936,068 4,379,809 94,485,962 3,365,545 4,091,054 101,254,059 ─────── ─────── ─────── 25,977,050 9,921,127 251,266,150 ─────── ─────── ─────── (1,027,896) (1,843,957) ─────── ─────── 88,899,504 123,596,616 ─────── ─────── (302,120) (58,368) (3,232,341) ─────── ─────── ─────── 25,674,930 9,862,759 248,033,809 ─────── ─────── ─────── 530,515 (270,978) ─────── 259,537 ─────── 89,159,041 ═══════ 4,768,992 1,399,993 1,806 (3,568,555) (958,918) ─────── ─────── ─────── 441,075 1,806 1,200,437 ─────── ─────── ─────── 26,116,005 9,864,565 249,234,246 ═══════ ═══════ ═══════ 89,927,400 ─────── 89,927,400 ─────── 2,836,678 (2,338,659) ─────── 498,019 ─────── 124,094,635 ═══════ b) The table below details the aging of the performing financing and advances: Neither past due nor impaired 86,735,245 123,990,121 ─────── ─────── 24,702,496 9,918,116 245,345,978 ─────── ─────── ─────── Past due but not impaired Less than 30 days 30-59 days 60-89 days Total past due not impaired Total performing financing and advances 2,149,990 658,704 383,461 ─────── 3,192,155 ─────── 89,927,400 ═══════ 3,603,265 958,033 495,242 1,435,980 399,994 374,271 3,011 880,927 92,425 405,041 ─────── ─────── ──────── ─────── 1,450,452 1,274,554 3,011 5,920,172 ─────── ──────── ─────── ─────── 125,440,573 25,977,050 9,921,127 251,266,150 ═══════ ════════ ═══════ ═══════ _____________________________________________________________________________________________________ 36
50. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.4) Credit quality of financing and advances (continued) a) The table below details the credit quality of financing and advances, net by asset class. SAR '000 Loans and advances Consumer & Credit card Corporate International Others Total 2016 Performing: Investment Grade Non-Investment Grade Unrated Sub total Less: portfolio (collective) allowance Net performing Non-performing: Total non-performing Less: specific allowance Net non-performing Total financing and advances, net - 54,606,546 75,515,027 3,038,178 ─────── 133,159,751 ─────── 1,009,277 1,996,138 57,611,961 22,187,103 3,115,208 100,817,338 4,978,381 3,834,578 97,165,767 ─────── ─────── ─────── 28,174,761 8,945,924 255,595,066 ─────── ─────── ─────── (956,635) (1,738,379) ─────── ─────── 84,357,995 131,421,372 ─────── ─────── (289,747) (40,394) (3,025,155) ─────── ─────── ─────── 27,885,014 8,905,530 252,569,911 ─────── ─────── ─────── 524,214 (270,368) ─────── 253,846 ─────── 84,611,841 ═══════ 1,482,864 1,604 3,925,482 (2,903,252) (973,675) ─────── ─────── ─────── 509,189 1,604 1,022,230 ─────── ─────── ─────── 28,394,203 8,907,134 253,592,141 ═══════ ═══════ ═══════ 85,314,630 ─────── 85,314,630 ─────── 1,916,800 (1,659,209) ─────── 257,591 ─────── 131,678,963 ═══════ b) The table below details the aging of the performing financing and advances: Neither past due nor impaired Past due but not impaired (performing) Less than 30 days 30-59 days 60-89 days Total past due not impaired Total performing financing and advances 81,583,426 131,731,416 ─────── ────── 2,675,624 935,377 787,478 332,267 268,102 160,691 ─────── ─────── 3,731,204 1,428,335 ─────── ─────── 85,314,630 133,159,751 ═══════ ══════ 26,306,590 ────── 8,945,177 248,566,609 ────── ─────── 1,011,486 4,622,487 401,337 747 1,521,829 455,348 884,141 ─────── ─────── ─────── 747 1,868,171 7,028,457 ─────── ─────── ─────── 28,174,761 8,945,924 255,595,066 ═══════ ═══════ ═══════ Unrated loans mainly comprise of consumer, credit cards, small businesses and private banking financing and advances. _____________________________________________________________________________________________________ 37
51. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.4) Credit quality of financing and advances (continued) Collateral The Group, in the ordinary course of its lending activities, holds collaterals as security to mitigate credit risk in the financing and advances. These collaterals mostly include time and demand and other cash deposits, financial guarantees, local and international equities, real estate and other long term assets. The collaterals are held mainly against corporate and consumer loans and are managed against relevant exposures at their net realizable values. Fair value of collateral held by Group against financing and advances by each category are as follows: 2017 SAR '000 2016 SAR '000 77,135,269 79,139,805 Past due but not impaired 3,643,127 4,606,064 Impaired 1,803,307 1,698,494 Neither past due nor impaired Total ─────── ─────── 82,581,703 85,444,363 ═══════ ═══════ Those collaterals, which are not readily convertible into cash (i.e. real estate), are accepted by the Group with intent to dispose off in case of default by the customer. _____________________________________________________________________________________________________ 38
52. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.5) Economic sector risk concentrations for the financing and advances and allowances for financing losses are as follows: 2017 Government and quasi Government Banks and other financial institutions Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumers Others Portfolio (collective) allowance Performing SAR' 000 Nonperforming SAR' 000 1,306,565 4,763,426 805,178 31,493,058 7,093,271 18,899,956 11,565,552 42,191,519 11,491,559 20,325,358 93,390,861 7,939,847 ─────── 251,266,150 115 29,279 953,161 11,841 23,077 1,018,994 1,702,837 107,150 251,646 583,944 86,948 ─────── 4,768,992 (75) (20,337) (688,581) (6,261) (17,577) (883,261) (1,303,759) (97,351) (179,020) (298,591) (73,742) ─────── (3,568,555) ─────── ─────── ─────── - Specific Financing and allowance advances, net SAR' 000 SAR' 000 - 1,306,565 4,763,466 814,120 31,757,638 7,098,851 18,905,456 11,701,285 42,590,597 11,501,358 20,397,984 93,676,214 7,953,053 ──────── 252,466,587 (3,232,341) ─────── 249,234,246 Financing and advances, net ═══════ 2016 Government and quasi Government Banks and other financial institutions Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumers Others Portfolio (collective) allowance Financing and advances, net Performing SAR' 000 Nonperforming SAR' 000 1,063,553 4,327,216 965,895 32,230,179 7,225,756 16,818,742 18,244,932 47,825,563 10,913,336 19,185,318 90,114,404 6,680,172 ─────── 255,595,066 130 38,331 685,742 18,230 23,572 573,343 1,583,981 122,055 212,878 589,303 77,917 ────── 3,925,482 (93) (25,659) (507,892) (11,340) (13,820) (492,418) (1,206,817) (110,196) (171,013) (301,555) (62,449) ────── (2,903,252) ─────── ────── ────── - Specific allowance SAR' 000 - Financing and advances, net SAR' 000 1,063,553 4,327,253 978,567 32,408,029 7,232,646 16,828,494 18,325,857 48,202,727 10,925,195 19,227,183 90,402,152 6,695,640 ─────── 256,617,296 (3,025,155) ─────── 253,592,141 ═══════ __________________________________________________________________________________________________________ 39
53. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 7. FINANCING AND ADVANCES, NET (continued) (7.6) Financing and advances include finance lease receivables (including Ijara in compliance with Shariah rules) which are analysed as follows: Gross receivables from finance leases: Less than 1 year 1 to 5 years Over 5 years Total Unearned finance income on finance leases Less than 1 year 1 to 5 years Over 5 years Total Net finance lease receivables: Less than 1 year 1 to 5 years Over 5 years Total 2017 SAR '000 2016 SAR '000 1,577,736 18,480,749 29,928,942 ─────── 49,987,427 1,584,530 19,073,018 25,294,665 ─────── 45,952,213 (149,587) (3,712,737) (8,712,654) ─────── (12,574,978) ─────── (155,504) (3,611,597) (7,123,854) ─────── (10,890,955) ─────── 1,428,149 14,768,012 21,216,288 ─────── 37,412,449 ═══════ 1,429,026 15,461,421 18,170,811 ─────── 35,061,258 ═══════ Allowance for uncollectable finance lease receivables included in the allowance for financing losses is SAR 675 million (2016: SAR 650 million). 8. INVESTMENT IN ASSOCIATES, NET 2017 SAR '000 2016 SAR '000 At the beginning of the year 1,014,000 1,014,000 At 31 December ────── ─ 1,014,000 ────── 1,014,000 (590,260) 7,416 At 31 December (582,844) 21,392 (2,500) ────── ─ (563,952) ────── (582,844) Investment in associates, net ────── ─ 450,048 ────── 431,156 ═══════ ══════ Cost: Allowance for impairment and share of results: At beginning of the year Share of results in associates Dividends - Investment in associates consists of a 60% (2016: 60%) ownership interest in the Commercial Real Estate Markets Company and 30% (2016: 30%) ownership interest in Al-Ahli Takaful Company, which are both registered in the Kingdom of Saudi Arabia. __________________________________________________________________________________________________________ 40
54. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 9. OTHER REAL ESTATE, NET 2017 SAR '000 2016 SAR '000 923,291 92,608 (39,221) ────── 976,678 958,671 165,020 (200,400) ────── 923,291 (61,511) (53,644) ────── (115,155) ────── 861,523 ══════ (56,998) (17,113) ────── (74,111) ────── 849,180 ══════ Cost: At beginning of the year Additions Disposals At 31 December Provision and foreign currency translation: Foreign currency translation adjustment Provision for impairment At 31 December Other real estate, net _____________________________________________________________________________________________________ 41
55. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 10. PROPERTY, EQUIPMENT AND SOFTWARE, NET 2016 2017 Software SAR '000 Work in progress SAR '000 Total SAR '000 Land, buildings and improvement SAR '000 2,721,913 1,700,762 829,526 9,479,013 3,768,578 2,453,342 1,306,889 828,006 8,356,815 (17,189) (14,891) (15,766) (26,002) (27,602) (43,547) 184,332 31,749 652,147 - 180,397 (36,167) (50,431) 865,184 (66,395) 243,883 (34,329) (32,260) 58,192 (153,840) 310,884 (73,848) 1,179,112 (1,122) - - 276,282 167,888 ─────── 10,517,882 ─────── ────── 4,226,812 ────── ────── 2,721,913 ────── Land, buildings and leasehold improvements SAR '000 Furniture, equipment and vehicles SAR '000 4,226,812 Furniture, equipment and vehicles SAR '000 Software SAR '000 Work in progress SAR '000 Total SAR '000 Cost: At beginning of the year Foreign currency translation adjustment Additions Disposals and retirements Transfers As at 31 December (1,237) 720,816 ────── 5,240,086 ────── (57,525) (7,633) 369,063 (813,233) 1,347,656 (71,618) - 26,964 ────── 2,860,793 ────── 242,436 ────── 1,951,548 ────── (990,216) ────── 465,455 ────── 1,830,512 1,808,829 1,020,263 - 4,659,604 1,693,180 1,624,363 787,964 - 4,105,507 (2,868) (12,369) (9,744) 240,569 201,556 (24,981) 654,281 (16,570) 177,746 (31,417) 250,926 (25,134) 212,156 - (73,121) 686,330 (51,694) (23,844) (35,043) - ─────── 5,237,210 ─────── ────── 1,830,512 ────── ────── 1,808,829 ────── ────── ────── ─────── 1,700,762 829,526 9,479,013 ────── ────── ─────── Accumulated depreciation/amortisation: At beginning of the year Foreign currency translation adjustment Charge for the year Disposals and retirements As at 31 December Net book value: As at 31 December (3,475) ────── 2,036,325 ────── (48,011) ────── 1,989,018 ────── (208) ────── 1,211,867 ────── ────── - ────── 257,658 (59,112) (225) ────── ────── ─────── 1,020,263 4,659,604 ────── ────── ─────── 2,396,300 913,084 680,499 829,526 3,203,761 871,775 739,681 465,455 5,280,672 ══════ ══════ ══════ ══════ ══════ ══════ ══════ ══════ ══════ _____________________________________________________________________________________________________ 42 4,819,409 ══════
56. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 11. GOODWILL (11.1) Net book value 2017 SAR '000 2016 SAR '000 801,518 968,302 (55,846) ────── 745,672 (166,784) ────── 801,518 ────── ────── 475,785 574,789 (33,150) ────── 442,635 (99,004) ────── 475,785 ────── ────── 303,037 325,733 ══════ ══════ Cost: At beginning of the year Foreign currency translation adjustment As at 31 December Amortisation, impairment and foreign currency translation: At beginning of the year Foreign currency translation adjustment At 31 December Net book value: At 31 December (11.2) Türkiye Finans Katılım Bankası A.Ş., (TFKB) In accordance with the requirements of International Financial Reporting Standards (IFRS), the Group’s management has carried out an impairment test as at 30 November 2017 (30 November 2016), in respect of the goodwill that arised on the acquisition of Türkiye Finans Katılım Bankası A.Ş (TFKB). The recoverable amount for TFKB as a Cash Generating Unit (CGU) has been determined based on value in use calculation by using Dividend Discount Model, built on the five-year projections approved by the senior management of TFKB. In preparing the forecasts for the value in use calculation, management has made certain assumptions regarding the future cash flows and level of earnings. Further, the key assumptions used in the calculation of value in use are the discount rate and the perpetual growth rate; the discount rate being a function of the beta, risk free rate, equity risk premium, and expected inflation. Discount rate of 14.38% (30 November 2016: 14.42%) was used to calculate the present value of future cash flows after incorporating expected inflation adjustments. The management compared the value in use, calculated based on the above assumptions, with the carrying value of TFKB as at the date of the impairment test. As a result, the value in use of TFKB was higher than its carrying value; hence, no impairment loss on goodwill has been recognised in respect of TFKB for the year ended 31 December 2017. Since the value in use calculation resulted in a higher value than the carrying value of the TFKB CGU, as such, the fair value less cost to sell was not required to be estimated, as per the requirements of IFRS. If the discount rate used for the value in use calculation had been adjusted by +/-1% with all other factors remaining constant, the value in use of TFKB, as a CGU, would have been lower by SAR 183 million and higher by SAR 193 million, respectively. _____________________________________________________________________________________________________ 43
57. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 12. OTHER ASSETS Assets purchased under Murabah arrangements Prepayments and advances Margin deposits against derivatives and repos (note 34) Others Total 2017 SAR '000 2016 SAR '000 1,309,455 958,051 5,697,497 2,569,603 ─────── 10,534,606 ═══════ 1,400,407 895,725 1,779,035 1,734,757 ────── 5,809,924 ══════ 13. DERIVATIVES In the ordinary course of business, the Group utilises the following derivative financial instruments for both trading and hedging purposes: (a) Swaps Swaps are commitments to exchange one set of cash flows for another. For special commission rate swaps, counterparties generally exchange fixed and floating rate special commission payments in a single currency without exchanging principal. For currency swaps, fixed special commission payments and principal are exchanged in different currencies. For crosscurrency special commission rate swaps, principal and fixed and floating special commission payments are exchanged in different currencies. (b) Forwards and futures Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specified price and date in the future. Forwards are customized contracts transacted in the over-the-counter market. Foreign currency and special commission rate futures are transacted in standardized amounts on regulated exchanges. Changes in futures contract values are settled daily. (c) Forward rate agreements Forward rate agreements are individually negotiated special commission rate contracts that call for a cash settlement for the difference between a contracted special commission rate and the market rate on a specified future date, based on a notional principal for an agreed period of time. (d) Options Options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, to either buy or sell at a fixed future date or at any time during a specified period, a specified amount of a currency, commodity or financial instrument at a pre-determined price. _____________________________________________________________________________________________________ 44
58. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 13. DERIVATIVES (continued) (e) Structured derivative products Structured derivative products provide financial solutions to the customers of the Group to manage their risks in respect of foreign exchange, special commission rate and commodity exposures and enhance yields by allowing deployment of excess liquidity within specific risk and return profiles. The majority of the Group's structured derivative transactions are entered on a back-to-back basis with various counterparties. (13.1) Derivatives held for trading purposes Most of the Group’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers and banks in order, inter alia, to enable them to transfer, modify or reduce current and future risks. Positioning involves managing market risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage involves profiting from price differentials between markets or products. (13.2) Derivatives held for hedging purposes The Group has adopted a comprehensive system for the measurement and management of risk (see note 35 - credit risk, note 36 - market risk and note 37 - liquidity risk). Part of the risk management process involves managing the Group's exposure to fluctuations in foreign exchange and special commission rates to reduce its exposure to currency and special commission rate risks to acceptable levels as determined by the Board of Directors within the guidelines issued by SAMA. The Board of Directors has established levels of currency risk by setting limits on counterparty and currency position exposures. Positions are monitored on a daily basis and hedging strategies are used to ensure that positions are maintained within the established limits. The Board of Directors has established the level of special commission rate risk by setting limits on special commission rate gaps for stipulated periods. Asset and liability special commission rate gaps are reviewed on a periodic basis and hedging strategies are used to reduce special commission rate gaps to within the established limits. As part of its asset and liability management, the Group uses derivatives for hedging purposes in order to adjust its own exposure to currency and special commission rate risks. This is generally achieved by hedging specific transactions as well as strategic hedging against overall statement of financial position exposures. Strategic hedging does not qualify for special hedge accounting and the related derivatives are accounted for as held for trading, such as special commission rate swaps, special commission rate options and futures, forward foreign exchange contracts and currency options. The Group uses special commission rate swaps to hedge against the special commission rate risk arising from specifically identified fixed special commission rate exposures. The Group also uses special commission rate swaps to hedge against the cash flow risk arising on certain floating rate exposures. In all such cases, the hedging relationship and objective, including details of the hedged items and hedging instrument, are formally documented and the transactions are accounted for as fair value or cash flow hedges. _____________________________________________________________________________________________________ 45
59. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 13. DERIVATIVES (continued) The tables below show the positive and negative fair values of derivative financial instruments, together with the notional amounts analysed by the term to maturity and monthly average. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year end, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Group’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor to market risk. (SAR '000) Notional amounts by term to maturity Positive fair value Negative fair value Notional amount Special commission rate instruments 1,727,770 (1,119,688) 132,471,806 Forward foreign exchange contracts 318,781 (48,284) 77,702,130 2017 Within 3 months 3-12 months 1-5 years Over 5 years Monthly average - 12,282,458 63,472,831 56,716,517 114,768,806 35,274,902 20,898,697 21,528,531 - 82,752,411 Held for trading: Options 13,173 (9,482) 326,049 98,574 227,475 - - 558,075 Structured derivatives 86,233 (90,513) 19,345,542 916,326 9,511,316 8,917,900 - 32,099,788 365,744 (276,401) 16,306,897 954,375 1,926,311 13,426,211 13,201,258 176,757 ────── 2,688,458 ══════ (401,072) ─────── (1,945,440) ══════ 300,000 ────── 44,174,321 ══════ 10,837,498 ──────── 106,683,071 ════════ 1,349,719 ─────── 71,492,447 ═══════ 11,954,204 Held as fair value hedges: Special commission rate instruments - Held as cash flow hedges: Special commission rate instruments Total - - 12,487,217 ──────── ─────── 258,639,641 36,289,802 ════════ ═══════ (SAR '000) Notional amounts by term to maturity 2016 Positive fair value Negative fair value Notional amount Within 3 months 3-12 months 1-5 years Over 5 years Monthly average Special commission rate instruments 1,540,177 (1,365,467) 98,996,336 1,801,057 8,050,850 41,468,343 47,676,086 81,408,323 Forward foreign exchange contracts 419,845 (121,199) 83,576,806 44,652,869 23,776,442 15,147,495 - 86,526,024 61,550 (29,797) 523,504 228,053 294,322 1,129 - 441,870 278,803 (278,803) 48,547,647 1,019,984 15,973,080 31,554,583 - 73,901,189 221,128 (280,887) 7,217,146 90,231 2,881,454 4,245,461 9,460,657 144,746 ────── 2,666,249 ══════ (559,037) ────── (2,635,190) ══════ 11,645,102 ────── 250,506,541 ══════ 39,822 ────── 48,224,747 ══════ 9,820,737 ─────── 100,873,741 ═══════ 1,784,543 ─────── 53,706,090 ═══════ 11,840,772 Held for trading: Options Structured derivatives Held as fair value hedges: Special commission rate instruments - Held as cash flow hedges: Special commission rate instruments Total ────── 47,701,963 ══════ __________________________________________________________________________________________________________________________________________ 46
60. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 13. DERIVATIVES (continued) The table below shows a summary of hedged items and portfolios, the nature of the risk being hedged, the hedging instrument and its fair value. (SAR '000) 2017 Fair value Cost Positive Negative fair value fair value Fixed rate instruments 15,872,613 15,940,996 Fair value Special commission rate instruments 365,744 (276,401) Fixed rate and floating rate instruments 11,249,498 11,306,777 Cash flow Special commission rate instruments 176,757 (401,072) 7,127,105 6,961,425 Fair value Special commission rate instruments 221,128 (280,887) 10,317,449 10,339,862 Cash flow Special commission rate instruments 144,746 (559,037) Risk Hedging instrument Description of hedged items 2016 Description of hedged items Fixed rate instruments Fixed rate and floating rate instruments Approximately 50% (2016: 54%) of the positive fair value of the Group's derivatives are entered into with financial institutions and 50% (2016: 46%) of the positive fair value contracts are with non-financial institutions at the consolidated statement of financial position date. Derivative activities are mainly carried out under the Group's Treasury segment. Cash flows hedges: The Group is exposed to variability in future special commission cash flows on non-trading assets and liabilities which bear special commission at a variable rate. The Bank generally uses special commission rate swaps as hedging instruments to hedge against these special commission rate risks. Below is the schedule indicating as at 31 December, the periods when the hedged cash flows are expected to occur and when they are expected to affect profit or loss: Within 1 year SAR' 000 1-3 years 3-5 years Over 5 years 665,973 113,338 2017 Cash inflows (assets) Cash outflows (liabilities) Net cash inflows (outflows) 144,743 290,900 (157,860) ────── (13,117) ────── (226,832) ────── 64,068 ────── Within 1 year SAR' 000 1-3 years 3-5 years Over 5 years 351,518 656,621 235,911 68,611 (553,765) (84,785) ────── ────── 112,208 28,553 ────── ────── 2016 Cash inflows (assets) (329,229) (595,567) (253,352) (76,900) ────── ────── ────── ────── 22,289 61,054 (17,441) (8,289) Net cash inflows (outflows) ────── ────── ────── ────── _________________________________________________________________________________________________________ 47 Cash outflows (liabilities)
61. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 14. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Current accounts Money market deposits Repos (note 34a) Total 15. 2017 SAR '000 2016 SAR '000 5,449,629 15,421,144 27,687,168 ─────── 48,557,941 ═══════ 4,844,183 22,968,002 17,661,889 ─────── 45,474,074 ═══════ 2017 SAR '000 2016 SAR '000 237,768,744 120,628 57,974,382 13,078,366 ──────── 308,942,120 ════════ 223,632,826 162,044 79,010,133 12,812,888 ─────── 315,617,891 ═══════ CUSTOMERS' DEPOSITS Current accounts Savings Time Others Total Other customers’ deposits include SAR 3,522 million (2016: SAR 3,754 million) of margins held for irrevocable commitments and contingencies (note 21). International segment deposits included in customers' deposits comprise of: Current accounts Savings Time Others Total 2017 SAR '000 2016 SAR '000 6,831,719 14,702,820 451,496 ─────── 21,986,035 ═══════ 6,140,329 15,539,602 572,069 ─────── 22,252,000 ═══════ 2017 SAR '000 2016 SAR '000 13,780,018 460 27,650,775 1,098,722 ─────── 42,529,975 ═══════ 14,377,090 611 29,687,462 1,511,942 ─────── 45,577,105 ═══════ Details on foreign currency deposits included in customers' deposits as follows: Current accounts Savings Time Others Total ________________________________________________________________________________________________________ 48
62. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 16. DEBT SECURITIES ISSUED Issuer Year of issue Tenure Particulars 2017 SR '000 2016 SR '000 5,055,540 5,062,404 National Commercial Bank 2014 10 years Non-convertible unlisted sukuk, callable on the 5th anniversary of the issue date, carrying profit payable semi-annually. Türkiye Finans Katılım Bankası A.Ş. 2013 5 years Non-convertible sukuk listed on the Irish Stock Exchange, carrying profit at a fixed rate payable semi-annually. 1,531,388 1,524,558 2014 5 years Non-convertible sukuk listed on the Irish Stock Exchange, carrying profit at a fixed rate payable semi-annually. 1,885,170 1,878,524 2014 5 years Non-convertible unlisted sukuk, carrying profit at a fixed rate payable semiannually. 742,832 670,995 5 years Non-convertible unlisted sukuk, carrying profit at a fixed rate payable semiannually. 338,613 305,965 2016 6 months Non-convertible sukuk listed on the Borsa Istanbul, carrying profit at a fixed rate. 2017 6 months Non-convertible sukuk listed on the Borsa Istanbul, carrying profit at a fixed rate. 2015 - 696,767 475,319 - ─────── 10,250,310 ═══════ ────── 9,917,765 ══════ 2017 SAR ’000 2016 SAR ’000 Balance at beginning of the year 9,917,765 9,940,717 Net movement in debt securities 263,900 53,048 68,645 ─────── 10,250,310 ═══════ (76,000) ─────── 9,917,765 ═══════ Total Movement of the debt securities issued during the year is as follows: Foreign currency translation adjustment Balance at the end of the year ________________________________________________________________________________________________________ 49
63. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 17. OTHER LIABILITIES 2017 SAR '000 2016 SAR '000 Zakat 1,482,919 1,282,062 Staff-related payables 1,046,447 941,186 Accrued expenses and accounts payable 2,889,211 2,788,623 308,793 347,273 Employee benefit obligation (note 28) 1,069,819 1,142,783 Others 3,097,269 2,584,552 Total ────── 9,894,458 ══════ ────── 9,086,479 ══════ Allowances for indirect facilities (note 7.3) Zakat assessments have been finalised with the General Authority of Zakat and Tax (GAZT) for all years up to 2011. The Bank has submitted Zakat returns for the years 2012 to 2016 and obtained final Zakat certificates. The Zakat returns for the years 2012 to 2016 are currently under review by GAZT and Zakat assessment for these years is awaited. 18. SHARE CAPITAL The authorised, issued and fully paid share capital of the Bank consists of 2,000,000,000 shares of SAR 10 each (31 December 2016: 2,000,000,000 shares of SAR 10 each). The capital of the Bank excluding treasury shares (refer note 27) consists of 1,994,798,024 shares of SAR 10 each (31 December 2016: 1,996,903,527 shares of SAR 10 each). The Board of Directors of the Bank has recommended on 28 December 2017, corresponding to 10 Rabi al-thani 1439H to an Extraordinary General Shareholders Assembly, an increase of 50% of the Bank's existing capital through bonus shares with 1 bonus share for every 2 shares owned. The number of shares will increase by 1,000,000,000 shares to reach 3,000,000,000 shares and the capital of the Bank will increase by SAR 10,000,000,000 to reach SAR 30,000,000,000 subject to approval from the official authorities and the Extraordinary General Assembly. 19. STATUTORY RESERVE In accordance with Saudi Arabian Banking Control Law, a minimum of 25% of the annual net income, inclusive of the overseas branches, is required to be transferred to a statutory reserve up to where the reserve equals a minium amount of the paid up capital of the Bank. Moreover, in accordance with the Regulation for Companies in Saudi Arabia, NCBC is also required to transfer a minimum of 10% of its annual net income (after Zakat) to statutory reserve. TFKB transfers 5% of its previous year annual net income to statutory reserve. The statutory reserves are not currently available for distribution. 20. OTHER RESERVES (CUMULATIVE CHANGES IN FAIR VALUES) Other reserves represent the net unrealised revaluation gains (losses) of cash flow hedges (effective portion) and available for sale investments. The movement of other reserves during the year is included under consolidated statement of other comprehensive income and the consolidated statement of changes in equity. ________________________________________________________________________________________________________ 50
64. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 21. COMMITMENTS AND CONTINGENCIES (21.1) Capital and other non-credit related commitments As at 31 December 2017 the Bank had capital commitments of SAR 677 million (2016: SAR 502 million) in respect of building and equipment purchases. (21.2) Credit-related commitments and contingencies Credit-related commitments and contingencies mainly comprise letters of credit, guarantees, acceptances and commitments to extend credit (irrevocable). The primary purpose of these instruments is to ensure that funds are available to customers as required. Guarantees including standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that customers cannot meet their obligations to third parties, carry the same credit risk as financing and advances. Cash requirements under guarantees are normally considerably less than the amount of the related commitment because the Group does not generally expect the third party to draw funds under the agreement. Documentary letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are generally collateralised by the underlying shipment of goods to which they relate and therefore have significantly less risk. Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group expects most acceptances to be presented before being reimbursed by the customers. Commitments to extend credit represent unused portions of authorisation to extended credit, principally in the form of financing, guarantees and letters of credit. With respect to credit risk relating to commitments to extend unused credit lines , the Group is potentially exposed to a loss in an amount which is equal to the total unused commitments. The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire or terminate without being funded. (a) The contractual maturity structure of the Group's credit-related commitments and contingencies is as follows: (SAR '000) 2017 Letters of credit Guarantees Acceptances Irrevocable commitments to extend credit Total Within 3 months 3-12 months 1-5 years Over 5 years Total 6,596,625 10,093,357 1,623,408 34,107 ─────── 18,347,497 ═══════ 2,903,560 18,790,443 844,515 2,294,722 ─────── 24,833,240 ═══════ 508,285 8,097,296 43,088 7,228,890 ─────── 15,877,559 ═══════ 8,724 3,877,209 4,098 2,497,278 ────── 6,387,309 ══════ 10,017,194 40,858,305 2,515,109 12,054,997 ─────── 65,445,605 ═══════ Over 5 years Total (SAR '000) 2016 Letters of credit Guarantees Acceptances Irrevocable commitments to extend credit Within 3 months 3-12 months 1-5 years 5,754,135 1,994,996 314,273 267,142 8,330,546 7,619,786 19,425,960 13,005,690 5,166,618 45,218,054 1,267,190 1,367,076 79,444 3,028 2,716,738 93,873 4,245,355 6,206,265 1,170,180 11,715,673 ─────── ────── ────── ────── ─────── 14,734,984 27,033,387 19,605,672 6,606,968 67,981,011 Total ═══════ ══════ ══════ ══════ ═══════ ______________________________________________________________________________________________________ 51
65. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 21. COMMITMENTS AND CONTINGENCIES (continued) (21.2) Credit-related commitments and contingencies (continued) (b) The analysis of commitments and contingencies by counterparty is as follows: Government and quasi Corporate and establishment Banks and other financial Others Total 2017 SAR '000 2016 SAR '000 6,975,228 41,826,553 15,081,684 1,562,140 ─────── 65,445,605 ═══════ 8,615,230 44,725,264 13,778,639 861,878 ─────── 67,981,011 ═══════ (21.3) Operating lease commitments The future minimum lease payments under non-cancelable operating leases where the Group is the lessee are as follows: Less than 1 year 1 to 5 years Over 5 years Total 2017 SAR '000 2016 SAR '000 27,675 476,951 1,094,902 ────── 1,599,528 ══════ 26,356 499,009 1,164,382 ────── 1,689,747 ══════ 2017 SAR '000 2016 SAR '000 859,123 7,061 2,514,324 ─────── 3,380,508 1,138,895 29,431 2,434,483 ────── 3,602,809 734,328 13,029,785 ─────── 17,144,621 ─────── 667,707 13,248,428 ────── 17,518,944 ────── 736,045 2,032,170 715,428 ─────── 3,483,643 ─────── 13,660,978 ═══════ 684,594 2,245,145 1,039,627 ────── 3,969,366 ────── 13,549,578 ══════ 22. NET SPECIAL COMMISSION INCOME Special commission income: Investments - available for sale Investments - held to maturity Other investments held at amortised cost Sub total - investments Due from banks and other financial institutions Financing and advances Total Special commission expense: Due to banks and other financial institutions Customers' deposits Debt securities issued Total Net special commission income ______________________________________________________________________________________________________ 52
66. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 23. FEE INCOME FROM BANKING SERVICES, NET 2017 SAR '000 2016 SAR '000 282,332 439,789 1,536,832 581,160 537,434 396,705 ─────── 3,774,252 ─────── 311,112 332,577 1,623,134 521,905 603,697 401,208 ─────── 3,793,633 ─────── (99,680) (461,229) (8,092) ────── (569,001) ────── 3,205,251 ══════ (91,855) (338,711) (72) ────── (430,638) ────── 3,362,995 ══════ 2017 SAR '000 2016 SAR '000 277,892 (75,028) 17,830 ────── 220,694 ══════ 218,104 161,745 18,995 (2,224) ────── 396,620 ══════ 2017 SAR '000 2016 SAR '000 443,296 38,752 ────── 482,048 ══════ 329,850 210,356 ────── 540,206 ══════ 2017 SAR '000 2016 SAR '000 21,392 13,835 45,495 Net other (expenses) (23,372) (109,437) Total ───── 11,855 ───── (56,526) ═════ ═════ Fee income: Shares brokerage Investment management services Finance and lending Credit cards Trade finance Others Total Fee expenses: Shares brokerage Credit cards Others Total Fee income from banking services, net 24. TRADING INCOME, NET Derivatives Foreign exchange Mutual funds Bonds Total 25. GAINS ON NON-TRADING FINANCIAL INSTRUMENTS, NET Gains on disposal of available for sale investments, net Gains on disposal of other investments held at amortised cost, net Total 26. OTHER NON-OPERATING INCOME (EXPENSES), NET Share of results of associates (note 8) Gain on disposal of property and equipment 7,416 ______________________________________________________________________________________________________ 53
67. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 27. SHARE BASED PAYMENTS RESERVE Employees' share based payment plan and Treasury shares: Employees' share based payment plan: On 18 October 2016, the Bank established a share based compensation plan (“equity settled share based payment plan” or the "plan") for its key management that entitles the related personnel to be awarded shares in the Bank subject to successfully meeting certain service and performance conditions (“plan conditions”). The vesting period shall be three years commencing 1 January 2016, while the grant date fair value is SAR 33.37 per share. As a consequence, the Group has recognised an expense of SAR 34 million during the year ended 31 December 2017 (presented under salaries and employee-related expenses) with a corresponding credit to a share based payment reserve in the consolidated statement of changes in equity. On 3 May 2017, the second cycle of the plan commencing 1 January 2017 was approved with a grant date fair value of SAR 40 per share and recognition of SAR 28 million of expense during the year ended 31 December 2017. Treasury shares: a) During the year ended 31 December 2017, the Bank in connection with its employee share based payment plan, purchased its own shares amounting to SAR 105 million to reach SAR 226 million (December 2016: SAR 121 million) which have been classified as treasury shares and presented under shareholders’ equity in the consolidated statement of changes in equity. b) During the year ended 31 December 2016, the Bank disposed of treasury shares amounting to SAR 191 million (previously acquired in satisfaction of debt), at a net gain of SAR 8.7 million. The Bank has secured all necessary regulatory approvals in respect of the share based payment plan and purchase of treasury shares. 28. Employee benefit obligation 28.1 The characteristics of the end of service benefits scheme The Group operates an unfunded end of service benefit plan (the plan) for its employees based on the prevailing Saudi Labor Laws. The liability in respect of the plan is estimated by a qualified external actuary in accordance with International Accounting Standard 19 – Employee Benefits, and using “Projected Unit Credit Method”. The liability recognised in the consolidated statement of financial position in respect of the plan is the present value of the defined benefit obligation at the end of the reporting period. During the year, based on the actuarial assessment, a charge of SAR 187 million (2016: SAR 178 million) related to current service and interest cost was recorded in the consolidated statement of income. The end of service liability is disclosed in note 17. 28.2 The valuation of the defined benefit obligation Liability under the plan is based on various assumptions (‘actuarial assumptions”) including the estimation of the discount rate, inflation rate, expected rate of salary increase and normal retirement ages. Based on the assumptions, also taking into consideration the future salary increases, cash outflows are estimated for the Group’s employees as a whole giving the total payments expected over the future years, which are discounted to arrive at the closing obligation. Any changes in actuarial assumptions from one period to another may effect the determination of the estimated closing obligation, which is accounted for as an actuarial gain or loss for the period. The actuarial gains/losses for the year ended 31 December 2017, are not material to the consolidated financial statements taken as a whole. In addition, changes, if any, in the assumptions, within a reasonable range, would have immaterial impact on future liability estimates. ______________________________________________________________________________________________________ 54
68. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 29. BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share for the years ended 31 December 2017 and 31 December 2016 is calculated by dividing the net income attributable to common equity holders of the Bank (adjusted for Tier 1 sukuk costs) for the periods by the weighted average number of shares outstanding during the period. Diluted earnings per share for the years ended 31 December 2017 and 31 December 2016 is calculated by dividing the fully diluted net income attributable to equity holders of the Bank for the year by the weighted average number of outstanding shares. The diluted earning per share are adjusted with the impact of the employees' share based payment plan. Details of Basic and diluted earnings per share are as follows: Basic EPS ─────────────── 2016 2017 Weighted-Average number of shares outstanding (in thousands) Earnings per share (in SAR) 1,996,026 4.74 1,998,848 4.51 Diluted EPS ─────────────── 2016 2017 1,999,255 4.73 2,000,221 4.51 30. TIER 1 SUKUK During 2017, the Bank through a Shariah compliant arrangement ("the arrangement") issued further Tier 1 Sukuk (the "Sukuk"), amounting to SAR 1.3 billion. The initial issue amounting to SAR 5.7 billion took place during the year ended 31 December 2015 under similar arrangement. These arrangements were approved by the regulatory authorities and the shareholders of the Bank. These Sukuks are perpetual securities in respect of which there is no fixed redemption dates and represents an undivided ownership interest of the Sukukholders in the Sukuk assets, with each Sakk constituting an unsecured, conditional and subordinated obligation of the Bank classified under equity. However, the Bank shall have the exclusive right to redeem or call the Sukuks in a specific period of time, subject to the terms and conditions stipulated in the Sukuk Agreement. The applicable profit rate on the Sukuks is payable quarterly in arrears on each periodic distribution date, except upon the occurrence of a non payment event or non-payment election by the Bank, whereby the Bank may at its sole discretion (subject to certain terms and conditions) elect not to make any distributions. Such non-payment event or non-payment election are not considered to be events of default and the amounts not paid thereof shall not be cumulative or compound with any future distributions. ______________________________________________________________________________________________________ 55
69. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 31. DIVIDEND During the year, the Board of Directors recommended dividends, net of zakat, for the year as follows: Amount SAR '000 2016 2017 Interim dividend paid Proposed final dividend Total net dividend Zakat provision for the year attributable to the Bank's shareholders Total gross dividend 2,196,594 1,196,879 ────── 3,393,473 1,200,000 1,996,904 ────── 3,196,904 1,361,446 ────── 4,754,919 ══════ 1,187,734 ────── 4,384,638 ══════ Dividend per share SAR 2016 2017 1.10 0.60 ────── 1.70 ══════ 0.60 1.00 ────── 1.60 ══════ 32. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: Cash and balances with SAMA excluding statutory deposits (note 4) Due from banks and other financial institutions with original maturity of three months or less Total 2017 SAR '000 2016 SAR '000 19,924,122 25,110,465 8,878,037 ─────── 28,802,159 ═══════ 10,550,988 ─────── 35,661,453 ═══════ ______________________________________________________________________________________________________ 56
70. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 33. OPERATING SEGMENTS An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components, whose operating results are reviewed regularly by the Group's management. The Group has five reportable segments, as described below, which are the Group's strategic divisions. The strategic divisions offer different products and services, and are managed separately based on the Group's management and internal reporting structure. Retail - Provides banking services, including lending and current accounts in addition to products in compliance with Shariah rules which are supervised by the independent Shariah Board, to individuals and private banking customers. Corporate - Provides banking services including all conventional credit-related products and financing products in compliance with Shariah rules to small sized businesses, medium and large establishments and companies. Treasury - Provides a full range of treasury and correspondent banking products and services, including money market and foreign exchange, to the Group’s clients, in addition to carrying out investment and trading activities (local and international) and managing liquidity risk, market risk and credit risk (related to investments). Capital Market - Provides wealth management, asset management, investment banking and shares brokerage services (local, regional and international). International - Comprises banking services provided outside Saudi Arabia including TFK. Transactions between the operating segments are recorded as per the Bank and its subsidiaries' transfer pricing system. The supports and Head Office expenses are allocated to segments using activity-based costing. ___________________________________________________________________________________________________________________ 57
71. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 33. OPERATING SEGMENTS (continued) (33.1) The Group’s total assets and liabilities at year end, its operating income and expenses (total and main items) and net income for the year, by business segments, are as follows: (SAR '000) Retail Corporate Treasury Capital Market Total assets 108,503,303 133,051,308 162,709,003 1,387,858 38,214,395 443,865,867 Total liabilities 212,693,092 73,687,694 60,627,429 274,984 32,307,070 379,590,269 6,148,422 6,809,581 3,047,849 635,783 1,703,593 18,345,228 -Intersegment operating income (expense) 2,155,862 (2,332,154) 285,221 -Total operating income of which: 8,304,284 4,477,427 3,333,070 Net special commission income 6,883,324 3,251,046 Fee income from banking services, net 1,162,545 1,045,621 4,246,441 2017 Total operating income from external customers Total operating expenses of which: - Depreciation/amortisation of property, equipment and software - Impairment charge for financing and advances losses, net - Impairment charge on investments, net Net income (Equity holders of the Bank and non-controlling interests) - International (108,929) Total - 635,783 1,594,664 18,345,228 2,250,717 3,606 1,272,285 13,660,978 96,890 618,934 281,261 3,205,251 2,113,111 520,634 343,663 1,168,577 8,392,426 408,919 89,367 48,680 19,894 87,421 654,281 447,262 1,115,001 - 301,360 1,863,623 - - - - 4,045,019 2,349,850 302,646 463,294 75,846 2,803,848 75,846 9,964,657 (SAR '000) 2016 Capital Market Retail Corporate Treasury Total assets 104,971,649 139,273,987 156,288,231 1,314,208 40,809,042 442,657,117 Total liabilities 201,637,470 87,963,304 57,900,573 222,797 35,007,255 382,731,399 580,721 2,335,895 18,647,379 Total operating income from external customers 6,007,781 6,464,464 3,258,518 -Intersegment operating income (expense) 1,697,186 (2,077,731) 486,252 -Total operating income of which: 7,704,967 4,386,733 3,744,770 Net special commission income 6,268,328 3,181,903 Fee income from banking services, net 1,239,793 1,065,875 4,650,525 Total operating expenses of which: - Depreciation/amortisation of property, equipment and software - Impairment charge for financing and advances losses, net - Impairment charge on investments, net Net income (Equity holders of the Bank and non-controlling interests) - International (105,707) Total - 580,721 2,230,188 18,647,379 2,421,266 1,240 1,676,841 13,549,578 113,167 560,597 383,563 3,362,995 1,615,573 646,280 350,967 1,911,675 9,175,020 422,219 88,108 49,068 34,667 92,268 686,330 501,289 608,514 8,000 - 813,162 1,930,965 - - 205,720 - - 3,048,228 2,763,479 233,788 283,352 3,086,986 205,720 9,415,833 ___________________________________________________________________________________________________________________ 58
72. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 33. OPERATING SEGMENTS (continued) (33.2) The Group's credit risk exposure, by business segments, is as follows: (SAR '000) 2017 Statement of financial position assets Commitments and contingencies (credit equivalent) Derivatives (credit equivalent) Retail Corporate Treasury 94,107,343 124,063,142 139,688,772 264,493 24,483,624 9,409,124 - 6,860,015 - Capital Market International 180,833 Total 31,599,763 389,639,853 - 5,831,735 39,988,976 - 224,252 7,084,267 (SAR '000) 2016 Statement of financial position assets Commitments and contingencies (credit equivalent) Derivatives (credit equivalent) Retail Corporate Treasury Capital Market International Total 89,173,816 131,678,965 128,061,340 102,859 34,544,811 383,561,790 362,260 24,658,325 8,559,222 - 8,100,017 41,679,824 - 3,380,707 - 314,301 3,695,008 - The credit exposure of assets as per the consolidated statement of financial position comprises the carrying value of due from banks and other financial institutions, investments subject to credit risk, financing and advances, positive fair value of derivatives, other receivables and refundable deposits. The credit equivalent of commitments and contingencies and derivatives is calculated according to SAMA’s prescribed methodology. 34. COLLATERAL AND OFFSETTING Following are the details of collaterals held/received by the Group and offsetting carried out as at 31 December 2017: a) The Bank conducts Repo transactions under the terms that are usually based on the applicable GMRA (Global Master Repurchase Agreement) collateral guidelines. Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognized in the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. These assets continue to be measured in accordance with related accounting policies for investments held for trading, available for sale, held to maturity and other investments held at amortised cost. The carrying amount and fair value of securities pledged under agreement to repurchase (repo) are as follows: 2016 2017 SAR '000 Carrying Fair amount value SAR '000 Carrying Fair amount value Available for sale 8,401,915 8,401,915 6,555,875 Held to maturity 19,517,027 19,446,659 847,696 852,783 12,208,998 11,695,013 ──────── 27,918,942 ─────── 27,848,574 ─────── 19,612,569 ─────── 19,103,671 Investments held at amortised cost Total 6,555,875 ═══════ ═══════ ════════ ════════ The Bank has placed a margin deposit of SAR 160 million (2016: SAR 361 million) as an additional security for these repo transactions. b) For details of collateral held in respect of financing and advances, please refer note 7.4. c) Collateral usually is not held against investment securities, and no such collateral was held at 31 December 2017 and 31 December 2016. d) For details of margin deposits held for the irrevocable commitments and contingencies, please refer note 15. e) Securities pledged with the Group in respect of reverse repo transactions comprise of SAR 1,049 million (2016: SAR 937 million). The Group is allowed to sell or repledge these securities in the event of default by the counterparty. f) The Group executes derivative transactions under the terms that are generally based on the applicable ISDA (International Swaps and Derivatives Association) and has accordingly received and placed certain amounts as cash margins under the guidelines of applicable CSA (Credit Support Annex). Amongst these, deposits amounting to SAR 609 million (2016: Nil) and SAR 316 million (2016: Nil) are eligible for offsetting against negative fair value derivatives and positive fair value of derivatives respectively, and have been accordingly offset at the reporting date. The accuracy of segregation of margin deposits between offset and non-offset amounts is regularly monitored in view of the offsetting criteria as set out in note 3.5, while also considering emerging regulatory developments and clearing house rules requiring net settlement. This segregation has been applied consistently to all periods and the comparative amounts have been presented accordingly. ___________________________________________________________________________________________________________________ 59
73. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 35. CREDIT RISK The Group manages exposure to credit risk, which is the risk that one party to a financial instrument or transaction will fail to discharge an obligation and will cause the other party to incur a financial loss. Credit exposures arise principally in credit-related risk that is embedded in financing and advances and investments. There is also credit risk in off-statement of financial position financial instruments, such as trade-finance related products, derivatives and financing commitments. For financing and advances and off-statement of financial position financing to borrowers, the Group assesses the probability of default of counterparties using internal rating models. For investments, due from banks and off-statement of financial position financial instruments held with international counterparties, the Group uses external ratings of the major rating agencies. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. The Group’s risk management policies are designed to identify risks and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored on a daily basis. The Group manages the credit exposure relating to its trading activities by monitoring credit limits, entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases, the Group may also close out transactions or assign them to other counterparties to mitigate credit risk. The Group’s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfill their obligation and the Group assesses counterparties using the same techniques as for its financing activities in order to control the level of credit risk taken. Concentrations of credit risk may arise in case of sizeable exposure to a single obligor or when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular customer, industry or geographical location. The debt securities included in investments are mainly sovereign risk and high-grade securities. Analysis of investments by counterparty is provided in note (6.5). For details of the composition of the financing and advances refer to note (7.5). Information on credit risk relating to derivative instruments is provided in note (13) and for commitments and contingencies in note (21). The information on the Group's total maximum credit exposure is given in note (35.1). Each individual corporate borrower is rated based on an internally developed debt rating model that evaluates risk based on financial, qualitative and industry specific inputs. The associated loss estimate norms for each grade have been developed based on the Group’s experience. These risk ratings are reviewed on a regular basis. Performing credit cards and consumer financing are classified as standard as they are performing and have timely repayment with no past dues. The Group in the ordinary course of lending activities holds collaterals as security to mitigate credit risk in the financing and advances. These collaterals mostly include time and other cash deposits, financial guarantees from other banks, local and international equities, real estate and other fixed assets. The collaterals are held mainly against commercial and individual loans and are managed against relevant exposures at their net realisable values. The Group holds real estate collateral against registered mortgage as a collateral Financial instruments such as financing and advances and customers' deposits are shown gross on the consolidated statement of financial position and no offsetting has been done. Please refer to note 34 for details of other collaterals held. ___________________________________________________________________________________________________________ 60
74. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 35. CREDIT RISK (continued) The Group also manages its credit risk exposure through the diversification of financing activities to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or businesses. It also takes security when appropriate. The Group also seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant financing and advances. The Group monitors the market value of collateral periodically and requests additional collateral in accordance with the underlying agreement and Group's policy. Specific allowances for financing losses for the impaired financing portfolio are maintained by the Group’s Credit Risk Management in addition to credit-related specific allowance for investments. Exposures failing to fulfil their due obligations over 90 days are considered impaired and appropriate specific allowances are individually made. An additional portfolio (collective) allowance is allocated over the performing financing and advances as well as investments [refer to notes (3.13 and 2.5(a)) for accounting policy of impairment of financial assets]. (35.1) Maximum credit exposure Maximum exposure to credit risk without taking into account any collateral and other credit enhancements is as follows: 2017 SAR '000 2016 SAR '000 Assets 21,966,218 19,213,063 Investments (note 6.6) 110,053,434 106,311,302 Financing and advances, net (note 7.4) 249,234,246 253,592,141 5,697,497 1,779,035 ─────── 386,951,395 ─────── 380,895,541 ─────── ─────── 61,614,342 63,879,738 2,688,458 2,666,249 Due from banks and other financial institutions (note 5) Other assets - margin deposits against derivatives and repos (note 12) Total assets Contingent liabilities and commitments, net (notes 15, 17 and 21.2) Derivatives - positive fair value, net (note 13) Total maximum credit exposure ─────── ─────── 451,254,195 447,441,528 ═══════ ═══════ ________________________________________________________________________________________________________ 61
75. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 36. MARKET RISK Market risk is the risk that changes in market prices, such as special commission rate, credit spreads (not relating to changes in the obligor's / issuer's credit standing), equity prices and foreign exchange rates, will affect the Group's income 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. The Group separates its exposure to market risk between trading and banking books. Trading book is mainly held by the Treasury division and includes positions arising from market making and proprietary position taking, together with financial assets and liabilities that are managed on a fair value basis. Overall authority for market risk is vested to the Board of Directors. The Risk Group is responsible for the development of detailed risk management policies (subject to review and approval by the Board of Directors) and for the day-to-day review of their implementation. (36.1) Market risk - Trading book The principal tool used to measure and control market risk exposure within the Group's trading book is Value at Risk (VaR). The VaR of a trading position is the estimated loss that will arise on the position over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used by the Group is based upon a 99 percent confidence level and assumes a 1-day holding period, except for Fair Value through Income Statement (FVIS) investments which are computed over a 3-month holding period (i.e., VaR is measured daily, except for VaR on FVIS investments which are computed on a monthly basis), to facilitate the comparison with the trading income (loss) which is also computed and reported on a daily and monthly basis respectively for these products. The model computes volatility and correlations using relevant historical market data. The Group uses VaR limits for total market risk embedded in its trading activities including derivatives related to foreign exchange and special commission rate. The Group also assesses the market risks using VaR in its FVIS investments which are controlled by volume limits. The overall structure of VaR limits is subject to review and approval by the Board of Directors. VaR limits are allocated to the trading book. The daily reports of utilisation of VaR limits are submitted to the senior management of the Group. In addition, regular summaries about various risk measures including the Economic Capital are submitted to the Risk Committee of the Board. Although VaR is an important tool for measuring market risk, the assumptions on which the model is based gives rise to some limitations, including the following: (i) A 1-day holding period assumes that it is possible to hedge or dispose of positions within one day horizon. This is considered to be a realistic assumption in most of the cases but may not be the case in situations in which there is severe market illiquidity for a prolonged period. (ii) A 99% confidence level does not reflect losses that may occur beyond this level. Even within the model used there is a 1% probability that losses could exceed the VaR. (iii) VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day. (iv) The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature. (v) The VaR measure is dependent upon the Group's position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa. The limitations of the VaR methodology are recognised by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading book. In addition, the Group uses stress tests to model the financial impact of exceptional market scenarios on individual trading book and the Group's overall trading position. ________________________________________________________________________________________________________ 62
76. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 36. MARKET RISK (continued) (36.1) Market risk - Trading book (continued) The table below shows the VaR related information for the year ended 31 December 2017 and 31 December 2016 for both Held for Trading and Held as FVIS portfolios: (SAR '000) 2017 Held for Trading ─────────────────────────── Foreign Special exchange Overall commission risk risk risk FVIS VaR as at 31 December 2017 619 479 1,098 214,512 Average VaR for 2017 607 831 1,438 179,440 Held for Trading ─────────────────────────── Foreign Special exchange commission Overall risk risk risk FVIS (SAR '000) 2016 VaR as at 31 December 2016 234 47 281 116,651 Average VaR for 2016 255 413 668 169,204 (36.2) Market risk - Banking book Market risk on banking book positions mainly arises from the special commission rate, foreign currency exposures and equity price changes. (36.2.1) Special commission rate risk Special commission rate risk arises from the possibility that changes in special commission rates will affect future cash flows or the fair values of financial instruments. The Group's Assets-Liabilities Committee (ALCO) has established limits on the special commission rate gap. Positions are regularly monitored and reported on a monthly basis to ALCO and hedging strategies are used to ensure positions are maintained within the established limits. In case of stressed market conditions, the asset-liability gap may be monitored more frequently. The following table depicts the sensitivity due to reasonably possible changes in special commission rates, with other variables held constant, on the Group’s consolidated statement of income or equity. The sensitivity of the income is the effect of the assumed changes in special commission rates on the net special commission income for one year, based on the special commission bearing non-trading financial assets and financial liabilities held as at 31 December 2017, including the effect of hedging instruments. The sensitivity of the equity is calculated by revaluing the fixed rate available for sale financial assets, including the effect of any associated hedges, as at 31 December 2017 for the effect of assumed changes in special commission rates. The sensitivity of equity is analyzed by maturity of the assets or cash flow hedge swaps. All significant banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in local currency. The sensitivity analysis does not take account of actions by the Group that might be taken to mitigate the effect of such changes. _____________________________________________________________________________________________________ 63
77. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 36. MARKET RISK (continued) (36.2) Market risk - Banking book (continued) (36.2.1) Special commission rate risk (continued) 2017 Increase / Sensitivity decrease of special in basis commission points income SAR '000 Sensitivity of equity (other reserves) Within 3 months 3-12 months 1-5 years Over 5 years Total Currency SAR ± 10 ± 118,400 ± USD ± 10 ± 2016 8,241 ± Increase / Sensitivity decrease of special in basis commission points income ± 120 ± 15,772 ± 2,998 ± 18,890 39 ± 341 ± 8,540 ± 50,879 ± 59,799 - SAR '000 Sensitivity of equity (other reserves) Within 3 months 3-12 months 1-5 years Over 5 years Total Currency SAR ± 10 ± 106,678 ± USD ± 10 ± 14,240 ± 15 ± 8 ± ± 2,579 ± 7,921 ± 10,515 94 ± 21,282 ± 84,749 ± 106,133 - _____________________________________________________________________________________________________ 64
78. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 36. MARKET RISK (continued) (36.2) Market risk - Banking book (continued) (36.2.1) Special commission rate risk (continued) (a) Special commission rate sensitivity of assets, liabilities and off-statement of financial position items The Group manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market special commission rates on its consolidated financial position and cash flows. The table below summarizes the Group’s exposure to special commission rate risks. Included in the table are the Group’s assets and liabilities at carrying amounts, categorized by the earlier of the contractual re-pricing or the maturity dates. The Group manages exposure to special commission rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and offstatement of financial position instruments that mature or re-price in a given period. The Group manages this risk by matching the re-pricing of assets and liabilities through risk management strategies. The table below summarizes the Group's exposure to special commission rate risks. SAR '000 2017 Assets Cash and balances with SAMA Due from banks and other financial institutions Investments, net - Held for trading - Held as FVIS - Available for sale - Held to maturity - Other investments held at amortised cost Financing and advances, net - Consumer & Credit Card - Corporate - International - Others Positive fair value of derivatives, net Total assets Liabilities Due to banks and other financial institutions Customers' deposits - Current accounts - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net Total liabilities On-statement of financial position gap Off-statement of financial position gap Total special commission rate sensitivity gap Cumulative special commission rate sensitivity gap Within 3 months 3-12 months 1-5 years Over 5 years Non-special commission bearing Total 9,224,001 11,104,476 28,149,042 2,590,105 265,493 1,227,607 19,739,343 2,755,241 200,048 3,431,996 33,733,775 5,350,090 231,740 28,453,918 4,154,225 - 28,745,233 6,202,139 4,501,747 646,652 1,332,121 2,522,974 - 37,969,234 21,966,218 114,577,825 646,652 1,332,121 17,372,635 697,281 25,293,444 76,490,464 2,788,091 65,012,796 6,765,347 1,924,230 1,294,297 ─────── 126,262,280 ═══════ 16,784,054 59,275,587 1,262,971 42,870,162 9,061,263 6,081,191 720,231 ─────── 80,962,768 ═══════ 28,151,945 104,476,676 85,099,195 9,287,343 9,526,414 563,724 236,039 ─────── 141,878,486 ═══════ 24,299,693 8,879,740 6,921,000 758,354 1,200,386 7,265 ─────── 37,340,923 ═══════ 94,529,136 111,779 249,234,246 8,784 89,159,041 3,334 124,094,635 4,627 26,116,005 95,034 9,864,565 430,626 2,688,458 ─────── ──────── 39,991,524 426,435,981 ═══════ ════════ 42,428,774 41,994,299 1,001,928 119 40,412,032 580,220 321,986 994,165 ─────── 85,739,224 ═══════ 40,523,056 4,129,163 ─────── 44,652,219 ─────── 5,245,211 15,583,738 15,583,738 1,938,564 494,459 ─────── 23,261,972 ═══════ 57,700,796 12,734,638 ─────── 70,435,434 ─────── 756,790 1,977,010 1,602 1,977,010 1,602 7,989,760 272,380 36,002 ─────── ─────── 10,995,940 37,604 ═══════ ═══════ 130,882,546 37,303,319 (3,326,121) (13,549,359) ─────── ─────── 127,556,425 23,753,960 ─────── ─────── 127,166 48,557,941 249,385,471 308,942,120 236,766,816 237,768,744 120,509 120,628 57,974,382 12,498,146 13,078,366 10,250,310 148,434 1,945,440 ─────── ──────── 249,661,071 369,695,811 ═══════ ════════ (209,669,547) 636,499 ──────── (209,033,048) ──────── 44,652,219 115,087,653 242,644,078 266,398,038 57,364,990 ═══════ ═══════ ═══════ ═══════ ════════ __________________________________________________________________________________________________________ 65
79. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 36. MARKET RISK (continued) (36.2) Market risk - Banking book (continued) (36.2.1) Special commission rate risk (continued) (a) Special commission rate sensitivity of assets, liabilities and off-statement of financial position items (continued) SAR '000 2016 Within 3 months 3-12 months 1-5 years Over 5 years Non-special commission bearing Total Assets Cash and balances with SAMA 15,014,001 - - - 28,427,290 - 3,140,415 19,213,063 5,197,524 111,508,971 Due from banks and other financial institutions 14,854,236 204,887 1,013,525 Investments, net 34,989,613 - 6,816,666 - 29,864,877 - - Held for trading - Held as FVIS - Available for sale - Held to maturity 34,640,291 - 708,352 708,352 - - - - 1,819,017 1,819,017 1,274,796 1,416,114 9,351,899 411,082 478,575 2,670,155 - 20,435,502 542,775 5,722,538 - 87,113,668 253,592,141 - Other investments held at amortised cost 33,172,042 4,989,470 20,034,403 28,917,753 - Financing and advances, net 83,677,731 62,735,671 100,378,232 1,125,368 79,688,387 6,675,032 - 125,475 3,787,628 - Consumer & Credit Card 43,441,291 1,432,432 10,458 84,611,841 67,946,776 48,531,925 9,546,337 5,651,764 2,161 131,678,963 7,319,814 9,454,450 10,588,184 1,023,268 8,487 28,394,203 4,623,513 1,064,721 ─────── 149,600,302 ═══════ 3,623,928 541,551 ─────── 70,298,775 ═══════ 555,324 248,308 ─────── 131,504,942 ═══════ 35,736 ─────── 41,351,059 ═══════ Due to banks and other financial institutions 31,069,312 13,011,972 974,582 418,208 45,474,074 Customers' deposits 57,224,742 20,643,797 1,717,868 3,811 236,027,673 315,617,891 - 223,625,245 223,632,826 - Corporate - International - Others Positive fair value of derivatives, net Total assets 8,907,134 104,369 2,666,249 775,933 ─────── ──────── 37,666,637 430,421,715 ═══════ ════════ Liabilities - Current accounts - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net Total liabilities On-statement of financial position gap Off-statement of financial position gap Total special commission rate sensitivity gap Cumulative special commission rate sensitivity gap 7,581 270 56,644,657 572,234 228,705 20,643,797 291,670 1,717,868 3,811 9,397,390 - 161,774 162,044 12,240,654 79,010,133 467,498 9,917,765 12,812,888 1,118,187 ─────── 89,640,946 ═══════ 59,959,356 522,270 ─────── 34,469,709 ═══════ 35,829,066 471,279 55,956 ─────── 12,561,119 ═══════ 118,943,823 ─────── 59,767 ═══════ 41,291,292 2,635,190 ─────── ──────── 236,913,379 373,644,920 ═══════ ════════ (199,246,742) 5,173,114 ─────── 65,132,470 ─────── 4,592,317 ─────── 40,421,383 ─────── (4,860,409) ─────── 114,083,414 ─────── (4,888,541) ─────── 36,402,751 ─────── 560,065 ─────── (198,686,677) ─────── 65,132,470 ═══════ 105,553,853 ═══════ 219,637,267 ═══════ 256,040,018 ═══════ 57,353,341 ═══════ The off-statement of financial position gap represents the net notional amounts of derivative financial instruments, which are used to manage the special commission rate risk. __________________________________________________________________________________________________________ 66
80. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 36. MARKET RISK (continued) (36.2) Market risk - Banking book (continued) (36.2.2) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its consolidated financial position and cash flows. The Board has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits. At the year end, the Group had the following significant net exposures denominated in foreign currencies: Currency 2017 SAR '000 Long (short) 2016 SAR '000 Long (short) US Dollar (576,212) (108,702) TRY 4,672,914 4,668,104 A long position indicates that assets in a foreign currency are higher than the liabilities in the same currency; the opposite applies to short position. The table below indicates the extent to which the Group was exposed to currency risk at 31 December 2017 on its significant foreign currency positions. The analysis is performed for reasonably possible movements of the currency rate against the Saudi Riyal with all other variables held constant, including the effect of hedging instruments, on the consolidated statement of income; the effect on equity of foreign currencies other than Turkish Lira (TRY) is not significant. A negative amount in the table reflects a potential net reduction in consolidated statement of income, while a positive amount reflects a net potential increase. The sensitivity analysis does not take account of actions by the Group that might be taken to mitigate the effect of such changes. 2016 SAR '000 2017 SAR '000 Currency TRY Increase/ decrease in currency rate in % ± 10% Effect on profit ± 31,439 Effect on equity ± 467,291 Increase/ decrease in currency rate in % ± 10% ± Effect on profit 24,125 Effect on equity ± 466,810 (36.2.3) Equity price risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in the levels of equity index and the value of individual stocks. The effect on equity (other reserves) as a result of a change in the fair value of equity instruments quoted on Saudi Stock Exchange (Tadawul) and held as available-for-sale at 31 December 2017 and 31 December 2016, due to reasonably possible changes in the prices of these quoted shares held by the Group, with all other variables held constant, is as follows: Market index - (Tadawul) 2017 SAR '000 Increase / decrease Effect on in market equity (other prices % reserves) 2016 SAR '000 Increase / decrease Effect on in market equity (other prices % reserves) ± 10% 9,742 ± 10% Impact of change in market prices ± ± 40,164 ___________________________________________________________________________________________________________ 67
81. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 37. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. Liquidity risk can be caused by market disruptions or credit downgrades, which may cause certain sources of funding to be less readily available. To mitigate this risk, management has diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, maintaining an appropriate balance of cash, cash equivalents and readily marketable securities and monitors future cash flows and liquidity on a daily basis. The Group has lines of credit in place that it can access to meet liquidity needs. In accordance with the Banking Control Law and the regulations issued by SAMA, the Bank maintains a statutory deposit with SAMA of 7% of total demand deposits and 4% of savings and time deposits. In addition to the statutory deposit, the Bank also maintains liquid reserves of not less than 20% of the deposit liabilities, in the form of cash, Saudi Government Development Bonds or assets which can be converted into cash within a period not exceeding 30 days. The Bank has the ability to raise additional funds through repo facilities available with SAMA against Saudi Government Development Bonds up to 75% of the nominal value of bonds held. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. One of these methods is to maintain limits on the ratio of liquid assets to deposit liabilities, set to reflect market conditions. Liquid assets consist of cash, short-term bank deposits and liquid debt securities available for immediate sale and Saudi Government Bonds excluding repos. Deposits liabilities include both customers and Banks, excluding non-resident Bank deposits in foreign currency. (37.1) Analysis of financial liabilities by remaining contractual maturities The table below summarises the maturity profile of the Group's financial liabilities at 31 December 2017 and 31 December 2016 based on contractual undiscounted repayment obligations; as special commission payments up to contractual maturity are included in the table, totals do not match with the consolidated statement of financial position. The contractual maturities of liabilities have been determined on the basis of the remaining period at the consolidated statement of financial position date to the contractual maturity date and do not take into account the effective expected maturities as shown on note (37.2) below (Maturity analysis of assets and liabilities for the expected maturities). Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group's deposit retention history. ___________________________________________________________________________________________________________ 68
82. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 37. LIQUIDITY RISK (continued) (37.1) Analysis of undiscounted financial liabilities by remaining contractual maturities SAR '000 On demand Less than 3 months 3 to 12 months 1 to 5 years 6,144,580 36,840,588 5,317,823 1,137,821 - 49,440,812 Customers' deposits 228,713,648 41,980,012 15,334,560 23,609,618 1,946 309,639,784 - Current accounts 215,514,656 1,045,928 - 21,256,582 - 237,817,166 - - - 120,628 Financial liabilities Over 5 years Total As at 31 December 2017 Due to banks and other financial institutions - Savings - Time - Others Debt securities issued Derivative financial instruments (gross contractual amounts payable) Total undiscounted financial liabilities 120,628 13,078,364 40,805,497 - 15,334,560 2,353,036 1,946 58,495,039 128,587 - - - 13,206,951 413,197 2,283,422 4,041,581 5,450,521 12,188,721 ──────── 5,508,531 ─────── 447,167 ─────── 26,972,963 ─────── 16,020,627 ─────── 48,949,288 ─────── 234,858,228 ═══════ 84,742,328 ═══════ 23,382,972 ═══════ 55,761,983 ═══════ 21,473,094 ═══════ 420,218,605 ═══════ Over 5 years Total - SAR '000 On demand Less than 3 months 3 to 12 months 1 to 5 years 4,429,757 27,104,638 13,214,657 1,741,494 - 46,490,546 Customers' deposits 236,607,757 223,632,826 13,939,705 - 9,317,647 - 4,429 - 316,626,697 - Current accounts 56,757,159 - - - Financial liabilities As at 31 December 2016 Due to banks and other financial institutions - Savings - Time - Others Debt securities issued Derivative financial instruments (gross contractual amounts payable) Total undiscounted financial liabilities 162,044 - - - 223,632,826 162,044 56,757,159 - 13,939,705 - 9,317,647 - 4,429 - 80,018,940 329,642 642,090 5,887,918 6,035,785 12,895,435 ──────── 73,918 ─────── 393,100 ─────── 9,777,777 ─────── 14,248,752 ─────── 24,493,547 ─────── 241,037,514 ═══════ 84,265,357 ═══════ 28,189,552 ═══════ 26,724,836 ═══════ 20,288,966 ═══════ 400,506,225 ═══════ 12,812,887 - 12,812,887 The contractual maturity structure of the credit-related and commitments and contingencies are shown under note (21.2(a)). ___________________________________________________________________________________________________________ 69
83. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 37. LIQUIDITY RISK (continued) (37.2) Maturity analysis of assets and liabilities The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled. See note (37.1) above for the contractual undiscounted financial liabilities. (SAR '000) 2017 Assets Cash and balances with SAMA Due from banks and other financial institutions Investments, net - Held for trading - Held as FVIS - Available for sale - Held to maturity - Held at amortized cost Financing and advances, net - Consumer & Credit Card - Corporate - International - Others Positive fair value of derivatives, net Investments in associates, net Other real estate, net Property, equipment and software, net Goodwill Other assets Total assets Liabilities Due to banks and other financial institutions Customers' deposits - Current accounts - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net Other liabilities Total liabilities Below 1 year Over 1 year No-fixed maturity Total 13,003,970 14,436,090 10,529,174 37,969,234 12,979,038 265,673 8,987,180 113,660,585 651,567 21,966,218 114,577,825 265,673 2,099,807 170,459 660,010 22,021 1,247,317 - 1,066,448 17,367,720 697,281 94,529,136 247,134,439 88,988,582 123,434,625 26,093,984 8,617,248 2,688,458 - 646,652 4,915 450,048 861,523 5,280,672 303,037 646,652 1,332,121 17,372,635 697,281 94,529,136 249,234,246 89,159,041 124,094,635 26,116,005 9,864,565 2,688,458 450,048 861,523 5,280,672 303,037 ─────── 28,348,488 ═══════ ─────── 386,906,752 ═══════ 30,813,390 17,467,676 69,547,617 47,553,749 24,125 239,394,503 190,214,995 96,503 - 308,942,120 237,768,744 120,628 17,392,314 4,577,429 - 40,582,068 8,500,937 10,250,310 - 57,974,382 13,078,366 10,250,310 ─────── 100,361,007 ─────── 1,945,440 ─────── 269,057,929 ─────── 10,534,606 10,534,606 ─────── ──────── 28,610,627 443,865,867 ═══════ ════════ 276,875 48,557,941 1,945,440 9,894,458 9,894,458 ─────── ──────── 10,171,333 379,590,269 ─────── ──────── ___________________________________________________________________________________________________________ 70
84. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 37. LIQUIDITY RISK (continued) (37.2) Maturity analysis of assets and liabilities (continued) (SAR '000) 2016 Below 1 year Over 1 year No-fixed maturity Total 18,718,880 12,135,817 14,664,661 7,077,246 10,057,750 - 43,441,291 19,213,063 363,803 363,803 2,262,970 271,539 979,650 94,098 917,683 108,213,301 1,455,214 18,211,987 1,432,432 87,113,668 251,329,171 84,340,302 130,699,313 28,300,105 7,989,451 2,931,867 708,352 2,223,515 - 111,508,971 708,352 1,819,017 20,435,502 1,432,432 87,113,668 253,592,141 84,611,841 131,678,963 28,394,203 8,907,134 ─────── 33,481,470 ═══════ 2,666,249 ─────── 383,950,628 ═══════ 22,075,924 72,946,525 44,726,565 23,398,150 242,671,366 178,906,261 - 45,474,074 315,617,891 223,632,826 32,409 23,703,040 4,484,511 - 129,635 55,307,093 8,328,377 9,917,765 - 162,044 79,010,133 12,812,888 9,917,765 ─────── 95,022,449 ─────── 2,635,190 ─────── 278,622,471 ─────── Assets Cash and balances with SAMA Due from banks and other financial institutions Investments, net - Held for trading - Held as FVIS - Available for sale - Held to maturity - Held at amortized cost Financing and advances, net - Consumer & Credit Card - Corporate - International - Others Positive fair value of derivatives, net Investments in associates, net Other real estate, net Property, equipment and software, net Goodwill Other assets Total assets 2,666,249 431,156 431,156 849,180 849,180 4,819,409 4,819,409 325,733 325,733 5,809,924 5,809,924 ─────── ──────── 25,225,019 442,657,117 ═══════ ════════ Liabilities Due to banks and other financial institutions Customers' deposits - Current accounts - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net Other liabilities Total liabilities 2,635,190 9,086,479 9,086,479 ─────── ──────── 9,086,479 382,731,399 ─────── ──────── ___________________________________________________________________________________________________________ 71
85. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 38. GEOGRAPHICAL CONCENTRATION OF ASSETS, LIABILITIES, COMMITMENTS AND CONTINGENCIES AND CREDIT EXPOSURE (38.1) The distribution by geographical region for major categories of assets, liabilities and commitments and contingencies and credit exposure at year end is as follows: (SAR '000) 2017 The Kingdom of Saudi Arabia GCC and Middle East Europe Turkey Other countries Total 34,029,626 40,944 1,326,627 1,257,202 1,314,835 37,969,234 6,645,018 5,071,551 2,264,253 6,052,735 1,932,661 21,966,218 61,729,626 646,652 24,758 33,861 61,024,355 20,748,827 1,817,547 18,931,280 733,367 100,474 203,495 429,321 3,994,427 3,331,007 663,420 77 27,371,578 1,231,647 11,995,828 14,144,103 114,577,825 646,652 1,332,121 17,372,635 697,281 94,529,136 212,458,333 89,157,028 115,122,794 8,178,511 3,761,381 2,013 3,212,528 546,840 359,781 359,781 30,003,587 3,887,582 26,116,005 - 2,651,164 1,871,731 779,433 249,234,246 89,159,041 124,094,635 26,116,005 9,864,565 1,399,303 206,504 920,352 162,299 Assets Cash and balances with SAMA Due from banks and other financial institutions Investments, net - Held for trading - Held as FVIS - Available for sale - Held to maturity - Other investments held at amortised cost Financing and advances, net - Consumer & Credit Card - Corporate - International - Others Positive fair value of derivatives, net Investments in associates, net Goodwill Total 435,538 - - - - 2,688,458 14,510 450,048 303,037 ──────── ──────── ─────── ─────── ─────── 316,697,444 29,829,207 5,604,380 41,773,287 33,284,748 ════════ ════════ ═══════ ═══════ ═══════ 303,037 ─────── 427,189,066 ═══════ Liabilities Due to banks and other financial institutions Customers' deposits - Current accounts - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net Total 7,407,982 6,002,962 26,844,264 4,039,743 4,262,990 48,557,941 285,398,340 230,905,447 120,628 41,775,198 12,597,067 1,517,461 28,957 1,470,852 17,652 - 21,986,035 6,831,719 14,702,820 451,496 40,284 2,621 25,512 12,151 308,942,120 237,768,744 120,628 57,974,382 13,078,366 - - 5,194,770 5,055,540 - 493,976 14,981 1,153,774 282,709 ──────── ──────── ─────── ─────── ─────── 298,355,838 7,535,404 27,998,038 31,503,257 4,303,274 ════════ ════════ ═══════ ═══════ ═══════ 10,250,310 1,945,440 ─────── 369,695,811 ═══════ 38,869,006 5,199,952 940,494 10,997,994 9,438,159 65,445,605 5,582,642 610,321 212,439 1,395,409 2,216,383 10,017,194 - Guarantees 21,331,149 2,115,891 728,055 9,461,434 7,221,776 40,858,305 - Acceptances 2,373,958 - Commitments and contingencies (note 21.2) - Letters of credit - Irrevocable commitments to extend credit - 141,151 - 9,581,257 2,473,740 ════════ ════════ ═══════ ═══════ ═══════ 2,515,109 12,054,997 ═══════ Credit exposure (credit equivalent) (note 33.2): Commitments and contingencies Derivatives 23,783,931 2,672,979 1,440,477 5,831,733 1,677,448 1,281,157 3,901,410 224,252 6,259,856 39,988,976 - 7,084,267 ________________________________________________________________________________________________________ 72
86. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 38. GEOGRAPHICAL CONCENTRATION OF ASSETS, LIABILITIES, COMMITMENTS AND CONTINGENCIES AND CREDIT EXPOSURE (continued) (38.1) The distribution by geographical region for major categories of assets, liabilities and commitments and contingencies and credit exposure at year end is as follows (continued): (SAR '000) The Kingdom of Saudi Arabia GCC and Middle East Europe Turkey Other countries Total Cash and balances with SAMA 39,011,053 27,743 1,011,393 1,209,319 2,181,783 43,441,291 Due from banks and other financial institutions Investments, net - Held for trading - Held as FVIS - Available for sale - Held to maturity - Other investments held at amortised cost 7,299,078 43,062,701 708,352 538,677 20,044 41,795,628 2,575,289 28,380,037 2,740,857 25,639,180 1,736,425 3,246,881 189,116 1,540,781 580,143 936,841 5,924,378 3,929,553 3,097,308 832,245 - 1,677,893 32,889,799 1,629,901 12,517,879 18,742,019 19,213,063 111,508,971 708,352 1,819,017 20,435,502 1,432,432 87,113,668 216,789,045 84,610,086 124,240,998 7,937,961 3,125,778 1,755 2,844,062 279,961 - 31,127,982 2,733,779 28,394,203 - 2,549,336 1,860,124 689,212 253,592,141 84,611,841 131,678,963 28,394,203 8,907,134 1,183,541 169,989 184,666 9,757 2,666,249 4,046 431,156 325,733 ──────── ──────── ─────── ─────── ─────── 307,772,528 34,278,836 7,112,995 42,701,631 39,312,614 ════════ ════════ ═══════ ═══════ ═══════ 325,733 ─────── 431,178,604 ═══════ 2016 Assets Financing and advances, net - Consumer & Credit Card - Corporate - International - Others Positive fair value of derivatives, net Investments in associates, net Goodwill Total 427,110 - 1,118,296 - - Liabilities 13,934,510 6,996,986 15,762,207 6,638,284 Customers' deposits 290,800,553 2,470,583 69,630 315,617,891 217,421,759 24,112 25,125 - 22,252,000 - Current accounts 270 46,626 - 223,632,826 161,774 6,140,329 - - Time 61,007,322 2,438,084 - Others 12,209,698 8,117 Due to banks and other financial institutions - Savings Debt securities issued 5,062,404 - 25,125 - 15,539,602 572,069 4,855,361 2,142,087 23,004 - 45,474,074 162,044 79,010,133 12,812,888 9,917,765 Negative fair value of derivatives, net 594,511 19,094 1,611,577 409,922 86 ──────── ──────── ─────── ─────── ─────── 2,635,190 ─────── Total 310,391,978 9,486,663 17,398,909 34,155,567 2,211,803 ════════ ════════ ═══════ ═══════ ═══════ 373,644,920 ═══════ Commitments and contingencies (note 21.2) - Letters of credit - Guarantees - Acceptances - Irrevocable commitments to extend credit 39,402,591 5,134,239 22,026,719 2,305,962 3,999,184 623,612 1,901,362 - 2,808,693 1,271,526 1,321,993 - 13,146,055 8,624,488 773,204 527,965 11,962,075 8,005,905 410,776 9,935,671 1,474,210 215,174 90,618 ════════ ════════ ═══════ ═══════ ═══════ 67,981,011 8,330,546 45,218,054 2,716,738 11,715,673 ═══════ Credit exposure (credit equivalent) (note 33.2): Commitments and contingencies Derivatives 24,239,477 2,191,060 1,381,728 8,100,017 799,319 620,859 1,960,529 314,301 5,767,542 - 41,679,824 3,695,008 The credit equivalent of commitments and contingencies and derivatives is calculated according to SAMA’s prescribed methodology. ________________________________________________________________________________________________________ 73
87. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 38. GEOGRAPHICAL CONCENTRATION OF ASSETS, CONTINGENCIES AND CREDIT EXPOSURE (continued) LIABILITIES, COMMITMENTS AND (38.2) The distribution by geographical concentration of non-performing financing and advances and specific allowance are as follows: (SAR '000) 2017 Non performing financing and advances Less: specific allowance Net The Kingdom of Saudi Arabia Turkey Total 3,368,998 1,399,994 4,768,992 (2,609,636) ─────── 759,362 ═══════ (958,919) ───── 441,075 ═════ (3,568,555) ────── 1,200,437 ══════ 2,442,618 (1,929,573) ─────── 513,045 ═══════ 1,482,864 (973,679) ───── 509,185 ═════ 3,925,482 (2,903,252) ────── 1,022,230 ══════ 2016 Non performing financing and advances Less: specific allowance Net 39. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. The fair values of on-statement of financial position financial instruments, except for other investments held at amortised cost and held-to-maturity investments which are carried at amortised cost, are not significantly different from the carrying values included in the consolidated financial statements. The fair values of financing and advances, commission bearing customers’ deposits, due from/to banks and other financial institutions which are carried at amortised cost, are not significantly different from the carrying values included in the consolidated financial statements, since the current market commission rates for similar financial instruments are not significantly different from the contracted rates, and for the short duration of due from/to banks and other financial institutions. The estimated fair values of held-to-maturity investments and other investments held at amortised cost are based on quoted market prices when available or pricing models when used in the case of certain fixed rate bonds respectively, the fair values of these investments are disclosed in note 6.4. The fair values of derivatives and other off-statement of financial position financial instruments are based on the quoted market prices when available and/or by using the appropriate valuation techniques. ________________________________________________________________________________________________________ 74
88. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 40. DETERMINATION OF FAIR VALUE AND FAIR VALUE HIERARCHY Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either: - In the accessible principal market for the asset or liability, or - In the absence of a principal market, in the most advantageous accessible market for the asset or liability. Fair value information of the Group's financial instruments is analysed below. a. Fair value information for financial instruments at fair value The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: quoted prices in active markets for the same instrument. Level 2: quoted prices in active markets for similar assets and liabilities or valuation techniques for which all significant inputs are based on observable market data, and Level 3: valuation techniques for which any significant input is not based on observable market data. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: (SAR '000) 2017 Level 1 Level 2 Level 3 Total Financial assets Derivative financial instruments Financial assets held as FVIS Financial assets available for sale Held for trading Other investments held at amortized cost, net - fair value hedged (see note (6.2)) Total - 2,688,458 - 1,291,844 40,277 1,332,121 11,597,666 5,338,726 436,243 17,372,635 646,652 - - 2,688,458 - - 646,652 13,031,739 - 13,031,739 ─────── 12,244,318 ═══════ ─────── 22,350,767 ═══════ ─────── 476,520 ═══════ ─────── 35,071,605 ═══════ ─────── ═══════ 1,945,440 ─────── 1,945,440 ═══════ ─────── ═══════ 1,945,440 ─────── 1,945,440 ═══════ Level 1 Level 2 Financial liabilites Derivative financial instruments Total (SAR '000) 2016 Level 3 Total Financial assets - Derivative financial instruments - 2,666,249 Financial assets held as FVIS - 1,713,941 105,076 1,819,017 12,513,409 7,507,573 414,520 - 20,435,502 ─────── 519,596 ═══════ 4,239,300 ─────── 29,868,420 ═══════ Financial investments available for sale Held for trading Other investments held at amortized cost, net - fair value hedged (see note (6.2)) Total 708,352 ─────── 13,221,761 ═══════ 4,239,300 ─────── 16,127,063 ═══════ 2,666,249 708,352 Financial liabilites 2,635,190 2,635,190 ─────── ─────── ─────── ─────── 2,635,190 2,635,190 Total ═══════ ═══════ ═══════ ═══════ ________________________________________________________________________________________________________ 75 Derivative financial instruments
89. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 40. DETERMINATION OF FAIR VALUE AND FAIR VALUE HIERARCHY (continued) b. Fair value information for financial instruments not measured at fair value The fair value of financing and advances, net amounts to SAR 249,850 million (2016: SAR 249,953 million).The fair value of the held to maturity and other investments held at amortized cost is disclosed in note 6.4. The fair values of due from banks and other financial institutions, due to banks and other financial institutions, customers deposits and debt securities issued at 31 December 2017, 31 December 2016 approximate their carrying values. c. Valuation technique and significant unobservable inputs for financial instruments at fair value The Group uses various valuation techniques for determination of fair values for financial instruments classified under levels 2 and 3 of the fair value hierarchy. These techniques and the significant unobservable inputs used therein are analysed below. The Group utilises fund manager reports (and appropriate discounts or haircuts where required) for the determination of fair values of private equity funds and hedge funds. The fund manager deploys various techniques (such as discounted cashflow models and multiples method) for the valuation of underlying financial instruments classified under level 2 and 3 of the respective fund's fair value hierarchy. Significant unobservable inputs embedded in the models used by the fund manager include risk adjusted discount rates, marketability and liquidity discounts and control premiums. For the valuation of unquoted debt securities and derivative financial instruments, the Group obtains fair value estimates from reputable third party valuers, who use techniques such as discounted cash flows, option pricing models and other sophisticated models. d. Transfer between Level 1 and Level 2 There were no transfers between level 1 and level 2 during 31 December 2017 (2016: Nil). e. Reconciliation of Level 3 fair values The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values. Movement of level 3 is as follows: Balance at beginning of the year Total gains/(losses) (realised and unrealised) in consolidated statement of income Total (losses)/gains in consolidated statement of comprehensive income Purchases (Sales) Transfer to/(from) level 3 Balance at end of the year 2017 SAR '000 519,596 2016 SAR '000 962,900 (143,833) - 220,610 (119,853) ─────── 476,520 ─────── (58,831) 242,834 (448,918) (178,389) ─────── 519,596 ─────── Transfer out of level 3 During the year ended 31 December 2017, an amount of SAR Nil (31 December 2016: SAR 178 million) was transferred to level 1 pursuant to the initial public offering of a private equity investment held by Eastgate MENA Direct Equity L.P. (note 1.2). f. Sensitivity analysis for significant unobservable inputs in valuation of financial instruments at fair value No significant unobservable inputs were applied in the valuation of hedge funds and private equities for the year ended 31 December 2017 and hence sensitivity analysis is not applicable for the year. _________________________________________________________________________________________________________ 76
90. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 41. RELATED PARTY TRANSACTIONS In the ordinary course of its activities, the Group transacts business with related parties. In the opinion of the management and the Board, the related party transactions are performed on an arm’s length basis. The related party transactions are governed by the limits set by the Banking Control Law and the regulations issued by SAMA. Related party balances include the balances resulting from transactions with Governmental shareholders. All other Government transactions are entered/conducted also at market rates. Major shareholders represent shareholdings of more than 5% of the Bank’s issued share capital. Related parties are the persons or close members of those persons' families and their affiliate entities where they have control, joint control or significant influence over these entities. (41.1) The balances as at 31 December included in the consolidated financial statements are as follows: 2017 SAR '000 2016 SAR '000 Financing and advances 133,751 367,969 Customers' deposits 117,801 227,086 33,557 100,895 Bank's Board of Directors and Senior Executives: Commitments and contingencies Investments (Assets under Management) 7,504 4,668 Other liabilities - end of service benefits 36,789 32,082 2,753,873 2,686,374 Customers' deposits 795,338 765,180 Commitment and contingencies 288,894 274,370 Customers' deposits 6,922,855 12,530,609 Investments (Assets under Management) 2,726,782 2,458,136 654,988 708,201 82,093 44,998 1,687,500 1,737,500 11,968 2,408 363,750 363,750 Balances of companies and institutions owned by 5% or more by related parties: Financing and advances Major shareholders: Group's investment funds: Investments Customers' deposits Subsidiaries: Financing and advances Customers' deposits Investments _________________________________________________________________________________________________________ 77
91. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 41. RELATED PARTY TRANSACTIONS (continued) (41.2) Income and expenses pertaining to transactions with related parties included in the financial statements are as follows: Special commission income Special commission expense Fees and commission income and expense, net 2017 SAR '000 2016 SAR '000 62,228 212,594 261,457 55,956 367,163 210,674 (41.3) The total amount of compensation paid to the Group's Board of Directors and key management personnel during the year is as follows: Directors' remuneration Short-term employee benefits End of service benefits 2017 SAR '000 2016 SAR '000 7,582 106,065 2,392 11,815 118,533 3,955 The Bank's Board of Directors includes the Board and Board related committees (Executive Committee, Risk Management Committee, Compensation and Nomination Committee and Audit Committee). For Group's senior executives compensation (note 42). 42. GROUP'S STAFF COMPENSATION The following table summarizes the Group’s employee categories defined in accordance with SAMA’s rules on compensation practices and includes the total amounts of fixed and variable compensation paid to employees during the years ended 31 December 2017 and 2016, and the forms of such payments: Categories of employees Senior Executives Employees engaged in risk taking activities Employees engaged in control functions Other employees Other employee related benefits Subsidiaries Group total 2017 Fixed Variable compensation compensation (on cash Number of (on accrual employees basis) basis) SAR '000 SAR '000 2016 Fixed Variable compensation compensation (on accrual (on cash Number of employees basis) basis) SAR '000 SAR '000 23 39,178 70,360 23 38,156 95,621 333 127,457 49,444 315 124,505 46,273 462 7,173 160,291 1,298,807 52,266 271,859 411 7,286 148,656 1,316,928 51,739 231,626 5,445 ─────── 13,436 ═══════ 399,825 457,182 ─────── 2,482,740 ═══════ 127,452 ─────── 571,381 ═══════ 4,275 ─────── 12,310 ═══════ 412,842 463,286 ─────── 2,504,374 ═══════ 97,294 ─────── 522,554 ═══════ All forms of payment for fixed and variable compensation are in cash. The Bank's Senior Executives are those persons, including an executive director, having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. Employees engaged in risk taking activities comprise those officers of the business sectors of Consumer Banking, Corporate and Treasury, who are the key drivers in undertaking business transactions, and managing related business risks. Employees engaged in control functions include employees in Risk Management, Internal Audit, Compliance, Finance and Legal divisions. The Group's variable compensation recognized as staff expenses in the consolidated statement of income for 2017 is SAR 595 million (2016: SAR 579 million). ___________________________________________________________________________________________________________ 78
92. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 43. CAPITAL ADEQUACY (43.1) Capital adequacy ratio The Group's objectives when managing capital are to comply with the capital requirements set by SAMA to safeguard the Group's ability to continue as a going concern and to maintain a strong capital base. The Group monitors the adequacy of its capital using the ratios and weights established by SAMA. These ratios measure capital adequacy by comparing the Group’s eligible capital with its consolidated statement of financial position assets, commitments and contingencies and notional amount of derivatives at a weighted amount to reflect their relative credit risk, market risk and operational risk. SAMA requires banks to hold the minimum level of the regulatory capital and maintain a ratio of total eligible capital to the risk-weighted asset at or above the agreed minimum of 8%. Regulatory Capital is computed for Credit, Market and Operational risks which comprise the Pillar 1 minimum capital requirements. SAMA has issued the framework and guidance regarding implementation of the capital reforms under Basel III - which are effective from 1 January 2013. Accordingly, the Group’s consolidated Risk Weighted Assets (RWA), total eligible capital and related ratios on a consolidated group basis are calculated under the Basel III framework. The following table summarizes the Bank's Pillar-1 Risk Weighted Assets, Tier 1 and Tier 2 capital and capital adequacy ratios. Risk weighted assets Credit risk Operational risk Market risk 2017 SAR 000 2016 SAR 000 317,684,135 311,695,219 33,970,252 32,802,763 9,452,340 8,048,978 ──────── ──────── Total Pillar-1 - risk weighted assets 361,106,727 352,546,960 ════════ ════════ Core capital (Tier 1) Supplementary capital (Tier 2) 63,825,327 59,670,175 8,232,300 8,025,155 ──────── ──────── Core and supplementary capital (Tier 1 and Tier 2) 67,695,330 ════════ ════════ 72,057,627 Capital Adequacy Ratio (Pillar 1):Core capital (Tier 1) 17.7% 16.9% Core and supplementary capital (Tier 1 and Tier 2) 20.0% 19.2% Tier 1 capital of the Group comprises share capital, statutory reserve, other reserves, proposed dividend, retained earnings, tier 1 eligible debt securities and non-controlling interests less treasury shares, goodwill, intangible assets, foreign currency translation reserve and other prescribed deductions. Tier 2 capital comprises of eligible debt securities issued and prescribed amounts of eligible portfolio (collective) provisions less prescribed deductions. The Group uses the Standardized approach of Basel III to calculate the risk weighted assets and required Regulatory Capital for Pillar -1 (including credit risk, market risk and operational risk). The Group's Risk Management is responsible for ensuring that minimum required Regulatory Capital calculated is compliant with Basel III requirements. Quarterly prudential returns are submitted to SAMA showing the Capital Adequacy Ratio. ___________________________________________________________________________________________________________ 79
93. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 44. GROUP’S INTEREST IN OTHER ENTITES (44.1) Material partly-owned subsidiaries a) Significant restrictions The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which TFKB operate. The supervisory frameworks require TFKB to keep certain levels of regulatory capital and liquid assets, limits its exposure to other parts of the Group and comply with other ratios. The carrying amounts of TFKB's assets and liabilities are SR 38,359 million and SR 34,320 million respectively (2016: SR 41,014 million and SR 37,118 million respectively). b) Non-controlling interests in subsidiaries The following table summarises the information relating to the Group's subsidiary (TFKB) that has material non-controlling interests (NCI). 2017 SAR '000 2016 SAR '000 26,116,005 11,863,117 34,319,468 3,659,654 28,394,203 12,136,879 36,998,013 3,533,069 1,206,588 1,164,853 1,591,613 469,026 214,959 2,222,377 284,944 (586,288) 70,872 (193,299) 69,347 (415,601) ─ 253,621 ─────── (92,633) ═══════ 1,805,529 (989,863) 53,104 ─────── 868,770 ═══════ Summarised statement of financial position Financing and advances, net Other assets Liabilities Net assets Carrying amount of NCI Summarised statement of income Total operating income Net income Total comprehensive income (loss) Total comprehensive income (loss) allocated to NCI Summarised cash flow statement Net cash from operating activities Net cash (used in) investing activities Net cash from financing activities Net (decrease) increase in cash and cash equivalents __________________________________________________________________________________________________________ 80
94. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 44. GROUP’S INTEREST IN OTHER ENTITES (continued) (44.2) Involvement with unconsolidated structured entities The table below describes the types of structured entities that the Group does not consolidate but in which it holds an interest. Type of structured entity Nature and purpose Interest held by the Group Mutual funds To generate fees from managing assets on behalf of third party investors. These funds are financed through the issue of units to investors. • Investments in units issued by the funds. Hedge funds To generate returns from trading in the units/shares of the fund and/or via distributions made by the fund. These funds are financed through the issue of units/shares to investors. • Investments in units issued by the funds. Private equity funds To generate returns from long-term capital appreciation in the net worth of the fund, reaslised via periodic distributions and eventual exit at the end of the life of the fund. These funds are financed through the issue of units/ shares to investors. • Investments in units/ shares issued by the funds. • Management fees. The table below sets out an analysis of the carrying amounts of interests held by the Group in unconsolidated structured entities. The maximum exposure to loss is the carrying amount of the assets held. Mutual funds 2017 SAR '000 646,652 2016 SAR '000 708,352 Hedge funds 1,332,121 1,819,017 486,838 ─────── 2,465,611 ═══════ 482,177 ─────── 3,009,546 ═══════ Private equity funds Total The Group considers itself a sponsor of a structured entity when it facilitates the establishment of the structured entity. At 31 December 2017, the Group holds an interest in all structured entities it has sponsored. These are mainly represented by mutual funds established and managed by NCBC and private equity funds established and managed by NCB Capital Dubai Inc. __________________________________________________________________________________________________________ 81
95. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 45. INVESTMENT SERVICES The Bank offers investment management services to its customers through its subsidiary NCB Capital Company. Assets under management outstanding at 31 December 2017 amounted to SAR 119,546 million (2016: SAR 113,003 million) (note 3.23). 46. COMPARATIVE FIGURES Certain prior year figures have been reclassified to conform to current year presentation, which are not material in nature. 47. PROSPECTIVE CHANGES IN ACCOUNTING POLICIES The Group has chosen not to early adopt the following new standards which have been issued but not yet effective for the Group’s accounting years beginning on or after 1 January 2018 and is currently assessing their impact. Implementation and Impact Analysis of IFRS-9 Implementation strategy In July 2014, the IASB issued IFRS-9 “Financial Instruments”, the standard that will replace IAS 39 effective from 1 January 2018, with early adoption permitted. The Group considers it as a significant project and therefore has set up a multidisciplinary implementation team with members from its Credit risk and Modeling, Finance, IT, Operations, and respective businesses to achieve a successful and robust implementation. The IFRS 9 project (the “Project” or “Program”) is managed by the Chief Financial Officer and Chief Risk Officer. Classification and measurement Financial assets The classification and measurement of financial assets will depend on how these are managed (the Group’s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income (‘FVOCI’) or fair value through profit or loss (‘FVTPL’). For equity instruments that are not held for trading, the Group may irrevocably elect to designate them as FVOCI, with no subsequent reclassification of gains or losses to the income statement. This election is made on an investment-by-investment basis. Financial liabilities Under IFRS 9, the accounting for financial liabilities will largely remain similar to IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVTPL. Hence the Group does not expect any material change to the classification of its financial liabilities upon transition. The de-recognition rules have been retained from IAS 39 and have not been changed. Impairment The Group will recognize impairment allowances based on Expected Credit Loss (ECL) on financial assets that are not measured via FVTPL. This mainly include, financing and advances, investments that are measured at amortised cost or at FVOCI (other than equity investments), interbank placements, margin deposits, other receivables, financial guarantees and credit commitments. No impairment loss will be recognised on equity investments. The key inputs into the measurement of ECL are the term structure of the following variables: • Probability of default (PD) • Loss given default (LGD) • Exposure at default (EAD) __________________________________________________________________________________________________________ 82
96. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 47. PROSPECTIVE CHANGES IN ACCOUNTING POLICIES (continued) The Group plans to categorizes its financial assets into following three stages in accordance with the IFRS-9 methodology: • Stage 1 – Performing assets: Financial assets that are not significantly deteriorated in credit quality since origination. The impairment allowance will be recorded based on 12 months Probability of Default (PD). • Stage 2 – Underperforming assets: Financial assets that has significantly deteriorated in credit quality since origination. This credit quality assessment is made by comparing the remaining lifetime PD as at reporting date with the remaining lifetime PD point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations). The impairment allowance will be recorded based on lifetime ECL. The impairment allowance will be recorded based on life time PD. • Stage 3 – Impaired assets: For Financial assets that are impaired, the Group will recognize the impairment allowance based on life time PD. The Group will also consider the forward-looking information in its assessment of significant deterioration in credit risk since origination as well as the measurement of ECLs. The forward-looking information will include the elements such as macroeconomic factors (e.g., unemployment, GDP growth, inflation, profit rates and house prices) and economic forecasts obtained through internal and external sources. To evaluate a range of possible outcomes, the Group intends to formulate various scenarios. For each scenario, the Group will derive an ECL and apply a probability weighted approach to determine the impairment allowance in accordance with the accounting standards requirements. Hedge accounting The general hedge accounting requirements aim to simplify hedge accounting, strengthen links with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. However, they do not explicitly address macro hedge accounting strategies, which are particularly important for banks. As a result, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting. Based on the analysis performed to date, the Group expects to exercise the accounting policy choice to continue IAS 39 hedge accounting and therefore is not currently planning to change hedge accounting. Expected impact According to transitional provisions for initial application of IFRS 9, the Group is allowed to recognise any differences between previous carrying amount under IAS 39 and the carrying amount at the beginning of the annual reporting period that includes the date of initial application in opening total equity. Based on the Group’s assessment to date, following impacts are anticipated as a result of transition to IFRS 9: Classification Based on management’s assessment of business models and nature of financial instruments carried at the reporting date, it expects the impact on classification to be as follows: • The majority of financial assets that are classified as loans and receivables and are measured at amortised cost under IAS 39 are expected to be measured at amortised cost under IFRS 9 as well. • The majority of the Group’s debt instruments that are currently classified as available for sale (AFS) will satisfy the conditions for classification as FVOCI and hence there will be no change in the accounting for these assets except for new impairment requirements. • The majority of Equity and Funds’ investments currently measured at FVOCI will be classified as FVTPL under IFRS 9. • The majority of the Group’s debt instruments that are currently classified as IAC will be classified as HTC under IFRS 9 and continue to be carried at amortized cost. The remainder shall be classified as HTCS (carried at FVOCI) under IFRS 9 and accordingly fair valued at the transition date. __________________________________________________________________________________________________________ 83
97. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 47. PROSPECTIVE CHANGES IN ACCOUNTING POLICIES (continued) Expected impact (continued) Impairment As a result of Group’s transition to the expected loss methodology for computation of credit losses, it anticipates an increase in allowance for such credit losses in respect of financial assets carried as at 1 January 2018. Furthermore and as a result, the Bank’s Tier 1 ratio may be impacted primarily from potential increase in credit impairment provisions, net of tax. Disclosure The new standard also introduces extended disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. Net financial impact Based on the foregoing, the Group expects a net reduction of 1% to 1.4% in its total equity as at the transition date, represented primarily by increase in allowance for credit losses at the transition date and recognition of unrealised marked to market gains/losses for financial assets, previously carried at amortised cost, and expected to be classified as HTCS under IFRS 9. Governance and controls The Group’s Program included the establishment of a Governance framework (the “Framework”) and related controls, consistent with the IFRS-9 Guidance Documents issued for banks in the Kingdom of Saudi Arabia. The Program is supported by a Steering Committee that includes representation from Finance, Risk and IT, as well as the involvement of subject matter experts in the areas of methodology reviews, data sourcing, risk modelling, and formulating judgements with respect to the aspects of significant increase in credit risk determination, macroeconomic assumptions and forward looking factors. The Framework and related controls are currently in the process of approvals by the board of directors. Caveat The estimated decrease in shareholders’ equity includes the impact of both balance sheet classification and measurement changes and the increase to credit impairment provisions compared to those applied at 31 December 2017 under IAS 39. The assessment above is a point in time estimate and is not a forecast. The actual effect of the implementation of IFRS 9 on the Bank could vary significantly from this estimate. The Group continues to refine models, methodologies and controls, and monitor developments in regulatory rule-making in advance of IFRS 9 adoption on 1 January 2018. __________________________________________________________________________________________________________ 84
98. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 47. PROSPECTIVE CHANGES IN ACCOUNTING POLICIES (continued) The following is a brief on the other new IFRS and amendments to IFRS, effective for annual periods beginning on or after 1 January 2018: Effective for annual periods Standard, amendment or interpretation Summary of requirements (2015-2017 annual improvements cycle) IFRS 3, IAS 12 and IAS 23 The standards affected under the 2015-2017 annual improvements cycle, and the subjects of the amendments are: - IFRS 3 business combinations and IFRS 11 Joint arrangements - previously held interest in a joint operation. - IAS 12 Income Taxes - income tax consequences of payments on financial instruments classified as equity. - IAS 23 Borrowing Costs - borrowing costs eligble for capitalisation. 1 January 2019 IFRS 16 IFRS 16 Leases eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating leases. The Group is in the process of evaluating how the new lease accounting model will impact its leasing arrangements. 1 January 2018 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions. IFRS 15 IFRS 15 Revenue from contracts with customers provides a framework that replaces the existing revenue recognition model under IAS 18. Entities applying IFRS 15 would need to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. The Group is in the process of evaluating how the new revenue recognition model will impact its revenue generating arrangements. Amendments to IAS 40 The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. IFRIC 22 The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration. Amendments to IAS 28 IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment - by investment choice. Amendments to IAS 28  The amendments clarify that the Group applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. 1 January 2019 1 January 2018 1 January 2018 1 January 2018 1 January 2018 1 January 2019 __________________________________________________________________________________________________________ 85
99. The National Commercial Bank (A Saudi Joint Stock Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2017 47. PROSPECTIVE CHANGES IN ACCOUNTING POLICIES (continued) 1 January 2019 Amendments to IFRS 9  Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. 48. BOARD OF DIRECTORS' APPROVAL The consolidated financial statements were approved by the Board of Directors on 4 February 2018 (corresponding to 18 Jumada Alawwal 1439H). __________________________________________________________________________________________________________ 86