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Ahli United Bank Kuwait: Annual Report - 2017

IM Insights
By IM Insights
5 years ago
Ahli United Bank Kuwait: Annual Report - 2017

Dinar, Fatwa, Fiqh, Ijara, Islamic banking, Mudaraba, Qard hassan, Sukuk, Takaful, Zakat, Credit Risk, Investment Risk Reserve, Net Assets, Participation, Profit Equalization Reserve, Profit Sharing Deposits, Provision, Receivables, Reserves, Sales, Specific Provision


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  1. ANNUAL REPORT 2017 Bahrain - Kuwait - UAE - Oman - Egypt - Iraq - Libya - United Kingdom
  2. Head Office Mubarak Al Kabir St . - Darwazat Abdul Razak - Commercial Area No. 9 - Joint Banking Complex - East Tower
  3. In The Name Of Allah The Most Gracious The Most Merciful 3
  4. His Highness His Highness Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah Crown Prince of The State of Kuwait Amir of The State of Kuwait 5
  5. CONTENTS Contents Page The Chairman 's Statement 8 CEO's Statement 10 The Board of Directors 12 Fatwa & Shari'ah Supervisory Board Report 16 Fatwa & Shari'ah Supervisory Board Members 17 Executive Management 18 Financial Performance 20 Management Report & Performance Analysis 22 Executive Summary 25 Corporate Governance 31 Independent Auditor's Report 54 Consolidated Financial Statements 59 Notes to the Consolidated Financial Statements 65 Basel III Pillar III - Disclosures 107
  6. THE CHAIRMAN 'S STATEMENT Dr. Anwar Al Mudhaf Chairman of Ahli United Bank K.S.C.P. Esteemed Shareholders, May peace, mercy, and blessings of Allah be upon you, On behalf of the members of the Board of Directors and myself, I am honored to present to you the 52nd Ahli United Bank K.S.C.P. Annual Report which highlights the Bank's main achievements and financial statements for the year ending on 31 December 2017. During this past year, we have recorded sound results which have helped reinforce the Bank's financial status, strengthen its performance, and maintain its position as a leading Islamic bank, both locally and regionally. With Allah's guidance and blessing we have witnessed a 10.4% growth in our net profits which reached KD 44.5 million (2016: KD 40.3 million) thanks to the strengthening of our core earnings achieving a net finance income growth of 18% during 2017. Furthermore, the Bank achieved growth in total operating income of 8.1% to reach KD 120.1 million as at the end of 2017 (2016: KD 111.1 million). In parallel, the equity attributable to shareholders has increased by 5.7% reaching KD 406.9 million as of 31 December 2017 up from KD 385 million at the end of 2016. Similarly, net operating income increased by 5.8%, reaching KD 81.7 million by end of 2017 (2016: KD 77.2 million). Ahli United Bank maintained a sound capital adequacy ratio of 18% on 31 December 2017 (18.2% on 31 December 2016), before dividend distributions, a ratio that is comfortably higher than the required regulatory level. This provides room for future expansion in both customers' credit facilities and the Bank's core businesses. Furthermore, the Bank achieved a return on average equity and a return on average assets of 11.4% and 1.2% respectively as at the end of 2017, being amongst the highest key performance indicators in the local market. This has led earnings per share to increase from 24 fils in 2016 to 24.4 fils per share as at the end of 2017. Despite the continued challenging global operating environment, Ahli United Bank continues to pursue its role as a leading financial institution that is striving to play an active role in the economic growth within "Kuwait's New Vision 2035." In doing so, the Bank recognizes and benefits from the strengths of Kuwait's operating environment which include political stability, large sovereign assets, and the greater stability in oil prices. Such positive factors ultimately reinforce the status of Kuwaiti banks in general. Based on this successful performance, the Board of Directors recommends to the General Assembly meeting a cash distribution of 13% (13 fils per share) of the share capital and 5% bonus shares (5 shares for each 100 shares) which were approved by the Central Bank of Kuwait on 7 February 2018. 2017: THE YEAR OF THE AWARDS Since its establishment in 1942, Ahli United Bank's development journey has accompanied and reflected the growth that Kuwait has experienced. The progress and development witnessed in the country over many years is reflected in the Bank's own path and throughout the many changes it has undergone. However, the Bank's values have remained steadfast and at the core of all that we do. Ahli United Bank has been recognized and honored by renowned and well-respected entities in the international financial and banking sectors, by receiving many prestigious awards to be added to a long list of allocades earned in the past. Accordingly, the Bank received the "Best Islamic Bank Award" in Kuwait for 2017 from "Islamic Business and Finance" magazine. The Bank also won the "Best Digital Bank of 2017" award in the Middle East (within the corporate banking sector) from "Global Finance" magazine which was proof of Ahli United Bank's innovative digital capabilities and ability to provide the best banking solutions for its customers. Furthermore, the Bank won the "Sukuk Deal of 2017" award in Kuwait from "International Finance" magazine for its debut issuance of the Additional Tier 1 Capital Sukuk of USD 200 million in 2016, which was oversubscribed by three times as a result of strong demand from investors in the Middle East, Asia and Europe. The Bank also received many other awards during the year that further highlighted its quality performance, particularly in Private Banking & Wealth Management and for excellence in Contact Center services. As a recipient of many prestigious awards earned across different banking disciplines in 2017, we are positive and optimistic about the future, as we move towards further growth and development. Whilst recognizing our strong legacy over the past 76 years, we can look to the future with confidence as we strive to consolidate our reputation and deepen the trust of our customers through continued improved products and services. 8
  7. THE CHAIRMAN 'S STATEMENT (CONTINUED) STRONG CREDIT RATINGS Ahli United Bank has continued to receive high credit ratings from major international credit rating agencies. The Bank maintained a credit rating of "A+" and "F1" on the long term and on the short term respectively, with a stable outlook by Fitch Ratings, in addition to receiving an "A2" with a stable outlook on its local currency rating by Moody's. Capital Intelligence reaffirmed the Bank's long term credit rating of foreign currency at "A+" and enhanced the short term foreign currency rating to "A2". These ratings reaffirm the credit standing, capital quality and stability of the Bank. SOUND AND EFFECTIVE GOVERNANCE In 2017, Ahli United Bank was able to perform based on a sound and effective governance system that applies and commits to the best governance standards which define its operations according to the Islamic Shari'ah. Throughout 2017 the Bank implemented the Central Bank of Kuwait's revised requirements for Shari'ah Supervisory Governance in Kuwaiti Islamic Banks to further develop Kuwait's Islamic Banking sector. The Bank is fully committed to these requirements and will benefit from them as we continue to improve our future performance. HUMAN CAPITAL: ONE OF OUR MOST VALUABLE ASSETS There is no doubt that our human capital counts as one of the Bank's most valuable assets. Accordingly, we constantly strive to enhance our human resources, invest in upskilling, training, and improving the knowledge of our staff, providing them with a work environment that promotes innovation and provides for their development opportunities. It should be emphasized that Ahli United Bank is perceived as one of the top employers in Kuwait, offering an attractive and stable work environment for employees. In fact, a number of staff members have been working for the Bank for more than 30 years, many of whom started their careers at the Bank. The Bank is equally committed to the recruitment of promising national talent, and providing and environment of development and learning as they further their careers. SOCIAL RESPONSIBILITY & SUSTAINABLE DEVELOPMENT The Bank enjoys a proven record of socially responsible initiatives over many years. In 2017, Ahli United Bank remained committed to its role towards the community by sponsoring many social, educational, humanitarian, charitable, and sporting events. This was in line with the Bank's corporate social responsibility program that was based mainly on volunteer work encouraging staff to engage in the community. The Bank firmly believes in instilling the spirit of initiative and collaboration between employees and increasing their engagement in support of different social causes. THANKS & RECOGNITIONS Finally, and on behalf of all the members of the Board of Directors, the Bank's Executive Management, all employees of the Bank and myself, I wish to express my sincere gratitude to His Highness the Amir of the State of Kuwait, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (may Allah Almighty keep him safe and sound), to His Highness the Crown Prince Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, and to His Highness the Prime Minister Sheikh Jaber Al-Mubarak Al-Sabah (may Allah keep them both safe and sound), for their continuous support to Kuwait's banking sector. I would also like to extend my thanks and appreciation to the Central Bank of Kuwait, headed by the Governor Dr. Mohamad Youssef Al Hashel, as well as the Capital Markets Authority and all other supervisory bodies in Kuwait, for their positive role in supporting Ahli United Bank. Last but not least, I would like to express my appreciation to the Bank's Shareholders and valued customers who help us maintain our strong position in this market. Also, I wish to address my sincere thanks to the members of our Shari'ah Supervisory Board, our Board members, Executive Management, and all our employees for their unwavering commitment and support. I have faith - Allah willing - that the coming years will bring us more achievements and successes which will further enhance the unique standing of this prestigious banking institution. Dr. Anwar Ali Al Mudhaf Chairman 9
  8. CEO 'S STATEMENT Richard W L Groves Chief Executive Officer Throughout 2017, Ahli United Bank carried out its ambitious plans to achieve its vision and maintain its premier positioning as one of the leading Islamic banks in Kuwait, and in the region. Notwithstanding the continued economic challenges and geo-political uncertainties, the Bank continued to make good progress with a strong set of financial results for the year. Ahli United Bank reported a net operating income of KD 81.7 million for 2017, as compared with KD 77.2 million in 2016. The net profit attributable to shareholders was KD 44.5 million as compared with KD 40.3 million in 2016, an increase of 10.4%. This increase in net profit underlined the strength of the Bank's main business divisions of Corporate Banking, Retail Banking, Private Banking & Wealth Management, and Treasury, combined with an effective risk and control framework, as well as a sound cost discipline. The return on average equity (ROAE) of 11.4% and return on average assets (ROAA) of 1.2% continue to be amongst the best returns of banks in the Kuwaiti market. The successful implementation of the Bank's strategic 5-year plan (2015-19) lies at the heart of our business direction bringing innovative Islamic financial solutions to the market in addition to focusing on customer satisfaction by putting our customers first. In recognition of this direction, the international credit rating agencies, Fitch, Moody's and Capital Intelligence, have all continued to favorably report on the Bank's credit ratings in terms of credit standing, capital quality and stable outlook for growth in the future. The Bank has again maintained a long term A+ rating with a stable outlook from Fitch, an A2 assessment of the local currency rating with a stable outlook from Moody's, and a long-term deposit rating on foreign currency with an A+ rating, and a short-term foreign currency valuation of A2 by Capital Intelligence, also with a stable outlook. During the year, Ahli United Bank received many prestigious awards including "Best Islamic Bank in Kuwait - 2017" from the Islamic Business & Finance magazine, and "Best Digital Bank Award 2017" in the Middle East, specifically related to the corporate banking sector, from Global Finance magazine. In addition, our Private Banking & Wealth Management Division and Customer Service Centre also won awards, as did our 2016 debut issuance of an Additional Tier 1 Sukuk, listed on NASDAQ Dubai and the Irish Stock Exchange, which was declared "Sukuk Deal of the Year 2017" by International Finance magazine. Ahli United Bank continued the focus on Retail Banking by optimizing the branch network and providing attractive products for customers supported by a high level of service. With a development of new products and services, coupled with an improved level of communication, Retail Banking evidenced the strategic aim of putting customers first. With an enhancement of the mobile banking application during 2017, customer usage grew by more than 100% during the year. This is a precursor to an accelerated development of the Bank's digital banking footprint in the coming year, coupled with a widespread use of social media platforms which are readily used by customers and followers alike since the official launch in 2017. These platforms provide an additional communication channel with customers and constitute an important step towards building a stronger brand image for Ahli United Bank in the market. Amongst the notable product initiatives during the year, Ahli United Bank launched a new long-term deposit account, Wikalat Al Khair, being one of the best Shari'ah-compliant investment proposals enabling customers to benefit from high and competitive profits amongst other features. The launch was supported by a promotional campaign, "Your Investment in Gold." The Bank also launched a "Beizat" prepaid credit card in conjunction with Master Card which is proving to be popular with a positive take-up. Furthermore, an insurance feature was added to a number of Retail Banking products, including free Takaful life insurance and free Takaful insurance against accidents to all customers choosing to directly transfer their salaries to the Islamic Hassad Account. This product enhancement was designed in collaboration with Al Hilal Takaful. Customer satisfaction remains a top priority for Ahli United Bank. The Service Quality Unit, as part of Customer Complaints and Protection Department, focused on enhancing customers' service through evaluating performance. This was against the standards and strategic plans adopted to improve the quality of service, increase productivity and enhance overall performance levels. As in the previous two years, the ISO 9001:2008 German Quality Certificate "TUV Nord" was revalidated which confirms the focus on quality banking services. 10
  9. CEO 'S STATEMENT (CONTINUED) Corporate Banking continued its active and historic role in the Kuwait market, concluding many new financing solutions for customers, whilst maintaining a high-quality credit portfolio coupled with diversification in the target economic sectors. The award winning Private Banking & Wealth Management Division, continued to provide excellence in service to customers, coupled with the introduction of a diverse range of investment opportunities both in Kuwait and in international markets. Real estate projects in the United Kingdom continued to attract interest amongst private banking customers, as were the periodic seminars on tax changes, which allowed investors to make informed decisions on their wealth management. Ahli United Bank is committed to complying with the best governance standards, being essential to all our activities in accordance with Islamic Shari'ah. Throughout 2017, the new Central Bank of Kuwait instructions related to "Shari'ah Supervisory Governance in Kuwaiti Islamic Banks" were implemented, taking effect on 1 January 2018. These instructions underscore the highest standards of integrity and transparency which we undertake in all our dealings as well as complying with all applicable regulatory standards. Internally achieving optimal employee satisfaction remained one of Ahli United Bank's top priorities throughout 2017. This was demonstrated by our commitment to be an employer of choice as we invest in our human capital. As such, the Bank adopted a thorough training program that complied with the latest banking sector requirements and benefited more than 850 members of staff. Undoubtedly, and in line with the Bank's overall strategy, attracting and retaining Kuwaiti staff, including new graduates, was one of our key objectives during the year, and this will continue in 2018 and beyond. Building on a fine legacy in Kuwait, Ahli United Bank continued to demonstrate its commitment to society through an active Corporate Social Responsibility program. There has been specific emphasis on youth, the environment, and those who are disadvantaged and in need of our support. We have seen an increased engagement by staff in the Bank's initiatives and sponsorships of beneficial activities which seek to improve the well-being in society. A separate Corporate Social Responsibility Report for 2017 has been published summarizing the activities throughout the year. Ahli United Bank is determined to build on the successful achievements realized in 2017 and to continue with a similar path in future to ensure our position as a leading Islamic bank. We have only achieved this position with the trust of our many customers and stakeholders, and the dedication and support of our staff. I wish to express my gratitude to the Board of Directors for their continued support and valuable guidance throughout the year, and similarly to our Shari'ah Supervisory Board. I also wish to express appreciation to the Governor of the Central Bank of Kuwait and his staff for the highly valued support and guidance provided to the Bank and its management. Appreciation is also extended to the Board of Commissioners of the Capital Markets Authority and staff for their continued support and advice. Finally, I must offer my deepest thanks and appreciation to our many customers and for the trust they place in us with their continued business, and to all my colleagues in Ahli United Bank whose commitment and hard work have been essential to the Bank in achieving the sound financial results in 2017 and which will continue to be key to our future success. Richard W L Groves Chief Executive Officer 11
  10. THE BOARD OF DIRECTORS Dr . Anwar Ali Al Mudhaf Chairman of the Board, Chairman of Corporate Governance Committee (Non-Executive Director) Dr. Al Mudhaf joined the Bank's Board in March 2014. Qualifications & Experience: Dr. Al Mudhaf holds a Ph.D. in Finance from Peter F. Drucker Graduate School of Management, Claremont Graduate University, California, U.S.A. He has more than 20 years of experience in banking and finance. Current Positions: Chairman & CEO of Al-Razzi Holding Company; Chairman of Banco ABC Brasil S.A.; Chairman of Sama Educational Company; Director of the Board of Governors of the Oxford Institute for Energy Studies; Director of the Board for Arab Banking Corporation-Bahrain; Member of the Board of Directors of the Public Authority for Applied Education. Former Positions: Dr. Al Mudhaf has formerly served as a Lecturer in Corporate Finance, Investment Management and Financial Institutions at Kuwait University; Chairman of the International Bank of Asia in Hong Kong; Board Director of the Public Institution for Social Security (PIFSS); Advisor to the Finance and Economic Affairs Committee at Kuwait's Parliament; Member of the Economic Task Force dealing with the implications of the 2008 Global Financial Crisis on Kuwait; Vice Chairman in Al Mal Investment Company; and a Director of Al Ahli Bank in Kuwait. Sheikh Abdullah Jaber Al-Ahmad Al-Sabah Vice Chairman, Chairman of Compensation & Nominating Committee, Chairman of the Executive Committee (Non-Executive Director) Sheikh Abdullah Jaber Al-Ahmad Al-Sabah joined the Bank's Board in March 2009. Qualifications & Experience: Sheikh Abdullah holds a Bachelor of Arts degree from Brown University, USA and Master's Degree in Business Administration from University of Colombia, NY. He has experience in the banking industry and investment sector. Current Positions: Deputy Director General for Investment-the Public Institution for Social Security (Kuwait); Vice Chairman of Bank of London & Middle East UK Former Positions: Chairman - Kuwait Financing Services Co., Board Member - Ahli Bank of Kuwait; Vice President - Wafra Investment Advisory Group (New York - USA); Board Member - Global Investment House (Kuwait); Chairman - Housing Finance Company (Kuwait). Mr. Jamal Shaker Al Kazemi Member of Governance Committee, Member of Audit & Compliance Committee (Non-Executive Director) Mr. Jamal Shaker Al Kazemi joined the Bank's Board in May 2004. Qualifications & Experience: Mr. Al Kazemi holds a Diploma in Applied Business Sciences (Accounting). He has experience in the commercial and investment sectors. Current Positions: Owner and CEO of Jamal Shaker Al Kazemi Corporation Former Positions: Deputy Chairman Marsa Alam Holding Company K.S.C.C.; Deputy General Manager Kazema Engineering Projects WLL., Director Zain (Kuwait, Jordan & Bahrain) 12
  11. THE BOARD OF DIRECTORS (CONTINUED) Mr. Adel A. El-Labban Member of Compensation & Nominating Committee, Member of the Executive Committee (Non-Executive Director) Mr. Adel El-Labban joined the Bank's Board in March 2002. Qualifications & Experience: Mr. El-Labban holds a Bachelors degree in Economics (Highest Honors) from American University, Cairo and a Master's degree in Economics (Highest Honors) from the American University of Cairo. He has extensive experience in commercial and investment banking with a particular focus on the GCC countries and Egypt. Current Positions: - Group Chief Executive Officer & Managing Director - Ahli United Bank BSC, Bahrain - First Deputy Chairman - Ahli Bank SAOG, Oman - Deputy Chairman - United Bank for Commerce & Investment LSC, Libya - Deputy Chairman - Commercial Bank of Iraq PSC - Deputy Chairman - Middle East Financial Investment Co. (Saudi Arabia) - Director - Ahli United Bank PLC, UK - Director - Ahli United Bank Ltd, United Arab Emirates - Director - Bahrain Association of Banks Former Positions: Chief Executive Officer and Director - United Bank of Kuwait PLC, UK; Managing Director - Commercial International Bank of Egypt; Chairman - Commercial International Investment Company, Egypt; Deputy Chairman - Ahli United Bank SAE Egypt; Vice President - Corporate Finance, Morgan Stanley, USA; Assistant Vice President - Arab Banking Corporation (Bahrain); Director Bahrain Stock Exchange, Director Kuwait & Middle East Financial Investment Co. Mr. Sanjeev Baijal Member of Audit & Compliance Committee (Non-Executive Director) Mr Sanjeev Baijal joined the Bank's Board on March 2016. Qualifications & Experience: Mr. Sanjeev Baijal is a senior banking and finance professional with 33 years of international experience in the financial services and auditing industry covering areas of finance, accounting, taxation, value addition, advisory, and strategic planning and development including mergers and acquisitions. Mr. Baijal is a Chartered Global Management Accountant under Association of International Certified Professional Accountants; Member of the American Institute of Certified Public Accountants (AICPA), and Associate Member of the Institute of Chartered Accountants of India (ACA). Current Positions: Deputy Group CEO Finance & Strategic Development, Ahli United Bank B.S.C.; Chairman Al Hilal Life B.S.C.(c) & Al Hilal Takaful B.S.C.(c), Bahrain; Director, Ahli Bank S.A.O.G., Oman.Former Positions: Group Head of Finance, Ahli United Bank B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain; and has held various positions at Ernst & Young, Bahrain and Price Waterhouse in India. Mr. Keith Henry Gale Chairman of Board Risk Committee, Member of the Executive Committee (Non-Executive Director) Mr. Gale joined the Bank's Board in March 2009. Qualification & Experience: Mr. Keith Gale holds a Bachelor's Degree in Accounting & Finance from Lancaster University, and is a Qualified Accountant and member of the Institute of Chartered Accountants for England and Wales. He has extensive experience in the banking sector and risk management. Current Position: Deputy Group CEO - Risk, Legal and Compliance, Ahli United Bank B.S.C. - Bahrain; . Director, Ahli Bank SAOG - Oman; Ahli United Bank S.A.E - Egypt; Ahli United Bank PLC, UK Former Positions: Group Head of Risk Management, Ahli United Bank B.S.C. - Bahrain; Head of Credit and Risk at ABC International Bank PLC; Assistant Vice President, Arab Banking Corporation, B.S.C. - Bahrain. 13
  12. THE BOARD OF DIRECTORS (CONTINUED) Mr. Michael Gerald Essex Member of Compensation & Nominating Committee, Member of the Board Risk Committee, Member of the Audit & Compliance Committee (Independent Director) Mr. Michael Essex joined the Bank's Board in March 2015. Qualification and Experience: Mr. Essex holds an Executive Development Program Certificate from Harvard Business School - Boston, USA; a Masters in Public Administration from Carleton University of Ottawa, Canada; and a Bachelors Degree in Economics and Political Science from University of Western Ontario - London, Canada. He has extensive experience in Asia Pacific, Africa and MENA regions in investment, portfolio management, risk and finance in the banking, infrastructure, energy, industrial and service sectors. Current Positions: Board Director, and Chairman, Group Audit Committee and Group Nomination & Compensation Committee, Ahli United Bank BSC Bahrain; Board Director, Chairman - Audit Committee, Compensation & Nomination Committee and Corporate Governance Committee, Ahli United Bank SAE Egypt; Board Director, Chairman of Audit Committee Kuwait & Middle. East Financial Investment Company Kuwait; Member, Investment Committee, APIS Growth Fund (UK); and Board Director, Macquarie Bank SBI India Infrastructure Fund (Singapore, India). Former Positions: Director, Investment & Advisory Operations, MENA Region for International Finance Corporation (IFC); Deputy Director, IFC Global Industry & Service sector investments; Managing Director, Corporate Banking, NZI Securities, Australia; and Risk Supervisor, Asia, Bank of Nova Scotia. Mr. Mohamed Tareq Mohamed Sadeq Mohamed Akbar Chairman of Audit & Compliance Committee (Independent Director) Mr. Mohamed Tareq Mohamed Sadeq joined the Bank's Board in March 2015. Qualification & Experience: Mr. Tareq is a Fellow Chartered Accountant from the Institute of Chartered Accountants in England and Wales. He has significant experience in the fields of financial advisory consultancy, audit services and business development. Current Positions: Managing Director, Keystone Consulting, Inc. W.L.L.; Independent Director and Chairman of the Audit & Compliance Committee of Ahli United Bank Limited, Dubai; Independent Director and Member of the Audit & Compliance Committee, Ahli United Bank S.A.E., Egypt; He is also the Chairman of Ibdar Bank B.S.C.; Chairman of Audit Committees and Advisor to several Family Offices; Independent Director of Al Zayani Investments B.S.C. and Bahrain Golf Course Company B.S.C. Former Positions: ¥ Area Leadership Team Member and Head of Advisory Practice Ernst & Young Middle East and North Africa ¥ Area Leadership Team Member and Head of Accounts & Business Development Ernst & Young Middle East & North Africa ¥ Office Managing Partner of the Bahrain practice of Ernst & Young Middle East & North Africa responsible for Assurance, Advisory, Tax and Transaction service lines. Staff partner in addition to providing audit and advisory services to a cross section of industries, including banking and financial services sector, government and public sector, real estate and hospitality, retail and healthcare. Mr. Abdulla AlRaeesi Member of Board Risk Committee, Member of Corporate Governance Committee (Non-Executive Director) Mr. AlRaeesi joined the Bank's Board in March 2015. Qualifications & Experience: Mr. Abdulla AlRaeesi is a senior banking professional with over 30 years of international experience in managing retail banking, operations, finance, strategic planning, conventional and Islamic banking, mergers, and acquisitions, and restructuring for banking institutions in Bahrain, Kuwait, Qatar, Oman, Egypt, Libya, Iraq and UK. Mr AlRaeesi holds an MBA in Business and Management from the UK. Current Positions: Deputy Group CEO- Retail Banking of Ahli United Bank BSC; Deputy Chairman of Alhilal Life B.S.C; Deputy Chairman of Alhilal Takaful B.S.C; Chairman of Ahli United Bank Group IT Steering Committee; Member of Group Assets and Liabilities Committee, Member of Group Management Committee and Member of Group Operation at Risk Committee. Former Positions: Board Director of Ahli Bank Qatar; Board Director of Ahli United Bank SAE Egypt; Board Director of International Chamber of Commerce; Board Director of Benefit Company; Chairman of Ahli Man Investment Committee; Vice Chairman of Charity Committee of Ahli United Bank; Head of Business Consulting Group of Arthur Andersen and Assistant General Manager of Commercial Bank of Qatar. 14
  13. The Best Islamic Bank in Kuwait for 2017
  14. FATWA & SHARI'AH SUPERVISORY BOARD REPORT 16
  15. FATWA & SHARI'AH SUPERVISORY BOARD MEMBERS Dr. Khaled Mathkour Al Mathkour Chairman -Ph.D. in Shari'ah and Law at Al-Azhar University- Cairo. -Faculty member at Kuwait University, Comparative Fiqh and Shari'ah Policy at Shari'ah and Islamic Studies College. -Head of Fatwa Committee at the Islamic Studies College. -Member of the Scientific Committee for the Fiqh Encyclopedia at the Ministry of Awqaf and member of Fatwa and Supervision Panel. -Member of the Board of Directors of the International Islamic Authority for Information - Islamic World Union. -Member of Fatwa and Shari'ah Supervision in several Islamic banks and Financial Institutions. -A founding member of the International Islamic Charity Authority headquartered in Kuwait. -Former head of the Higher Consulting Committee for the Application of Islamic Shari'ah Principles - Amiri Diwan - State of Kuwait. Dr. AbdulAziz Khalifa Al Qassar Member and Reporter -Ph.D. in Shari'ah at Shari'ah and Law College- Al Azhar University, Cairo. -Professor of Comparative Fiqh at the Shari'ah and Islamic Studies College, Kuwait University -Member of Fatwa and Shari'ah Supervision in several Islamic banks and Financial Institutions both in Kuwait and abroad. -Lecturer in Islamic Financial Transactions. -Author of many studies in research in Islamic Fiqh and Contemporary Financial transactions. -Former Assistant Dean for Scientific and Higher Studies and Research Affairs. Dr. Essam Khalaf Al Enezie Member -Ph.D. in Shari'ah- The University of Jordan, (Fiqh Major). -Faculty Member at Kuwait University, Comparative Fiqh Section- Shari'ah and Islamic Studies College -Member of the Shari'ah Council at the Accounting and Audit Board for Islamic Financial Institutions. -Member of Fatwa and Shari'ah Supervision Board in several banks and Islamic Financial Institutions. -Author of a number of studies and research works. 17
  16. EXECUTIVE MANAGEMENT Richard W L Groves Chief Executive Officer Mr . Richard Groves joined the Bank in April 2015 as Chief Executive Officer. Prior to joining, Mr. Groves had extensive international financial and banking experience, including senior management roles, with HSBC Group. These roles included Chief Executive Officer, HSBC Oman and Managing Director, The Saudi British Bank, in a career spanning over 30 years which also included assignments in Europe and Asia. He was also a Board Member of HSBC Bank Middle East Ltd and HSBC Bank Egypt SAE. Mr. Groves holds a Bachelor of Arts degree in Economic and Social History from the University of Hull, United Kingdom. Tareq Muhmood Senior Deputy CEO - Banking Business Group Mr. Tareq Muhmood, Senior Deputy CEO Banking Group, has over 24 years of banking experience. Prior to joining Ahli United Bank in July 2017, he was with ANZ for 6 years and HSBC Group for 18 years. With ANZ he held several senior positions including Chief Executive Officer of ANZ in Korea and Vietnam, along with a Global Corporate Banking leadership role based out of Singapore. Mr. Muhmood started his career with HSBC in Hong Kong, and worked in various countries holding a variety of senior positions including HSBC's Chief Executive Officer in Iraq and The Sultanate of Brunei. Mr. Mumood holds a Bachelor of Science Degree in Management Sciences from the University of Manchester, United Kingdom. Ahmed Zulficar Senior Deputy CEO - Banking Support Group Mr. Ahmed Zulficar joined the Bank as Deputy Chief Executive Officer - Risk, Finance and Operations in January 2007. He is Chairman of Kuwait & Middle East Finance Investment Co (KMEFIC) a Board Member of the United Bank for Commerce & Investment, Libya, and Board Member of the Commercial Bank of Iraq PSC. Prior to joining the Bank, Mr. Zulficar held various senior managerial positions in credit, marketing, risk, trade finance and operations in several banks, including Commerzbank A.G., Germany, Chase National Bank of Egypt (now Commercial International Bank), Saudi Cairo Bank (now Samba - Saudi American Bank), and National Bank of Kuwait. Mr. Zulficar holds a Bachelor of Commerce Degree from Cairo University. Jehad Soud Al-Humaidhi Senior General Manager - IT & Operations Ms. Jehad Al-Humaidhi joined the Bank in 1984 as an IT Programmer and has held several managerial positions related to operations, administration, electronic systems, data processing and system development. Since 2011, she has held the position of General Manger of IT & Operations rising to Senior General Manager in 2016. She is a Board Member of KNET and a Board Member of Gulf Custody Company. Ms. Jehad holds a Bachelor of Science Degree in Mathematics (Major) and Economics (Minor) from Kuwait University. Hisham Zaghloul Senior General Manager - Corporate Banking and Financial Institutions Mr. Hisham Zaghloul joined the Bank in 2007. He holds a Bachelor of Arts Degree in Economics from Cairo University and has extensive experience in Corporate Banking, Treasury, and Trade Finance, having worked for various banks and financial institutions including BNP Paribas (Egypt), Commercial International Bank (Egypt) and United Bank for Commerce & Investment (Libya). Mr. Zaghloul is Vice Chairman of Kuwait & Middle East Financial Investment Co. (KMEFIC), a Board Member of Commercial Bank of Iraq P.S.C. and a Board Member of Middle East Financial Investment Company (MEFIC) in Saudi Arabia. Medhat Tawfik General Manager - Private Banking & Wealth Management Mr. Medhat Tawfik joined the Bank in 2005 as Assistant General Manager of Private Banking and Wealth Management. He currently holds the position of General Manager. Prior to joining the Bank, Mr. Tawfik held managerial positions in credit, accounts relationship & private banking with several other banks. Mr. Tawfik holds a Bachelor of Arts Degree in Business Administration from the University of Texas and a Master's Degree in Marketing/Management from Amber University, Texas. 18
  17. EXECUTIVE MANAGEMENT (CONTINUED) Amgad Younes General Manager - Finance Mr. Amgad Younes joined the Bank in 2014 as General Manager, Finance. Previously he served in regional commercial and Islamic Banks in senior positions for Finance, Strategy, Planning, Operations and Technology. He holds a Bachelor of Commerce Degree in Accounting and Finance from Cairo University and attained a post-graduate accountancy diploma from the same university before obtaining his Master's Degree in Business Administration from the American University in Dubai. He is a Certified Public Accountant and member of the American Institute of Certified Public Accountants in addition to being an International Certified Public Arab Accountant and member of Arab Institute of Certified Public Accountants. He carries certifications also in Project Management, Islamic Finance Qualification from the Chartered Institute for Securities and Investments (UK) and Certified Business Manager from the American Institute for Management. Naqeeb Hamed Amin General Manager - Human Resources Mr. Naqeeb Hamed Amin joined the Bank in 2014 as Assistant General Manager Human Resources. Prior to joining, he held senior management positions in the field of HR and Sales in various sectors such as Petrochemical, Telecom, Medical, Research and IT. He holds a Bachelor's Degree in Hotel and Tourism Administration from the University of South Carolina, Columbia SC, USA. Naqeeb is a Harvard Business School Alumni. Shabbir Shaikh General Manager - Risk Management Mr. Shabbir Shaikh joined the Bank in 2006 as the Head of Risk Management. Prior to joining, he was Head of Risk at Ahli United Bank Group Head Office, Bahrain since January 2001. His previous experience was with Standard Chartered Bank (1996 - 2000) as Senior Credit Officer for Bahrain, Qatar, Oman and Saudi Arabia and Head of Corporate at its Bahrain and Karachi offices respectively. He also held managerial positions in the area of Treasury and Corporate Banking in American Express Bank, Societe General and Bank Al Falah in Pakistan. He holds a Bachelor's and Master's Degree in Business Administration from University of Karachi. Ranjan Sen General Manager - Retail Banking Mr. Ranjan Sen joined the Bank as General Manager Retail Banking in August 2016. Ranjan is a career banker with varied experience gained through diverse roles across more than a dozen countries and three international banks - commencing with American Express Bank, Commerzbank and extensively with HSBC Group. He has experience of a range of wholesale and retail banking functions, most recently in high impact consumer banking leadership roles which include Retail Banking and Wealth Management Country Manager for HSBC Egypt and Head of Sales and Distribution for HSBC across the Middle East and North Africa region (MENA), and Head of International Countries in MENA, also for HSBC. Ranjan holds a Masters in Business Administration from Delhi University. Hatem Badr General Manager - Legal Mr. Hatem Badr joined the Bank in 2016 as the General Counsel & General Manager Legal. He has extensive legal experience in financial and investment organizations. He worked as the General Counsel & Vice President of Citibank covering North & West Africa (based in Cairo) and then covering the GCC region (based in Bahrain). He also was the General Counsel and General Manager - Legal Department for Gulf Bank in Kuwait. He further worked with the law firms of White & Case in New York and Baker & McKenzie in Cairo. Mr. Badr holds a Masters Degree in Banking, Corporate and Finance Law from Fordham University in New York and a certificate of "Leadership in Corporate Counsel" from Harvard University. 19
  18. FINANCIAL PERFORMANCE SUMMARY KD Thousands Unless Otherwise Stated Net Profit Dec 2016 Dec 2015 44 ,463 40,348 42,805 Net Financing Income 104,132 88,402 89,082 Financing Receivables 2,672,832 2,706,054 2,680,334 Total Assets 3,665,579 3,692,161 3,904,303 Total Deposits 3,135,148 3,194,023 3,490,618 Shareholders Equity 406,948 385,048 356,158 Total Equity 467,588 445,688 360,835 Return on Average Assets (ROAA) 1.2% 1.0% 1.2% Return on Average Equity (ROAE) 11.4% 11.0% 12.7% Cost to Income Ratio 32.0% 30.5% 29.9% Capital Adequacy Ratio 17.2% 17.5% 15.2% 24.4 24.0 25.4 Earnings Per Share (Fils) 20 Dec 2017
  19. FINANCIAL PERFORMANCE SUMMARY (CONTINUED) 100 3,000 2,500 80 2,000 60 1,500 1,000 2017 2016 2015 2017 2016 2015 40 20 500 0 Net financing income KD Million Financing receivables KD Million 104 2,673 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 2017 2016 500 2015 2017 2016 2015 1,000 0 500 0 Total assets KD Million Total deposits KD Million 3,666 3,135 21
  20. MANAGEMENT REPORT & PERFORMANCE ANALYSIS OVERVIEW OF BANK STRATEGY Since its establishment, and with 76 years of industry-leading expertise, Ahli United Bank (AUB) has differentiated itself from other banks through its dedicated teamwork, innovative products and services, sustainable returns, experience and solidity, and world-class customer service its clients deserve. AUB embraced a pioneering role in the economic development and social advancement of the country. The Bank has achieved its success by balancing growth with disciplined management of costs and risks while keeping a firm grip on both liquidity and equity values. The Bank remained committed to the successful implementation of its strategic initiatives, which is achieved through the enhancement of e-channels to meet customers' needs by offering them convenient and flexible services based on the latest technology in the banking sector. The introduction of a mobile banking application, social media platform and enhanced B2B services demonstrates the Bank's commitment towards providing customers with updated and creative digital solutions. The Bank is committed to the continuous improvement in banking services, including the innovation of its products and services and financial solutions. Building on success and as part of the Bank's Strategy of Excellency Recognition for 2017, the Bank has been presented with "The Best Islamic Bank in Kuwait 2017" award by Global Business and Islamic Finance Magazine which recognizes AUB's leading position as one of the safest Islamic banks offering innovative products, creative customer services, effective cost management and generating earnings and values to the shareholders. In addition, our Private Banking businesses has been awarded "The Best Bank for Private Banking in Kuwait in 2017" Award by "CPI Financial Banker Middle East" and "Best Private Bank in Kuwait" by PWM The Banker Global Private Banking. Furthermore, AUB's debut issuance of the Additional Tier 1 Capital Sukuk issued in 2016 and listed on NASDAQ Dubai and the Ireland Stock Exchange, won the award of "Sukuk Deal in 2017" from the "International Finance Magazine". This is attributable to the successful Sukuk issuance of USD 200 Million, for which demand exceeded three times the size of the issue through strong intent from investors in the Middle East, Asia and Europe. This reaffirmed the market confidence in Ahli United Bank and the economic climate of Kuwait in general. The Bank also won the "Best Digital Bank of 2017" award in the Middle East (within the corporate and corporate banking sector) by Global Finance magazine. The Bank continued its services through smartphone applications in 2017 to achieve a growth rate of 104%. In 2018, the Bank will focus on channelling more investment towards the development of digital banking as part of the Bank's continued commitment to providing the best banking services to its customers. It is a tribute to the efforts of the executive management and the staff of the different departments for their outstanding performance which has resulted in these positive results. The Bank's vision as embedded into our strategy is to become a leading Shari'ah compliant bank operating by international standards while always placing its customers first. In line with this vision, the Bank proceeded with its plans as defined in the core strategic goals which include: ¥ Provide innovative Shari'ah compliant financial solutions, competitive products and quality services to its customers. ¥ Maintain high standards of corporate governance and risk management and a solid capital base whilst also achieving maximum returns for shareholders on a sustainable basis ¥ Keeping the Bank's position among the top Islamic Banks in Kuwait by focusing on market-share, having a balanced and diversified growth plan, in addition to the efficient use of internal and external resources ¥ Retain and develop its human resources through a meritocratic management structure with a view to becoming the employer of choice in the financial services sector in Kuwait. The Bank focused on effective training programs related to business areas and the development of key managerial skills for staff through effective leadership programs ¥ Adopting the latest technology in order to meet the needs of the Bank's customers whilst introducing process efficiencies and reducing costs, in addition to moving toward digitalization ¥ The cost to income ratio identified the Bank as one of the most efficient operating banks in Kuwait, as compared with its peers. The Bank monitored its operational efficiency indicators to ensure sustainable KPIs ¥ The potential for maintaining high performance levels is ensured throughout a strategy of focusing on e-services and the development of unique products designed to minimize the branch's costs and enhance efficiency ¥ Contribute to the social and economic advancement of the local communities in line with the Bank's commitment to the corporate social responsibility 22
  21. MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED) BUSINESS PROFILE Following the conversion to Shari'ah compliant banking services, the Bank has conducted its businesses in accordance with Islamic Shari'ah provisions under the oversight of its Fatwa & Shari'ah Supervision Board. This business model has been beneficial, resulting in a growth in AUB's businesses both in terms of deposits and net financing assets. The progress achieved since conversion has laid the foundation to target further growth within the risk appetite framework defined by the Board of Directors. FINANCIAL & PERFORMANCE OVERVIEW The Bank's asset base comprises mainly net financing constituting 73% of the total asset base. Cash and balances with banks, including inter-bank deposits, account for 19% of the total assets, thereby reflecting the rising liquidity levels within the Bank. Available for sale investments mainly consist of short term and long term investments in sukuks reached 6% of total assets. On another front, the Bank's liabilities mainly comprise customer deposits, and deposits from banks and financial institutions at 76% and 22% respectively of the total liabilities. AUB achieved its operational effectiveness and efficiency, owing to its focused Asset Liability Management within its Board approved prudent risk framework. The following table shows comparison of growth rates of AUB from 2015 to 2017: Main Indicators 2017 2016 2015 Total Assets (million KD) 3,666 3,692 3,904 Total Financing (million KD) 2,673 2,706 2,680 Total Customer Deposits (million KD) 2,426 2492 2,661 468 446 361 Main Indicators 2017 2016 2015 Net Financing Income (million KD) 104.1 88.4 89.1 Total Operating Income (million KD) 120.1 111.1 110.9 Net Profit for Shareholders (million KD) 44.5 40.3 42.8 Earnings Per Share (fils) 24.4 24.0 25.4 Total Equity Net Profit Trends Attributable to Shareholders: The Bank recorded an operating income of KD 120.1 million in comparison to KD 111.1 million during the previous year. The operating profit recorded at KD 81.7 million following extra precautionary provision impact to mitigate the impacts of market volatility witnessed subsequent to the sharp decline in global oil prices during recent years. The average Return on Equity (ROE) and average Return on Assets (ROA) in AUB recorded 11.4% and 1.2% for 2017 which is one of the highest in Kuwait, along with a solid capital adequacy ratio of 18.0% under the Basel-III accord, being higher than the regulatory requirement of 13.5% as of 31 December 2017. The Bank achieved the higher capital ratio following issuance of the Tier 1 Perpetual Capital Sukuk. The Bank has continued to receive high credit ratings from international credit rating agencies, such as Fitch, Moody's and Capital Intelligence. The Bank maintained a credit rating of "A+" on the long term and "F1" on the short term with stable outlook by Fitch Ratings Agency, and "A2" on the local currency with stable outlook by Moody's. Capital Intelligence affirmed the Bank's long term credit rating of foreign currency to "A+" and enhanced the short term foreign currency rating to "A2". All these ratings underscore the credit standing, capital quality and stability of the Bank now and for future growth. 23
  22. MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED) FUTURE OUTLOOK The Bank works to accelerate the transformation into a more strategically focused, technologically modern, digitalized and operationally agile institution, so that it can remain dominant in a rapidly evolving ecosystem. The Bank will further enhance shareholders' value and achieve competitive returns for its deposit holders and Mudaraba accounts. The Bank will contend with multiple challenges tied to regulations, financial sector with low oil prices and regional uncertainty, disruptive models and technologies, new competitors, and a restive customer base. Owning a number of key competitive advantages will maintain the Bank's positive outlook, being: ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ 24 Strong regional group presence, distinguished brand and local franchise Innovative and extensive product range Shari'ah compliance Stable funding base and capital adequacy Quality of service and speed of response time Competent, loyal and professional management Focused staff training Systematic approach to developing strategy Strong association with the community Transitioning to a mobile centric and digitally anchored institution
  23. EXECUTIVE SUMMARY
  24. EXECUTIVE SUMMARY CORPORATE BANKING During 2017 , Corporate Banking has continued to solicit select finance deals within the Bank's prudent credit and risk policy and has maintained a high quality credit portfolio whilst ensuring diversification in targeted economic sectors. This has contributed to maintaining the Bank's strong position in the Kuwaiti banking sector. Moreover, Corporate Banking has continued to offer its Shari'ah compliant products and services bringing a high level of professionalism to its local and foreign corporate clients with an enhanced focus on multinationals and Small to Medium Sized Enterprises (SMEs). This has been achieved through sector specialized units being Contracting & Manufacturing, Food, Pharmaceutical & Energy, Trading & Services, Real Estate & Investments, and the SMEs Unit. With the intent of growing client deposits and account balances, and whilst ensuring competitiveness and a diversified depositor base, the Cash Management Unit under Corporate Banking has continued to offer its customized services to corporate clients. This has led to growth in the number of clients benefiting from the Business to Business (B2B) on-line Banking service, offering a secure overall electronic solution aimed at facilitating and streamlining banking transactions through integration between a client's Enterprise Planning System (ERP) and the Bank's system. Corporate Banking has succeeded in achieving its objectives in terms of maintaining a high-quality asset portfolio, providing a fullrounded product/service mix offering, growing the client base amongst varying business sectors and consequent diversification in both asset and liabilities while aiming at enhancing its market share and profitability. In this regard, Corporate Banking has continued its focus on risk-calculated growth, soliciting new clients, taking a participation in select regional syndications and supporting a good number of large-scale projects floated under Kuwait's Government Development Plan. In addition, there has been a distinct emphasis on bolstering human capital through attracting young qualified national and senior bankers with a high level of Islamic banking experience. Corporate Banking strives to continue its achievements whilst augmenting the Bank's brand equity across the State of Kuwait and the region and to contribute positively to the banking sector and the economy overall. PRIVATE BANKING AND WEALTH MANAGEMENT Private Banking and Wealth Management Division continued its path of excellence by achieving further milestones in 2017. The division received the "Best Private Bank in Kuwait 2017" award presented by the prestigious magazine The Banker. Moreover, Private Banking achieved another accolade in 2017 by being named the "Best Private Bank in Kuwait" by Banker Middle East magazine These awards reaffirm the divisions' achievements and reflects the commitment, knowledge, competencies through which the confidence of our valued clients has been acquired and preserved. Private Banking and Wealth Management launched a new real estate project in the heart of London to Kuwait clients. The Paddington Gardens apartments project is the latest real estate project of a long line of successful launches of such high caliber. The project reception was successful in attracting significant client interest. The division prides itself on its advisory role and awareness responsibilities, where it held sessions of training and development workshops for a number of prominent clients. The sessions aim to provide cutting edge investment and financial expertise for such an esteemed organization. Private Banking and Wealth Management continues to drive the objective of enlightening its clients and prospective clients on local and global markets awareness where such is a core value of the private banking mission. RETAIL BANKING Throughout 2017, Retail Banking has focused on developing its products and services, on enhancing its communications with customers, while continuing to build trust and loyalty through improved sales and service across distribution channels. The Bank's Premium proposition for high net worth customers was refreshed and upgraded to include a wide array of packaged services including concierge on demand, valet parking throughout Kuwait, lounge access at multiple airports, dedicated Relationship Managers, pricing advantages and more. Premium was relaunched to a very positive reception from existing and new customers, showing encouraging growth during the year. The Bank also embedded insurance in various products to provide enhanced value to customers. As an exciting new feature, the Bank arranged life insurance and accident cover for all salaried customers who chose to transfer their salaries directly into the Al Hassad Islamic Account - a unique offering in the market. 26
  25. EXECUTIVE SUMMARY (CONTINUED) Retail Banking also upgraded and relaunched the packaged offer for salary accounts, including a wide array of benefits communicated through an aggressive advertising campaign, to be positioned very strongly in the market for this key segment. During the year, there were two unique 100% cash back offers on credit cards, to promote expenditure through AUB credit cards by existing customers as well as to position AUB cards attractively to prospective customers. This helped drive higher growth in usage of AUB credit cards compared to market. To widen the array of payment instruments, Retail Banking launched the Beizat payment card on a MasterCard Platinum base. The card offers an exceptional bouquet of features including airport lounge access around the world in addition to the holder the full benefits of the credit card reward program. It has been well received by customers as evidenced by strong take up since launch. Retail Banking launched a new long-term Deposit Account (Wikalat Al Khair). This is positioned as one of the best Sharia'hcompliant investment propositions as it enables customers to benefit from high and competitive profits in addition to other advantages and features. To drive the launch of Al Khair and to offer customers an innovative opportunity to benefit over and above profit rates, Retail Banking launched a promotional campaign, "Your Investment in Gold," to reward long-term deposit customers in Al Khair. As part of the ongoing efforts to optimize efficiency and customer coverage of our branch network, the Bank closed its Al Sour branch and business was transferred to our Fahad Al Salem branch. Additionally, preparations were finalized to open the Bank's latest branch in Bayan in early 2018 whilst plans remain ongoing for the Rumaithiya and Rawda branches. As part of its evolving digital roadmap, Retail Banking sponsored the launch of the Bank's social media platform initially on Instagram and Snap Chat, later extended to LinkedIn, which has now garnered over 30,000 followers since launch and provided a vital additional channel of customer engagement and brand building. Furthermore, the Bank continued to develop its services through smart phone applications during the year to achieve more than 100% growth in operations. Further investment in developing digital banking services will continue in 2018. These and other ongoing service efforts in the Call Center have earned the Bank the "Best Customer Service Center in Kuwait" award for 2017 from The Banker Middle East magazine. This award is considered a positive recognition of the continuous efforts and ongoing commitment towards offering best-in-class services and customer-appropriate banking solutions through the specialized and dedicated Customer Service Center which is able to cater to customers' needs 24/7. Overall, a number of significant building blocks for the business were put in place to develop and strengthen Retail Banking in 2017, with efforts continuing strongly into 2018. TREASURY Treasury Division continued to successfully implement positive strategies for managing the Bank's liquidity and ensuring adequate funding to finance the Bank's asset growth. This included adherence to Basel III liquidity requirements as provided for under Central Bank of Kuwait regulations. Treasury has actively worked to improve the Bank's funding profile by expanding and diversifying its liability sources ensuring solid liquidity buffers, with optimal management of cost of funds in parallel to satisfying regulatory ratios. Treasury has established an effective approach for monitoring and measuring volatility to mitigate market risks related to liquidity, interest rates and foreign exchange. Treasury has continued to achieve substantial growth in terms of profitability by investing in High Quality Liquid Assets (HQLA) and marketable fixed-income instruments, especially sukuk. This has resulted in a greater contribution to the Bank's overall net income margin with prudent investment in these sukuks positioned above the yield curve. By leveraging a deep understanding of customer needs, Treasury takes the lead in providing innovative and customized financial solutions resulting in an expanding client base. Treasury has strengthened its customer relationship activity which has reflected significantly in the contribution to the Bank's growth and expanding market share in 2017. Treasury has also enriched relationships with both Islamic and conventional banks in the local and regional markets, expanding the Bank's interbank presence. 27
  26. EXECUTIVE SUMMARY (CONTINUED) RISK MANAGEMENT Risk is inherent in all of the Bank's activities and is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls, in accordance with regulatory and Board requirements. The Bank is exposed principally to credit risk, liquidity risk, market risk and operational risk. Other risks such as reputational risk, legal risk and the various risks defined by the Basel accord are also monitored and managed. The Risk Management Framework, Financing & Risk Management Policy and related documents, which incorporate risk mitigation, as well as the governance structure, provide comprehensive control and management of the risk/reward relationship across the entire Bank. The Risk Management Framework clearly establishes the dynamic link between risk appetite and the return target, internal controls and capital adequacy management. The Risk Management Division (RMD) is the primary body responsible for setting the overall risk threshold. The Board of Directors is the ultimate owner of the risk appetite within the Bank and approves all risk appetite related policies. The RMD structure has a distinct identity and independence from the business units, making it the ideal partner in achieving business objectives within the acceptable risk/reward criteria. RMD is headed by the General Manager, who has a direct reporting line to the Board via the Board Risk Committee. RMD is comprised of the following units which address the risk exposure of the Bank: • • • • • • • Credit Risk Market & Liquidity Risk Operational Risk Credit Administration Credit Control & MIS Remedial Accounts Unit System Security Unit RMD co-ordinates and communicates with each line of business to properly manage its risks. The General Manager - RMD is a member of several management committees that have the overall responsibilities and authorities vested in them for the day to day risk management activities of the Bank. Such authorities are exercised within the objectives and policies approved by the Board and subject to the rules and regulations laid down by the Central Bank of Kuwait. The Bank measures risk using a variety of qualitative and quantitative methodologies based on the nature of the risks. The Bank has taken appropriate preparatory steps to ensure full compliance with IFRS 9 guidelines which are in force effective January 2018. Stress tests and benchmarking to other industry standards are also periodically conducted. Measurement models and related assumptions are routinely subject to reviews, validation and benchmarking with the goal of ensuring that the Bank's risk estimates are reasonable, reflective of the risk of the underlying positions and comparable to best practices. INFORMATION TECHNOLOGY Information Technology Division (IT) comprises Systems Development, Infrastructure, Technical Support and Operations. Together these form the back-bone of the Bank as the custodian of its systems and data. IT provides its services and support to all Divisions so that they can collectively meet the goals and objectives of the Bank. In order to further protect the Bank's increasingly valuable resources (Systems and Data), IT has spent much time and effort this year in adopting and implementing the latest in terms of Systems, Infrastructure and Security related frameworks to protect the Bank against the ever increasing global threat of cyber-attacks and cyber-crime. Whilst upgrading internal systems to the latest versions, IT has laid the foundations for the Bank to move towards a Digital Transformation in 2018 and beyond. A prime objective is to increase the Bank's Corporate, Private Banking and Retail Customer business by attracting new and retaining existing customers. This made possible through the further development and enhancement of the Bank's B2B, Corporate and Retail Internet Banking systems. Mobile Banking saw a tremendous growth in usage making it the preferred channel for our Retail customers. Automation along with streamlining internal processes and procedures across various divisions has helped reduce manual effort and increased efficiency and turn-around time, thereby enhancing the customer experience. 28
  27. EXECUTIVE SUMMARY (CONTINUED) COMPLAINTS & CUSTOMER PROTECTION Established in 2015, Complaints & Customer Protection Department ensures the Bank's compliance with the highest standards of customer service and satisfaction through three main units, namely: Service Quality, Customer Protection and Customer Complaints. These were key areas of focus for the Bank in 2017 SERVICE QUALITY UNIT The Service Quality Unit measures, monitors and develops services to evaluate the performance of the business divisions against the highest level of standards required. These are adopted to improve the quality of customer service, to increase productivity and to improve overall performance levels This has resulted in the renewal of the ISO 9001: 2008 German Quality Certificate TUV Nord for the third consecutive year. The Service Quality Unit is responsible of the following: • • • • • Enhancing the overall staff perception of the quality of service concept and fully develop comprehensive long-term skills by implementing programs and campaigns that contribute to fostering a positive environment in the workplace Building greater awareness of the importance of Service Quality, as well as nurturing a culture of quality and excellence in the services offered to the Bank's customers Preparing and delivering comprehensive training courses to enhance the importance of Service Quality and its relevance to the Bank's strategic vision Conducting market studies and surveys with the Bank's customers and customers of other banks to identify service development opportunities in line with the Bank's aspirations for excellence and customer satisfaction Creating special programs and promotional activities for employees with outstanding Service Quality performance to promote positive competition between staff to drive higher levels of performance CUSTOMER PROTECTION UNIT The Customer Protection Unit performed the important tasks assigned to it under the Bank's Complaints & Customer Protection Policy to ensure compliance across the Bank with the Customer Protection guidelines issued by the Central Bank of Kuwait. The main activities accomplished by the Customer Protection Unit in 2017 included: • • • • • Reviewed all Bank documents (policies, procedures, forms, marketing materials, contracts, SLAs and others) and ensured their compliance with the relevant Customer Protection requirements before their official publication and use by the Bank Implemented a comprehensive program to verify that all Bank units are in compliance with the requirements of Customer Protection Completed the first issue of the annual Customer Protection verification report Contributed to analyzing customer complaints in order to classify them, identify their root causes, and suggest corrective actions COMPLAINTS UNIT The Complaints Unit (including Central Bank complaints) perceives customer satisfaction as a top priority. The unit's mission is to improve customer satisfaction by effectively addressing their issues, accurately investing root causes, and actively committing to the implementation of corrective and preventive actions to avoid repetition. 29
  28. EXECUTIVE SUMMARY (CONTINUED) HUMAN RESOURCES As in previous years attracting and retaining competent Kuwaiti graduates remained one of the key measures in 2017 and is in line with the Bank's strategy. Kuwaitization requirements are met meticulously. Graduate trainees are systematically placed in various Business divisions within the Bank and are trained for the specialized functions. This ensures that all graduate trainees perform at an optimum level and can prove their worthiness for being successors for key positions across the Bank. Throughout 2017, Human Resources continued supporting the staff's professional and personal development through training and coaching. Human Resources' Learning & Development unit provided and facilitated more than 150 training programs in alignment with the latest banking requirements benefitting more than 850 employees. Staff were engaged in numerous and various training programs provided by the Institute of Banking Studies (IBS), with special focus on specialized and professional certificates such as Certified Credit Management (CCM), Advanced Certified Credit Management (ACCM), Executive Leadership Development Program (by Harvard Business School), Project Management Professional (PMP) and Kuwaiti Graduates Development Program (KGDP) amongst other courses. Over 3,500 hours of in-class training were facilitated for staff to enhance their knowledge and progress within the Bank. Such programs included risk management, Islamic Banking Certification, compliance, finance, governance, International Financial Reporting Standard 9 (IFRS9), and Basel III rules. In addition, all Bank employees were provided with e-Awareness programs on regulatory requirements including Customer Protection, Combatting Money Laundering and Terrorism and the Bank's policies and procedures. In addition, an e-Library was added to the Learning Management System which includes core business courses and an interesting soft skills package Human Resources played a crucial role as Business Partner to the Bank's senior management team by developing performance objectives for employees across divisions which enabled the Bank to achieve its goal of sustainable, profitable growth. Furthermore, to reflect the Bank's strategic vision, Human Resources seeks to increase Employee Engagement and Well-being, to maintain a happy and healthy work environment, to strengthen the internal customer experience in the Bank and provide support to both operational and business functions. These actions are aimed to also improve the customer experience and to enhance the Bank's current market share and profitability. In compliance with the regulators' governance, HR has restructured the Shari'ah Department to be aligned with the new rules and regulations. HR has supported the Bank employees by providing training courses and educational awareness on issues related to Islamic Shari'ah to build the desired Shari'ah governance culture and enhance the corporate values across the Bank. 2017 has been a year of transformation. With the assistance of the newly implemented Human Resources Systems - SAP© Success Factors, Human Resources achieved its goal of transforming several Human Resources processes to go 100% paperless. Utilizing the new system, HR processes have been streamlined and turnaround time has been significantly reduced, which enhanced internal customer satisfaction. Achieving a higher internal customer satisfaction was a key focus for the year. 30
  29. CORPORATE GOVERNANCE
  30. Best Private Bank 2017
  31. CORPORATE GOVERNANCE CORPORATE GOVERNANCE FRAMEWORK Overview Ahli United Bank is committed to a set of systems , organizational structures and operations that help realize institutional discipline in accordance with global standards and principles by means of identifying the responsibilities and duties of the Board of Directors and Executive Management, taking into account the protection of shareholders and relevant stakeholders' rights. The Board of Directors of the Bank adopts the governance system which was issued by the Central Bank of Kuwait in 2012. The Board is responsible for defining the Bank's objectives, setting strategies and policies after which Executive Management takes charge of organizing daily operations and procedures. Ahli United Bank ensures compliance with regulatory guidelines including prudent risk management by developing the necessary tools and systems, internal controls achieving the principles of accountability towards shareholders and depositors preserving stakeholders' rights to comply with rules and regulations passed by regulatory authorities and to protect the interests of depositors. Strong risk management and development of systems and tools are in place to achieve these objectives. The Corporate Governance scope of work has expanded further to include Shari'ah Governance. In December 2016, the Central Bank of Kuwait issued instructions regarding the Shari'ah Supervisory Governance in Kuwaiti Islamic banks, complementing the previously issued Central Bank of Kuwait's instructions in June 2012 concerning corporate governance in Kuwaiti banks. Corporate Governance Structure of The Bank: General Assembly Fatwa & Shari’ah Supervisory Board Board of Directors Compensation and Nominating Committee Executive Committee Board Risk Committee Head of Internal Shari’ah Audit Corporate Governance Committee Audit & Compliance Committee Head of Audit SSB Secretary/ Internal Shari’ah Researcher Chief Executive Officer Head of Risk Management Board Secretary/ Head of Governance & Disclosure 33
  32. CORPORATE GOVERNANCE (CONTINUED) CORPORATE GOVERNANCE FRAMEWORK (CONTINUED) The Bank operates its business observing the Central Bank of Kuwait’s instructions issued on Corporate Governance pillars, and they are: ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ Board of Directors Corporate Values, Conflict of Interest and Group Structure Senior Executive Management Risk Management & Internal Control Remuneration Regulations & Policy Disclosure and Transparency Complex Corporate Structure Protection of Shareholders Rights Protection of Stakeholders Rights Equity: The act of being fair & neutral Besides the above nine (9) pillars, the Bank observes the instructions on Shari’ah Supervisory Governance within the following five (5) principles; they are: 1. Supervision, responsibility and accountability, of the Board of Directors, the Executive Management and the Shari'ah Supervisory Board within the framework of the Shari'ah Governance 2. Independence of the members of the Shari'ah Supervisory Board in issuing fatwas without external influences. 3. Competence and Aptness of members of the Shari'ah Supervisory Board with regard to academic qualifications and practical experience 4. Confidentiality of all information members of the Shari'ah Supervisory Board are exposed to 5. Congruity among the Shari'ah Supervisory Board members and harmony in fatwas they submit to the Bank As well as the areas of internal and external Shari'ah audit and the scope and objectives of Shari'ah Auditing Key elements of good Corporate Governance practiced at Ahli United Bank Probity: Being honest and ethical Disclosure & Transparency: Make information widely known and available 34 Accountability: Taking responsibility for decisions & actions
  33. CORPORATE GOVERNANCE (CONTINUED) THE BOARD OF DIRECTORS The Board of Directors comprises of nine non-executive members out of which two are independent. The Board has an overall responsibility for the Bank, including the development of the Bank’s strategic objectives, risk strategy, and governance standards as well as the responsibility for implementing these objectives and standards and supervising the integrity of their implementation, as well as the responsibility of supervising the executive management. The Board of Directors determines good governance practices for its business and shall warranty the existence of necessary means to ensure that such practices are followed and reviewed regularly with the aim of continuous improvement. The Board should reflect through its practices the standards of good governance which will also support it in carrying out its duties efficiently and convey a clear picture of the Bank’s aspirations and objectives. Composition of the Board of Directors Chairman ¥ Dr. Anwar Ali Al-Mudhaf Chairman of Corporate Governance Committee Vice Chairman ¥ Sheikh Abdullah Jaber Al-Ahmad Al-Sabah Chairman of Compensation & Nominating Committee Chairman of the Executive Committee Independent Directors ¥ Michael Gerald Essex Member of the Board Risk Committee Member of the Audit & Compliance Committee Member of the Compensation & Nominating Committee ¥ Mohamed Tareq Mohamed Sadeq Mohamed Akbar Chairman of the Audit & Compliance Committee Non-executive directors ¥ Jamal Shaker Al-Kazemi Member of the Corporate Governance Committee Member of the Audit & Compliance Committee ¥ Adel Mohamed Abdelshafi El-Labban Member of the Compensation & Nominating Committee Member of the Executive Committee ¥ Sanjeev Baijal Member of the Audit & Compliance Committee ¥ Keith Henry Gale Chairman of Board Risk Committee Member of the Executive Committee ¥ Abdulla Ahmed Al-Raeesi Member of the Board Risk Committee Member of the Corporate Governance Committee 35
  34. CORPORATE GOVERNANCE (CONTINUED) CORPORATE VISION, MISSION, OBJECTIVES AND VALUES Vision To become a leading innovative Islamic Bank operating with international standards while placing our customers always “FIRST” Mission ¥ To provide innovative Shari’ah-compliant financial solutions, competitive products and quality services to our customers ¥ To maintain the highest standards of corporate governance, risk management and a solid capital base while achieving the maximum returns for shareholders on a sustainable basis. ¥ To retain and develop our qualified and professional employees by establishing a meritocratic management structure and be the employer of choice ¥ To provide cutting-edge technology and adopt customer centric technology ¥ To contribute to the social and economic advancement of communities within which the Bank operates and fulfil its corporate social responsibility. Corporate Core Objectives ¥ ¥ ¥ ¥ ¥ ¥ ¥ 36 To maximize shareholder value on a sustainable basis To maintain the highest corporate governance and compliance standards To maintain solid capital and liquidity measures To entrench a disciplined risk and cost management culture To develop a cross-cultural and efficient management structure To contribute to the social and economic advancement of communities. To instill a culture of adherence to Islamic Shari’ah within the Bank through appropriate policies and programs in this regard.
  35. CORPORATE GOVERNANCE (CONTINUED) BOARD OF DIRECTORS FOCUS & ACHIEVEMENTS IN 2017 Governance Structure & Shareholder's Value Strategy & Performance Progress & Growth Risk Management & Internal Controls The Board has given special attention to the preparation for implementation of the revised Shari'ah Governance structure. It has provided guidance and periodic follow-up to the task force appointed by the Bank to achieve the targeted outcome. The Bank’s Shari'ah Supervision System has been upgraded and enhanced through the following tools and techniques: 11. Amend the Bank's Board of Directors and Board Committees' terms of reference to comply and to take further active roles in monitoring the implementation of Central Bank of Kuwait regulations concerning Shari'ah Governance inclusive of the appointment /reappointment of the members of the Shari'ah Supervisory Board, Shari'ah risks management, adherence of the Bank's management with the decisions of the Shari'ah Supervisory Board, and protection of investment account holders’ interests. 2. Develop a Shari’ah Governance Framework Document to designate the responsibilities at all levels of the Bank, from Shari'ah Supervisory Board, Board of Directors and Executive Management and other staff to ensure compliance with the principles of Islamic Shari'ah. 3. Develop Policies, procedures & manuals to include all necessary pillars and elements of Shari'ah Governance 44. Allocate sufficient resources and manpower to support the implementation of the Shari'ah Supervisory Governance Framework. 5. Spread the culture of mandatory compliance with Islamic Shari'ah and all Fatawas rendered by the Shari’ah Supervisory Board amongest all Bank staff and to integrate this culture into the Human Resource policies and work specialized manuals. 66. Ensure presence of clear channels of effective communication within the Bank to ensure that significant Shari’ah issues are raised to the Board of Directors. 77. Enhance the role of Internal Shari’ah Audit which should exercise its role independently in assessing employees’ adherence to the Shari’ah Supervisory Board’s decisions, and providing technical opinion as to Bank’s management compliance at all times. BOARD EFFECTIVENESS REVIEW: EVALUATION OF DIRECTORS The Bank continues to explore methods to enable continuous enhancement of the Board’s effectiveness. The Compensation and Nominating Committee facilitates this process by conducting annual effectiveness reviews via questionnaires, self-evaluation or executive session discussions of which collective answers are analyzed to decide points of strength & weakness. This review assesses the performance of the Board of Directors and the Board Committees. This assessment does not only involve the Board as a whole, but also reviews the contribution of individual directors and committees through the process of self-assessment. 37
  36. CORPORATE GOVERNANCE (CONTINUED) ACHIEVEMENTS OF THE BOARD OF DIRECTORS FOR 2017 ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ Approved the Financial Statements Approved Risk Management framework (Risk Appetite) Reviewed and approved The Internal Capital Adequacy Assessment Process and Stress Testing (ICAAP) Reviewed Risk Audit Reports raised by their respective committees Monitored Bank’s Strategy on Semi Annual basis Approved 2018 estimated budget and business plans Reviewed quarterly performance via reports prepared by Management Reviewed reports submitted by Customer Compliance unit Reviewed reports submitted by internal audit and regulatory compliance Reviewed the Remuneration Policy Reviewed Bank’s policies to ensure compliance with Shari’ah governance laws issued by Central Bank of Kuwait Reviewed Resolutions rendered by the Shari’ah Supervisory Board Approved the amendments for the Bank's Organization Structure to comply with Central Bank of Kuwait Instructions on Shari’ah Governance ¥ Reviewed and approved the proposed amendments to the Board of Directors and Board Committees' Terms of Reference to comply with the Central Bank of Kuwait instructions issued on Shari'ah Governance ¥ Issued the Shari'ah Governance Framework 38
  37. CORPORATE GOVERNANCE (CONTINUED) BOARD COMMITTEES The Bank has five Board committees which assist the Board of Directors to fulfil its supervisory roles and responsibilities. The Board committees continuously update the Board on latest developments: ¥ ¥ ¥ ¥ ¥ Corporate Governance Committee Board Risk Committee Audit & Compliance Committee Compensation & Nominating Committee Executive Committee In addition to the objectives of formation and terms of reference of the Board committees mentioned in the instructions promulgated in June 2012 concerning corporate governance in Kuwaiti banks, the Shari'ah Supervisory Board Committees Terms of References have been updated to include additional responsibilities with regard to Shari'ah Governance. Board of Directors / Board Committees Meetings and Attendance Number of Meetings held in 2017 Board of Corporate Audit & Compensations Board Risk Executive Directors Governance Compliance & Nominating Committee Committee Meetings Committee Committee Committee 6 Board of Directors 2 5 6 2 3 Number of Meetings Attended by the Board of Directors Anwar Ali Al-Mudhaf 6 2 - - - - Abdullah Jaber Al-Ahmad Al-Sabah 5 - - - 2 3 Jamal Shaker Al-Kazemi* 5 2 1 5 - - Adel Mohamed El-Labban 6 - - - 2 3 Sanjeev Baijal 5 - - 5 - - Keith Henry Gale 6 - 5 - - 3 Michael Gerald Essex 6 - 5 6 2 - Mohamed Tareq Mohamed Sadeq Mohamed Akbar 6 - - 6 - - Abdulla Ahmed Al-Raeesi** 6 2 4 1 - - * Jamal Shaker Al-Kazemi: membership ended on Board Risk Committee and he joined the Audit & Compliance Committee on 30/03/2017 ** Abdulla Ahmed Al-Raeesi: membership ended on Audit & Compliance Committee and he joined the Board Risk Committee on 30/03/2017 39
  38. CORPORATE GOVERNANCE (CONTINUED) BOARD COMMITTEES (CONTINUED) 1. Corporate Governance Committee OBJECTIVES The Corporate Governance Committee's primary role is to assist the Board of Directors in fulfilling its oversight responsibilities related to sound governance practices, implementation and framework assessment. The Committee also takes a leadership role in shaping the Bank’s corporate governance policies. Committee Members: Dr. Anwar Ali Al-Mudhaf Chairman Jamal Shaker Al-KazemiMember Abdulla Ahmed Al-RaeesiMember Number of meetings held during 2017: 2 2017 HIGHLIGHTS ¥ Monitored the Bank’s compliance with the Corporate Governance policy and conducted ongoing assessments of its framework to ensure it is appropriateness to the Bank’s structure ¥ Reviewed & assessed amendments to the Bank’s policies to comply with Shari’ah Governance regulations as of January 2018 ¥ Reviewed the terms of reference of the Board and its committees and introduced the necessary changes to implement Shari’ah Governance ¥ Followed up on the progress of the team formed to implement the instructions of Shari’ah Governance ¥ Reviewed the framework of the governance of Shari’ah Governance ¥ Reviewed the Shari’ah Internal Audit Manual ¥ Proposed amendments to the Memorandum of Association and the Articles of Association of the Bank within the framework of the Shari’ah Governance ¥ Monitored the Bank’s subsidiaries from a Corporate Governance perspective 2. Board Risk Committee OBJECTIVES The Board Risk Committee (BRC) assists the Board of Directors in fulfilling its oversight responsibilities related to present and emerging risk issues, strategies, the risk appetite associated with the Bank’s banking and financing activities, including the investment portfolio. BRC recommends to the Board the risk management policies, risk appetite and framework, ensures adherence to the risk appetite policy and provides oversight on major risk categories and adequacy of the provisions and reserves. Committee Members: Keith Henry Gale Michael Gerald Essex Abdullah Al Raeesi Chairman Member (independent) Member Number of meetings held during 2017: 5 2017 HIGHLIGHTS ¥ Reviewed and followed up the work plan for the assessment of security systems and information ¥ Reviewed updates and implementation process of IFRS 9 ¥ Reviewed performance of the Bank's Islamic products ¥ Reviewed revised Terms of Reference (TOR) of BRC amended to be in line with the new Central Bank of Kuwait regulations on Shari’ah Supervisory Governance in Islamic Banks ¥ Reviewed all stress-tests and ICAAP submissions, underlying analysis and methodologies ¥ Reviewed updates on establishment of Enterprise Risk Management Unit combining various existing activities within RMD ¥ Reviewed revised Risk Management policies ¥ Reviewed and discussed the Bank’s risk appetite including risk concentrations, operational risk, compliance, anti-money laundering, liquidity and disaster recovery and business continuity 40
  39. CORPORATE GOVERNANCE (CONTINUED) BOARD COMMITTEES (CONTINUED) 2. Board Risk Committee (Continued) ¥ Evaluated the performance of the General Manager (GM) – Risk Management Division (RMD) and recommended his compensation to the Board of Directors ¥ Reviewed all reports submitted by the Management Risk Committee on timely basis 3. Audit and Compliance Committee OBJECTIVES The Audit & Compliance Committee (ACC) carries out its functions in accordance with the authorities & responsibilities vested in it by the Board of Directors with regard to the oversight of the Bank’s financial reporting, accounting principles, internal and external audit, compliance, anti-monny laundering and internal control matters as well as liaison with the Bank’s external auditors. Committee Members: Mohamed Tareq Mohamed Sadeq Mohamed Akbar Chairman (independent) Sanjeev Baijal Member Michael Gerald Essex Member (independent) Jamal Shaker Al-Kazemi Member Number of meetings held during 2017: 6 2017 HIGHLIGHTS ¥ Approved the internal Audit risk-based Plan for 2017 and submitted relevant recommendations ¥ Reviewed and evaluated the Internal Audit reports and their efficacy ¥ Monitored the execution of corrective action plans & regulatory compliance ¥ Reviewed the Internal Audit, Risk Management, quarterly reports ¥ Reviewed and evaluated the Internal Control System Review (ICR) report of the Bank ¥ Reviewed Subsidiary Internal Audit semi-annual and ICR reports ¥ Evaluated the nature, framework and implementation of the compliance plan, in addition to the mechanism of monitoring performance ¥ Reviewed reports from the anti-money laundering (AML) unit ¥ Reviewed complaints reports from the Complaints and Customer Protection Unit to ensure the effectiveness of internal procedures in handling these complaints in line with the relevant policies and regulatory requirements ¥ Reviewed and discussed the consolidated financial statements of the Bank and submitted recommendations to the Board of Directors for their approval ¥ Met with the internal control auditors to discuss the findings of this report ¥ Met with internal and external auditors, without the presence of executive management, to discuss financial and internal audit/compliance reports and matters of regulatory compliance ¥ Followed up on adequacy of internal audit and compliance resources and commitment to ensure their success ¥ Reviewed appointment of external auditors with recommendations to the Board ¥ Assessed the performance of General Manager Audit & Assistant General Manager Regulatory Compliance and recommended their compensation to the Board ¥ Approved Audit plan for 2018 ¥ 4. Compensation & Nominating Committee OBJECTIVES The role of the Compensation & Nominating Committee (CNC) is to assist the Board of Directors in fulfilling its oversight responsibilities related to managing the Bank's compensation arrangements including short and long term performance related remuneration and recommending for the Board's own approval the remuneration of Directors in line with Islamic Shari'ah principles and international best practice. In addition, the CNC identifies individuals qualified to become members of the Board and the Bank's Senior Management; to recommend to the Board nominees to serve on each committee of the Board and to assess the performance of the Board, its members and individual Committees. 41
  40. CORPORATE GOVERNANCE (CONTINUED) BOARD COMMITTEES (CONTINUED) 4. Compensation & Nominating Committee (Continued) Committee Members: ¥ Sheikh Abdullah Jaber Al-Ahmad Al-Sabah Chairman ¥ Adel A. El-Labban Member ¥ Michael Gerald Essex Member (independent) Number of meetings held during 2017: 2 2017 HIGHLIGHTS ¥ Reviewed & recommended to the Board of Directors the amendments to the Terms of Reference of the Compensation & Nominating Committee to comply with Central Bank of Kuwait Instructions on Shari'ah Governance ¥ Reviewed and proposed for Board approval, the Compensation Policy of the Bank and the structure of the Bank's fixed and variable compensation arrangements to comply with regulations and internal policies and to ensure that the compensation system operates as intended ¥ Reviewed & recommended for ratification to the Board of Directors, changes to the HR policy to comply with the new Kuwait Labour Law published on 9 July 2017 and the CBK guidelines concerning Shari'ah Corporate Governance issued on 20 December 2016 ¥ Reviewed & recommended to the Board of Directors the amendments for the Bank's Organization Structure to comply with Central Bank of Kuwait Instructions on Shari'ah Governance ¥ Reviewed the analysis of the annual assessment for the Board of Directors that included individual self-assessment, Board overall performance and Board Committees performance and presented the results for Board notification ¥ Reviewed & recommended to the Board of Directors the changes in the composition of the Board Risk Committee and Audit & Compliance Committee ¥ Recommended to the Board of Directors the performance bonus pool accrual and related risk adjustment methodology for creation of the proposed bonus pool ¥ Reviewed and recommended the appointment of Senior Deputy Chief Executive Officer- Banking Group ¥ Reviewed and recommended the appointment of General Manager - Internal Audit Department in coordination with Audit & Compliance Committee ¥ Reviewed the Bank's Succession Plan for Executives ¥ 5. Executive Committee OBJECTIVES The Executive Committee (EC) assists the Board of Directors in the oversight of key executive activities of the Bank, mainly related to the core banking functions and any other tasks delegated by the Board. It discharges its responsibilities in two capacities, namely: acting on behalf of the Board on matters normally reserved for the Board’s own resolutions and assuming responsibilities delegated by the Board including, but not limited to, credit, investment, liquidity, market and operational risks and excesses over limits assigned to other Committees. Committee Members: Sheikh Abdullah Jaber Al-Ahmad Al-Sabah Chairman Adel A. El-LabbanMember Keith H. GaleMember Number of meetings held during 2017: 3 2017 HIGHLIGHTS ¥ Reviewed and approved financing transactions and investment proposals as per approved authority matrix ¥ Reviewed the quality of the overall financing/facilities portfolio of the Bank ¥ Reviewed the decisions/minutes/reports of the management committees 42
  41. CORPORATE GOVERNANCE (CONTINUED) INDUCTION AND TRAINING CNC has developed an annual comprehensive training plan for the Board of Directors in order to develop the Board of Directors' skills and experience; which include Shari'ah corporate governance, risk management, cyber security, innovation and current topics trending in the banking sector. The plan is based on current international industry bench-marks and best practice. The Board of Directors had collectively attended the following programs in 2017: ¥ IFRS 9: Implementation Changes and the Role of the Board ¥ Information Security Awareness: Protecting you & the Bank ¥ Corporate Governance Trends ¥ Cyber Security: Some Practical Considerations More courses were taken via e-learning such as Foreign Account Tax Compliance Act & Anti Money Laundering. FATWA & SHARI'AH SUPERVISORY BOARD In accordance with the applicable laws, an independent Shari’ah Supervisory Board must be established in each Islamic bank to oversee the Bank’s businesses. The number of members of the Shari’ah board should not be less than three appointed by the Bank’s general assembly. Memorandum and Articles of Association of the Bank must provide for the existence of such a board, the means of its formation, and the means of exercising of its functions. Shari’ah Board resolutions are binding upon the Bank's departments, and the Bank is responsible for implementing these resolutions. The Shari’ah Board shall oversee and ensure the Management’s adherence to these resolutions and shall present its report to the General Assembly, including its opinion on the Bank’s business compliance to with Islamic Shari’ah provisions. The Fatwa & Shari’ah Supervisory Board convened (seven) times in 2017. Hereunder is a table of attendance of the Shari’ah Board members: Shari’ah Board Members Number of Meetings Attended by the Member Sheikh Dr. Khaled M. Al Mathkour 7/7 Sheikh Dr. Abdulaziz K. Al-Qassar 7/7 Sheikh Dr. Issam K. Al-Enezi Number of Meetings Attended by the Member 68 resolutions were issued by the Committee. 7/7 43
  42. CORPORATE GOVERNANCE (CONTINUED) FATWA & SHARI'AH SUPERVISORY BOARD (CONTINUED) EXECUTIVE COMMITTEE The Executive Committee is an independent body emanating from the Fatwa & Shari’ah Supervisory Board. It considers the issues referred to it by the Shari'ah Supervisory Board, as well as endorsing issues in accordance with the authority vested in it by the Shari’ah Supervisory Board. The Executive Committee convened (three) times during 2017. Hereunder is a table of attendance of the EC’s members of these meetings: Committee Members Sheikh Dr. Abdulaziz K. Al-Qassar Sheikh Dr. Issam K. Al-Enezi Number of Meetings Attended by the Member 8 recommendations were issued and endorsed as by Shari’ah Board. Number of Meetings Attended by the Member 3/3 3/3 SHARI'AH SUPERVISORY BOARD'S RAPPORTEUR Shari’ah Supervisory Board’s Rapporteur is the executive member of the Fatwa & Shari’ah Supervisory Board. He sets the agenda of Shari’ah Supervisory Board meetings, sends out the invitations to such meetings, and drafts the minutes of the Shari’ah Supervisory Board meetings and forwards its resolutions to the Bank Management for execution. He also looks into issues referred to him by Shari’ah Supervisory Board, in addition to endorsing issues in accordance with the authority vested in him by the Shari’ah Supervisory Board and ensures their soundness and compliance with the Shari’ah Supervisory Board’s resolutions. DISPOSAL OF NON-COMPLIANT SHARI'AH INCOME STEERING COMMITTEE The objective of this Committee is to supervise and follow up on the disposal of interest amounts, generated from pre-conversion or non-compliant Islamic Shari’ah transactions, and those subsequent transactions conducted erroneously. The Committee also endorses the Executive Management’s requests relevant to necessary payments based on descriptions and factual cases of human and social considerations, based on the data bases related to these issues, and presents the necessary amendments thereto, and determines the priorities of expenditure of these amounts. This Committee convened three times during 2017, and hereunder is a table of attendance of the members of the Contract to these meetings: Committee Members 44 Number of Meetings Attended by the Member Sheikh Dr. Abdulaziz K. Al-Qassar 3/3 Sheikh Dr. Issam K. Al-Enezi 3/3 Mr. Ahmed Zulficar 3/3
  43. CORPORATE GOVERNANCE (CONTINUED) DISPOSAL OF NON-COMPLIANT SHARI'AH INCOME STEERING COMMITTEE (CONTINUED) Internal Shari'ah Audit Internal Shari’ah Audit conducts quarterly audits on all the Bank's departments to ensure their compliance with the Fatwa & Shari’ah Supervisory Board resolutions, and that the Bank exercises its business in accordance with the Islamic Shari’ah provisions based on the resolutions of the Shari’ah Board. The Internal Shari’ah Audit submits its reports to the Shari’ah Supervisory Board on the findings of the audit function and its recommendations on these findings. Shari'ah Compliance Internal Shari’ah Audit replies to queries raised by the Bank’s departments as well as the Bank’s customers on the Shari’ah matters and explains and illustrates the resolutions of the Shari’ah Supervisory Board resolutions in addition to various daily submissions presented from the Bank departments and approves them based on the resolutions of the Shari'ah Supervisory Board. The Shari’ah Supervisory Board also reviews the policies, procedures, contracts, various forms, and checks the Bank advertisements in newspapers. Research, Training & Development In order to materialize its role and constitute a competent administrative personnel who form a part of a robust regulatory system, Shari’ah Department takes part in the development of products and training of staff in collaboration with Human Resources Division and the various development units in the Bank. VIOLATIONS RESULTING IN PROFITS OR EXPENSES IN BREACH OF ISLAMIC SHARI'AH PROVISIONS No financial violations (that means financial impacts result therefrom, either by collection of prohibited income or payment of prohibited expenses, according to the resolutions of the Fatwa & Shari'ah Supervision Board) were detected during 2017. ANNUAL ZAKAT PAID BY THE BANK In accordance with the law No. 46 of 2006, and according to the resolution of the Ministry of Finance No. 58/2007, the Bank shall have to pay zakat tax imposed by law. In some cases, the zakat tax covers the zakat amount to be paid by the Bank shareholders as zakat for their money. The amount of zakat tax for the fiscal year ending 31/12/2017 amounted to KD 490,432 (four hundred ninety thousand and four hundred thirty two Kuwaiti Dinars) REMUNERATION OF THE FATWA & SHARI'AH SUPERVISORY BOARD The annual general assembly endorses appointment/reappointment of the Shari’ah Supervisory Board members and authorizes the board of directors to determine their remunerations. 45
  44. CORPORATE GOVERNANCE (CONTINUED) RISK GOVERNANCE AND RISK MANAGEMENT FUNCTIONS Effective corporate governance remains central to the culture and business practices of the Bank, which is continuously upgraded to adopt best practices in the areas of governance, transparency, ethics, management and oversight of risk, audit and compliance, including to that of Shari'ah’s principles. These values are embedded throughout the Bank through a corporate governance policy that is relevant and proportionate to the scope and size of the businesses. The policy is built on the principles prescribed by the Basel Committee on Banking Supervision and the Guidelines of the Central Bank of the Kuwait. The Corporate Governance structure includes the Board, Board committees, management committees and various specified functions. The corporate governance policy supports the Bank’s objective of being a dynamic banking entity providing Islamic financial services of excellence, with insight and transparency in risk-taking. The Risk Management Framework is focused on integrating Enterprise-wide Risk Management fully into the Bank’s operations and culture. The role of Risk Management is to support growth, whilst ensuring consistent quality of the Bank’s portfolio and an appropriate return for the risk being taken. The objective is to manage balance sheet and earnings volatility, which is achieved by setting clear risk-taking parameters and robust processes. The Board has the overall responsibility for establishment and oversight of the Bank’s risk management framework, as well as for approving the Bank’s overall risk appetite, and ensuring that business is conducted within this framework. The Board is the ultimate sanctioning authority. The Corporate Governance Policy, The Disclosure and Transparency Policy and Subsidiaries’ Governance Policy have all been approved by the Board. INTERNAL CONTROL Management assumes the task of executing the internal control rules. The Board of Directors assumes full responsibility for the adequacy of the internal control systems. The Audit and Compliance Committee oversees the Bank’s internal control framework. Risk Management, the Internal Audit and the independent External Auditors submit their evaluations to the Board Risk Committee, the Audit and Compliance Committee and to the Board of Directors. The Board has reviewed the Internal Control systems and the Risk Management responsibilities and ensured their effectiveness within the Bank for 2017. In light of CBK instructions on internal audits within financial institutions, and to ensure the effectiveness and adequacy of its internal control systems, the Board has reviewed the Bank’s internal control systems through an independent and certified external audit firm. The Internal Control Report (ICR) was discussed by the Board of Directors as of December 2017 and no significant control gaps were detected in the opinion concluded by the report. Accordingly, the Board of Directors certifies the adequacy of the internal controls and supervision of the Bank. A copy of the opinion letter about ICR report is attached. 46
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  47. CORPORATE GOVERNANCE (CONTINUED) CODE OF ETHICS AND PROFESSIONAL CONDUCT The Bank’s Code of Conduct describes the values and minimum standards for ethical business conduct expected to be followed by the Bank’s Board members, executive management and employees. These values and standards govern employee interactions with our clients, competitors, business partners, shareholders and forms the basis of our policies, which provide guidance on compliance with applicable laws and regulations. The Bank’s directors, executive management and employees are committed to the highest degree of adherence to the code of conduct policies in addition to fostering and maintaining a work environment that supports ethical behavior and actively encourages an open dialogue on ethics and conduct. REPORTING POLICY (WHISTLE BLOWING) Whistle blowing policies are intended to make it easier for staff members to report irregularities in good faith and confidentiality, without having to fear adverse consequences for their action. The Bank has adopted a Whistle Blowing policy to maintain the highest possible standards of ethical and legal conduct. Staff members are encouraged to speak up if they have any genuine concerns about malpractice or unlawful conduct which they suspect is taking place within the Bank. Such misconduct may relate to financial malpractice, failure to comply with a legal or regulatory obligation, a criminal offence, behavior detrimental to the image or reputation of the Bank, the endangering of health and safety or the environment, or the deliberate concealment of any such matters “misconduct”. The Bank will protect and support anyone raising genuine concerns and will respect a need for anonymity. The Whistle Blowing policy is in furtherance of the Bank’s desire to strengthen the Bank’s system of integrity and fight against corruption, fraud and related offences. CONFLICT OF INTEREST The conflict of Interest Policy has been prepared to ensure that the highest degree of transparency and objectivity is maintained within the Bank. Directors and employees, their kinships and family members and the Bank itself as an entity as well as associates, should all avoid conflicts of interest over their commercial and economic transactions. The Bank’s policy is to take all reasonable steps to maintain and operate effective organizational and administrative arrangements to identify and manage relevant conflicts. The Bank has in place business-specific procedures that address the identification and management of actual and potential conflicts of Interest that may arise in the course of the Bank’s business. The Bank is required to take all reasonable steps to identify and adequately manage conflicts of interest entailing a material risk of damage to a client’s interest. This policy sets the requirement of the Bank, to have in place appropriate procedures, controls and measures in order to identify and manage any such material conflicts of interest. In accordance with the policy guidelines, Directors are required to disclose to the Board any interest they may have that might cause a conflict of interest. Any Director with a material personal interest in a matter being considered by the Board shall not attend nor vote on the matter being considered. CONFIDENTIALITY Confidentiality is among the key principles of banking business and is essential to earn the confidence of all parties dealing with banks, being depositors, borrowers, investors or otherwise. The Bank has adopted a Confidentiality Policy that shall serve as the standard reference for its Directors, officers and employees in concern of the collection, use, retention and security of non-public personal financial information of individual Bank customers and about the Bank itself. All Board members and the Bank’s employees are responsible for safeguarding the confidential and proprietary information in compliance with all applicable laws and approved policies. Furthermore, the Bank’s customers have access to a broad range of products and services such as basic banking products, mortgages and online banking. To deliver these products and services effectively and conveniently, it is extremely important that the Bank uses technology to manage and maintain certain customer information while ensuring that customer information is kept confidential and protected. The safeguarding of customer information is an issue that the Board of Directors takes seriously. In addition, all Bank employees upon employment have pledged themselves to a code of conduct in which one of the basic principles is to maintain the confidentiality, security and privacy of information in each client’s records. 49
  48. CORPORATE GOVERNANCE (CONTINUED) RELATED PARTIES DEALINGS The policy of dealing with related parties has been prepared in line with the relevant laws and resolutions including CBK rules and International Financial Reporting Standards (IFRS) requirements. The related party transactions are subject to review and audit by Internal Audit and the Board of Directors. The Bank ensures that all disclosures of the related party transactions are in line with local rules and regulations. Largest Shareholders: Committee Members Holding Percentage Ahli United Company WLL 67.330% Public Institution for Social Security 12.2% Major Shareholders Public Institution for Social Security 12.20% Minority Shareholders 20.47% Ahli United Company 67.33% COMPLAINTS AND CUSTOMER PROTECTION Customer Protection Unit has carried out the tasks assigned to it in accordance with the Complaints and Customer Protection Policy adopted by the Board of Directors of Ahli United Bank on August 16, 2017, in order to ensure that the Bank’s various units comply with the Bank’s Banking Protection Instructions issued by the Central Bank of Kuwait on July 5th 2015, through a review of all documents of the Bank to ensure that they comply with the requirements of protecting the relevant customers. The Customer Protection Unit has also participated in the task of analyzing customer complaints for the purpose of classifying them and identifying the root causes and proposing corrective actions for each complaint submitted to them. 50
  49. CORPORATE GOVERNANCE (CONTINUED) COMPLAINTS AND CUSTOMER PROTECTION (CONTINUED) As part of its responsibility, the Unit has provided new and comprehensive training courses to enhance the importance of quality of service, solve customer complaints with employees and relate them to the strategic vision of the Bank, and conduct market studies and surveys with clients and external clients to identify service development opportunities. STAKEHOLDERS PROTECTION The Bank works on stakeholder interests in a logical extension based on the Bank’s core values, and lays the foundation for the ongoing opportunities to attract investors, customers and staff. The Bank recognizes that stakeholders’ rights constitute an essential part of good governance, and its success is the outcome of the joint efforts of many parties and a pre-requisite for long-term development sustainability and value creation. The Bank aims to: ¥ Protect its shareholders rights, including minority shareholders, as well as the Bank’s various stakeholders ¥ Encourage the effective participation of shareholders in General Assembly meetings ¥ Make timely disclosures to all stakeholders REMUNERATION The compensation policy provides a framework that covers the Board of Directors and the employees of Ahli United Bank KSCP. The Board of Directors compensation is calculated in a pro-rated manner on the basis of actual attendance of Board meetings and related committee meetings in line with regulatory guidelines. The compensation system for employees consists of fixed remuneration and variable discretionary remuneration based on individual performance, aligned with the Bank's overall performance, within the Board of Directors approved risk framework and in compliance with the Central Bank of Kuwait and regulatory guidelines in Kuwait. Individual variable remuneration for Executive Management and Material Risk Takers is risk-based and covers both short-term and long-term compensation, out of which who are highly rewarded for their outstanding performance, part of their variable pay will deferred over a per of 2 years and is subject to malus and claw back. The Compensation Policy is reviewed by the Compensation & Nominating Committee on annual basis and audited by the internal/ external auditors to ensure compliance with CBK corporate governance guidelines. REMUNERATION POLICY & DISCLOSURES The Bank has categorized its staff into Senior Management, Material Risk Takers and Control functions. The Board of Directors proposed a board remuneration of KD 120,400 for year 2017 subject to the Ordinary General Assembly approval. Total remuneration of the top eight (8) Bank’s executives, including the GM Finance, GM Internal Audit and GM Risk Management KD 1,192,869 Disclosure of Remuneration as per Employees Categories. Personal Categories No. of Employees Fixed Remunerations (KD) Variable Remunerations (KD) Total Payments (KD) Senior Management 13 1,241,830 415,906 1,657,736 Material Risk Takers 24 1,222,449 298,640 1,521,089 Financial & Control Functions 20 1,024,700 249,281 1,273,981 51
  50. Best Call Centre in Kuwait 2017
  51. CONSOLIDATED FINANCIAL STATEMENTS Contents Page Independent Auditors ' Report 54 Consolidated Statement of Profit or Loss 60 Consolidated Statement of Other Comprehensive Income 61 Consolidated Statement of Financial Position 62 Consolidated Statement of Changes in Equity 63 Consolidated Statement of Cash Flows 64 Notes to the Consolidated Financial Statements 65
  52. INDEPENDENT AUDITORS ' REPORT 54
  53. INDEPENDENT AUDITORS ' REPORT (CONTINUED) 55
  54. INDEPENDENT AUDITORS ' REPORT (CONTINUED) 56
  55. INDEPENDENT AUDITORS ' REPORT (CONTINUED) 57
  56. INDEPENDENT AUDITORS ' REPORT (CONTINUED) 58
  57. CONSOLIDATED FINANCIAL STATEMENTS
  58. CONSOLIDATED STATEMENT OF PROFIT OR LOSS For the year ended 31 December 2017 Notes 2017 KD 000 2016 KD 000 Financing income 3 148 ,112 132,589 Distribution to depositors 4 (43,980) (44,187) 104,132 88,402 10,522 10,618 2,612 4,006 (74) 2,949 2,589 3,451 292 1,627 120,073 111,053 (34,907) (31,679) - (5,813) 85,166 73,561 (24,468) (20,624) (2,586) (2,509) Other operating expenses (11,332) (10,758) Total operating expenses (38,386) (33,891) PROFIT FROM OPERATIONS 46,780 39,670 (2,149) (1,873) Directors’ remuneration (168) (150) PROFIT FOR THE YEAR 44,463 37,647 Net profit for the year attributable to Bank's equity shareholders 44,463 40,348 - (2,701) 44,463 37,647 24.4 24.0 Net financing income Net fees and commission income 5 Foreign exchange gains Net (loss) gain on sale of investment properties Net gain on sale of investments Other income 6 Total operating income Provision and impairment losses 7 Provision on asset held for sale Operating income after provisions and impairment losses Staff costs Depreciation Taxation 8 Net loss attributable to non-controlling interests Basic and diluted earnings per share attributable to the Bank's equity shareholders (fils) The attached notes 1 to 29 form part of these consolidated financial statements. 60 9
  59. Consolidated Statement of Other Comprehensive Income For the year ended 31 December 2017 Note Profit for the year 2017 KD 000 2016 KD 000 44 ,463 37,647 (446) (4,706) 11 (276) (435) (4,982) (74) 36 (74) 36 (509) (4,946) 43,954 36,393 - (3,692) 43,954 32,701 Other comprehensive (loss) income: Other comprehensive (loss) income to be reclassified to consolidated statement of profit or loss in subsequent periods: Net movement in cumulative changes in fair values of investments available for sale Exchange differences on translation of foreign operations Net other comprehensive loss to be reclassified to consolidated statement of profit or loss in subsequent periods Other comprehensive income not to be reclassified to consolidated statement of profit or loss in subsequent periods: Revaluation of freehold land Net other comprehensive income not to be reclassified to consolidated statement of profit or loss in subsequent periods Other comprehensive loss for the year Total comprehensive income attributable to Bank's equity shareholders Total comprehensive loss attributable to non-controlling interests Total comprehensive income for the year 15 The attached notes 1 to 29 form part of these consolidated financial statements. 61
  60. CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2017 Notes 2017 KD 000 2016 KD 000 10 42 ,329 44,144 Deposits with Central Bank of Kuwait 415,626 426,847 Deposits with other banks 222,631 227,280 ASSETS Cash and balances with banks Financing receivables 11 2,672,832 2,706,054 Investments available for sale 12 217,358 203,973 Investment in associate 13 9,318 10,162 Investment properties 14 38,026 23,055 Premises and equipment 15 33,273 31,393 Other assets 16 14,186 19,253 3,665,579 3,692,161 708,867 702,152 TOTAL ASSETS LIABILITIES AND EQUITY LIABILITIES Deposits from banks and other financial institutions Deposits from customers 17 2,426,281 2,491,871 Other liabilities 18 62,843 52,450 3,197,991 3,246,473 EQUITY Share capital 19 187,096 173,237 Reserves 19 263,809 255,768 450,905 429,005 (43,957) (43,957) 406,948 385,048 60,640 60,640 467,588 445,688 3,665,579 3,692,161 Treasury shares 20 ATTRIBUTABLE TO BANK'S EQUITY SHAREHOLDERS Perpetual Tier 1 Sukuk 21 TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Dr. Anwar Ali Al-Mudhaf Richard Groves Chairman Chief Executive Officer The attached notes 1 to 29 form part of these consolidated financial statements. 62
  61. 63 63 - 74 ,199 -  -  -  4,237 -  -  -  -  -  69,962 78,877 -  4,678 -  -  -  -  -  74,199 22,660 -  -  -  - -  -  -  -  - 22,660 22,660 -  - -  -  -  -  - 22,660 KD 000 reserve General The attached notes 1 to 29 form part of these consolidated financial statements. 12,883 - 173,237 Other movement Balance as at 31 December 2016 - - - - - - - - 12,883 12,883 - - - - - 15,749 - - 21) Perpetual Tier 1 Sukuk issuance cost (Note (Note 21) Proceeds from issue of Perpetual Tier 1 Sukuk Transfer to reserves (Note 19) Bonus shares issued - 2015 (Note 19) - - year - Dividend - 2015 (Note 19) Total comprehensive income (loss) for the year Other comprehensive (loss) income for the - 157,488 Profit (loss) for the year Balance as at 1 January 2016 - 187,096 Profit payment on Tier 1 Sukuk (Note 21) Balance as at 31 December 2017 - 13,859 Transfer to reserves (Note 19) Bonus shares issued - 2016 (Note 19) - - year - - - - 12,883 173,237 KD 000 Dividend - 2016 (Note 19) Total comprehensive income (loss) for the year Other comprehensive (loss) income for the Profit for the year Balance as at 1 January 2017 reserve premium capital KD 000 KD 000 Statutory Share Share CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2017 131,048 -  (413) -  (4,237) (15,749) (7,090) 40,348 -  40,348 118,189 134,920 (3,337) (4,678) (13,859) (18,717) 44,463 -  44,463 131,048 KD 000 earnings Retained 3,924 - - - -    -    -    (3,868) (3,868) -    7,792 3,478 - -    -    -    (446) (446) -    3,924 KD 000 fair values changes in Cumulative Reserves 10,050 -   -   -   -    -    -    36 36 -   10,014 9,976 -   -    -    -    (74) (74) -   10,050 KD 000 reserve revaluation Property 974   -   -   -   -   -   -   -   -  -  974 974 -   -   -   -   -   -  -  974   KD 000 reserve shares Treasury Attributable to Bank's equity shareholders Foreign 30  -   -   -   -   -   -   (123) (123) - 153 41 -   -   -   -   11 11 - 30  KD 000 reserve translation currency 255,768 -    (413) -    -    (15,749) (7,090) 36,393 (3,955) 40,348 242,627 263,809 (3,337) -    (13,859) (18,717) 43,954 (509) 44,463 255,768 KD 000 reserves Total (43,957) -     -     -     -     -     -     -     -    -   (43,957) (43,957) -     -     -     -     -     -    -   (43,957) KD 000 shares Treasury 60,640 -  -  60,640 -     -     -     -     -  -  -  60,640 -  -     -     -     -     -  -  60,640     KD 000 Tier 1 Sukuk Perpetual Non- - (985) - - - - - (3,692) (991) (2,701) 4,677  -  -   -   -   -   -   -  -  445,688 (985) (413) 60,640 - - (7,090) 32,701 (4,946) 37,647 360,835 467,588 (3,337) - - (18,717) 43,954 (509) 44,463 445,688 KD 000 KD 000 - Total Equity interests controlling
  62. CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2017 Notes OPERATING ACTIVITIES Net profit for the year Adjustments for : Net loss (gain) on sale of investment properties Net gain on sale of investments Share of results from associate Dividend income Net income from investment properties Depreciation Provision and impairment losses Amortisation of sukuk premium Provision on asset held for sale Operating profit before changes in operating assets and liabilities Changes in operating assets / liabilities: Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Other assets Deposits from banks and other financial institutions Deposits from customers Other liabilities Net cash from (used in) operating activities INVESTING ACTIVITIES Purchase of investments available for sale Sale and redemption of investments available for sale Purchase of investment properties Proceeds from sale of investment properties Purchase of premises and equipment Net income from investment properties Dividend from associate Dividend income received Net cash used in investing activities FINANCING ACTIVITIES Proceeds from issue of Perpetual Tier 1 Sukuk Perpetual Tier 1 Sukuk issuing cost Profit payment on Tier 1 Sukuk Dividend paid to shareholders Net cash (used in) from financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at 1 January CASH AND CASH EQUIVALENTS AT 31 DECEMBER 13 6 6 7 6 6 21 19 10 Financing income received amounted to KD 149,972 thousand (2016: KD 132,613 thousand) and distribution to depositors paid amounted to KD 45,735 thousand (2016: KD 39,178 thousand). The attached notes 1 to 29 form part of these consolidated financial statements. 64 2017 KD 000 2016 KD 000 44,463 37,647 74 (2,589) 687 (688) (105) 2,586 34,907 595 79,930 (2,949) (3,451) 33 (1,173) (403) 2,509 31,679 573 5,813 70,278 11,221 17,016 6,567 5,489 6,852 (65,590) 4,935 66,420 (161,649) (25,753) (65,360) 7,790 (127,837) (168,758) 1,353 (469,936) (358,069) 344,895 (21,409) 4,517 (4,540) 105 688 (33,813) (394,198) 328,693 8,784 (4,116) 403 464 1,173 (58,797) (3,337) (18,717) (22,054) 60,640 (413) (7,090) 53,137 10,553 77,048 87,601 (475,596) 552,644 77,048
  63. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  64. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As at 31 December 2017 1 . INCORPORATION AND ACTIVITIES Ahli United Bank K.S.C.P. “the Bank” is a public shareholding company incorporated in Kuwait in 1971 and is listed on the Kuwait Stock Exchange. It is engaged in carrying out banking activities in accordance with Islamic Shari'ah and is regulated by the Central Bank of Kuwait “CBK”. Its registered office is at Darwazat Al-Abdul Razzak, P.O. Box 71, Safat 12168, Kuwait. The Bank commenced operations as an Islamic bank from 1 April 2010. From that date, all activities are conducted in accordance with Islamic Shari'ah, as approved by the Bank's Fatwa and Shari'ah Supervisory Board. The Bank is a subsidiary of Ahli United Bank B.S.C., a Bahraini bank "the Parent", listed on the Bahrain and Kuwait Stock Exchanges. As at 31 December 2017, the Bank holds 50.12% (2016: 50.12%) effective interest in its subsidiary, Kuwait and Middle East Financial Investment Company K.S.C.P. “KMEFIC”, a company incorporated in the State of Kuwait. KMEFIC is listed on the Kuwait Stock Exchange and engaged in investment and portfolio management activities for its own account and for its clients. The consolidated financial statements comprising the financial statements of the Bank and its subsidiary "the Group" were authorized for issue in accordance with a resolution of the Board of Directors of the Bank on 16 January 2018 and are subject to the approval of the Ordinary General Assembly of the Shareholders of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance. 2 . SUMMARY SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements are prepared under the historical cost convention except for the remeasurement at fair value of investments available for sale, freehold land and derivative financial instruments. The consolidated financial statements are presented in Kuwaiti Dinars “KD”, which is also the functional currency of the Bank, rounded to the nearest thousand except when otherwise indicated. 2.2 Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards “IFRS” issued by the International Accounting Standard Board “IASB”, as adopted for use by the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait. These regulations require adoption of all IFRSs except for the International Accounting Standard (IAS) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the Central Bank of Kuwait’s requirement for a minimum general provision as described under the accounting policy for impairment of financial assets. 2.3 Changes in accounting policies The accounting policies applied are consistent with those used in the previous year. Amendments to IFRSs which are effective for annual accounting period starting from 1 January 2017 did not have any material impact on the accounting policies, financial position or performance of the Group. 2.4 New and revised IASB Standards, but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective. 66
  65. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 New and revised IASB Standards, but not yet effective (Continued) IFRS 9: Financial Instruments The IASB issued the final version of IFRS 9 Financial Instruments in July 2014, that replaces IAS 39 Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: Classification and Measurement, Impairment and Hedge Accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group plans to adopt the new standard on the required effective date from 1 January 2018. The Group will avail of the exemption allowing it not to restate comparative information for prior periods. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 will be recognized in opening retained earnings and reserves as at 1 January 2018. During the year 2017, the Group has performed a detailed impact assessment of IFRS 9. This assessment is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made available to the Group, until the Group presents its first consolidated financial statements that include the date of initial application. (a) Classification and measurement IFRS 9 has a new classification and measurement approach for financial assets that reflect the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains three classification categories for financial assets: measured at Amortized Cost, Fair Value through Other Comprehensive Income “FVOCI” (with and without recycling of gains or losses to profit or loss on derecognition of debt and equity instruments, respectively) and Fair Value Through Profit or Loss “FVTPL”. The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. The Group has evaluated the Classification and measurement criteria to be adopted for various financial assets considering the IFRS 9 requirements with respect to the business model and Contractual Cash flow Characteristics "CCC" / Solely Payment of Principal and Profit "SPPP". The Group does not expect a significant impact on its consolidated statement of financial position from applying the classification and measurement requirements of IFRS 9 except that for certain financial assets held as availablefor-sale with gains and losses recorded in OCI mainly representing the Group’s investment in Sukuks as disclosed in Note 12, which will instead be measured at amortized cost. As at 31 December 2017, the Group has equity securities classified as available-for-sale held for long term strategic purposes. Under IFRS 9, the Group has designated these investments as measured at FVOCI. Consequently, all fair value gains and losses will be reported in OCI, no impairment losses will be recognized in consolidated statement of profit or loss and no gains or losses will be recycled to consolidated statement of profit or loss on disposal. Financing receivables will be held under the business model to collect contractual cash flows and are expected to give rise to cash flows representing Solely Payments of Principal and Profit. The Group analyzed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required. There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The de-recognition rules under IAS 39 Financial Instruments: Recognition and Measurement have not been changed. 67
  66. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 New and revised IASB Standards, but not yet effective (Continued) (b) Impairment of financial assets IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘Expected Credit Loss’ "ECL" model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The ECL model contains a three stage approach which is based on the change in credit quality of financial assets since initial recognition. Under Stage 1, where there has not been a significant increase in credit risk since initial recognition, an amount equal to 12 months ECL will be recorded. Under Stage 2, where there has been a significant increase in credit risk since initial recognition but the financial instruments are not considered credit impaired, an amount equal to the default probability-weighted lifetime ECL will be recorded. Under the Stage 3, where there is objective evidence of impairment at the reporting date these financial instruments will be classified as credit impaired and an amount equal to the lifetime ECL will be recorded for the financial assets. The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment are intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. The Group has completed the development and testing of operating models and methodologies for the calculation of ECL. The Group has also performed parallel runs during the year to gain a better understanding of the potential effect of the new standard and for the governance framework to gain experience. The Group continues to revise, refine and validate the impairment models and related process controls in advance of 31 March 2018 reporting. The Group will determine the potential impact of the expected credit loss provision in accordance with IFRS 9 during the period ended 31 March 2018. The Group will also comply with instructions issued by the Central Bank of Kuwait in this regard. (c) Hedge accounting The Group determined that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 will not have a significant impact on Group’s consolidated financial statements. (d) Disclosure The new Standard also introduces expanded 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. The Group’s assessment included an analysis to identify data gaps against current process and the Group is in process of implementing the system and controls changes that it believes will be necessary to capture the required data. IFRS 15: Revenue from Contracts with customers IFRS 15 was issued by IASB on 28 May 2014, effective for annual periods beginning on or after 1 January 2018. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue along with related IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31 from the effective date. This new Standard removes inconsistencies and weaknesses in previous revenue recognition requirements, provides a more robust framework for addressing revenue issues and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The Group does not expect any impact upon adoption of this Standard. 68
  67. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4 New and revised IASB Standards, but not yet effective (Continued) (d) Disclosure (continued) IFRS 16: Leases In January 2016, the IASB issued IFRS 16 ‘Leases’ with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the Standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 ‘Leases’. Lessees will recognise a ‘right of use’ asset and a corresponding financial liability on the balance sheet. The asset will be amortized over the length of the lease and the financial liability measured at amortized cost. Lessor accounting remains substantially the same as in IAS 17. The Group is in the process of evaluating the impact of IFRS 16 on the Group’s consolidated financial statements, but does not expect any significant effect on adoption of this Standard. 2.5 Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank as at 31 December 2017 and its subsidiary. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • • • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure or rights to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to the elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of Other Comprehensive Income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. 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. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, noncontrolling interest and other components of equity while any resultant gain or loss is recognized in consolidated statement of profit or loss. Any investment retained is recognized at fair value. 69
  68. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments Classification As per IAS 39, the Group classifies its financial instruments as “investments at fair value through profit or loss”, “loans and receivables”, “investments available for sale” or “financial liability other than at fair value through profit or loss”. Management determines the appropriate classification of each instrument at the time of acquisition. (i) Investments at fair value through profit or loss These are financial assets that are either financial assets held for trading or those designated as investments at fair value through profit or loss upon initial recognition. A financial asset is classified in this category only if they are acquired principally for the purpose of generating profit from short-term fluctuation in price or if so designated by the management in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. This includes all derivative financial instruments, other than those designated as effective hedging instruments. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cash and balances with banks, deposits with Central Bank of Kuwait, deposits with other banks, financing receivables, and certain other assets are classified as “loans and receivables“. The Bank offers Shari'ah compliant products and services such as Murabaha, Musawamah, Wakala and Ijara. Murabaha is the sale of commodities, real estate and certain other assets at cost plus an agreed profit mark-up whereby the seller informs the purchaser of the cost of the product purchased and the amount of profit to be recognized. Musawamah is an agreement under which negotiations between a buyer and a seller preclude the disclosure of seller's cost. Wakala is an agreement whereby the Group provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. The agent is obliged to return the amount in case of default, negligence or violation of any terms and conditions of the Wakala. Ijara is an agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for a specific period and against certain rent instalments. Ijara could end by transferring the ownership of the asset to the lessee. (iii) Investments available for sale These are financial assets either designated as “available for sale” or are not classified as fair value through profit or loss, loans and receivables, and held to maturity. (iv) Financial liabilities other than at fair value through profit or loss Financial liabilities which are not held for trading are classified as “other than at fair value through profit or loss”. Deposits from banks and other financial institutions, deposits from customers and certain other liabilities are classified as “financial liabilities other than at fair value through profit or loss”. Financial liabilities include depositors’ accounts created by Murabaha, Mudaraba and Wakala contracts. 70
  69. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (Continued) Recognition and de-recognition A financial asset or a financial liability is recognized when the Group becomes a party to the contractual provisions of the instrument. All “regular way” purchases and sales of financial assets are recognized on the settlement date, i.e. the date that the Group receives or delivers the asset. Changes in fair value between the trade date and settlement date are recognized in the consolidated statement of profit or loss or in the consolidated statement of other comprehensive income in accordance with the policy applicable to the related instrument. 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. A financial asset (in whole or in part) is derecognized either when: (i) the contractual rights to receive the cash flows from the asset have expired; or (ii) the Group has retained its right to receive cash flows from the assets but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or (iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. A financial liability is derecognized when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same counterparty on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statement of profit or loss. Measurement All financial assets and liabilities are initially measured at fair value of the consideration given plus transaction costs except for financial assets classified as investments at fair value through profit or loss. Transaction costs on financial assets classified as investments at fair value through profit or loss are recognized in the consolidated statement of profit or loss. On subsequent measurement financial assets classified as “investments at fair value through profit or loss” are measured and carried at fair value. Realized and unrealized gains / losses arising from changes in fair value are included in the consolidated statement of profit or loss. “Loans and receivables” are carried at amortized cost using effective yield method, less any provision for impairment. Those classified as “investments available for sale” are subsequently measured at fair value until the investment is sold or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in other comprehensive income is included in the consolidated statement of profit or loss for the year. “Financial liabilities other than at fair value through profit or loss” are subsequently measured at amortized cost. Impairment of financial assets At each reporting date, the Group assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired, if and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the asset or group of financial assets is written down to its recoverable amount. The recoverable amount of a profit-bearing instrument is estimated based on the net present value of future cash flows discounted at original profit rates, and of equity instrument is determined with reference to market rates or appropriate valuation models. For variable profit rate bearing instruments, the net present value of future cash flows is discounted at the current effective profit rate determined under the contract. 71
  70. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (Continued) Impairment of financial assets (Continued) The carrying amount of the asset is reduced through the use of an allowance account and the amount of impairment loss is recognized in the consolidated statement of profit or loss. The Group assesses whether objective evidence of impairment exists on an individual basis for each individually significant financing and collectively for others. The main criteria that the Group uses to determine that there is objective evidence of impairment includes whether any payment of principal or profit are overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty's business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral, bankruptcy, other financial reorganization, and economical or legal reasons. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. Financial guarantees and letter of credit are assessed and provisions are made in a similar manner as for financing receivables. Financing receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the “Provision for impairment” in the consolidated statement of profit or loss. For equity instruments classified as investments available for sale, impairment losses are not reversed through the consolidated statement of profit or loss; any increase in the fair value subsequent to the recognition of impairment loss, is recognized in the consolidated statement of Other Comprehensive Income. For Sukuk classified as investments available for sale, if in a subsequent year, the fair value of the Sukuk increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of profit or loss, the impairment loss is reversed through the consolidated statement of profit or loss. General provision In accordance with the Central Bank of Kuwait’s instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non-cash facilities. The required rates were to be applied effective from 1 January 2007 on the net increase in facilities, net of certain categories of collateral during the reporting period. The minimum general provision in excess of the present 1% for cash facilities and 0.5% for non-cash facilities is retained as a general provision until further directives are received from the CBK. Fair values measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • • 72 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
  71. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.6 Financial instruments (Continued) Fair values measurement (Continued) The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a 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, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • • • Level 1:- Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 :- Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 :- Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value. For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes. For financial instruments carried at amortized cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost. 2.7 Islamic Forward Agreements and Hedging For assets and liabilities that are recognized 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 the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 73
  72. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Islamic Forward Agreements and Hedging (Continued) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts and the Group intends to settle on a net basis. The Group makes use of Islamic derivative instruments to manage exposures to profit rate, foreign currency and credit risks. Derivative financial instruments are initially recognized in the consolidated statement of financial position at cost (including transaction costs) and subsequently measured at their fair value. Islamic Forward Agreements In the ordinary course of business, the Bank enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Shari'ah. The notional amount, disclosed gross, is the amount of a Waad’s underlying asset/ liability and is the basis upon which changes in the value are measured. The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk. For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated statement of profit or loss. Profit rate swaps Profit rate swaps are contractual agreements between two parties and may involve exchange of profit or exchange of both principal and profit for a fixed period of time based on contractual terms. The notional amounts indicate the volume of transactions outstanding at the period-end and are neither indicative of the market risk nor credit risk. Most of the Group’s profit rate swaps are held for hedging. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; and (b) cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or a foreign currency risk in an unrecognized firm commitment. 74
  73. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.7 Islamic Forward Agreements and Hedging (Continued) The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated statement of profit or loss, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortized to the consolidated statement of profit or loss over the period to maturity of the previously designated hedge relationship using the effective profit rate. If the hedged item is derecognized, the unamortized fair value is recognized immediately in the consolidated statement of profit or loss. When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in consolidated statement of profit or loss. For those contracts classified as cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognized directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognized immediately in the consolidated statement of profit or loss. Amounts recognized as other comprehensive income are transferred to the consolidated statement of profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or nonfinancial liability, the amounts recognized as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognized in fair value reserve are transferred to the consolidated statement of profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in Other Comprehensive Income remains in Other Comprehensive Income until the forecast transaction or firm commitment affects profit or loss. The Group discontinues hedge accounting when the following criteria are met: a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge; b) the hedging instrument expires, or is sold, terminated, or exercised; c) the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable. 2.8 Financial guarantees In the ordinary course of business, the Group provides financial guarantees, consisting of letter of credit, guarantees and acceptances. Financial guarantees are initially recognized in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is amortized in the consolidated statement of profit or loss on a straight line basis over the life of the guarantee. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortized premium received and the best estimate of net cash flow required to settle any financial obligation arising as a result of the guarantee. 2.9 Renegotiated financing receivables Where considered appropriate, the Group seeks to restructure past due financing receivables. This may involve extending the payment arrangements and the agreement of new financing conditions including enhancing collateral position. Management continuously reviews renegotiated financing receivables, if any, to ensure that all criteria are met and that future payments are likely to occur. Once the terms have been renegotiated, the facility is neither considered past due nor impaired. 75
  74. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.10 Investment in associate The Group’s investment in its associate is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment. The consolidated statement of profit or loss reflects the share of the results of operations of the associate. Where there has been a change recognized directly in the other comprehensive income of the associate, the Group recognizes its share of any changes and discloses this, when applicable, in the consolidated statement of other comprehensive income. Unrealized gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The Group’s share of profit attributable to equity holders of an associate is shown on the face of the consolidated statement of profit or loss. The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the consolidated statement of profit or loss. Upon loss of significant influence over the associate, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognized in consolidated statement of profit or loss. 2.11 Investment properties Land and buildings held for the purpose of capital appreciation or for long term rental yields and not occupied by the Group are classified as investment properties. Investment properties are measured at cost less accumulated depreciation (based on an estimated useful life of forty years using the straight line method) and accumulated impairment. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statement of profit or loss in the period of retirement or when sale is completed. Fair values of investment properties are determined by appraisers having an appropriate recognized professional qualification and recent experience in the location and category of the property being valued. The fair value measurement 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. 76
  75. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.12 Premises and equipment Freehold land is initially recognized at cost and not depreciated. After initial recognition freehold land is carried at the revalued amount, which is the fair value at the date of revaluation. The revaluation is carried out periodically by professional property evaluators. The resultant revaluation surplus or deficit is recognized in the consolidated statement of profit or loss and other comprehensive income to the extent the deficit does not exceed the previously recognized surplus. The portion of the revaluation deficit that exceeds a previously recognized revaluation surplus is recognized in the consolidated statement of profit or loss. To the extent that a revaluation surplus reverses a revaluation decrease previously recognized in the consolidated statement of profit or loss, the increase is recognized in the consolidated statement of profit or loss. Upon disposal, the revaluation reserve relating to the freehold land sold is transferred to retained earnings. Buildings, other premises and equipment are stated at cost, less accumulated depreciation and impairment losses if any. Depreciation of buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings 40 to 45 years Other premises and equipment 2 to 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognized in the consolidated statement of profit or loss. Expenditure incurred to replace a component of an item of premises and equipment that is accounted for separately is capitalized and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalized only when it increases future economic benefits of the related item of premises and equipment. All other expenditure is recognized in the consolidated statement of profit or loss as the expense is incurred. 2.13 Perpetual Tier 1 Sukuk Perpetual Tier 1 Sukuk are recognized under equity in the consolidated statement of financial position and corresponding distributable profits on those Sukuk are accounted as a debit to the retained earnings. 2.14 Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and then its recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by available fair value indicators. 77
  76. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.15 End of service indemnity Provision is made for employees' end of service indemnity in accordance with the local laws based on employees' salaries and accumulated periods of service or on the basis of employment contracts, where such contracts provide extra benefits. The provision, which is unfunded, is determined as the liability that would arise as a result of involuntary termination of staff at the reporting date. This basis is considered to be a reliable approximation of the present value of the final obligation. 2.16 Treasury shares Treasury shares consist of the Bank's own issued shares that have been reacquired by the Group and not yet reissued or cancelled. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in equity. When the treasury shares are reissued, gains are credited to a separate account in equity, (the "treasury shares reserve"), which is not distributable. Any realized losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the general reserve and statutory reserve. Gains realized subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, treasury shares reserve account and retained earnings. No cash dividends are paid on these shares. The issue of stock dividend shares increases the number of treasury shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. 2.17 Cash and cash equivalents Cash and cash equivalents include cash and balances with Central Bank of Kuwait, deposits with banks with original maturity not exceeding seven days. 2.18 Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. (i) Financing income For all financial instruments measured at amortized cost, profit bearing financial assets classified as available-forsale, financing income is recorded using the effective profit rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective profit rate, but not future credit losses. Once a financial instrument categorized as “financing receivables” is written down to its estimated recoverable amount, related income is thereafter recognized on the unimpaired portion based on the original effective profit rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount. (ii) Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: • Fee income earned from services that are provided over a certain period of time are accrued over that period. • Fee income arising from negotiating or participating in the negotiation of a transaction for a third party, are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. 78
  77. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.18 Revenue recognition (Continued) (iii) Dividend income is recognized when right to receive payment is established. (iv) Rental income is recognized on an accrual basis. 2.19 Taxation National Labour Support Tax (NLST) The Bank calculates NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year. Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007. 2.20 Provisions Provisions are recognized when, as a result of past events, it is probable that an outflow of economic resources will be required to settle a present, legal or constructive obligation and the amount can be reliably estimated. 2.21 Foreign currency Foreign currency transactions are recorded at the rate of exchange prevailing at the date of transactions. Monetary assets and liabilities denominated in foreign currencies outstanding at the year-end are translated into Kuwaiti Dinars at the rates of exchange prevailing at reporting date. Any resultant gains or losses are taken to the consolidated statement of profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Translation differences on non-monetary investments at fair value through profit or loss are reported as part of the fair value gain or loss in the consolidated statement of profit or loss, whilst those for Available For Sale non-monetary assets are included in the consolidated statement of Other Comprehensive Income, unless it is part of an effective hedging strategy, using exchange rates when the fair value was determined. Translation differences arising on net investments in foreign operations are taken to the consolidated statement of Other Comprehensive Income. 2.22 Segment information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. 79
  78. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.23 Contingencies Contingent assets are not recognized in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable. Contingent liabilities are not recognized in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Provisions for contingent liabilities are recognized when the outflow of resources is probable. 2.24 Fiduciary assets ssets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly are not included A in these consolidated financial statements. 2.25 Significant accounting judgement, estimates and assumptions The preparation of consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of financial assets and liabilities and disclosure of contingent liabilities. These judgements and estimates also affect the revenues and expenses and the resultant provisions as well as the fair value changes reported in other comprehensive income. Judgements are made in the classification of financial instruments based on management’s intention at acquisition, i.e. whether it should be classified as financial assets at fair value through profit or loss or available for sale. In making these judgements, the Group considers the primary purpose for which it is acquired and how it intends to manage and report its performance. Such judgements also determine whether the financial instruments are subsequently measured at amortized cost or at fair value and if the changes in fair value of instruments are reported in the consolidated statement of profit or loss or directly in equity. Judgements are also made in determination of the objective evidence that a financial asset is impaired. The Group treats investments Available For Sale as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is "significant" or "prolonged" requires considerable judgement and involves evaluating factors including industry and market conditions, future cash flows and discount factors. When the fair values of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the income models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Any changes in these estimates as well as the use of different, but equally reasonable estimates may have an impact on their carrying amounts. In accordance with the accounting principles contained in the International Financial Reporting Standards, management is required to make estimates and assumptions that may affect the carrying values of financing receivables, unquoted equity instruments classified as investments available for sale and intangible assets. Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing financing receivables as well as for impairment provisions for investments available for sale and assets held for sale. Estimates are also made in determining the useful lives of buildings and other premises and equipment and fair values of financial assets and derivatives that are not quoted in an active market. Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions. 80
  79. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.25 Significant accounting judgement, estimates and assumptions (Continued) The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on the carrying amounts of financing receivables, unquoted instruments classified as investments available for sale and intangible assets for the year. 3. FINANCING INCOME During the year, financing income included interest income, till the date of final conversion to Islamic Financing Receivable on 15 March 2017 amounting to KD 14 thousand (2016: KD 143 thousand) received from non-converted loans and advances granted before conversion to an Islamic Bank, which represents 0.01% (2016: 0.1%) of the total financing income. Treatment of interest income is subject to resolutions of the Bank's Fatwa and Shari'ah Supervisory Board. 4. DISTRIBUTION TO DEPOSITORS The Board of Directors of the Bank determines and distributes the depositors’ share of profit based on the Bank's results at the end of each quarter. 5. NET FEES AND COMMISSION INCOME 2017 KD 000 2016 KD 000 Investment management fees 1,217 1,879 Credit related fees and commission 9,818 9,450 Brokerage fees 1,112 824 Total fees and commission income 12,147 12,153 Fees and commission expense (1,625) (1,535) Net fees and commission income 10,522 10,618 2017 KD 000 2016 KD 000 688 1,173 6. OTHER INCOME Dividend income Net income from investment properties Share of results from associate Other income 105 403 (687) (33) 186 84 292 1,627 81
  80. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 7. PROVISION AND IMPAIRMENT LOSSES 2017 KD 000 2016 KD 000 Financing receivables (Note 11) 32,293 33,993 Recoveries from written off financing receivables (5,641) (4,348) 1,867 (134) 691 269 Investment properties (Note 14) 1,685 519 Others 4,012 1,380 34,907 31,679 2017 KD 000 2016 KD 000 419 385 1,240 1,069 490 419 2,149 1,873 Non-cash credit facilities (Note 11) Investments available for sale 8. TAXATION Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) National Labour Support Tax (NLST) Zakat 82
  81. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 9. BASIC AND DILUTED EARNINGS PER SHARE 2017 2016 Net profit for the year attributable to the Bank's equity shareholders (KD 000) 44,463 40,348 Less: Profit payments on Tier 1 Sukuks (KD 000) (3,337) - Net profit for the year attributable to equity holders of the Bank after profit payment on Tier 1 Sukuks 41,126 40,348 1,684,510,454 1,684,510,454 24.4 24.0 Weighted average number of shares outstanding during the year Basic and diluted earnings per share attributable to the Bank's equity shareholders (fils) The weighted average number of shares outstanding during the year is calculated after adjusting for treasury shares as follows: 2017 2016 Weighted average number of Bank's issued and paid up shares 1,870,958,003 1,870,958,003 Less: Weighted average number of treasury shares (186,447,549) (186,447,549) 1,684,510,454 1,684,510,454 Earnings per share for the year ended 31 December 2016 was 25.9 fils, before retroactive adjustment to the number of shares following the bonus issue (Note 19). As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical. 10. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows consists of the following: 2017 KD 000 2016 KD 000 Cash and balances with banks 42,329 44,144 Deposits with other banks with an original maturity of seven days or less 45,272 32,904 87,601 77,048 83
  82. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 11. FINANCING RECEIVABLES Financing receivables as at 31 December 2017 comprises of only Shari'ah compliant Islamic Financing while the comparative year included loans and advances carried forward from prior years before conversion to an Islamic Bank amounting to KD 964 thousand as at 31 December 2016. The movement in provision for impairment of financing receivables by class of financial assets is as follows: Retail financing Commercial  financing Total  10,742 110,151 120,893 3,949 28,344 32,293 Amounts written off (3,991) (36,123) (40,114) At 31 December 2017 10,700 102,372 113,072 At 1 January 2017 Charge for the year (Note 7) Retail financing At 1 January 2016 Charge for the year (Note 7) 9,598 Commercial  financing 87,279 Total  96,877 4,281 29,712 33,993 Amounts written off (3,137) (6,840) (9,977) At 31 December 2016 10,742 110,151 120,893 As at 31 December 2017, non-performing financing receivables on which income has been suspended from recognition amounted to KD 38,624 thousand (2016: KD 70,369 thousand). The available specific provision on cash facilities is KD 5,433 thousand (2016: KD 3,615 thousand). The provision charge for the year on non-cash facilities is KD 1,867 thousand (2016: provision recovery of KD 134 thousand). The available provision on non-cash facilities of KD 7,790 thousand (2016:  KD 5,923 thousand) is included in other liabilities (Note 18). The policy of the Group for calculation of the impairment provision for financing receivables complies in all material respects with the provision requirements of Central Bank of Kuwait. According to the Central Bank of Kuwait instructions, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities has been made on all applicable credit facilities (net of certain categories of collateral), that are not provided for specifically. 84
  83. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 12. INVESTMENTS AVAILABLE FOR SALE Sukuk 2017 KD 000 2016 KD 000 210,002 192,719 724 3,926 6,632 7,328 217,358 203,973 Equity securities and funds - Quoted - Unquoted Investments available for sale include unquoted equity instruments carried at cost of KD 140 thousand (2016: KD 140 thousand). 13. INVESTMENT IN ASSOCIATE The share in assets, liabilities and results of the associate for the year ended is as follows: 2017 KD 000 2016 KD 000 Current assets 2,464 2,948 Non-current assets 7,215 7,569 Current liabilities (274) (272) (87) (83) 9,318 10,162 788 1,317 (687) (33) Share of associate's statement of financial position: Non-current liabilities Net assets Share of associate’s results: Operating income Loss for the year 85
  84. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 14. INVESTMENT PROPERTIES These represents properties acquired by the Group and is recognized at cost. Investment properties were revalued by independent valuers using market comparable approach that reflects recent transaction prices for similar properties and is therefore classified under level 2 of the fair value hierarchy. In estimating the fair value of investment properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. The fair value of the investment properties at the reporting date is KD 40,448 thousand (2016: KD 24,089 thousand). Movement for the year is as follows: 2017 KD 000 2016 KD 000 At 1 January 23,055 29,572 Additions 21,409 - Disposals (4,591) (5,835) Impairment (Note 7) (1,685) (519) (162) (163) 38,026 23,055 Depreciation charged for the year At 31 December 15. PREMISES AND EQUIPMENT Premises and equipment includes a revaluation decrease of KD 74 thousand (2016: increase of KD 36 thousand) in the value of freehold land based on valuations determined by independent valuation experts. Freehold land was revalued by independent valuers using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy. 16. OTHER ASSETS Financing profit receivable Positive fair value of derivative financial instruments (Note 24) Others 86 2017 KD 000 2016 KD 000 7,098 8,958 528 123 6,560 10,172 14,186 19,253
  85. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 17.DEPOSITS FROM CUSTOMERS Depositors’ accounts are deposits received from customers under current account, saving investment accounts, and fixed term investments accounts. The depositors’ accounts of the Bank comprise the following: i. Non-investment deposits in the form of current accounts. These deposits are not entitled to any profits nor do they bear any risk of loss as the Bank guarantees to pay the related balances on demand. Accordingly, these deposits are considered Qard Hassan from depositors to the Bank under Islamic Shari'ah. Investing such Qard Hassan is made at the discretion of the Board of Directors of the Bank, the results of which are attributable to the equity shareholders of the Bank. ii. Investment deposit accounts include savings accounts, fixed term deposit accounts, and open term deposit accounts. Saving Investment Accounts These are open-term deposits and the client is entitled to withdraw the balances of these accounts or portions thereof at any time. Fixed-Term Deposit Investment Accounts These are fixed-term deposits based on the deposit contract executed between the Bank and the depositor. These deposits mature monthly, quarterly, semi-annually, or annually. Open-Term Deposit Investment Accounts These are open-term deposits and are treated as annual deposits renewed automatically for a similar period, unless the depositor notifies the Bank in writing of his/her desire not to renew the deposit. Funds utilized in investments for each investment deposit are computed using ratios identified in the contracts for opening of these accounts with clients. The Bank guarantees to pay the remaining un-invested portion of these investment deposits. Accordingly, this portion is considered Qard Hassan from depositors to the Bank, in accordance with Islamic Shari'ah. The fair values of deposits from customers do not differ significantly from their carrying values. 18. OTHER LIABILITIES 2017 KD 000 2016 KD 000 12,859 14,614 Provision for staff indemnity and passage 6,310 3,491 Provision for non-cash credit facilities (Note 11) 7,790 5,923 217 168 35,667 28,254 62,843 52,450 Depositors' profit share payable Negative fair value of derivative financial instruments (Note 24) Account payables, accruals and others 87
  86. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 19. EQUITY i. The authorized share capital as at 31 December 2017 comprises of 2,500,000,000 ordinary shares (31 December 2016: 2,500,000,000 shares) of 100 fils each and the issued and fully paid share capital as at 31 December 2017 comprises of 1,870,958,003 ordinary shares (31 December 2016: 1,732,368,522 shares) of 100 fils each. ii. The Board of Directors of the Bank has proposed cash dividend of 13% (2016: 12%) amounting to 13 fils per share (2016: 12 fils) and bonus shares of 5% (2016: 8%). The proposed dividends are subject to the approval of the Shareholders at the Bank's Annual General Assembly. The Shareholders’ Annual General Assembly held on 30 March 2017 approved the distribution of cash dividend of 12 fils per share (2015: 5 fils per share) to the Bank's equity Shareholders registered in the Bank's records as of the date of Annual General Assembly Meeting and issuance of bonus shares of 8% (2015:10%) to the Bank's equity shareholders on record at the date of regulatory approval. iii. The Bank is required by the Companies’ Law and the Bank's Articles of Association to transfer 10% of the profit for the year attributable to the Bank's equity shareholders before KFAS, NLST, Zakat and Directors’ remuneration to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the statutory reserve equals 50% of the paid up share capital. Accordingly the Bank has transferred KD 4,678 thousand (2016: KD 4,237 thousand) to statutory reserve. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of up to 5% of share capital in years when retained earnings are not sufficient for the payment of such dividend. iv. The Articles of Association of the Bank requires that an amount of not less than 10% of the profit for the year attributable to the Bank's equity shareholders before KFAS, NLST, Zakat and Directors’ remuneration should be transferred annually to a general reserve account. The Board of Directors have resolved to discontinue such transfer from the year ended 31 December 2007 onwards, which was approved by the shareholders at the Bank's Annual General Assembly on 6 March 2008. General reserve is available to be distributed to shareholders at the discretion of the general assembly in ways that may be deemed beneficial to the Bank. v. The balances of share premium and treasury shares reserve are not available for distribution. The balance in the property revaluation reserve is not available for distribution unless the relevant assets are derecognized. The cost of the Bank's own shares purchased, including directly attributable costs, is recognized in equity. In accordance with the instructions of the Central Bank of Kuwait and Annual General Assembly, the Bank may purchase treasury shares up to 10% of its paid up share capital. 88
  87. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 20. TREASURY SHARES There was no purchase or sale of treasury shares during the current year. 2017 2016 186,447,549 172,636,620 Treasury shares as a percentage of total shares issued 9.97% 9.97% Cost of treasury shares (KD 000) 43,957 43,957 Market value of treasury shares (KD 000) 65,070 69,918 409 412 Number of treasury shares Weighted average market value per treasury share (fils) Amount equivalent to cost of treasury shares are retained out of reserves as non-distributable throughout the holding period of the treasury shares. 21. PERPETUAL TIER 1 SUKUK In October 2016, the Bank through a Sharia’s compliant Sukuk arrangement issued Tier 1 Sukuk amounting to USD 200 million. Tier 1 Sukuk is a perpetual security in respect of which there is no fixed redemption date and constitutes direct, unsecured, deeply subordinated obligations (senior only to share capital) of the Bank subject to the terms and conditions of the Mudaraba Agreement. The Tier I Sukuk is listed on the Irish Stock Exchange and NASDAQ Dubai and callable by the Bank after five-year period ending October 2021 (the “First Call Date”) or any profit payment date thereafter subject to certain redemption conditions including prior CBK approval. The net proceeds of Tier 1 Sukuk are invested by way of Mudaraba with the Bank (as Mudareb) on an unrestricted basis, by the Bank in its general business activities carried out through the general Mudaraba pool. Tier I Sukuk bears profit rate of 5.5% per annum to be paid semi-annually in arrears until the First Call Date subject to terms of the issue. After that, the expected profit rate will be reset based on then prevailing 5 years U.S Mid Swap Rate plus initial margin of 4.226% per annum. At the issuer’s sole discretion, it may elect not to make any Mudaraba distributions expected and in such event, the Mudaraba profit will not be accumulated and the event is not considered an event of default. Semi-annual profits were paid during the year ended 31 December 2017. 89
  88. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 22. TRANSACTIONS WITH RELATED PARTIES The Group enters into transactions with the parent, associate, major shareholders, directors and key management, close members of their families and entities controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business. The terms of these transactions are approved by the Group’s management. The year-end balances and transactions included in the consolidated financial statements are as follows: As at 31 December 2017 Financing receivables Credit cards Deposits with other banks Deposits from banks and financial institutions Deposits from customers Commitments and contingent liabilities Islamic Forward Agreements Profit Rate Swap As at 31 December 2016 Financing receivables Credit cards Deposits with other banks Deposits from banks and financial institutions Deposits from customers Commitments and contingent liabilities Islamic Forward Agreements Parent KD 000 Others KD 000 Total KD 000 - 40,302 40,302 - 52 52 93,174 175 93,349 16,891 398,532 415,423 - 13,492 13,492 8,486 45,008 53,494 9,651 - 9,651 44,659 - 44,659 - 12,346 12,346 - 40 40 86,227 6,294 92,521 46,236 480,094 526,330 - 11,501 11,501 17,385 8,025 25,410 8,367 - 8,367 1,257 1,574 2,831 320 9,593 9,913 738 407 1,145 378 8,398 8,776 2017 KD 000 2016 KD 000 168 150 2,106 2,027 204 2,478 116 2,293 Transactions For the year ended 31 December 2017 Financing income Distribution to depositors For the year ended 31 December 2016 Financing income Distribution to depositors Directors: Board of Directors' remuneration Key management compensation: Salaries and other short term benefits Post-employment benefits Board of Directors’ remuneration is subject to approval of shareholders in the Annual General Assembly. 90
  89. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 23. COMMITMENTS AND CONTINGENT LIABILITIES a) Credit- related commitments Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances, which are designed to meet the requirements of the Group’s customers. Letters of credit (including standby letters of credit), guarantees and acceptances commit the Group to make payments on behalf of customers upon failure of the customers to perform under the terms of the contract. Commitment to extend credit represents contractual commitments to financing and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. The Group has the following credit related commitments: 2017 KD 000 2016 KD 000 Acceptances 42,040 30,272 Letters of credit 74,072 68,452 436,367 435,614 552,479 534,338 Guarantees Irrevocable credit commitments to extend credit at the reporting date amounted to KD 2,894 thousand (2016: KD 24,077 thousand). b) Capital commitment The capital commitment for purchase of assets as at 31 December 2017 is KD 1,827 thousand (2016: KD 1,631 thousand). 91
  90. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 24. ISLAMIC FORWARD AGREEMENTS AND HEDGING Islamic forward agreements (Waad) In the ordinary course of business, the Bank enters into various types of transactions that involve financial instruments represented in forward foreign exchange agreements (Waad) to mitigate foreign currency risk. A Waad is a financial transaction between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index in accordance with Islamic Shari'ah. The notional amount, disclosed gross, is the amount of a Waad’s underlying asset/ liability and is the basis upon which changes in the value are measured. The notional amounts indicate the volume of transactions outstanding at the year-end and are neither indicative of the market risk nor credit risk. Most of the Group's islamic forward agreements relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties. Profit rate swaps Profit rate swaps are contractual agreements between two parties and may involve exchange of profit or exchange of both principal and profit for a fixed period of time based on contractual terms. The notional amounts indicate the volume of transactions outstanding at the period-end and are neither indicative of the market risk nor credit risk. Most of the Group’s profit rate swaps are held for hedging. The fair value of derivative financial instruments included in the financial records, together with their notional amounts is summarized as follows: Notional amount 31 December 2017 Assets Liabilities (Positive) (Negative) KD 000 KD 000 Less than 1 month KD 000 1 to 3 months KD 000 3 to 12 months KD 000 More than 12 months KD 000 Total KD 000 Waad 107 42 8,838 3,597 12,126 - 24,561 Profit Rate Swaps (held as fair value hedge) 246 - - - - 44,659 44,659 Profit Rate Swaps (others) 175 175 - - - 30,175 30,175 528 217 8,838 3,597 12,126 74,834 99,395 Notional amount 31 December 2016 Waad 92 Liabilities Assets (Positive) (Negative) KD 000 KD 000 123 168 Less than 1 month KD 000 1 to 3 months KD 000 4,235 6,406 3 to 12 More than months 12 months KD 000 KD 000 1,704 - Total KD 000 12,345
  91. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 25. FAIR VALUES MEASUREMENT The following table provides the fair value measurement hierarchy of the Group's financial instruments. Fair value measurement hierarchy for assets and liabilities as at 31 December 2017 is as follows: Level: 1 KD 000 Level: 2 KD 000 Level: 3 KD 000 Total KD 000 210,726 2,167 4,325 217,218 Waad - 107 - 107 Profit Rate Swap - 421 - 421 210,726 2,695 4,325 217,746 Waad - 42 - 42 Profit Rate Swap - 175 - 175 - 217 - 217 Level: 1 KD 000 Level: 2 KD 000 Level: 3 KD 000 Total KD 000 193,464 6,077 4,292 203,833 - 123 - 123 193,464 6,200 4,292 203,956 - 168 - 168 - 168 - 168 2017 Assets measured at fair value Financial assets Investments available for sale Derivative financial instruments Liability measured at fair value Derivative financial instruments 2016 Assets measured at fair value Financial assets Investments available for sale Derivative financial instruments Waad Liability measured at fair value Derivative financial instruments Waad 93
  92. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 25. FAIR VALUES MEASUREMENT (CONTINUED) Investments classified under level 1 are valued based on the quoted bid price. Equity securities and funds classified under level 2 are valued based on market multiples and declared NAV’s. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. The movement in level 3 is mainly on account of change in fair value of financial assets during the year. The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value.    The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year. Other financial assets and liabilities are carried at amortized cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in interest rates. Fair values of remaining financial assets and liabilities carried at amortized cost are estimated mainly using based on discounted cash flows, with most significant inputs being the discount rate that reflects the credit risk of counterparties. 94
  93. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 26. MATURITY ANALYSIS OF ASSETS AND LIABILITIES The table below summarises the maturity profile of the Group’s assets and liabilities analyzed according to remaining contractual maturity: 2017 ASSETS Cash and balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investments available for sale Investment in associate Investment properties Premises and equipment Other assets Total assets LIABILITIES Deposits from banks and other financial Institutions Deposits from customers Other liabilities Total liabilities Net liquidity gap 2016 ASSETS Cash and balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investments available for sale Investment in associate Investment properties Premises and equipment Other assets Total assets LIABILITIES Deposits from banks and other financial Institutions Deposits from customers Other liabilities Total liabilities Net liquidity gap Up to 3 months KD 000 3 to 12 months KD 000 Over 1 year KD 000 Total KD 000 42,329 140,911 222,631 1,889,998 102,787 11,137 2,409,793 274,715 273,189 16,061 1,814 565,779 509,645 98,510 9,318 38,026 33,273 1,235 690,007 42,329 415,626 222,631 2,672,832 217,358 9,318 38,026 33,273 14,186 3,665,579 370,202 290,807 47,858 708,867 1,940,032 22,439 2,332,673 84,054 447,218 16,383 754,408 (191,048) 39,031 24,021 110,910 574,582 2,426,281 62,843 3,197,991 467,588 Up to 3 months KD 000 3 to 12 months KD 000 Over 1 year KD 000 Total KD 000 44,144 169,788 227,280 1,435,961 90,410 17,775 1,985,358 257,059 717,539 16,094 1,470 992,162 552,554 97,469 10,162 23,055 31,393 8 714,641 44,144 426,847 227,280 2,706,054 203,973 10,162 23,055 31,393 19,253 3,692,161 311,878 349,999 40,275 702,152 2,034,724 38,761 2,385,363 (400,005) 443,124 10,506 803,629 188,533 14,023 3,183 57,481 657,160 2,491,871 52,450 3,246,473 445,688 95
  94. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Strategy in using financial instruments As an Islamic commercial bank, the Bank's activities are principally related to the sourcing of funds through Shari'ah compliant financial instruments, within the guidelines prescribed by the Central Bank of Kuwait (CBK) and deploying these funds in Shari'ah compliant financing and investment activities, to earn a profit. The profit is shared between the shareholders and profit sharing deposit account holders, as per the Bank's policies approved by the Board of Directors and Fatwa and Shari'ah Supervisory Board. The funds raised vary in maturity between short and long term and are mainly in Kuwaiti Dinars, apart from major foreign currencies and GCC currencies. While deploying the funds, the Bank focuses on the safety of the funds and maintaining sufficient liquidity to meet all claims that may fall due. Safety of shareholder and depositor funds is further enhanced by diversification of financing activities across economic and geographic sectors, and types of financed parties. RISK MANAGEMENT The use of financial instruments also brings with it associated inherent risks. The Group recognizes the relationship between returns and risks associated with the use of financial instruments and the management of risks forms an integral part of the Group’s strategic objectives. The strategy of the Group is to maintain a strong risk management culture and manage the risk/reward relationship within and across each of the Group’s major risk-based lines of business. The Group continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility. Group’s objectives, policies and process for managing its risk are explained in detail in the Pillar 3 disclosures of the Annual Report. The following sections describe the several risks inherent in the banking process, their nature, techniques used to minimise the risks, their significance and impact on profit and loss and equity due to future expected changes in market conditions. A. CREDIT RISK Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group attempts to control risk by monitoring credit exposures, limiting transactions with reputable counterparties, and continually assessing the creditworthiness of counterparties. Concentration of credit risk arises 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. Concentration of credit risk indicates the relative sensitivity of the Group’s performance to developments, affecting a particular industry or geographic location. The Group seeks to manage its credit risk exposure through diversification of financing activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or businesses. It also obtains collateral, when appropriate. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained include charges over bank deposits and balances, listed securities acceptable to the Group, real estate, plant and equipment, inventory and trade receivables. Management monitors the market value of collateral on a daily basis for quoted shares and periodically for others, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The table below shows the maximum exposure net of provision to credit risk for the components of the statement of financial position and off-balance sheet items without taking account of any collateral and other credit enhancements. 96
  95. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) A. CREDIT RISK (Continued) Credit risk exposures relating to consolidated statement of financial position items: Balances with banks Deposits with the Central Bank of Kuwait Deposits with other banks Financing receivables Investments available for sale Other assets Credit risk exposures relating to off - balance sheet items: (Note 23a) Acceptances, letters of credit, and guarantees Irrevocable credit commitments Maximum exposure 2017 KD 000 Maximum exposure 2016 KD 000 20,029 27,127 415,626 426,847 222,631 227,280 2,672,832 2,706,054 210,002 192,719 13,183 18,178 3,554,303 3,598,205 552,479 534,338 2,894 24,077 555,373 558,415 The gross maximum credit exposure to a single client or counterparty as of 31 December 2017 is KD 62,004 thousand (2016: KD 57,622 thousand) and credit exposure net of eligible collateral to the same counterparty is Nil (2016:Nil). Geographical and industry-wise concentration of assets and off balance sheet items are as follows: 2017 Geographic region: Kuwait Other GCC Europe North America Other countries Industry sector: Trading and manufacturing Banks and financial institutions Construction and real estate Other   Assets representing credit risk KD 000 Contingencies & Commitments representing credit risk KD 000 3,195,888 427,460 240,105 69,127 12,382 39,107 14,535 1,423 91,393 18,256 3,554,303 555,373 514,267 211,175 861,294 105,645 1,204,466 166,494 974,276 72,059 3,554,303 555,373 97
  96. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) A. CREDIT RISK (Continued)   Assets representing credit risk KD 000 Contingencies & Commitments representing credit risk KD 000 3,194,597 440,044 282,584 83,129 Europe 16,355 26,238 North America 11,678 1,478 Other countries 92,991 7,526 3,598,205 558,415 Trading and manufacturing 499,356 183,671 Banks and financial institutions 901,281 104,795 1,252,699 181,272 944,869 88,677 3,598,205 558,415 2016 Geographic region: Kuwait Other GCC Industry sector: Construction and real estate Other Credit quality of the financial assets is managed by the Group with a combination of external and internal ratings mechanisms. It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates management to focus on the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. The credit quality of class of assets with underlying credit risks are as follows: 98
  97. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) A. CREDIT RISK (Continued) Neither past due nor impaired (KD 000) High grade Standard grade Closely monitored Total 20,029 - - 20,029 Deposits with Central Bank of Kuwait 415,626 - - 415,626 Deposits with other banks 222,631 - - 222,631 2,362,878 163,647 62,433 2,588,958 210,002 - - 210,002 13,183 - - 13,183 3,244,349 163,647 62,433 3,470,429 27,127 - - 27,127 Deposits with Central Bank of Kuwait 426,847 - - 426,847 Deposits with other banks 227,280 - - 227,280 2,413,351 127,258 83,203 2,623,812 192,719 - - 192,719 18,178 - - 18,178 3,305,502 127,258 83,203 3,515,963 2017 Balances with banks Financing receivables Investments available for sale Other assets 2016 Balances with banks Financing receivables Investments available for sale Other assets 99
  98. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) A. CREDIT RISK (Continued) Financial assets by class that are past due but not impaired: 2017 Past due up to 30 days KD 000 Past due 31 to 60 days KD 000 Financing receivables -Retail financing -Commercial financing Past due 61 to 90 days KD 000 Total KD 000 8,233 3,019 927 12,179 28,446 7,355 2,703 38,504 36,679 10,374 3,630 50,683 Fair value of collateral 2016 37,732 Past due up to 30 days KD 000 Past due 31 to 60 days KD 000 Past due 61 to 90 days KD 000 Total KD 000 7,970 2,481 1,180 11,631 1,310 346 2,201 3,857 9,280 2,827 3,381 15,488 Financing receivables -Retail financing -Commercial financing Fair value of collateral 3,418 Financial assets by class that are impaired: 2017 Financing receivables -Retail financing -Commercial financing 2016 Financing receivables -Retail financing -Commercial financing Gross exposure KD 000 Impairment provision KD 000 Fair value of collateral KD 000 10,938 1,551 - 27,686 3,882 29,816 38,624 5,433 29,816 Gross exposure KD 000 Impairment provision KD 000 Fair value of collateral KD 000 5,084 1,501 - 65,285 2,114 64,772 70,369 3,615 64,772 The factors the Group considered in determining impairment are disclosed in Note 2 - Significant accounting policies. 100
  99. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) B. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its net funding requirements. Liquidity risk can also be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an adequate balance of cash, cash equivalents, and readily marketable securities. Analysis of financial liabilities by remaining contractual maturities The table below summarizes the maturity profile of the Group's financial liabilities based on contractual undiscounted repayment obligations including profit share. 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 earlier than the contractual date and the table also does not reflect the expected cash flows indicated by the Group's deposit retention history. Less than 1 month KD 000 1 to 3 months KD 000 3 to 12 months KD 000 1 to 5 years KD 000 Over 5 years KD 000 Total KD 000 Deposits from banks and other financial institutions 295,872 74,582 294,296 49,085 - 713,835 Deposits from customers 1,431,291 510,879 451,802 39,031 - 2,433,003 19,028 3,411 16,383 24,021 - 62,843 1,746,191 588,872 762,481 112,137 - 3,209,681 Less than 1 month KD 000 1 to 3 months KD 000 3 to 12 months KD 000 1 to 5 years KD 000 Over 5 years KD 000 Total KD 000 Deposits from banks and other financial institutions 233,546 78,619 354,674 41,565 - 708,404 Deposits from customers 1,260,832 776,131 447,006 14,117 - 2,498,086 30,497 1,974 10,506 9,473 - 52,450 1,524,875 856,724 812,186 65,155 - 3,258,940 2017 Other liabilities 2016 Other liabilities 101
  100. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) B. LIQUIDITY RISK (Continued) The table below shows the contractual expiry by maturity of the Group’s credit related contingent liabilities and commitments as disclosed in Note 23: Less than 1 month KD 000 1 to 3 months KD 000 3 to 12 months KD 000 1 to 5 years KD 000 Over 5 years KD 000 Total KD 000 22,289 62,162 250,368 185,516 32,144 552,479 22,289 62,162 250,368 158 185,674 2,736 34,880 2,894 555,373 19,285 68,252 266,631 161,614 18,556 534,338 19,285 68,252 266,631 161,614 24,077 42,633 24,077 558,415 2017 Credit related contingent liabilities Irrevocable credit commitments 2016 Credit related contingent liabilities Irrevocable credit commitments C. MARKET RISK The Group defines market risk as the uncertainty in future earnings on the Group’s on and off balance sheet positions resulting from changes in market variables such as interest rate risk, currency risk and equity price risk. C.1 INTEREST RATE RISK Interest rate risk arises from the possibility that changes in interest rates will affect the value of the underlying financial instruments. The Group is not exposed to interest rate risk since in accordance with Islamic Shari'ah the Bank does not charge interest. Changes in interest rates may, however affect the fair value of financial assets available for sale. Change in the interest rates by 25 basis point, with all other variables held constant will affect the equity by KD 963 thousand (2016: KD 695 thousand). C.2 CURRENCY RISK Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits. The Group had the following net exposures denominated in foreign currencies. The effect on profit before tax, as a result of change in currency rate, with all other variables held constant is shown below: Effect on profit before tax 102 Currency Change in currency rate in % US Dollars +5% 2017 KD 000 3 2016 KD 000 41
  101. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) RISK MANAGEMENT (Continued) C. MARKET RISK (Continued) C.2 CURRENCY RISK (Continued) A 5% decrease of the above currency against the Kuwaiti Dinar would have had equal, but opposite, effect of the amount shown above, on the basis that all other variables remain constant. Sensitivity to currency rate movements will be on a symmetric basis, as financial instruments giving rise to nonsymmetric movements are not significant. There is no significant impact on the equity. C.3 EQUITY PRICE RISK Equity price risk is the risk that the fair values of equity investments decrease as a result of the changes in the level of equity indices and the value of the individual stocks. The non-trading equity price risk exposure arises from the Group’s investment portfolio. The effect on equity as a result of a change in the fair value of the equity instruments at 31 December due to a reasonable possible change in the equity indices, with all other variables held as constant is as follows: Effect on equity Market indices Kuwait Index Changes in equity price % 2017 KD 000 2016 KD 000 +5% 5 122 An equal change in the opposite direction would have had equal, but opposite effect to the amount shown above, on the basis that all other variables remain constant. Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to nonsymmetric movements are not significant. C.4 PREPAYMENT RISK Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when profit rates fall. Due to the contractual terms of its Islamic products, the Bank is not significantly exposed to prepayment risk. D.OPERATIONAL RISK The Group has a set of policies and procedures approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risk relating to the banking and financial activities of the Group. Operational risk is managed by the Risk Management Division. This Division ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global Risk Management. The Group manages operational risks in line with the Central Bank of Kuwait instructions dated 14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding "Sound Practices for the Management and Control of Operational Risks’". 103
  102. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 28. SEGMENT REPORTING The Group’s operating segments are determined based on the reports reviewed by the Chief Operating decision maker that are used for strategic decisions. These segments are strategic business units having similar economic characteristics that offer different products and services. These operating segments are monitored separately by the Group for the purpose of making decisions about resource allocation and performance assessment. These operating segments meet the criteria for reportable segments and are as follows: ¥ Retail and Commercial Banking – comprising a full range of banking operations covering credit and deposit services provided to customers and correspondent banking. The Bank uses a common marketing and distribution strategy for its commercial banking operations. ¥ Treasury and Investment Management – comprising clearing, money market, foreign exchange, sukuk, other treasury and miscellaneous operations, proprietary investment, securities trading activities and fiduciary fund management activities. Segment results include revenue and expenses directly attributable to a segment and an allocation of overhead cost. The Group measures the performance of operating segments through measure of segment profit or loss net of taxes in management and reporting systems. Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment. Retail and Commercial Banking Treasury and Investment Management 2017 KD 000 2016 KD 000 2017 KD 000 2016 KD 000 2017 KD 000 2016 KD 000 Net financing income Fees, commissions and others 85,500 68,093 18,632 20,309 104,132 88,402 11,544 11,123 4,397 11,528 15,941 22,651 Total operating income Provision and impairment Losses and Provision on asset held for sale Operating expenses and Taxation 97,044 79,216 23,029 31,837 120,073 111,053 (34,178) (29,884) (729) (7,608) (34,907) (37,492) (31,334) (30,861) (9,369) (5,053) (40,703) (35,914) 31,532 18,471 12,931 19,176 44,463 37,647 - 2,701 44,463 40,348 Segment result Add: Non-controlling interest Net profit for the period attributable to Bank's equity shareholders Retail and Commercial Banking Segment assets Segment liabilities Treasury and Investment Management 2017 KD 000 2016 KD 000 2017 KD 000 3,043,808 3,080,985 621,771 1,789,133 1,704,182 1,408,858 The Group primarily operates in Kuwait. 104 Total 2016 KD 000 Total 2017 KD 000 2016 KD 000 611,176 3,665,579 3,692,161 1,542,291 3,197,991 3,246,473
  103. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 December 2017 29. CAPITAL MANAGEMENT The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong and healthy capital ratios in order to support its business and to maximize shareholders’ value. The Group actively manages its capital base in order to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the Central Bank of Kuwait in supervising the Group. The Group’s regulatory capital and capital adequacy ratios (Basel III) for the year ended 31 December 2017 are calculated in accordance with CBK circular number 2/RB, RBA/336/2014 dated 24 June 2014 are shown below: 2017 KD 000 2016 KD 000 Risk weighted assets 2,778,966 2,613,799 Total capital required 375,160 352,863 Tier 1 capital 466,961 445,052 Tier 2 capital 33,184 31,416 500,145 476,468 Tier 1 capital adequacy ratio 16.8% 17.03% Total capital adequacy ratio 18.0% 18.23% Capital available Total capital The Group’s financial leverage ratio for the year ended 31 December 2017 is calculated in accordance with CBK circular number 2/IBS/ 343/2014 dated 21 October 2014 is shown below: Tier 1 capital Total exposure Financial leverage ratio 2017 KD 000 2016 KD 000 466,961 445,052 5,161,609 5,117,616 9.05% 8.70% 105
  104. Sukuk Deal of the Year 2017
  105. BASEL III - PILLAR III DISCLOSURES 31 December 2017 In accordance with Central Bank of Kuwait ("CBK") Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide circular reference 2/RB,RBA/A336/2014 dated June 24, 2014.
  106. BASEL III - PILLAR III DISCLOSURES As at 31 December 2017 INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTS The public disclosures under this section have been prepared in accordance with the Central Bank of Kuwait ("CBK") Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide circular reference 2/RB,RBA/ A336/2014 dated June 24, 2014, which apply to Ahli United Bank, Kuwait ("the Bank" or "AUBK"). The disclosures under this section consist of disclosures of the Bank and its subsidiary (together known as "the Group"). The Bank's principal subsidiary is Kuwait and Middle East Financial Investment Company K.S.C.P. ("the Subsidiary"), a company incorporated in the State of Kuwait and engaged in investment management activities and regulated by the CBK and the Capital Market Authority ("CMA"). The Bank holds 50.12% effective interest in KMEFIC at 31 December 2017 (2016: 50.12%). The Board of Directors of the Bank in December 2015 approved to sell its entire equity interest in the Subsidiary and recorded this as assets held for sale as per IFRS 5. The Bank owns 30% (31 December 2016: 30%) equity interest in Middle East Financial Investment Company, an unquoted company incorporated in the Kingdom of Saudi Arabia engaged in investment activities. Investments by the Bank in the Group are in accordance with the CBK instruction No.2/BSA/143/2003 on Organization of Local Bank's Investment Policy and subsequent amendments / updates. INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK The Group's capital comprises Common Equity Tier (1) (CET1), Additional Tier (1) (AT1) and Tier (2) capital. CET1 capital demonstrates the Group's strength and includes share capital, reserves minus the treasury shares, dividends declared, goodwill, intangible assets and investments. AT1 capital includes additional paid in capital, including AT1 sukuk, and non-controlling interest. Tier (2) consists of non-controlling interest and general provision up to 1.25% of the total credit risk weighted assets according to CBK rules and regulations. The authorized, issued and fully paid share capital as at 31 December 2017 comprises 1,964,505,903 (Post dividend) (31 December 2016: 1,870,958,003 (Post dividend)) ordinary shares of 100 fils each (31 December 2016: 100 fils each). In accordance with the CBK instruction vide circular 2/IBS/101/2003 and subsequent amendments / updates, the Group may purchase treasury shares up to 10% of its issued shares. No cash dividend is paid on treasury shares held by the Group. However, treasury shares are entitled for bonus shares. During October 2016, the Group issued USD 200 million (31 December 2017: KD 60.64 million) Perpetual NonCumulative Non-Convertible Additional Tier 1 Regulation S Mudaraba Sukuk (AT1 Sukuk) which has been classified as additional tier (1) capital in accordance with CBK's Basel III regulations. The Group does not have structured or complex capital instruments which are prohibited by Islamic Shari'ah principles. 108
  107. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Table 1 - Capital Structure 2017 KD 000 2016 KD 000 196,451 187,096 Property revaluation reserve 9,976 10,050 Cumulative changes in fair value reserve 3,478 3,924 Profit equalization reserve 2,313 2,313 Statutory Reserve 78,877 74,199 General Reserve 22,660 22,660 Treasury share reserves 974 974 Other disclosed reserve 12,924 12,913 100,726 95,523 Treasury shares (43,957) (43,957) Total Common Equity Tier 1 384,422 365,695 60,640 60,640 - - 60,640 60,640 445,062 426,335 - - General provision (up to 1.25% of RWA) 33,184 31,416 Total Tier 2 capital 33,184 31,416 478,246 457,751 Details Common Equity Tier 1 Paid up share capital Retained earnings Less: Additional Tier 1 Perpetual Tier 1 Sukuk Eligible non-controlling interest in consolidated subsidiaries Total Additional Tier 1 Total Core Capital Tier 2 capital Eligible non-controlling interest in consolidated subsidiaries Total Eligible Capital 109
  108. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Table 2 - Reconciliation between the statement of financial position and the regulatory capital elements - December 2017 Step 1 2017 KD 000 Details Asset Cash and balances with banks Deposits with Central Bank of Kuwait Deposits with other banks Financing receivables Investments available for sale Investment in associate Investment properties Premises and equipment Other assets and intangibles Total assets Liabilities Deposits from banks and other financial institutions Deposits from customers Other liabilities Total liabilities Equity Share capital Reserves Treasury shares Attributable to Bank's equity shareholders Perpetual Tier 1 Sukuk Total equity Total liabilities and equity Statement Of Financial Position As Per Published Financial Statement Under Regulatory Scope Of Consolidation 42,329 42,329 415,626 415,626 222,631 222,631 2,672,832 *2,780,483 217,358 217,358 9,318 9,318 38,026 38,026 33,273 33,273 14,186 **13,658 3,665,579 3,772,702 708,867 *** - 2,426,281 *** - 62,843 *** - 3,197,991 *** - 187,096 ****196,451 263,809 *****231,928 (43,957) (43,957) 406,948 384,422 60,640 60,640 467,588 445,062 3,665,579 445,062 * Difference is due to inclusion of general provision which was deducted for the accounting consolidation. ** Difference is due to replacement cost for Shari'ah compliant hedging contracts. *** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I. **** Difference is due to proposed bonus shares. ***** Difference is due to accrual for the profit distribution on the AT1 Sukuk, proposed dividends and bonus shares. 110
  109. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Step 2 2017 KD 000 Details Statement Of Financial Position As Per Published Financial Statement Under Regulatory Scope Of Consolidation Reference Asset Cash and balances with banks - Cash items 22,328 22,328 - - Bank balances with CBK 11,840 11,840 - - Bank balances at other banks 8,161 8,161 - Deposits with Central Bank of Kuwait 415,626 415,626 - Deposits with other banks 222,631 222,631 - 2,672,832 2,780,483 - 217,358 217,358 - 9,318 9,318 - Investment properties 38,026 38,026 - Premises and equipment 33,273 33,273 - Other assets and intangibles 14,186 13,658 - 3,665,579 3,772,702 - 708,867 - - 2,426,281 - - 62,843 - - 3,197,991 - - Financing receivables Investments available for sale Investment in associate Total assets Liabilities Deposits from banks and other financial institutions Deposits from customers Other liabilities Total liabilities 111
  110. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Step 2 (Continued) 2017 KD 000 Statement Of Financial Position As Per Published Financial Statement Under Regulatory Scope Of Consolidation Share capital 187,096 196,451 (a) Treasury shares (43,957) (43,957) (b) Details Reference Equity Reserves - Statutory reserve 78,877 78,877 (c) - Voluntary reserve 22,660 22,660 (d) - Cumulative changes in fair value 3,478 3,478 (e) - Property revaluation reserve 9,976 9,976 (f) - Treasury share reserve 974 974 (g) - Other disclosed reserves 12,924 12,924 (h) - Profit equalisation reserve - 2,313 (i) - Retained earnings 134,920 100,726 (j) 406,948 384,422 60,640 60,640 467,588 445,062 Attributable to Bank's equity shareholders Perpetual Tier 1 Sukuk (AT1 Sukuk) Total equity (k) * Profit equalization reserve reclassified from "Retained earnings" and shown separately. Additional difference is due to accrual for the profit distribution on the AT1 Sukuk. Moreover, proposed dividends and bonus shares deducted from the "Retained earnings" and proposed bonus shares added to "Common Equity Tier (1)" 112
  111. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Step 3 2017 KD 000 Details Component Of Regulatory Capital Reported By The Bank Source Based On Reference Of The Balance Sheet Under The Regulatory Scope Of Consolidation From Step 2 Share capital 196,451 (a) Retained earnings 100,726 (j) Property revaluation surplus 9,976 (f) Cumulative changes in fair value 3,478 (e) Profit equalisation reserve 2,313 (i) Statutory reserve 78,877 (c) Voluntary reserve 22,660 (d) 974 (g) 12,924 (h) Treasury share reserve Other disclosed reserves Common Equity Tier (1) capital before regulatory adjustments 428,379 Treasury shares (43,957) Common Equity Tier (1) capital 384,422 Additional Tier 1 Capital (AT1 Sukuk) Total Tier 1 Capital 60,640 (b) (k) 445,062 113
  112. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Table 3 - Reconciliation between the statement of financial position and the regulatory capital elements - December 2016 Step 1 2016 KD 000 Details Statement Of Financial Position As Per Published Financial Statement Under Regulatory Scope Of Consolidation Asset Cash and balances with banks 44,144 44,144 Deposits with Central Bank of Kuwait 426,847 426,847 Deposits with other banks 227,280 227,280 2,706,054 *2,823,341 203,973 203,973 Investment in associate 10,162 10,162 Investment properties 23,055 23,055 Premises and equipment 31,393 31,393 Other assets and intangibles 19,253 19,253 3,692,161 3,809,448 Financing receivables Investments available for sale Total assets Liabilities Deposits from banks and other financial institutions Deposits from customers Other liabilities Total liabilities 702,152 **- 2,491,871 **- 52,450 **- 3,246,473 **- Equity Share capital 173,237 187,096 Reserves 255,768 ***222,556 Treasury shares (43,957) (43,957) Attributable to Bank's equity shareholders 385,048 365,695 Perpetual Tier 1 Sukuk Total equity Total liabilities and equity 60,640 60,640 445,688 426,335 3,692,161 426,335 * Difference is due to inclusion of general provision which was deducted for the accounting consolidation. ** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I. *** Difference is due to accrual for the profit distribution on the AT1 Sukuk, proposed dividends and bonus shares. 114
  113. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Step 2 2016 KD 000 Details Statement Of Financial Position As Per Published Financial Statement Under Regulatory Scope Of Consolidation Reference Asset Cash and balances with banks - Cash items 17,060 17,060 - - Bank balances with CBK 14,632 14,632 - - Bank balances at other banks 12,452 12,452 - Deposits with Central Bank of Kuwait 426,847 426,847 - Deposits with other banks 227,280 227,280 - 2,706,054 2,823,341 - 203,973 203,973 - Investment in associate 10,162 10,162 - Investment properties 23,055 23,055 - Premises and equipment 31,393 31,393 - Other assets and intangibles 19,253 19,253 - 3,692,161 3,809,448 - 702,152 - - 2,491,871 - - 52,450 - - 3,246,473 - - Financing receivables Investments available for sale Total assets Liabilities Deposits from banks and other financial institutions Deposits from customers Other liabilities Total liabilities 115
  114. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Step 2 (Continued) 2016 KD 000 Statement Of Financial Position As Per Published Financial Statement Under Regulatory Scope Of Consolidation Share capital 173,237 187,096 (a) Treasury shares (43,957) (43,957) (b) Details Reference Equity Reserves - Statutory reserve 74,199 74,199 (c) - Voluntary reserve 22,660 22,660 (d) - Cumulative changes in fair value 3,924 3,924 (e) - Property revaluation reserve 10,050 10,050 (f) - Treasury share reserve 974 974 (g) - Other disclosed reserves 12,913 12,913 (h) - Profit equalisation reserve - 2,313 (i) - Retained earnings 131,048 *95,523 (j) 385,048 365,695 60,640 60,640 445,688 426,335 Attributable to Bank's equity shareholders Perpetual Tier 1 Sukuk (AT1 Sukuk) Total equity (k) * Profit equalization reserve reclassified from "Retained earnings" and shown separately. Additional difference is due to accrual for the profit distribution on the AT1 Sukuk. Moreover, proposed dividends and bonus shares deducted from the "Retained earnings" and proposed bonus shares added to "Common Equity Tier (1)". 116
  115. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Step 3 2016 KD 000 Details Share capital Component Of Regulatory Capital Reported By The Bank Source Based On Reference Of The Balance Sheet Under The Regulatory Scope Of Consolidation From Step 2 187,096 (a) Retained earnings 95,523 (j) Property revaluation surplus 10,050 (f) Cumulative changes in fair value 3,924 (e) Profit equalisation reserve 2,313 (i) Statutory Reserve 74,199 (c) Voluntary Reserve 22,660 (d) 974 (g) 12,913 (h) Treasury share reserve Other Disclosed Reserves Common Equity Tier (1) capital before regulatory adjustments 409,652 Treasury shares (43,957) Common Equity Tier (1) capital 365,695 Additional Tier 1 Capital (AT1 Sukuk) Total Tier 1 Capital 60,640 (b) (k) 426,335 117
  116. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Table 4 - Main features of regulatory capital instruments Share Capital Issuer Ahli United Bank K.S.C.P. Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) ALMUTAHED Governing laws of the instrument Type of Capital (CET1, AT1 or T2) Eligible at solo/group/group and solo Instrument type Amount recognized in regulatory capital Par value of instrument Accounting classification Original date of issuance Perpetual or dated Issuer call subject to prior supervisory approval Optional call date and redemption amount 118 AT1 Sukuk Ahli United Sukuk Limited, an exempted company registered in the Cayman Islands with incorporation number 313772 with its registered office at MaplesFS Limited, PO Box 1093, Queensgate House, Grand Cayman, KY1-1102, Cayman Islands. XS1508651665 / 150865166 Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of the banking business and Companies Law No. 1 of 2016. CET1 AT1 Group Group & solo Equity instrument Deeply subordinated mudaraba sukuk English Law KD 196,451 thousands (Post dividends) (2016: KD 187,096 thousands (Post dividend)) 100 fils each Equity (CET1) Various Perpetual USD 1,000 Equity (AT1) 25 October 2016 Perpetual Not applicable Yes KD 60,640 thousands (USD 200,000 thousands) Subsequent call dates, if applicable Not applicable Fixed or floating dividend/coupon Floating Profit rate Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Not applicable Not applicable 25 October 2021 at par value of the instruments 25 April and 25 October every year, commencing 25 October 2021 Fixed (Subject to profit-rate reset after every 5 years) 5.5% per annum Yes Fully discretionary Fully discretionary Not applicable
  117. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO THE CAPITAL STRUCTURE OF THE LICENSED BANK (CONTINUED) Table 4 - Main features of regulatory capital instruments Share Capital AT1 Sukuk Noncumulative or cumulative Noncumulative Noncumulative Convertible or non-convertible Non-convertible Non-convertible Write-down feature Not applicable Yes, in case of non-viability loss event If write-down, write-down trigger Not applicable A non-viability event means that the CBK has informed the AUBK in writing that it has determined that a trigger event has occurred. A trigger event would have occurred if any of the following events occur: • AUBK is instructed by the CBK to write-off or convert the AT1 Sukuk on the grounds on non-viability; or • An immediate injection of capital is required, by way of an emergency intervention, without which AUBK would become nonviable. If write-down, full or partial Not applicable Full or partial (On pro rata basis) If write-down, permanent or temporary Not applicable Permanent Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Equity Instrument Deeply subordinated, senior only to ordinary shares Non-compliant transitioned features None None 119
  118. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION ON LICENSED BANK'S CAPITAL ADEQUACY The process of assessing the capital requirements of the Group commences with the compilation of the annual business plan by individual business units which are then consolidated into the annual budget plan of the Group. The annual budget plan provides an estimate of the overall growth in assets, its impact on capital and targeted profitability which helps the Group in capital management. Annual dividend payout, is prudently determined and proposed by the Board of Directors ("the Board"), endeavoring to meet shareholder expectations while ensuring adequate retention of capital to support budgeted growth. The Bank seeks to maintain sufficient capital to meet its current and projected business requirements commensurate with Board approved business plans/strategic initiatives by developing/ maintaining an optimal Tier I / Tier II capital mix while having sufficient cushion over and above the mandatory regulatory minimum capital requirements set by the Central Bank of Kuwait for its operations. As per Group standards, the Bank is required to maintain at least 0.5% cushion over the regulatory minimum at all points in time. The Group may resort to the disposal of its Treasury shares to enhance capital adequacy subject to the market conditions. The Group assesses the adequacy of its capital to support its current and future activities on an ongoing basis. Risk weighted assets and capital are monitored periodically to assess the quantum of capital available to support assets growth and optimally deploy capital to achieve targeted returns. The Group regularly monitors its credit and market risks exposures, limits transactions with specific counterparties, and continually assesses the creditworthiness of counterparties to avoid any unexpected capital charge. The Bank has been given the credit rating of "A2" and "A+" by Moody's and Fitch respectively. Given the favorable ratings, the Bank is confident of raising any additional capital requirements including resorting to eligible Shari'ah compliant instruments at competitive pricing to support any need for additional capital. Currently the Group's measurement of capital requirement is based on the CBK and Basel III guidelines on capital adequacy. However the Group ultimately, aims to achieve a convergence of the regulatory capital with economic capital as it adopts advanced risk measurements for performance evaluation and capital adequacy. At 31st of December 2017, the total Capital Adequacy Ratio recorded as 17.21% (Post dividend) (31 December 2016: 17.51% (Post dividend)) higher than the ratio required by regulatory authorities of 13.5% (31 December 2016: 13.5%) and Tier (1) Capital 16.02% (Post dividend) (31 December 2016: 16.31% (Post dividend)) and CET1 Capital 13.83% (Post dividend) (31 December 2016: 13.99% (Post dividend)). The percentage of the total Capital Adequacy Ratio is derived from dividing the Eligible Capital (CET (1) + AT (1) + Tier (2)) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure). The percentage of the Tier (1) Capital is derived from dividing the core capital (CET (1) + AT 1) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure). The percentage of the CET1 Capital is derived from dividing the common equity capital (CET1) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure). 120
  119. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION ON LICENSED BANK'S CAPITAL ADEQUACY (CONTINUED) Table 5 - Capital requirement for Credit, Market and Operational Risks 2017 KD 000 Standard Portfolio Claims on PSE 2016 KD 000 Minimum Capital Requirement Risk Weighted Assets Risk Weighted Assets Minimum Capital Requirement 1,663 220 - - 92,126 12,262 82,536 10,981 1,866,322 247,305 1,614,055 213,735 379,655 50,189 369,234 48,760 19,982 2,641 30,209 3,988 13 2 9 1 Investments in real estate and real estate inventory 76,052 10,053 46,110 6,088 Share & commercial real estate financing 192,184 25,408 235,848 31,143 - - 97,296 12,846 77,940 10,303 88,934 11,746 2,705,937 358,383 2,564,231 339,288 (82,861) (11,186) (94,572) (12,767) 2,623,076 - 2,469,659 - Claims on banks Claims on corporate Claims on regulatory retail Past due exposures Goods & commodity other than real estate Securitized Sukuk Other exposures Total credit risk weighted assets Credit risk weighted assets adjustments Net credit risk weighted exposure Minimum capital requirement for credit risk Minimum market risk capital charge Minimum operational risk capital charge Total 347,197 326,521 309 41 1,136 153 206,828 27,922 193,989 26,189 375,160 352,863 121
  120. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) The Board and Senior Management take active interest in the overall capital adequacy assessment process. The Bank takes reasonable care in organizing and controlling its affairs responsibly and effectively. This is supported by adopting risk management systems in line with industry best practices and maintaining adequate financial resources. Internal Capital Adequacy Assessment Process (ICAAP) provides the foundation as to how the Bank internally assesses the additional capital requirements of the Bank. It is intended to: • Determine the level of capital required to support the risk profile of the Bank over and above the minimum capital adequacy required by the Central Bank of Kuwait; • Assess and quantifies the additional risks under Pillar 2 and correspondingly required capital to cover those risks; • Stresses Bank's exposure to risk areas under Pillar 1 (Minimum Capital Requirements) and those under Pillar 2 (Supervisory Review Process); • Assess available risk mitigation techniques and their impact on gross exposures; • Help in capital and liquidity planning to support current and future capital and funding requirements vis-a-vis business growth targets; • Provide robust management information system regarding coverage, scenarios and key assumptions used, segregation of roles, independent review, reporting the outcome and periodicity of such reporting; and • Provide a guidance in the business decision-making process vis-a-vis capital adequacy requirements and its impact. The Bank's ICAAP comprises a comprehensive analysis of the Bank's key risks. Below are the key risks that form part of the Bank's ICAAP under Pillar 1 and Pillar 2: Risks covered under Pillar 1 (impact on profit & loss) • Credit Risk • Operational Risk • Market Risk Risks covered under Pillar 1 (impact on equity) • Investment Risk Risks covered under Pillar 2 (impact on risk-weighted assets) • Credit Concentration Risk - Group exposure - Sectorial exposure • Underestimation of Credit Risk • Residual Credit Risk due to Standardized approach • Fraud Risk • Profit Rate Risk • Liquidity Risk • Residual Market Risk • Legal Risk • Regulatory & Shari'ah Non-compliance Risk • Reputational Risk • Strategic Risk The stress testing under the Bank's ICAAP Policy is to determine the Bank's financial position from plausible to severe scenarios. Stress testing also provides an indication of the appropriate level of capital necessary to ensure the economic viability of the Bank in the face of deteriorating business conditions. ICAAP is an ongoing process and reviewed by management on a semiannual basis. 122
  121. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 STRESS TESTING Stress testing and scenario analysis are essential tools that the Bank employs for its capital management and planning as well as risk management process. Stress testing is an evaluation of the Bank's financial position under multiple scenarios that try to capture potentially adverse conditions. It covers a range of risks and business areas as an Enterprise-wide risk assessment, quantification, impact analysis and decision making accordingly. Consequently it alerts the Bank's management to adverse unexpected outcomes related to a variety of risks and provides an indication of how much capital might be needed to absorb losses, should economic shocks occur. The Board of Directors and Senior Management ensure that the process takes into account the following major considerations, which are then communicated across all the business and support units. These include the following: • Risks that the Bank is and may be exposed to as well as assessment of adequacy of compensating control processes • Assessment of business conditions prevailing in the markets • Assessment of the legal and regulatory environments pertaining to the business activities and sources of financing • Short-term and medium-term business plans and strategies to achieve such plans • Assessment of the level of capital required to protect the Bank against anticipated business risks • Sources of capital • Profit distribution • Supplementary funding While stress tests provide an indication of the appropriate level of capital necessary to endure deteriorating economic conditions, the Bank alternatively employs other actions in order to help mitigate increasing levels of risk. In this connection, stress testing is a supplementary tool to other risk management approaches and measures. INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT The Bank maintains a strong risk management culture and manages the risk / reward relationship within and across each of the major risk-based lines of business. The Bank continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility. Stress testing is also conducted on a periodical basis to sensitize the secured exposures with Real Estate and Shares, along with a comprehensive sensitization of the portfolio in relation to stress scenarios. The Board, senior management, risk officers, and line managers contribute to effective bank wide risk management. The Board defines its expectations, and through its oversight determines its accomplishment. The Board also has ultimate responsibility for risk management as they set the tone and other components of an enterprise-wide risk management framework. Risk officers have the responsibility for monitoring progress and for assisting line managers in reporting relevant risk information. The line managers are directly responsible for all business booked in their respective domains. The effective relationship between these parties significantly contributes to the improvement in the Bank risk management practices as this leads to the timely identification of risk and facilitation of appropriate response. The Risk Management Division (RMD) structure has a distinct identity and independence from business units. RMD is headed by "General Manager" Risk Management reporting to the Board's Risk Committee. The division is comprised of the following units to address the pertinent risk exposure of the Bank: - Credit risk - Market and liquidity risk - Operational risk - Risk management - Credit control - Remedial and watch list accounts unit - System security unit - Credit administration unit 123
  122. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) RMD's main responsibilities are to: 1. Ensures implementation of risk framework, risk strategy 2. Development and updating of risk management policies and procedures 3. Setting up the Bank's risk appetite which is to be duly approved by the Board 4. Implementation of risk management tools to identify, assess, monitor, control and mitigate risks 5. Managing risks by identification, assessment, monitoring and control 6. Providing periodic reports to the Board and the Board approved committees to assist in taking informed decision 7. Building risk awareness culture by providing regular trainings and other awareness campaigns The following committees have the overall responsibility and authorities vested in them for the day-to-day risk management activities of the Bank. Authorities vested in the committees are exercised within the objectives and policies approved by the Board, and subject to the rules and regulations laid down by the CBK. 1. Board Risk Committee (BRC) to assist the Board of Directors of the Bank in fulfilling its oversight responsibilities 2. 3. 4. 5. 6. 7. 8. related to present and emerging risk issues, strategies and appetite associated with the Bank's banking and credit activities including the investment portfolio. BRC recommends to the Board the risk management policies and framework, ensures adherence to the risk appetite policy and provide oversight on major risk categories. Executive Committee (EC) to assist the Board in discharging its responsibilities in two capacities, deputizing between Board meetings on matters normally reserved to the Board's own decision and discharging responsibilities delegated by the Board including credit, investment, liquidity and market risks, in excess of limits assigned to other committees. Shari'ah Supervisory Board (SSB), whose members are assigned by the General Assembly, supervises and controls the validity of the Group's activities to ensure that they comply with principles and rulings of the Islamic Shari'ah, and provides its recommendations. It has the right to submit written objections to the Board of Directors with respect to any of the Group's activities which it considers non-compliant with any of the principles and rulings of the Islamic Shari'ah. Senior Credit Committee (SCC) approves financing proposals with limits in excess to those assigned to the Credit Committee (CC) and within the parameters that have been set by the Board. In addition, SCC reviews and approves country, bank and investment exposures within the prescribed limits. Whenever necessary, SCC makes the appropriate recommendations to the EC and the Board on related matters. Credit Committee (CC) reviews and approves financing proposals within parameters that have been set by the Board. It also assists the SCC, EC and BRC in managing the Bank's exposure to credit risk. Credit Evaluation and Provisioning Committee (CEPC) evaluates the overall quality of investment and finance portfolio, ensures that irregular investment and finance transactions are classified based on the CBK guidelines, ensures adequate provisions are taken and assists the CC, SCC, EC, BRC and the Board in managing the Bank's exposure to credit risk. Assets and Liabilities Committee (ALCO) meets periodically to review and approve strategies relating to the management of assets and liabilities including liquidity, profit rate, foreign exchange, cost of funds, cost allocation, deposit pricing matrix and strategic trading positions. The Risk Management Committee (RMC) meets at least once in a calendar quarter to monitor and ensures risk management framework, policies and procedures are applied across all divisions of the Bank. RMC assists the BRC and the Board in fulfilling its oversight responsibilities related to risk management practices, implementation and on-going assessment of the risk framework. Moreover, it also provides update to the Board committees and a leadership role in shaping the Bank's risk management policies. The risk management function of the subsidiary is managed by its independent Board of Directors and Senior Management. The Bank's nominee directors on the Board of Directors of the subsidiary through its oversight manage and monitor the risk management activities of the subsidiary. 124
  123. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) The following sections below, detail the risks inherent in the activities undertaken by the Bank, their nature and approach adopted towards management / mitigation of these risks. Strategic Risk The Bank defines strategic risk as the current or prospective impact on Bank's earnings, capital, and risks arising from changes in environment the Bank operates in, from adverse strategic decisions, improper implementation of decision or lack of responsiveness to industry strength, economic direction or technological changes. In this regard the Bank has put in place strategic risk framework to identify, measure, monitor and report strategic risk exposures. For the purposes of strategic risk the sources of risks are from: • Inadequate strategic governance framework; • Inadequate identification of factors that impact the strategy and/or business plans; • Insufficient planning and resource allocation process; • Failure in execution of plans, projects and initiatives; and • Issues related to environment dynamics' internal and external including products, services and practices of the Bank. Strategic risk will be primarily assessed in terms of the controls available to mitigate such risks and the Bank's ability to successfully implement its goals under its long term strategic plan. Financing Risk Financing risk is the risk that one party to a financial instrument will fail to discharge an obligation on time and in full as contracted and cause the other party to incur a financial loss. Financing risk includes the major risks mentioned below: Direct Financing Risk The risk that actual customer obligations will not be repaid on time. Direct financing risk occurs in various Islamic products offered by the Bank, both secured and unsecured. It exists for the entire life of the transactions. Contingent Financing Risk The risk that potential contingent obligations will become actual obligations and will not be repaid on time. Contingent financing risk occurs in products offered by the Bank ranging from letters of credit and guarantees to unused financing commitments. It exists for the entire life of the transaction. Issuer Spread Risk The risk that the market value of a security or other financing instrument may change when the perceived or actual financing standing of the issuer changes thereby exposing the Bank to a financial loss. It is interrelated to price risk. Pre-Settlement Risk The risk that a counter-party with which the Bank trades may default on a contractual obligation before settlement of the contract. Settlement Risk The risk occurs when the counter-party fails to settle the transaction on settlement date. The Bank's Financing Policy aims to promote a strong financing risk management architecture that includes financing policies, procedures and processes. The policy defines the areas and scope of financing activities undertaken by the Bank and its main goal is not simply to avoid losses, but to ensure achievement of targeted financial results with a high degree of reliability in an efficient manner. The Bank's financing risk management focuses on the dynamic and interactive relationship between three financing extension processes. 125
  124. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Financing Risk (Continued) Portfolio Strategy and Planning The portfolio strategy and planning phase defines desired financial results (in each Business Unit and for the Bank) and the credit standards required to achieve them. Business strategies integrate risks and meet defined hurdles for riskadjusted return on capital. Facility structure translates this risk-conscious business strategy into terms and conditions that mitigate risk. Portfolio management establishes composition targets, monitors the results of these diverse business strategies on a continual basis, and allows the Bank to manage concentrations that can result from seemingly unrelated activities. Specifically, portfolio management involves setting concentration limits by standard dimensions so that no one category of assets or dimension of risk can materially harm the overall performance of the Bank. The Risk Management and Senior Management, on monthly basis reviews portfolio concentrations in terms of geographical concentrations, individual economic sectors and credit risk rating to ensure that there are no undue concentrations in one sector or risk rating, and that the limits are within those set out by the Bank. These reports are submitted to the Board on quarterly basis. The Approving bodies (EC, SCC and CC) approve bank-wide portfolio credit concentration limits to corporate or individual counterparties based on the Bank's overall risk capacity, capital considerations, and assessment of the internal and external environments. The Bank's credit exposure to individuals or group of counterparties is in accordance with the CBK instructions BS/101/1995 on Maximum Credit Concentration Limits and subsequent amendments / updates. The process of periodic review and approval of country and bank limits is done within the Bank. The approved limits are then segregated sector wise, which cover Commercial Banking, Treasury and Investments. A summary of bank wide risk exposure incorporating all the above concentration limits plus discussion on past due, non performing financing (NPFs), collateral concentration, funding profile, capital adequacy and other risk management initiatives are reviewed by the Senior Management and Group Risk on monthly basis and reported to the Board on quarterly basis. Financing Origination and Maintenance In the Financing origination and maintenance phase, each Business Unit solicits, evaluates and manages credit according to the strategies and portfolio parameters established in the portfolio strategy and planning phase. Transactions are generated within well-defined target market criteria, product structure and are approved on riskadjusted basis through the use of risk rating models. The Bank uses a Credit Risk Rating ("CRR") model using Moody's system to assess the credit worthiness of borrowers. The Financing risk measurement methodology is geared towards measuring Financing risk for corporate and private banking portfolio in a scale of 1 to 10 which meets the requirements of Bank for International Settlements (BIS). Risk ratings 1 to 6 for performing assets; and risk rating 7 to watch list accounts while ratings from 8 to 10 for classified accounts. Financing maintenance involves processes to control documentation and disbursement, monitor timely repayment, value collateral and review the status of exposures. Within this phase, origination and underwriting for distribution to investors take place. All financing proposals are reviewed independently by Credit Risk before proposals are sent for approval. A Post Fact Approval Unit independently reviews Financing approvals to ensure that the approvals are consistent with policy and that all covenants of the approvals are met prior to disbursement of proceeds and throughout the tenure of the Financing facilities. Financing maintenance also includes early problem identification and remedial management of troubled exposures. The Special Asset Management Unit established within Risk Management Division provides a more focused attention to irregular and delinquent accounts. The primary objective of the unit is to develop effective strategies in order to either rehabilitate or restructure impaired financing. 126
  125. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Financing Risk (Continued) Financing Origination and Maintenance (Continued) The Bank constantly reviews the entire Financing portfolio and conduct stress tests in order to provide senior management with clear indication of the composition, maximum exposure at risk, overall Financing quality as well as identifying potential signs of weaknesses. As a result, the Bank is able to take timely and appropriate courses of action. For secured Financing exposure, the collateral valuation is updated in robust manner. Quoted securities are independently valued on a daily basis while the most recent independent valuation for other securities, including real estate, is obtained. Whenever a gap in minimum-security coverage is identified, the concerned counterparty is asked to provide collateral top-up and/or reduce the outstanding exposure to comply with the minimum-security requirement. For unsecured exposure, selected counterparties are requested to provide acceptable collateral. While structuring Financing facilities, the Bank ensures that financing exposure will be repaid from clearly identifiable and unencumbered sources of repayment. Performance Assessment and Reporting The performance assessment and reporting phase allows both the Senior Management and Business Units to monitor results and improve performance continually. Both portfolio and process trends are monitored in order to make appropriate and timely adjustments to business strategies, portfolio parameters, and financing policies and credit origination and maintenance practices. This phase of the credit process draws on information within the Bank and external benchmarks to help evaluate performance. Credit performance is assessed through analysis of: 1. Portfolio concentrations by obligor, industry, risk rating, tenor, product, collateral and other dimensions 2. Credit quality indicators 3. Exceptions to risk appetite policy 4. Other policy exceptions The Bank has adopted an internal account profitability model (APM) to determine the profitability of corporate and private banking accounts. The methodology is based on the risk-adjusted return on capital (RAROC). In addition, periodic review of both portfolio and process are performed by the Business Units as well as by Risk Management and Audit Division. In accordance with the instructions of the CBK dated 18 December 1996, setting out the rules and regulations regarding the classification of financing facilities, the Bank has a Credit Classification and Evaluation Committee which is composed of senior management. The committee studies and evaluates existing financing facilities of each customer of the Bank, and identifies any abnormal situations and difficulties associated with a customer's position which might cause the debt to be classified as irregular and to determine an appropriate provisioning level. Market Risk The Bank defines "Market risk" as the uncertainty in future earnings, of the Bank's on and off Balance Sheet positions, resulting from changes in market conditions i.e. changes in prices of assets, currency rates and profit rates. Market risk pertains to the profit, equity, foreign exchange and commodity risks in the Bank's trading and banking books. Market Risk Management addresses the following areas: • Quantitative parameters that define the acceptable level of market risk; • Authorized instruments and hedging policies for managing risk exposures; and • Exposure limits Risk Exposure Reporting Risk Management Division submits on monthly basis the risk exposure report to senior management. 127
  126. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Market Risk (Continued) Periodic Stress Testing Risk Management Division, on regular basis, prepares the stress test report covering profit rate risk in the banking book and liquidity risk. This exercise is conducted in order to assess the Bank's exposure to certain stress scenarios. The Market Risk Management policy covers the following broad areas: Profit rate risk management in the banking book The Bank assesses its profit rate risk from earnings perspective in the balance sheet through gapping analysis based on the re-pricing mismatches of assets and liabilities. Given the Islamic nature of the Bank's assets and liabilities and the fact that many of its assets are re-priced on roll-over date basis, there is generally no significant exposure to profit rate risk in the banking book. Profit rate risk or price risk due to profit rates arises when fixed-income investments are present valued against changing profit rates or yield curves and varying issuer credit spreads. The Bank faces this risk if profit rates or issuer spreads increase - resulting in a negative valuation impact on fixed-income investments i.e. Sukuks. Foreign exchange risk management in the banking book Foreign exchange risk in the banking book arises from a currency mismatch between the Bank's assets and liabilities. The Bank views itself as a Kuwaiti entity with Kuwaiti Dinars as its functional currency. Conventional methods such as limiting the net open positions, are used to manage any significant risk in other currencies. Assets carried at fair values that are not denominated in Bank's functional currency are hedged using non-derivative Islamic financial liabilities for foreign currency risk, such as borrowing foreign currency to fund respective foreign currency assets. Risk Management Division monitors the various foreign exchange limits (overnight, forward gap, stop loss, etc.) on daily basis and the report summarizing all these are presented to ALCO on regular basis. Equity risk management in the trading book and banking book Equity price risk arises from the changes in fair values of equity investments. Values of individual securities can fluctuate in response to a variety of factors, other than movements in the profit or exchange rates. The equity price risk could be due to entity or issuer specific or it could be due to general systemic reasons. For example market valuations of equity securities may respond to factors such as operating results of the company, rights issues, key corporate decisions, changes in credit ratings of the securities and other market changes. Additionally, the equity prices could also be affected due to the market reasons which are not related to the company itself, e.g. tightening of monetary policy, budget deficit, economic downturn and overall dimmed consumer sentiment. The Bank does not have any exposure in equities in trading book. Equity risk in the banking book could be mitigated through diversification of investments in terms of risk sector, geography, equity issuer, beta and other market dynamics. Liquidity Risk The Bank defines liquidity risk as its ability to meet all present and future financial obligations in a timely manner and without undue effort and cost. Liquidity risk also entails that the Bank is able to liquidate its unencumbered assets with a minimal additional liquidity asset cost. The following key factors are taken into consideration while assessing and managing the liquidity risk of the Bank: • The Bank keeps a well-diversified base for funding sources comprising a portfolio of retail customers, large corporate and institutions, small and medium enterprises, high net worth individuals without significant correlation or concentrations thereby diversifying the funding base and mitigating concentration risks • Based on past behavioral pattern analysis of Bank's main liabilities, management expects large portion of our customers deposits to be rolled over at contractual maturity • As per Central Bank of Kuwait rules and regulation the Bank keeps at least 18% of its deposits in qualifying liquid assets 128
  127. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Liquidity risk (Continued) • • • Commitments for financing are approved after taking into account the Bank's overall liquidity position The Bank calculates its high quality liquid assets against net cash outflows in 30-days as part of CBK's Basel III Liquidity Coverage Ratio (LCR). LCR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by both of the Bank's external auditors. The Bank calculates Basel III Net Stable Funding Ratio (NSFR) to determine as how the Bank's balance sheet is positioned with respect to its long-term or stable required funding against stable available funding. NSFR is prepared on daily basis and submitted to CBK on monthly basis after being reviewed by both of the Bank's external auditors. In application of the general guidelines highlighted above, the Bank maintains, reviews and reports the following: • • • • A liquidity gapping report is likewise prepared following the CBK guidelines which show periodic and cumulative net outflows between asset and liability run-off profiled in terms of their contractual maturities A monthly liquidity stress test report is submitted to senior management. This report summarizes the 8-week liquidity forecast taking into account the behavioral adjustments, duly approved by ALCO, and presents different scenarios for efficient management of liquidity risk In order to supplement the existing liquidity risk monitoring reports, a set of liquidity ratios including Financing to Deposit Ratio (FDR), are monitored on a regular basis to manage liquidity funding profile of the Bank A liquidity contingency plan to address systemic and localized liquidity emergencies is reviewed periodically to ensure that it is kept up to date and in line with the business continuity plan Table 6 - Maturity analysis of liabilities 2017 KD 000 Standard Portfolio Up to 3 Months Deposits from banks and other financial institutions Deposits from customers Other liabilities Total Other liabilities Total Total 290,807 47,858 708,867 1,940,032 447,218 39,031 2,426,281 22,439 16,383 24,021 62,843 2,332,673 754,408 110,910 3,197,991 2016 KD 000 Up to 3 Months Deposits from customers Over 1 Year 370,202 Standard Portfolio Deposits from banks and other financial institutions 3 to 12 Months 3 to 12 Months Over 1 Year Total 311,878 349,999 40,275 702,152 2,034,724 443,124 14,023 2,491,871 38,761 10,506 3,183 52,450 2,385,363 803,629 57,481 3,246,473 129
  128. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Operational Risk The Bank has adopted the BASEL's definition of Operational Risk which states that any risk arising from inadequate or failed internal processes, people or systems or from external events. The definition includes legal risk but excludes reputation and strategic risk. Moreover, being an Islamic Bank, it went through an enterprise wide assessment of potential risks, came up with robust control processes, updated the policy and procedures documents and educated the staff on the Islamic products, processes and systems. These were complemented by the establishment of the Shari'ah Board to ensure that the Bank's activities comply with the principles and rulings of the Islamic Shari'ah. The operational risk management framework provides the Bank with the foundation for a comprehensive and an effective operational risk management program with the following major objectives: ¥ ¥ ¥ ¥ ¥ ¥ ¥ ¥ Operational Risk Policies and procedures - the Bank has operational risk policies and procedures which are being updated on periodic basis Operational Risk Management - the Bank has outlined the process of identifying, assessing, monitoring and mitigating operational risks by implementing various operational risk tools such as operational risk selfassessment, key risk indicators, operational risk approval process Loss Recording Policy - The Bank has the process of recording all actual losses and near miss events as per the BASEL accord Reporting - Operational Risk Management submits reports to Board sanctioned committees and Senior Management highlighting their analysis, thus enabling these committees and Senior Management to take risk based business decisions New Products/ Process/ System Changes - All the new products, processes, and any significant change in the existing process and change in system will be reviewed by Operational Risk Business Continuity Management - Business Continuity Plans have been designed, developed and implemented for all business units to recover all critical business functions at the time of disaster scenarios. Business Impact Analysis has also been done on an yearly basis to identify all the critical processes, systems, department dependencies and critical resources to recover the processes Risk Awareness - The Bank is committed to train its employees on Operational Risk Management to ensure all employees are able to understand and identify operational risk in their respective business areas, and Outsourcing - An integral part of Operational Risk management is associated with oversight on outsourcing of services. Operational Risk management and concerned business units evaluate all the risks associated with such outsourcing and ensure proper risk mitigation The Bank defines "contingency planning", Disaster Recovery Plan (DRP) and Business Continuity Plan (BCP) as the process of identifying critical information systems and business functions and developing plans to enable those systems and functions to be resumed in the event of a disruption with minimal disruption. Business Impact Analysis (BIA) is being performed to assess the identify functions in the Bank and plans are being developed accordingly to ensure we recover all such identified critical processes at the time of Disaster. Bank performs regular testing to ensure that contingency plans are effective. During the testing process, management verifies that the business unit plans complement the information systems plans that are in effect for mainframe functions. 130
  129. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Operational Risk (Continued) The Bank's has enhanced its Business Continuity Management by implementing Active/ Active environment to ensure Recovery Time Objective is minimal since all the systems will be automatically fail over to the secondary data center and vice-versa in case of any disaster. The Technical DRP is the foundation on which the remaining three factors have been built up e.g. the business continuity plan or recovery process is developed, reviewed and updated based on the progress in the technical disaster recovery front. In case of disaster at Head Office, all the data is replicated at DR site on real-time basis. The Bank has been conducting semi-annually test which includes not limited to: 1. Full BCP test where head office including data center in not available and all systems and processes are recovered from the BCP Site 2. System/ applications testing - one or more application are not available from the primary data center and are recovered from the Site 2 (DR Site) 3. Floor Testing - one or more floors got disconnected from primary data center and all applications are recovered from Site 2 data center Results of the all the test are presented to RMC and BRC. BCP procedures are updated regularly in line with any technical changes implemented by IT. The exercise also requires the end users to accomplish a "Business Impact Analysis" to assess and support business continuity in the end-users' respective areas. The above operational risk initiatives comply in all material respects with the CBK instructions dated 14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding "Sound Practices for the Management and Control of Operational Risks". Moreover, the Bank conducted fire drills intended to meet any contingency. The results of these tests were satisfactory. Additionally, fire drills are conducted semi-annually to ensure readiness in case of actual fire. Floor wardens are identified from all departments and trained to assist staff in evacuation. Reputation Risk Reputational risk is the potential that negative publicity regarding an institution's business practices, whether true or not, could cause a decline in the customer base, costly litigation, or revenue reductions. The extent of reputational loss is normally measured by comparing the decline in a firm's market value. The safeguarding of AUBK's reputation is of paramount importance to its continued operations and is the responsibility of every member of staff. Board, the RMC, and Senior Management ensure that a full appraisal of any reputational implications is made before strategic decisions are taken. The standards and policies, which are integral to the Bank's system of internal control, are communicated through policies and manuals and appropriate staff training. The Bank's management anticipates and responds adequately and promptly to changes of a market/regulatory nature that impacts Bank's reputation and foster a sound culture that is well adopted throughout the Bank and has proven very efficient over time. In addition, the Bank has very effective internal control environment and management of customer complaints, whether these are raised to the Bank's staff or escalated to the regulators. 131
  130. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Data Security Management Data Security is a fundamental element in the Bank's overall posture; breaches in security often pose an immediate threat. Lapses in data security could result in breaches of privacy, theft or corruption of information, contamination of programs and theft of resources or assets. An unsecured network may allow access to sensitive information (e.g., personnel, financings, or payroll records, customer information). In order to safeguard the Bank from the various security threats a robust information security program has been established. A few of the core elements are discussed below: • • • • • • • • • • • • • • • • • 132 The Bank has deployed a well-defined information security framework (Policies, Procedures, Processes, Guidelines), which forms the basis for protecting critical information. The necessary documents of such framework are circulated to employees, third party vendors, partners and others to demonstrate that the Bank takes the security of data seriously. The Bank's main statement of policy is to implement a secure information system by identifying the responsibilities at every level of information handling i.e. from data ownership (encoding) to data access. Access to such data is granted based on "Need to Know - Need to Do" concept. The comprehensive Information security framework and policy covers not only the technical aspects of security, but also defines how Bank employees should treat sensitive information, this is to ensure: - Data confidentiality - Availability of resources - Data integrity  Well defined baselines are in place to handle core infrastructure including but not limited to firewalls, Intrusion Detection and Prevention, network devices, databases servers. These baselines identify the minimal configurations required to ensure security To ensure the integrity of critical systems the Bank maintains change management procedures in addition to audit logs Configuration assessment, periodic vulnerability assessment and penetration testing (internally and externally) on infrastructure components are carried out to ensure that the Bank maintains a good security posture The Bank analyzes network traffic to important critical servers and network devices on daily basis and proactively blocks any suspicious activity to ensure that any unseen security risks are controlled The Bank also provides security guidelines on banking projects to establish an equitable and standard approach Periodic audits are conducted to ensure compliance with the information security framework set by the Bank In the area of Payment Cards security, the Bank attained  PCI-DSS certification and is recertified annually The Bank achieved ISO27001:2013 certification and is recertified annually Periodic security awareness for the new joiners and current staff A comprehensive cyber security assessment was carried out in 2016 by a third party service provider to assess the Bank's security controls (Internal/ external penetration and vulnerability assessment, security configuration review, network architecture review). The service provider also carried out a phishing campaign to assess the awareness level of the staff The Bank is subscribed with a pronounced anti-phishing company to take down any phishing sites in timely manner The Bank acquired a state of the art Advance Threat Detection (ATD) protection appliances to protect us from zero-day attacks (new malwares) The Bank acquired a comprehensive Data Loss Prevention (DLP) solution to restrict unauthorized data leakage Enhanced our Swift systems security framework by introducing modern security controls Mobile Device Management (MDM) solution will be implemented in Q1 2018 Reducing the amount of users with peripheral device access (CD/USB) to the minimal
  131. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Legal and Compliance Legal risks represent the possibility of incurring a monetary loss as a result of an inability to enforce contracts / agreements signed by the Bank due to faulty documentation or improper drafting. As a general rule, the Bank ensures that counterparties and customers have legal and necessary authorities to engage in contracts and transactions with the Bank and that obligations arising from these transactions are enforceable. Legal Division ensures that the Bank is compliant with all legislation applicable to the Bank's business activities. Meanwhile, the Compliance Unit ensures that the Bank is compliant with all the requirements of CBK and any other legislative party, to which the Bank is held responsible to directly communicate or report. Part of the Compliance Unit's  main responsibilities is to comply with the CBK's instruction regarding combating money laundering and terrorist financing. Policy and procedures manual are updated on regular basis and regulatory reporting is conducted and delivered within the appropriate time frames. The Bank, whenever required, follows international standards and adopts best market practices when it comes to risk management activities. RMD stays aware of developments both within the organization as well as in the marketplace to ensure that the Bank may quickly adapt its risk management policies for any significant changes. The risk control programs are periodically benchmarked against regulatory standards and industry best practices. Whilst the Bank adheres to the regulatory standards and best market practices, it also recognizes the fact that the myriad of risks, affecting different parts of the Bank's risk-taking activities is continuously evolving. The biggest challenge, therefore, is keeping the information updated and relevant to facilitate better understanding of risk and effective response. To this end, RMD periodically performs a re-evaluation of significant risk management policies and procedures and develops action plans to correct any weaknesses. This also ensures that the Bank moves further along the continuum in terms of sophistication and analytical tools with respect to each of the risk dimensions. INFORMATION RELATED TO A LICENSED BANK'S COUNTERPARTY CREDIT RISK The Bank faces Counterparty Credit Risk ("CCR") or two-way risk in terms of FX Waad and Profit Rate Swaps (PRS) Contracts, where the mark-to-market could be on either side. In order to cover CCR, the Bank has setup FX/ PRS limits for clients as well as banks. Setting up limits is based on usual limit setting process of financial review, past history, transaction requirements and other credit worthiness criteria. The Bank actively monitors all FX Waad and PRS contracts by marking-to-market based on forward points and yield rates. The Bank also performs Credit Value Adjustment based on standardized approach as per CBK guidelines to account for potential counterparty credit deterioration. A daily monitoring of the Bank's exposure to counterparties against approved limits and tenor is presented to senior management. The Bank periodically reviews the latest available quantitative and qualitative information on the counterparties and based on the findings, limits and tenor are adjusted accordingly. Waad and PRS transactions are reported gross and there are no netting arrangements or collaterals. The table below shows the fair value and notional amount of the Waad and PRS transactions: 133
  132. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S RISK MANAGEMENT (CONTINUED) Table 7 - Waad Transactions Standard Portfolio 2017 KD 000 2016 KD 000 Assets (Positive) Liabilities (Negative) Waad Contracts 107 42 PRS (held as fair value hedge) 246 PRS (others) Total Notional amount Assets (Positive) Liabilities (Negative) Notional amount 24,561 123 168 12,345 - 44,659 - - - 175 175 30,175 - - - 528 217 99,395 123 168 12,345 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES Credit Risk Management The objective of Credit Risk Management is to establish and maintain a performing financing portfolio that minimizes the incidence of customer default. The process of risk management begins with the relationship manager who is responsible to assess the markets in which the customer operates and evaluate their credit requests before recommending the same to the respective approving authorities. The Board of Directors determines the authorities for various approving levels including Executive Committee, Senior Credit Committee and Credit Committee. In AUB, credit decisions are taken, based on an overall assessment of the customer's profile primarily relating to its ability to service the due obligations. Collateral is taken as security to mitigate loss in the event of a default by the customer. All the applications including consumer financing, are reviewed independently in the business before being submitted to the risk management department for assessment and recommendation. The Credit Committee deliberates on the recommendation of risk management department and takes appropriate decision. All applications which are beyond the scope of approving authority assigned to the Credit Committee are elevated to the next approving level. Finance facilities with overdue amounts of 90 days or less are identified as past due. In line with regulatory guidelines, facilities with overdue amounts of more than 90 days are classified as either sub-standard, doubtful or bad depending on the number of days which the amounts are overdue. The provision for impairment of credit facilities covers losses where there is objective evidence that losses may be present in components of the finance facilities portfolio at the balance sheet date. These have been estimated based on historical patterns of losses in each component, the credit ratings allotted to the borrowers and reflecting the current economic climate in which the borrowers operate. Besides, as per the CBK's requirements, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities is made on all asset based and proxy based facilities not subject to specific provision. The Bank has taken appropriate preparatory steps to ensure full compliance of IFRS 9 guidelines which are effective for the period beginning January 2018. 134
  133. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) The Bank uses Moody's Risk Rating calculator to assign an internal risk rating to corporate customers. The internal ratings are mapped to the ratings of ECAI as below: Risk Rating RR 1 RR 2 RR 3 RR 4 RR 5 RR 6 RR 7 RR 8 RR 9 RR 10 Moody’s Aaa Aa (1-3) A (1-3) Baa (1-3) Ba (1-3) B (1-3) Caa (1-3) Ca C D S&P AAA AA (+/-) A (+/-) BBB (+/-) BB (+/-) B (+/-) CCC (+/-) CC C D Where available, the Bank uses External Credit Assessment Institutions (ECAI) ratings for categorizing riskiness of credit assets. ECAIs have been used for the following standard portfolios Standard portfolio ECAI Claims on banks Fitch, Moody's and standard & poor's 135
  134. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 8 - Gross Credit Risk exposures before CRM 2017 KD 000 Year end balances Selffinanced URIA Monthly average balances Selffinanced Total URIA Total Claims on Cash Items 21,396 932 22,328 19,318 842 20,160 Claims on sovereigns 432,859 18,859 451,718 444,186 19,353 463,539 65,436 2,851 68,287 59,948 2,612 62,560 Claims on MDBs 2,832 123 2,955 1,899 83 1,982 Claims on banks 316,290 13,781 330,071 321,878 14,024 335,902 2,302,416 100,315 2,402,731 2,227,189 97,038 2,324,227 388,472 16,925 405,397 384,575 16,756 401,331 43,114 1,878 44,992 76,892 3,350 80,242 7 - 7 17 1 18 36,438 1,588 38,026 30,629 1,335 31,964 214,373 9,340 223,713 270,443 11,783 282,226 - - - 58,514 2,549 61,063 61,292 2,671 63,963 67,449 2,939 70,388 3,884,925 169,263 4,054,188 3,962,937 172,665 4,135,602 Claims on PSE Claims on corporate Claims on regulatory retail Past due exposures Inventory & commodity other than real estate Investment in real estate and real estate inventory Share & commercial real estate financing Securitized Sukuk Other exposures Total Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose. 136
  135. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 8 - Gross Credit Risk exposures before CRM (Continued) 2016 KD 000 Year end balances Selffinanced URIA Monthly average balances Selffinanced Total URIA Total Claims on cash items 16,309 751 17,060 15,378 708 16,086 Claims on sovereigns 422,174 19,435 441,609 472,589 21,756 494,345 49,949 2,299 52,248 24,472 1,127 25,599 278,207 12,808 291,015 444,885 20,481 465,366 2,094,215 96,410 2,190,625 2,116,733 97,446 2,214,179 378,784 17,438 396,222 363,706 16,744 380,450 76,294 3,512 79,806 73,198 3,370 76,568 5 - 5 313 14 327 22,040 1,015 23,055 23,032 1,060 24,092 316,073 14,550 330,623 358,428 16,501 374,929 Securitized Sukuk 184,238 8,482 192,720 138,692 6,385 145,077 Other exposures 70,445 3,243 73,688 81,913 3,771 85,684 3,908,733 179,943 4,088,676 4,113,339 189,363 4,302,702 Claims on PSE Claims on banks Claims on corporate Claims on regulatory retail Past due exposures Inventory & commodity other than real estate Investment in real estate and real estate inventory Share & commercial real estate financing Total Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose. 137
  136. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 9 - Geographic distribution of exposures 2017 KD 000 Standard Portfolio Cash items USA & Canada Europe Other countries Total 22,328 - - - - 22,328 427,467 24,251 - - - 451,718 68,287 - - - - 68,287 Claims on MDBs - 2,955 - - - 2,955 Claims on banks 129,946 156,630 21,067 15,263 7,165 330,071 2,211,899 99,436 - - 91,396 2,402,731 405,397 - - - - 405,397 44,992 - - - - 44,992 7 - - - - 7 28,412 9,614 - - - 38,026 223,713 - - - - 223,713 53,486 1,154 5 - 9,318 63,963 3,615,934 294,040 21,072 15,263 107,879 4,054,188 Claims on sovereigns Claims on PSE Claims on corporate Claims on regulatory retail Past due exposures Inventory & commodity other than real estate Investments in real estate and real estate inventory Share & commercial real estate financing Other exposures Total 138 Other Middle East Kuwait
  137. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 9 - Geographic distribution of exposures (Continued) 2016 KD 000 Standard Portfolio Cash items Other Middle East Kuwait USA & Canada Europe Other countries Total 17,060 - - - - 17,060 441,609 - - - - 441,609 52,248 - - - - 52,248 Claims on MDBs 107,357 159,654 18,525 3,287 2,192 291,015 Claims on banks 2,123,472 53,111 4,415 - 9,627 2,190,625 396,222 - - - - 396,222 58,099 21,707 - - - 79,806 5 - - - - 5 19,466 3,589 - - - 23,055 330,623 - - - - 330,623 Share & commercial real estate financing 94,546 - 6,217 - 91,957 192,720 Other exposures 61,771 11,608 309 - - 73,688 3,702,478 249,669 29,466 3,287 103,776 4,088,676 Claims on sovereigns Claims on PSE Claims on corporate Claims on regulatory retail Past due exposures Inventory & commodity other than real estate Investments in real estate and real estate inventory Total The exposures are allocated under each geographic unit based on the residence / domicile of the obligor. 139
  138. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 10 - Distribution of gross exposures by industry 2017 KD 000 Standard Portfolio 140 Funded Unfunded 2016 KD 000 Total Funded Unfunded Total Trading & manufacturing 536,238 111,472 647,710 519,131 92,649 611,780 Banks & financial institutions 895,711 53,345 949,056 929,750 52,276 982,026 Construction & real estate 1,298,098 78,713 1,376,811 1,346,022 87,338 1,433,360 Others 1,042,655 37,956 1,080,611 1,014,547 46,963 1,061,510 Total 3,772,702 281,486 4,054,188 3,809,450 279,226 4,088,676
  139. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 11 - Distribution of gross exposures by residual contractual maturity 2017 KD 000 Standard Portfolio Up to 1 Month 1 to 3 Months 3 to 12 Months Over 1 Year Total Cash items 22,328 - - - 22,328 Claims on sovereigns 85,972 79,040 277,585 9,121 451,718 Claims on PSE 9,887 50,087 - 8,313 68,287 Claims on MDBs 2,955 - - - 2,955 Claims on banks 199,849 74,690 6,413 49,119 330,071 Claims on corporate 933,877 956,475 299,448 212,931 2,402,731 6,083 1,712 4,834 392,768 405,397 44,992 - - - 44,992 Inventory & commodity other than real estate 7 - - - 7 Investments in real estate and real estate inventory - - - 38,026 38,026 79,946 79,785 33,973 30,009 223,713 4,792 7,068 2,072 50,031 63,963 1,390,688 1,248,857 624,325 790,318 4,054,188 Claims on regulatory retail Past due exposures Share & commercial real estate financing Other exposures Total ­ 141
  140. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 11 - Distribution of gross exposures by residual contractual maturity (Continued) 2016 KD 000 Standard Portfolio 1 to 3 Months 3 to 12 Months Over 1 Year Total Cash Items 17,060 - - - 17,060 Claims on sovereigns 65,954 118,596 163,147 93,912 441,609 Claims on PSE 12,270 30,171 - 9,807 52,248 Claims on MDBs 143,394 102,793 35,420 9,408 291,015 Claims on banks 545,492 766,730 634,850 243,553 2,190,625 6,874 2,233 5,896 381,219 396,222 79,806 - - - 79,806 Past due exposures 5 - - - 5 Inventory & commodity other than real estate - - - 23,055 23,055 Investments in real estate and real estate inventory 84,131 68,756 152,909 24,827 330,623 Share & commercial real estate financing 73,767 15,119 15,315 88,519 192,720 2,686 9,155 7,790 54,057 73,688 1,031,439 1,113,553 1,015,327 928,357 4,088,676 Claims on corporate Claims on regulatory retail Other exposures Total 142 Up to 1 Month
  141. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 12 - Impaired financings and provisions 2017 KD 000 Standard Portfolio Impaired Financing Past Due Financing Specific Provisions * Charge/ (Reversal) for the Period General Provisions Write Off Trading & manufacturing 1,882 - 697 23,713 23,768 20,258 Banks & financial institutions 1,243 - - - - 2,392 29,326 37,675 2,984 14,141 12,355 48,511 6,173 13,008 1,752 4,078 3,991 36,478 38,624 50,683 5,433 41,932 40,114 107,639 Specific Provisions * Charge/ (Reversal) for the Period Construction & real estate Others Total 2016 KD 000 Standard Portfolio Trading & manufacturing Banks & financial institutions Construction & real estate Others Total Impaired Financing Past Due Financing General Provisions Write Off 22,791 - 752 (1,481) 5,017 21,512 1,324 - - 1,227 1,227 2,865 37,455 3,207 1,198 181 - 46,108 8,799 12,281 1,665 3,209 3,733 46,793 70,369 15,488 3,615 3,136 9,977 117,278 There are no impaired or past due financings outside Kuwait. * Charge for specific provision As at 31 December 2017, the Bank carries a total provision of KD 113,072 thousand (31 December 2016: KD 120,893 thousand) including the above mentioned specific provision and general provision of minimum 1% on all claims on corporate and regulatory retail exposure (net of certain categories of collateral), that are not provided for specifically in line with CBK instructions. Profit amounting to KD 1,241 (31 December 2016: KD 8,487) has been suspended on the above mentioned impaired financing. 143
  142. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 13 - Movement in specific provision 2017 KD 000 2016 KD 000 Specific provision Specific provision Details At 1 January 3,615 10,456 Charge for the year 41,932 3,136 Amount written off (40,114) (9,977) 5,433 3,615 At 31 December Irregular and past due financing facilities Irregular Credit facilities (Impaired) are classified upon meeting conditions of irregularity defined by CBK and consist of the following categories: Watch list Category requiring specific provisions: Includes regular clients but upon management's discretion, provisions have been taken to confront any possible future deterioration, in addition to credit facilities that are overdue for 90 days or less (inclusive). The specific provision percentage is determined based on each case and after a thorough study by the management and after deducting deferred, suspended profit and eligible collateral. Sub-standard: If facilities are irregular for a period of 91 - 180 days (inclusive), a provision rate of minimum 20% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral. Doubtful Debts: If debts are irregular for a period of 181 - 365 days (inclusive),a provision rate of minimum 50% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral. Bad Debts: If debts are irregular for more than 365 days, a provision rate of 100% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral. 144
  143. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 14 - Ageing of Past Due Exposure Details 2017 KD 000 2016 KD 000 Past due exposure Past due exposure Past due but not impaired 90 days or less 50,683 15,488 91 – 180 days 15,059 2,598 181 – 365 days 4,775 2,529 42,006 65,242 112,523 85,857 Past due and impaired More than 365 days At 31 December Renegotiated financing: The Bank has not renegotiated any financial asset of major exposures that would otherwise be past due or impaired. 145
  144. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 15 - Exposure post risk mitigation and credit conversion 2017 KD 000 2016 KD 000 Standard Portfolio Rated Claims on PSE Unrated Total Rated Unrated Total - 1,663 1,663 - - - Claims on banks 92,126 - 92,126 82,536 - 82,536 Claims on corporate 65,225 1,801,098 1,866,323 - 1,614,055 1,614,055 Regulatory retail exposures - 379,655 379,655 - 369,234 369,234 Past due exposures - 19,982 19,982 - 30,209 30,209 Inventory & commodity other than real estate - 13 13 - 9 9 Investments in real estate and real estate inventory - 76,052 76,052 - 46,110 46,110 Share & commercial real estate financing - 192,184 192,184 - 235,848 235,848 Securitized Sukuk - - - 97,296 - 97,296 Other exposures - 77,940 77,940 - 88,934 88,934 157,351 2,548,587 2,705,938 179,832 2,384,399 2,564,231 Total Information Related to Financing Risk Mitigation Collateral is obtained from clients pursuant to the Bank's appraisal of the financial position, solvency, reputation and past experience of the client and the Bank's estimation of the degree of financing risks. Adequate collateral coverage ratios are maintained by the Bank in line with CBK guidelines and Bank policies. In the event of a decline in value of collateral, additional coverage is sought by the Bank. A significant portion of the Bank's financing portfolio is adequately covered either by tangible collateral that adhere to the Islamic Shari'ah principles or assignment of revenues and third party receivables or other kind of support such as personal/corporate guarantees. In order to mitigate the financing risk the Bank is exposed to, it accepts collateral in the form of cash (e.g., fixed deposits, deposit certificates and/or other savings instruments); shares / portfolio of shares traded on recognized exchanges and are compliant with the Islamic Shari'ah principles and unconditional Stand-by letters of credit or Bank guarantees by financial institutions having pre-approved limits covering principal amount plus profit. In addition to the above, the Bank accepts lien on sponsored funds, mortgages on real estate properties and chattel, legal assignment of contracting works or supply contracts as well as legal assignment of rentals or leases. With respect to counter-party guarantors, the Bank considers only those that fall within the acceptable criteria. 146
  145. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Where applicable, on and off-balance sheet netting are used to the extent allowed as per the provisions of the contracted documentation, legal right to set-off and there being no maturity mismatches. Information Related to Financing Risk Mitigation (Continued) The Bank has a system of periodic collateral valuation, monitoring, and follow-up for inadequate coverage. This ensures that the Bank has an effective collateral management process, wherein: 1. The collateral are appraised periodically, following the CBK guidelines as the minimum time interval, e.g. real estate properties are appraised at least annually while shares / portfolio of shares traded on recognized stock exchanges are monitored daily 2. The minimum Financing to Value (FTV) of 60% is required upon granting share/real estate financing bearing in mind, that FTV for individual obligor maybe lower than that set parameters depending on the financing circumstances, structure of facility, and creditworthiness of the obligor 3. the Bank executes documentation with borrowers empowering the Bank, the right to liquidate or take legal possession of the collateral, and 4. The obligor and the value of the collateral do not have a material positive correlation Financing exposure is reviewed monthly to ensure that there is no undue concentration. In the event that there is heavy concentration towards specific economic sector or counter-party, the Bank takes corrective actions including but not limited to sell down the related assets and / or requires the client to put up sufficient liquid security. 147
  146. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 16 - Eligible financial collateral and guarantees 2017 KD 000 Standard Portfolio 2016 KD 000 Gross Exposure Eligible collaterals Eligible Guarantees Gross Exposure Eligible collaterals Eligible Guarantees 330,071 23,009 - 291,015 23,373 - 2,402,731 473,207 - 2,190,624 576,569 - 405,397 22,183 - 396,222 22,117 - Past due exposures 44,992 15,093 - 79,807 21,417 - Real Estate & Shares Trading 223,713 95,590 - 330,623 173,391 - 3,406,904 629,082 - 3,288,291 816,867 - Claims on banks Claims on corporate Regulatory retail exposures Total Information Related to Market Risk Banking Book Currency and Commodity Positions and Trading Book Equity and Fixed-Income Positions The Bank currently follows the standardized approach in determining capital requirement for market risk on the trading book. All Banking Book currency and commodity net open positions are considered for market risk capital charges. While equity risk and profit rate risk (Benchmark risk on account of fixed-income positions) is calculated on positions which are for the sole purposes of trading or booked as Held For Trading (HFT). As the Bank does not involve in any trading in equity or fixed-income instruments, the market risk capital requirements are restricted to only banking book currency and commodity positions. The capital charges are calculated as per CBK Criteria in accordance with Basel III guidelines. 148
  147. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 17 - Capital requirement for components of Market Risk Standard Portfolio 2017 KD 000 2016 KD 000 Commodity risk 2 1 Equity position risk - - Foreign exchange risk 39 152 Total 41 153 Information Related to Operational Risk Operational risk is defined by Bank as the risk of direct and indirect loss resulting from inadequate or failed internal processes, people or systems or from external events. The operational risk capital charge is calculated using the Basic Indicator approach. As required under this approach, the Bank has computed its capital as a percentage of the positive average annual gross income of the previous three years. Gross income for this purpose is defined as net profit income plus net non-profit income. The Basel III accord requires banks to hold capital against operational risk. The accord offers a continuum of approaches from the simplest basic indicator approach to the more advanced measurement approaches. The Bank has adopted basic indicator approach which is in line with CBK requirements. Risk management is the essence of operational risk where different tools are applied for identification, assessment, monitoring, control and mitigate risks. Risk identification is vital to the development of viable operational risk monitoring and control systems. Risk identification considers internal factors such as the Bank's structure, the nature of its activities, the quality of its human resources, organizational changes and employee turnover. It also examines external factors such as changes in the industry, major political and economic changes, and technological advances. Following tools are implemented for managing risks: Level 1 - Operational Risk Self-Assessment (ORSA) it is a tool used to identify all inherent risks in the process along with its probability and impact to measure the risk value. We also assess the controls associated to that event and assess its effectiveness using historical data to arrive at residual risk/ risk severity. All the risks identified are classified as per BASEL event categories and this is an ongoing exercise where all departments are updating the ORSA as and when the risk or potential risk is being identified. Business Risk Officer and Division Head sign off on the ORSA after every calendar year and all risks are being presented to RMC. Level 2 - Key Risk Indicators (KRI) is the process of collecting and reporting on a selective set of quantitative measures that correlate with the likelihood of potential failures in a process. These indicators are not readily combined into a single aggregate, rather, they are useful on a comparative basis across similar processes and over time. They allow effective benchmarking of processes. All KRIs are tracked on monthly basis and analysis is performed to see the risk trend whether the trend is increasing, decreasing or stable and accordingly mitigating actions are being taken to proactively mitigate the risk 149
  148. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Information Related to Operational Risk (Continued) Level 3 - Loss Data Collection - the Bank's collection of historical operational risk losses as well as "near misses" is an ongoing exercise. Operational Risk performs the root cause analysis of the all the actual and near miss incidents to understand the cause and to assess existing controls and its effectiveness. New controls are put in place if required to avoid re-occurrence of such incidents and accordingly procedures and ORSA documents are being updated. Incident Management form is available for all staff in the Bank to report all actual or near miss events. In addition, every division submits the Operational Risk Disclosure certificate to certify that all incidents and loss events are reported to risk management as and when the same are detected. Level 4 - Operational Risk System - the Bank has implemented state of the art Operational Risk system in June 2017 which enables Bank to effectively identify, assess, monitor and control Operational Risk across all Business Units in the Bank. The system has the capability to perform ORSA exercise whereby each designated Business Risk Officer captures the identified risks, assess the risk based on impact and probability, assess existing controls and its effectiveness. The system also has the functionality to record KRIs and perform trend analysis to proactively manage Operational Risk. All incidents (actual and near miss) are being recorded into the system along with its root cause and mitigating actions. Level 5 - Operational Risk Awareness Program - the Bank is continuously making efforts to promote risk awareness culture in the Bank by providing risk awareness trainings to all the staff and Business Risk Officers through workshop and online trainings programs. Level 6 - Business Continuity Management - to avoid business disruption and to provide services to the customers during disaster situations, each business unit in the Bank has developed BCPs in co-ordination with Operational Risk team where in all processes undergo Business Impact Analysis to assess the criticality and recovery strategy. To ensure its readiness to be able to recover the business during disaster situations, the Bank has been conducting various BCP tests throughout the year covering different scenarios such as Loss of Site, Loss of System and Loss of People. Operational risk weighted exposures calculated during the year 2017 amounted to KD 206,828 thousand (31 December 2016: KD 193,989 thousand) as per the Basic Indicator Approach. The amount calculated for operational risk weighted exposures is adequate to cover any projected risks to maintain a reasonable profit ratio for shareholders and investment account owners. The minimum required capital for operational risk exposures amounts to KD 27,922 thousand (31 December 2016: KD 26,188 thousand). 150
  149. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 18 - Capital requirement for operational risk Year 2017 KD 000 2016 KD 000 Net income from financing activities 33,880 30,723 Net income from investing activities 1,490 1,837 Fees and service income 2,670 2,666 (10,118) (9,038) 27,922 26,188 Deduction: Investment Account Holders’ Share of Income Total Information Related to Investment Securities Investments in the banking book are made in Shari'ah compliant instruments and are classified at the time of acquisition into those acquired for capital gains and strategic investments. Investments acquired with a view of generating income and profits from capital appreciation are reviewed periodically and disposed off at opportune instances. The Bank reviews its strategic investment portfolio based on the industry, market and economic developments and then either liquidates or further consolidates holdings in these investments. Strategic investment represents the investment in other entities with long term objective in line with the overall Bank's strategy, rather than short term profit making. In accordance with International Financial Reporting Standard, investment in sukuks and equity positions in the banking book are classified as available for sale securities. Sukuks may also be classified as Held To Maturity (HTM). AFS investments are fair valued periodically and revaluation gains / losses are accounted as cumulative changes in fair value in equity. For investments quoted in organized financial markets, fair value is determined by reference to quoted bid prices. Fair values of unquoted investments are determined by reference to the market value of a similar investment, on the expected discounted cash flows, or other appropriate valuation models. The significant assumptions used for valuation of unquoted equity securities include annual growth rate of cash flows and discount rates and illiquidity premium. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. Equity investments whose fair value cannot be estimated accurately are carried at cost less impairment if any. 151
  150. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INFORMATION RELATED TO A LICENSED BANK'S INVESTMENT & FINANCE EXPOSURES (CONTINUED) Credit Risk Management (Continued) Table 19 - Investment securities in banking book Investment Type Publicly traded Privately held Total 2017 - KD 000 2016 - KD 000 Carrying Value Capital Charge Carrying Value Capital Charge 210,725 28,334 193,464 26,028 6,633 1,427 10,509 2,016 217,358 29,761 203,973 28,044 Table 20 - Classification of investment available for sale by industry 2017 - KD 000 Industry sector Banks and financial institutions Services Real estate Others Total Carrying Value 2016 - KD 000 Minimum capital requirements Carrying Value Minimum capital requirements 143,794 19,337 157,279 21,233 31,227 4,204 28,419 3,821 1,481 140 1,762 192 40,856 6,080 16,513 2,798 217,358 29,761 203,973 28,044 Publicly traded investments represent quoted securities traded on local and international stock exchanges. Privately held investments represent investments in unquoted securities and venture funds. The total value of investments in the banking book in the statement of financial position is KD 217,358 thousand (31 December 2016: KD 203,973 thousand). Cumulative realized gain from sale of available for sale securities is KD 2,589 thousand (31 December 2016: KD 3,451 thousand). The total unrealized gain recognized in the equity is KD 3,478 thousand (31 December 2016: KD 3,924 thousand). INVESTMENT ACCOUNTS The Bank receives deposits from customers as part of several unrestricted investment accounts. These deposits are fixed-term, open-term, or renewable automatically with different investment rates. These funds are used by the Bank in all finance activities that will achieve a targeted return. Investment returns are distributed among the Bank as a Mudarib and investment account holders on proportionate basis for each type of these accounts and the elapsed period of these funds. The Bank also receives deposits from customers that are restricted. The Bank is investing these deposits as an investment agent (Wakeel). Customers' deposits are received and invested according to certain regulations that are mentioned in the procedures manual and instructions guide to ascertain that these funds, whether they were in Kuwaiti Dinar or foreign currency, are invested according to Islamic Shari'ah principles. Following are the Investment percentages for major Mudaraba based deposits used for the Profit distribution: 152
  151. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 INVESTMENT ACCOUNTS (CONTINUED) Table 21 - Deposit Accounts Investment Percentage Investment Percentage Investment Percentage 2017 2016 Savings %60.00 %60.00 1 Month %60.00 %60.00 3 Months %60-62 %60-62 6 Months %65.00 %65.00 9 Months %70.00 %70.00 1 Year %70-90 %70-90 Deposit Category Table 22 - Classification of Deposit Accounts 2017 - KD 000 Profit equalization reserve Deposit categories Unrestricted Profit equalization reserve Investment risk reserve Investment risk reserve 1,580 2,279 1,840 2,278 - - - - 1,580 2,279 1,840 2,278 Restricted Total 2016 - KD 000 Table 23 - Deposit Accounts Ratios 2017 - KD 000 Deposit categories 2016 - KD 000 Profit Rate Reserve To Profit Sharing Deposits Investment Risk Reserve To Profit Sharing Deposits Profit Distributed To Profit Sharing Deposits Profit Rate Reserve To Profit Sharing Deposits Investment Risk Reserve To Profit Sharing Deposits Profit Distributed To Profit Sharing Deposits 0.67% 0.97% 1.43% 0.73% 0.91% 1.36% - - - - - - Unrestricted Restricted SHARI'AH GOVERNANCE Shari'ah Governance is a main pillar in any Islamic financial institution. The strengths of the Shari'ah Control unit in any bank provides assurance on the solidity of its operations and accuracy of its businesses and income in compliance with Shari'ah rules and regulations. It will further protect the Bank from accepting expenses or incomes which do not comply with Islamic principles and places the transparency as main principle of the business values. During December 2016, CBK issued circular 2/RBA/369/2016 regarding Shari'ah Governance. The Bank is fully compliant with the requirements of Shari'a Governance Standards as applicable for implementation by 1 January 2018. 153
  152. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 SHARI'AH GOVERNANCE (CONTINUED) Shari'ah Control Structure Fatwa & Shari'ah Supervisory Board (Shari'ah Board) The Shari'ah Board is formed in Islamic Banks in Kuwait consisting of at least three members appointed by the AGM in compliance with the Memorandum and Articles of Association (AOA) and the Law number 30/2003. The AOA provides the terms of reference and responsibilities of the Shari'ah Board. The resolutions of the Shari'ah Board are enforceable and due for execution as specified and determined. The Shari'ah Department & Shari'ah Board are responsible to ensure compliance and report the results of the annual review to the AGM. Shari'ah Executive Committee It is an Executive Committee delegated by the Shari'ah Board responsible to study and review the matters referred to the committee by the Bank management or the Shari'ah Board. Secretary of the Shari'ah Board Attending the meetings and responsible for Shari'ah Board & Shari'ah Executive Committee meetings, prepares the agendas, minutes of meetings, circulates the resolutions and studies / reviews all matters delegated or referred to him by the Shari'ah Board and Executive Committee. He has further to monitor the execution of the Shari'ah resolutions. The Supervisory Authority on Revenues Received from Non-Shari'ah Compliant Sources or Activities. Revenues generated from non-Shari'ah compliant sources either pre-conversion to Islamic Bank or having resulted from some unintentional defective transactions contradicted with the Shari'ah guidelines are maintained under a restricted account. This account is monitored and controlled by the Supervisory Authority and no withdrawals are allowed prior to obtaining a permit from the Authority according to the rules and laws determined by the Shari'ah Board. Shari'ah Compliance Department Shari'ah Audit Shari'ah Audit department carries out periodical audits on all departments of the Bank to ensure compliance with the resolutions of the Shari'ah Board. All findings are discussed with the concerned department and subsequently escalated to the Shari'ah Board. Shari'ah Advisory & Training Part of the Shari'ah Compliance Department duties is to act as advisor on all inquiries or matters referred to the department for review, e.g. contracts, engagements, letters, policies, procedures and newspapers advertisements. The department, in coordination with Human Resources, arranges all the required training and career development plans for the Sharia related skills for employees at all levels. The Secretary of the Shari'ah Board is responsible to schedule and arrange all Shari'ah meetings, circulate the resolutions and follow up with management on all Shari'ah related matters to ensure that Shari'ah resolutions are properly maintained and communicated. Shari'ah Violations Violating the Shari'ah guidelines may result in turning the underlined revenue or expense to be non- Shari'ah compliant. The financial consequence of this violation is reported to the Shari'ah Board after discussing it with concerned department and all proceeds are transferred accordingly to the restricted account designed for that purpose which is used for charitable contributions upon proper approvals During 2017, no violation was observed at the Bank that may have a financial impact on the results of the Bank and its operations. Violating the Shari'ah guidelines in other cases may not result in gaining any income or incurring expenses or does not have material financial impact on the Bank. In such circumstances, the Shari'ah Departments directs the concerned department to take the corrective action and monitors the compliance subsequently. 154
  153. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 SHARI'AH GOVERNANCE (CONTINUED) Zakat In accordance with the Law No. 46 of 2006 and as per the resolution of the Ministry of Finance No. 58/2007, the Bank pays the Zakat. Occasionally, the Zakat covers the Zakat amount to be paid by the Bank's shareholders. However, The Bank is not responsible for paying Zakat on behalf of shareholders other than Tax Zakat. Any inquiries on Zakat are adequately addressed by the Shari'ah Department. The amount of the Zakat for the financial year ended 31 December 2017 amounted to KD 490 thousand (31 December 2016: KD 419 thousand). Remunerations of the Fatwa & Shari'ah Supervisory Board Members The AGM endorses the appointment/ reappointment of the Shari'ah Board members and authorizes the Board of Directors to determine & pay the related remuneration. During the year, remuneration paid/ will be paid to the members of Shari'ah Board amounts to approximately KD 32 thousand (31 December 2016: KD 35 thousand). Remuneration The Bank has set up policies over remuneration practices and guides its remuneration based on performance and risk. For this purpose the Bank has set up a Compensation & Nominating Committee ("CNC") to independently assess and monitor remuneration systems. CNC consists of three non-executive board members. CNC met 2 times during the year 2016. During the year, remuneration paid/ will be paid to the members of CNC amounts to KD 6,000 (31 December 2016: KD 6,000) approximately which is subject to approval of the Board of Directors. The remuneration policy provides the basis of determining remuneration to Group's employees, including material risk-takers based on their responsibilities and authority levels. Senior executives and material risk-takers comprise those whose activities have a significant impact on the Bank's risk profile and their divisional financial matrix (KPIs), which is cascaded from the annual business targets, expanded to incorporate risk measures (KRIs). These risk measures and weights shall be defined by respective business functions in concurrence with Risk Management. Remuneration is determined based on this policy guidelines including performance rewards and these policy guidelines are applicable to the Group. The material risk takers includes CEO and the business line executives of Corporate Banking, Retail Banking, Private Banking, Treasury and Direct Investments. Remuneration includes a fixed component that rewards the capacity to hold a position in a satisfactory manner through the employee displaying the required skills and variable components that aim to reward collective and individual performance, depending on the smart objectives defined at the beginning of the period and conditional to meeting said objectives, according to the performance standards and risk parameters defined by the Bank. In addition, for senior executives and key risk-takers, remuneration is aligned with prudent risk taking and quantitative and human judgment measures included for risk adjustment. Risk adjustment accounts for all type of risks including intangibles such as reputation risk, liquidity risk and cost of capital. Back testing and stress testing is required to test performance alignment of remuneration with risk. The remuneration processes are designed to reward based on evaluation of performance and advice of external consultants are sought whenever required. Specific employee roles and responsibility related to performance metrics are designed in the form of Key Performance Indicators Matrices (KPIs) to continuously evaluate performance of executives and staff employees. Performances are evaluated based on smart objectives and their achievement measured on a transparent basis that are applied for determining rewards. The CNC regularly reviews the remuneration policy and updates as required. The Bank takes into account the risk taken by business executives in determining remuneration where the future risks and crystallization of such risks are considered. In cases where the performance-related pay exceeds 60% of the senior executive's total annual salary, then the performance bonus portion above 60% is deferred for the subsequent 3 years subject to claw back rules in case of negative performance. 155
  154. BASEL III - PILLAR III DISCLOSURES (CONTINUED) As at 31 December 2017 SHARI'AH GOVERNANCE (CONTINUED) Remunerations of the Fatwa & Shari'ah Supervisory Board Members (Continued) Remuneration (Continued) The Bank has put in place ex-ante operating profits, net profit, NPLs and ex-post matrices like, trends in NPLs, Peer comparison in key matrix etc, that are used to determine rewards taking long term view including deferred payment of such rewards. The performance of the Bank's employees are measured through a performance management system with measurable metrics for performance rewards. Rewards will vary based on the performance of individual managers and employees which are linked to overall performance of the Bank and HR compares the rewards with the normal distribution curve to ensure consistency and that any variances have been investigated. Performance assessment of the Bank's designated approved persons in the function of Risk Management, Internal Audit, Operations, Finance, Shari'ah audit, compliance and AML functions measured primarily on the achievement of the objectives and targets of their functions, ensuring independence from business areas. The performance assessment, fixed and variable compensations for the Heads of Audit and Compliance and the GM - Risk Management are specifically discussed by the committee and endorsed by the Chairman of Audit & Compliance Committee and approved by the CNC. Table 24 - Type of Remuneration 2017 KD 000 2016 KD 000 Unrestricted Unrestricted Senior management and material risk takers Fixed remunerations* Cash based 2,811 2,688 Variable remuneration* Cash based 715** 637 Table 25 - Number of Employees and Remuneration Paid Employees categories Senior management* 2017 KD 000 2016 KD 000 Number Of Employees Total Number Of Employees Total 15 1,807 14 1,805 Material risk takers* 30 1,719 26 1,520 Financial and control functions* 24 1,432 20 1,217 Table 26 - Number of Employees and Other Employment Benefits 2017 KD 000 End of service benefits (Senior Management and Material Risk-takers)* 2016 KD 000 Number Of Employees Amount Number Of Employees Amount 45 297 40 241 *Some of the positions are duplicated in the categories Senior management, Material risk takers and Financial and control functions. **Variable remuneration is estimated using the prior year's variable remuneration and is subject to approval of the Board of Directors by the end of first quarter of 2018. 156