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Al Khalij Commercial Bank: Annual Report 2018

IM Insights
By IM Insights
4 years ago
Al Khalij Commercial Bank: Annual Report 2018

Credit Risk, Participation, Provision, Receivables, Reserves, Sales


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  1. The Advantage of Success 2018 Annual Report
  2. H .H. Sheikh Hamad Bin Khalifa Al-Thani The Father Emir H.H. Sheikh Tamim Bin Hamad Al-Thani The Emir of the State of Qatar
  3. MISSION Working to deliver next generation banking by blending tradition with innovation . VISION To become the most highly rated and respected bank in Qatar - by our staff, preferred clients, shareholders, regulators, and the community that we serve. VALUES To foster a corporate culture where we are: • united in all our efforts • reliable whenever tasked • committed to our stakeholders • always striving for excellence
  4. al khaliji bank Annual Report 2018 TABLE OF CONTENT 08 Board of Directors Report and Chairman ’s Statement 10 Group Chief Executive Officer Foreword 12 CORPORATE GOVERNANCE 14 External Auditor Report on Corporate Governance 20 Corporate Governance Disclosures 82 CORE BANKING ACTIVITY 84 Wholesale Banking 86 Personal Banking 88 Treasury and Capital Markets 90 INTERNAL CONTROL AND SUPPORT FUNCTIONS 92 Group Internal Audit 94 Group Risk Management 102 Group Compliance and Anti-Money Laundering 108 Group Finance and Investor Relations 110 Group Human Resources and Administration Affairs 111 Legal 112 Operations and ICT 114 CORPORATE SOCIAL RESPONSIBILITY 116 CSR Report 120 SUBSIDIARIES 124 CONSOLIDATED FINANCIAL STATEMENT AS OF 31 DECEMBER 2018
  5. al khaliji bank Annual Report 2018 BOARD OF DIRECTORS ’ REPORT AND CHAIRMAN’S STATEMENT I am pleased to present al khaliji’s 2018 Annual Report for the year ended 31 December 2018 on behalf of the Board of Directors. In 2018, Qatar continued its growth path. According to the International Monetary Fund, Qatar’s economy has shown considerable flexibility in dealing with all the challenges. The real GDP growth recorded ca. 2.7% in 2018 compared to 1.6% in 2017. Reserves are considered broadly adequate in view of the size of the sovereign wealth fund. This ensures the economy remains immune to any potential risk. The projections for the economy on the mid-term are promising in light of the prudent economic policies and the stable financial system. The Global rating agencies re-confirmed the country’s robust credit rating with stable outlook. Qatar’s banking sector remains healthy overall, reflecting high liquidity and asset quality as well as strong capitalization while continuing in diversifying the funding resources and deposit structures and granting healthy support to both the public and privates sectors, all of which are an indication of Qatar’s resilience under the wise leadership of H.H the Emir of the State of Qatar. In al khaliji, we started the year with the election of a new Board of Directors, on-boarding new members that have injected fresh blood into the Board and enriched its structure. The Bank’s support and continuous growth in a challenging environment were the core priorities of the new Board. To this end, a number of strategic initiatives were launched to protect the Bank’s stability and achieve sustainable profits. Our business was primarily Qatar-centric. We were selective in growing our balance sheet. We divested non-core assets and focused on efficiently managing our funding base to improve yields while maintaining tight control over operating expenses. During 2018, we also engaged in discussions with various bidders for the disposal of our subsidiary, Al Khaliji France S.A. The Board considered the terms of the various offers received to be not in the best interest of the Bank’s stakeholders, and decided not to pursue the process any further. Furthermore, the Bank raised USD 500 million fiveyear senior unsecured bonds under its USD 2.5 billion European Medium Term Note (“EMTN”) Programme. This transaction was the second benchmark 8
  6. issuance of the Bank , and despite volatile markets, I am pleased to report that the issuance was three times oversubscribed and we managed to achieve our target pricing. This was a clear indication of the continuing confidence of international investors in the strength and economic stability of Qatar and, particularly, in the strategic direction of our Bank. The Bank has maintained a credit rating of “A3” and “A” from Moody’s and Fitch respectively with an outlook upgraded from ‘negative’ in 2017 to “sable’ in 2018. These good ratings remain a testament of the Bank’s solid position. In our results for the year ended December 31, 2018, we reported a net profit of QAR 608 million, which is 10.5% higher compared to QAR 550 million as at end 2017. Our Net Operating Income for 2018 reached QAR 1,143 million. These results are particularly impressive as the bank focused on the quality of its earnings as opposed to growing revenues by solely relying on balance sheet growth. Therefore, Total Assets at QAR 52 billion were lower by 10%, driven by a reduction in investments by 15% mainly due to maturities compared to 2017 and Loans and Advances by 11% at QAR 31 billion compared to 2017, particularly as the Bank divested from non-core assets and aligned its core-lending portfolio to its Qatar centric strategy. Customer Deposits reached QAR 28.6 billion as at 31 December 2018, lower by 12.5% over the same period last year. The Bank reduced its impairment on loans and investments by 40% recording total impairment charges of QAR 190 million for the year. The NPL ratio stood at 1.88% as at end 2018 compared to 1.94% as at 31 December 2017. This decrease was led by a combination of write-offs and low NPL formation, and a reduction in the total loans and advances. The Bank’s NPL ratio remains below the Qatari market average. Earnings per share grew by 11% to QAR 1.54 for 2018 compared to 1.38 in 2017. The Banks’ capital adequacy ratio was well above regulatory requirements, closing at 16.9%. There have been no significant changes to the Bank’s accounting policies during 2018 and the basis of presentation remains the same. Similar to past years, the Bank has drawn up its financial statements in compliance with IFRS and applicable requirements of the Qatar Central Bank. We recommend the appropriation of the profits as proposed in the audited 9 financial statements presented to the shareholders. Accordingly, the Board of Directors recommends the General Assembly to distribute cash dividends to shareholders of 7.5% of the nominal value of its shares at the rate of QAR 0.75 per share. For further details or to check the additional disclosures made as per the applicable laws and regulations, we hereby present the full annual report for 2018 including the corporate governance report, the audited financial statements as of 31 December 2018 and the external auditors reports. In 2019, the Board of Directors will be working on developing a new mid-term strategy that will focus on achieving sustainable growth, creating added value to all shareholders and providing better customer service while enhancing and promoting al khaliji’s reputation in the banking sector. In conclusion, I am privileged, on behalf of the Board of Directors and al khaliji, to extend my deepest gratitude to His Highness Sheikh Tamim Bin Hamad Bin Khalifa Al Thani, the Emir of the State of Qatar, and to His Highness Sheikh Hamad Bin Khalifa Al Thani, the Father Emir, for their continuous support to the Qatari economy and institutions. The Board would also like to express its gratitude to His Excellency Sheikh Abdullah Bin Nasser Bin Khalifa Al Thani, the Prime Minister and Minister of Interior for his constant support. Our appreciation is also extended to His Excellency Sheikh Abdullah Bin Saoud Al Thani, the Governor of Qatar Central Bank, for his dedicated efforts to develop Qatar’s banking sector and to all regulators, in particular, the Ministry of Commerce and Industry, the Qatar Financial Markets Authority and the Qatar Stock Exchange for their unwavering support. Finally, I would like to thank the executive management and all staff of al khaliji Group for their dedication and efforts, as well as our clients and shareholders for their confidence and continued support to al khaliji. Sheikh Hamad Bin Faisal Bin Thani Al Thani Chairman and Managing Director
  7. al khaliji bank Annual Report 2018 GROUP CHIEF EXECUTIVE OFFICER FOREWORD I am pleased to report a strong financial performance for 2018 . All our core business divisions are profitable, contributing towards an underlying profit of QAR 608 million. The financial results reflect the strength and potential of al khaliji. Our Qatar centric strategy and business model remains resilient as the country is one of the strongest, most diverse and competitive economies in the region. The supportive economy has enabled us to grow our client base and improve asset quality while preserving risk discipline. The strength of our three main Qatar businesses generated improved revenues, increased margins and growth in the client base during 2018. Net Operating Income of QAR 1.1billion was earned on Loans and Advances of QAR 31.1billion underscoring an increased yield on assets in line with our strategic goal of delivering sustainable earnings. We have streamlined our business, improved balance sheet management and increased profitable lending in our core market to lay a solid foundation for future performance. Loan impairment charges were significantly lower than 2017, mainly due to active remedial management of weaker credits. The 40% reduction in charge, due to careful risk management, also includes the introduction of IFRS9 to create an impairment allowance on the performing portfolio. al khaliji has a scalable platform with a highly disciplined approach to risk. Operating expenses have decreased year on year, achieved through streamlined processes, greater automation and increased productivity. Our cost income ratio remains below 30% and we will continue to invest in business model initiatives to drive efficiency. Our robust balance sheet and capital strength continued to attract deposits and enabled the Bank to contain its cost of funding. The Bank’s Liquidity Coverage Ratio and Capital Adequacy Ratio remain well above the minimum levels required by the Qatar Central Bank. Our customers are at the heart of everything we do. We have a stable and experienced team with deep customer relationships. Our strong customer franchise built on expert advice and outstanding customer service, operating to high standards and transparency is central to al khaliji’s long-term success as we aim to help our clients to grow, manage and preserve their wealth. 10
  8. Our Qatar centric strategy , continuous focus on product and process enhancements, and strive for customer service excellence is reflected in the broad range of industry awards conferred on al khaliji during the year: 2018 Global The European Banking and Finance Awards, • Best Private Banking Services MENA • Best Corporate Bank Qatar World Union of Arab Bankers • Best Commercial Bank in Qatar New Age Banking and Finance Awards • Premium Banking; Best Bank in Productivity Qatar Development Bank (QDB) 2018 Awards • Al Dhameen Best Customer Satisfaction Qatar CSR Report, Qatar University • Responsible Leadership Award in CSR The Bank is also highly recognized in the Debt Capital Markets, as al khaliji was mandated as joint lead manager and book runner for the issuance of the largest sovereign debt in Qatar’s histroy valued at USD 12 billion. Our employees are key to our success and the value of the business rests with their ability to deliver high quality service into the future. Every two years we appoint an external party to conduct an Employee Engagement Survey, as we give great importance to ensuring our people are highly motivated to drive organizational performance. Our 2018 Engagement Levels exceed those of GCC Commercial Banks and Middle East Financial Institutions. The Bank makes every effort to achieve workforce diversity, as we believe this gives us a competitive edge in the form of increased creativity, new ideas and processes brought into the organization. In tandem we also adopt a skills based Qatarization strategy to ensure we develop the next generation of leaders to meet our social objectives. Six Qatari graduates and school leavers undertook an intensive Leadership and Development Rotation Program. While our 11 Branch Managers, and associates, attended an indepth customized development program run over a number of weeks with the QFBA. We actively sponsor a number of students in Qatar University and 10 Interns availed of work experience during the year. Locals are well represented on the Senior Management Team and our broader Qatarization rate is 24%. As believers in Qatar’s Vision 2030, we are committed to supporting its four pillars, which is why for al khaliji, Corporate Social Responsibility (CSR) is more than just giving back, it’s about balancing economic, social and environmental obligations. Over the past number of years al khaliji employees have donated more than 1,500 hours to community service. Our Senior Management Team regularly engages in knowledge sharing sessions with local universities and high schools. We also donate to charitable organizations in the neighborhoods where our customers and colleagues live and work. We are grateful recipients of the Responsible Leadership Award in CSR in recognition of our efforts. In H1 2019, we look forward to moving to our new prestigious head office at al khaliji Tower Lusail, which has been awarded a 4-star Global Sustainability Assessment System (GSAS) certification for sustainable design, construction and operation. Qatar’s transformation over the next decade as outlined in QNV 2030 underpins our growth ambitions. Evolving with customers and leveraging economic growth to build a truly customer focused organization is our primary aim. We will continue to have a positive impact on the communities we serve and deliver attractive sustainable returns to our shareholders. To conclude, I would like to extend my heartfelt support and gratitude to our Chairman and the Board. Fahad Al Khalifa Group Chief Executive Officer
  9. CORPORATE GOVERNANCE REPORT 2018
  10. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Independent Assurance Report to the Shareholders of Al Khaliji Commercial Bank (al khaliji) P.Q.S.C. on the Board of Directors’ Statement on the Design and Implementation of Internal Controls over Financial Reporting and Report on Compliance with the applicable Qatar Financial Markets Authority’s Laws and relevant legislations including the Governance Code for Companies and Legal Entities Listed on the Main Market EXTERNAL AUDITORS’ REPORT ON CORPORATE GOVERNANCE In accordance with Article 24 of the Governance Code for Companies and Legal Entities Listed on the Main Market issued by the Qatar Financial Markets Authority (“QFMA”) Board pursuant to Decision No. (5) of 2016, we have carried out: • a reasonable assurance engagement over the Board of Directors’ Statement on Design and Implementation of Internal Controls over Financial Reporting (the ‘Directors’ Internal Controls Statement’) as at 31 December 2018; and • a limited assurance engagement over the Board of Directors’ Annual Corporate Governance Report on compliance of the Group with the applicable QFMA Laws and relevant legislations including the Governance Code for Companies and Legal Entities Listed on the Main Market (the “ Code”) as at 31 December 2018. Responsibilities of the directors and those charged with governance The Board of Directors of Al Khaliji Commercial Bank (al khaliji) P.Q.S.C. (the “Bank” or “al khaliji”) and its subsidiaries (the “Group”) is responsible for implementing and maintaining effective internal control over financial reporting. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. The Bank has assessed the design and implementation of its internal control system as of 31 14
  11. December 2018 , based on the criteria established in the Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). The Bank’s assessment of its internal control system is presented by the Board of Directors in the form of the Directors’ Internal Controls Statement contained in Sections 3.8, 3.9, 3.10, and 3.11 of the Annual Corporate Governance Report, which includes: • A description of the controls in place within the Components of Internal Control as defined by the Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission; • a description of the process and internal controls over financial reporting for the processes of Treasury, Customer Deposits, Loans and advances, Commission Income, Financial Reporting, and Entity-level controls; • a description of control objectives; identifying the risks that threaten the achievement of the control objectives; • an assessment of the design of Internal Controls over Financial Reporting; and •an assessment of the severity of control deficiencies, if noted any, and not remediated at 31 December 2018. The Board of Directors of the Group is also responsible for preparing the accompanying Annual Corporate Governance Report that covers at the minimum the requirements of Article 4 of the Code. In Section 3.16 of the Annual Corporate Governance Report, the Board of Directors provides its statement on compliance with the applicable QFMA Laws and relevant legislations including the Code. Our Responsibilities Our responsibilities are to: • Express a reasonable assurance opinion on the fairness of the presentation of the “Board of Director’s Statement on Internal Controls over Financial Reporting” presented in Section 3.10, 15 based on the criteria established in the COSO Framework, including its conclusion on the effectiveness of design and implementation of Internal Controls over Financial Reporting as at 31 December 2018. • Issue a limited assurance conclusion on whether anything has come to our attention that causes us to believe that the “Board of Directors’ Annual Corporate Governance Report on compliance with the applicable QFMA Laws and relevant legislations including the Code” stated in Section 3.16 does not present fairly, in all material respects, the Group’s compliance with the Code. We conducted our engagement in accordance with International Standard on Assurance Engagements 3000 (Revised) ‘Assurance Engagements Other Than Audits or Reviews of Historical Financial Information’ issued by the International Auditing and Assurance Standards Board (‘IAASB’). This standard requires that we plan and perform our procedures to: Reporting on internal controls over financial reporting a.) Obtain reasonable assurance about whether the Directors’ Internal Controls Statement is fairly presented. The COSO Framework comprises the criteria by which the Bank’s compliance is to be evaluated for purposes of our reasonable assurance opinion. An assurance engagement to issue a reasonable assurance opinion on the Directors’ Internal Controls Statement involves performing procedures to obtain evidence about the fairness of the presentation of the Statement. Our procedures on the Directors’ Internal Controls Statement included: • Obtaining an understanding of the components of internal control as defined by the COSO Framework and comparing this to the Directors’ Internal Controls Statement; •Obtaining an understanding of Internal Controls over Financial Reporting for significant processes, and comparing this to the Directors’ Internal Controls Statement;
  12. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 EXTERNAL AUDITORS ’ REPORT ON CORPORATE GOVERNANCE • Performing a risk assessment for all material Account Balances, Classes of Transactions, and Disclosures within the significant processes and comparing this to the Directors’ Internal Controls Statement; • Testing of the design of internal controls to address these risks and comparing the results to the assessment presented in the Directors’ Internal Controls Statement; and • Assessing of the severity of deficiencies in internal control which are not remediated at 31 December 2018, or in management’s assessment, if noted any, and comparing this to the assessment included in the Directors’ Internal Controls Statement, as applicable. The components of internal control as defined by the COSO Framework are Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring. We performed procedures to conclude on the risk of material misstatement within significant processes considering the nature and value of the relevant account balance, class of transaction, or disclosure. A process is considered significant if a misstatement due to fraud or error in the stream of transactions or financial statement amount would reasonably be expected to affect the decisions of the users of financial statements. For the purpose of this engagement, the processes that were determined as significant are: Treasury, Customer Deposits, Loans and Advances, Commission Income and Financial Reporting. The procedures to test the design of internal control depend on our judgement, including the assessment of the risks of material misstatement identified, and involve a combination of inquiry, observation and inspection of the evidence. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion on the Directors’ Internal Controls Statement. 16
  13. Reporting on compliance with the applicable Reporting Standards . An entity’s internal control QFMA Laws and relevant legislations over financial reporting includes those policies and procedures that: including the Code b.) Obtain limited assurance about whether anything has come to our attention that causes us to believe that the Board of Directors’ Annual Corporate Governance Report in Section 3.16, taken as a whole, is not prepared in all material respects in accordance with the applicable QFMA Laws and relevant legislations including the Code. The applicable QFMA Laws and relevant legislations including the Code comprises the criteria by which the Bank’s compliance is to be evaluated for purposes of our limited assurance conclusion. The procedures performed in a limited assurance engagement vary in nature and timing from, and are less in extent than for, a reasonable assurance engagement. Consequently, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had a reasonable assurance engagement been performed. We did not perform procedures to identify additional procedures that would have been performed if this were a reasonable assurance engagement. Our limited assurance procedures comprise mainly of inquiries of management and inspection of supporting policies, procedures, and other documents to obtain an understanding of the processes followed to identify the requirements of the applicable QFMA Laws and relevant legislations including the Code (the ‘requirements’); the procedures adopted by management to comply with these requirements; and the methodology adopted by management to assess compliance with these requirements. When deemed necessary, we observed evidences gathered by management to assess compliance with the requirements. Meaning of Internal Controls over Financial Reporting An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial 17 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; 2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of the management of the entity; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements, which would reasonably be expected to impact the decisions of the users of financial statements. Inherent limitations Non-financial performance information is subject to more inherent limitations than financial information, given the characteristics of the subject matter and the methods used for determining such information. Because of the inherent limitations of certain qualitative criteria in the applicable QFMA Laws and relevant legislations including the Code, many of the procedures followed by entities to adopt governance and legal requirements depend on the personnel applying the procedure, their interpretation of the objective of such procedure, their assessment of whether the compliance procedure was implemented effectively, and in certain cases would not maintain an audit trail. Because of the inherent limitations of Internal Control over Financial Reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may occur and not be detected. Therefore, Internal Control over Financial Reporting may not prevent or detect all errors or omissions in processing or reporting transactions and consequently cannot provide absolute assurance that the control objectives will be met.
  14. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 In addition , projections of any evaluation of the Internal Controls over Financial Reporting to future periods are subject to the risk that the internal control over financial reporting may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Furthermore, the controls activities designed during the period covered by our assurance report will not have retrospectively remedied any weaknesses or deficiencies that existed in relation to the Internal Control over Financial Reporting prior to the date those controls were designed. EXTERNAL AUDITORS’ REPORT ON CORPORATE GOVERNANCE Our Independence and Quality Control In carrying out our work, we have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour and the ethical requirements that are relevant in Qatar. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. Our firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Other information The Board of Directors is responsible for the other information. The other information comprises the Annual Corporate Governance Report (but does not include the Directors’ Internal Controls Statement presented in Sections 3.8 to 3.11 and the Directors’ Report on compliance with applicable QFMA Laws and relevant legislations including the Code presented in Section 3.16, and our report thereon) (the “Directors’ Statements”), which we obtained prior to the date of this auditor’s report. 18
  15. Our conclusion on the Directors ’ Statements does not cover the other information and we do not, and will not express any form of assurance conclusion thereon. In connection with our engagement of the Directors’ Statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the Directors’ Statements or our knowledge obtained in the engagement, or otherwise appears to be materially misstated. If, based on the work we have performed, on the other information that we obtained prior to the date of this report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the complete Annual Corporate Governance Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Conclusions 1. In our opinion, the Board of Directors’ Internal Controls Statement in Section 3.10 of the Annual Corporate Governance Report, is fairly stated, in all material respects, based on the criteria established in the COSO Framework, including its conclusion on the effectiveness of design and implementation of Internal Controls over Financial Reporting as at 31 December 2018; 2.Based on our limited assurance procedures performed and evidence obtained, nothing has come to our attention that causes us to believe that the Board of Directors’ statement in Section 3.16 of the Annual Corporate Governance Report on compliance with the applicable QFMA Laws and relevant legislations including the Code, is not, in all material respects, fairly stated as at 31 December 2018. 19 Emphasis of matters – Compliance with the Code Without qualifying our conclusions above, we draw attention to the following in connection with the Director’s Internal Controls Statement; 1.As disclosed on paragraph 3 of the ‘Board of Directors’ Statement on Design and Implementation of Internal Controls over Financial Reporting’ and agreed with QFMA, the Group has excluded Al Khaliji France S.A. (wholly owned subsidiary) from its assessment of internal control over financial reporting as of December 31, 2018. The subsidiary has total assets of QAR 3,724,338,000 and net profit of QAR 12,702,000 which are excluded from the assessment and represented approximately 7.1 percent and 2.1 percent, respectively, of the Group’s related consolidated financial statements amounts as of and for the year ended December 31, 2018. 2.As disclosed on Section 3.10 of the ‘Annual Corporate Governance Report’, based on market reporting practices for 2018, the Board of directors performed an assessment of suitability of design of internal controls over financial reporting as at 31 December 2018, but did not assess whether that the specified control objectives would be achieved if the relevant controls operated effectively for the year ended 31 December 2018. For Deloitte & Touche Qatar Branch Walid Slim Partner License No. 319 QFMA Auditor License No. 120156 Doha – Qatar February 6, 2019
  16. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 1 . Introduction ANNUAL CORPORATE GOVERNANCE REPORT 2018 The Board of Directors of Al Khalij Commercial Bank (al khaliji) P.Q.S.C. (“al khaliji” and/or “Bank” and/or “Company”) prepared the present Annual Corporate Governance Report (the “Report”) in compliance with the Corporate Governance Instructions for Banks and Financial Institutions issued by Qatar Central Bank (“QCB”) under Circular No. (68) of 2015 (“QCB CG Rules”), the applicable legislations issued by the Qatar Financial Market Authority (“QFMA”) including the Corporate Governance Code for Shareholding Companies Listed on the Primary Market issued by the Board of QFMA under the resolution No. (5) of 2016 (“QFMA Code”) and the QFMA’s Offering and Listing Regulation, the Qatar Stock Exchange rules, the Qatar’s Commercial Companies Law No. (11) of 2015 and the Bank’s Articles of Association (altogether hereinafter referred to as the “Governance Regulations”). This document is constantly available on al khaliji’s website (www.alkhaliji.com). The Report describes the measures and procedures taken by al khaliji to apply and implement the Governance Regulations. It also includes all disclosures required under the Governance Regulations including the Board of Directors assessment of compliance of the Company with the Governance Regulations and the Board of Directors report on internal controls over financial reporting. 2. Applications 2.1 At Overall Governance System Level A comprehensive corporate governance (CG) framework/system is in place that focuses on the rights and equitable treatment of shareholders, disclosure and transparency, and the duties of the Board of Directors. It involves systems, policies and processes for ensuring proper accountability, probity and openness in the conduct of the Bank’s business. It defines the roles and responsibilities, separation of duty, transparency and disclosure requirements of the key participants and reports issued. This 20
  17. covers the Board itself , Board committees, executive management, internal and external audit, internal controls and interactions with supervisory and regulatory authorities. The CG framework/system is fully described in the Bank’s Group Corporate Governance Framework Policy and Manual (the “CG Charter”) approved by the Board. This document is compliant with local and relevant overseas regulations while taking into consideration the requirements of the Bank’s Articles of Association. It addresses all underlying principles, operating aspects and the composition of each body within the framework. The Bank conducted an overall review of the CG framework in light of the changes introduced by the relevant legislations. To this end, an Extraordinary General Meeting was held on 29 November 2017 and approved amendments to the Articles of Association to comply with the Governance Regulations, in particular, the QFMA Code. The CG Charter is freely accessible on the Bank’s website (www.alkhaliji.com). The Board is ultimately responsible for the Bank’s corporate governance; this encompasses the entire Group including all controlled entities and subsidiaries. It is fully committed to maintaining the highest standards to ensure the members discharge their fiduciary responsibilities with integrity. Board Composition The Bank’s Articles of Association, in particular, articles (31), (32) and (48), determine the composition requirements of the Board and its committees in accordance with the Governance Regulations. Currently, al khaliji’s Board comprises 9 members the majority of which are Non Executive Directors (“NEDs”) (8 out of 9) including 3 Independent Directors (“INDs”). For further information about the Board composition, please refer to section 3.2 entitled “Board of Directors” under the “Corporate Governance Disclosures” section below. Prohibition of Combining Positions All Board members, during the Board meeting held on 5 December 2018, renewed their annual acknowledgment by virtue of which they confirmed that they do not combine and undertook in writing not to combine positions prohibited to be combined under the Governance Regulations. All acknowledgments and undertakings were maintained with the Company Secretary. In addition, Articles (11) and (12) of the Board Nomination and Election Policy approved by the General Meeting on 29 November 2017 require a Board candidate not to combine any position prohibited to be combined by law. Accordingly, a candidate must present an acknowledgement and undertaking in writing to that effect as a condition precedent for his application to be considered. Main Functions and Tasks of the Board 2.2 At Board Level Eligibility conditions for Board Member Article (31) of al khaliji’s Articles of Association (“AoA”) determines the eligibility terms and conditions to be met by a Board member. These are in line with the Governance Regulations. In addition, the Board of Directors developed a written Board Nomination and Election Policy that defines, amongst others, the procedures for Board nominations and election and sets further terms and conditions around Board nominees and eligibility criteria. The policy was prepared in accordance with the applicable laws and regulations and approved by the General Meeting of Shareholders on 29 November 2017. It is available on al khaliji’s website www.alkhaliji.com 21 The Board functions within written Terms of References (“TORs”) developed and approved by the Board and reviewed by an independent consultant to ensure that they are compliant with the applicable laws, regulations, the Bank’s Articles of Association and best practices. The Board TORs describe the composition and selection of the Board members and Chairman, the organization of the meetings, the training of the Board and Board Committees, the remuneration, and the responsibilities and functions of the Board. They equally comprise a broad description of matters required to be considered by the Board, including, but not limited to, setting-up strategies, defining risk levels, developing policies as well as matters
  18. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 that constitute events of conflict of interest and disqualifications for the Board . The Board TORs are available and accessible on al khaliji’s website (www.alkhaliji.com) Below are the matters considered and resolved by the Board in 2018. This gives further overview on the type of matters reserved for Board or Board committees’ approval: • Approval of quarterly, semiannually and end-of year financials for 2018 • Approval of strategic directions, capital and liquidity plans • Recommend Dividend Payouts for AGM approval • Approval of the Group’s Budget for 2019 APPLICATIONS • Recommend the 2019 external auditors for AGM approval • Periodic review of Capital Plan and ICAAP and stress testing for 2018 • Approval of the Group’s Balanced Scorecard for 2018 • Approval of several appointments on Senior Management level •Assess performance of the Board, Subcommittees and the Management and recommend Board remunerations for AGM approval • Review and approve Succession Planning for QCB submission • Consider the potential disposal of the fully owned subsidiary, Al Khaliji France, and decision to cease the process as the terms of the various offers received were not in the best interest of the Bank’s stakeholders • Approval of several items related to the Bank’s regular activities including the approval of new policies and frameworks and enhancing governance practices and policies to ensure they are maintained updated and in compliance with the applicable laws and regulations 22
  19. Main systems , policies and procedures set 9.Board Remuneration Policy and Procedures presented annually under the present Report to by the Board al khaliji’s Corporate Governance system comprises a number of strategic policies, procedures, systems, processes and mechanisms (“Policies”) set by the Board of Directors or its committees that are key to the functioning of the Bank. They are subject to periodic reviews whereas amendments are recommended for Board approval to ensure they remain updated and relevant. Adherence to Boardapproved Policies is monitored by the control functions whereas periodic reports are submitted to the Board regarding any breaches to the Policies for appropriate action. A number of critical Policies are published on the Bank’s website. The key Policies are as follows: 1. Mid Term Strategy 2016-2017-2018 2. Group Budget for 2019 3.Group Organizational Chart (for details, please refer to section 6.3 entitled “Group Organizational Chart” under the “Corporate Governance Disclosures” section below) 4. Capital Plan and ICAAP documents 5. Code of Conduct for directors and employees. It sets up the corporate principles and values that guide the decisions, procedures and systems of al khaliji in a way that contributes to the welfare of its key stakeholders and protects their rights 6. Delegation of Authority Matrix and Policy 7. Board Nomination and Election Policy developed by the Corporate Governance, Nomination and Remuneration Committee of the Board and approved by the General Meeting of Shareholders on 29 November 2017. The policy sets out clear terms, conditions and criteria for Board nominations and eligibility for directorship including the nomination and election process for both INDs and Non INDs and other organizational matters 8.Performance assessment system based on Balanced Scorecard approach (BSC) that sets financial and non-financial goals at Group level. The BSC is presented for Board’s discussion and approval at the beginning of each year. Regular update reports are submitted to the Board on the progress made in achieving the approved goals throughout the year together with the quarterly financials 23 the General Meeting’s endorsement (to check the policy, please refer to section 3.7 entitled “Incentives and Remunerations” under the “Corporate Governance Disclosures” section below) 10. A policy for compensation and incentives of Senior Management and employees of the Bank presented annually under the present Report to the General Meeting’s endorsement (to check the policy, please refer to section 3.7 entitled “Incentives and Remunerations” under the “Corporate Governance Disclosures” section below) 11.Various risk management policies 12.Various accounting and finance policies 13. Compliance and Anti Money Laundering/ Combating Financing of Terrorism (AML/CFT) policies 14. Internal Audit Charter and Internal Control procedures 15.External Auditor Policy developed in accordance with the applicable laws and regulations including QCB’s relevant regulations and QFMA’s External Auditors and Financial Evaluators Regulation 16. Human Resources Policy, Health and Safety Policy and induction programs for directors and employees 17. Group Corporate Governance Framework Manual and Subsidiaries Governance Framework Policy 18.Procurement and Suppliers Policy 19.Customer Complaints and Compliments Policy 20.Corporate Social Responsibility Policy 21.Whistleblowing Policy 22. Standard Operating Procedures (SOP) for conflict of interest management and related parties transactions (for details, please refer to section 2.4 below entitled “Conflict of Interest, Transparency and Related Party Transactions) 23. Disclosure and Transparency Policy that sets out a comprehensive system for disclosure (for details, please refer to section 2.4 below entitled “Disclosure”)
  20. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Board Responsibilities and Directors ’ Obligations APPLICATIONS The Board is responsible for the management of the Bank in accordance with the Bank’s Articles of Association and the Board TORs. Through the regular meetings of the Board and the Board sub-committees, the Board oversees the Senior Management, considers and discusses with the Senior Management any topic presented to the Board for decision making. Periodic updates are requested by the Board on material decisions taken to ensure the Board is kept informed of any developments and to maintain accountability. In addition to Board meetings, the Chairman meets separately from management with individual directors and chairpersons of Board committees to discuss the performance of the management and other matters that need close oversight by the Board. Furthermore, the Board approved a written Delegation of Authority Policy and Matrix to manage the delegation of authorities and to ensure that al khaliji Board performs its functions in a neutral manner without influence by relations to the Executive Management. The said policy ensures the functions and authorities of al khaliji Board are separated from those of the Executive Management. It distributes the responsibilities and authorities based on hierarchical structure that ensures participation of all stakeholders in the decision making process within specific controls in accordance with the laws and the Bank’s AoA. The Board always ensures adherence to the applicable laws and regulations and the Bank’s Articles of Association. To this end, the Board setup internal processes to ensure any topic or policies presented to the Board is reviewed and assessed from legal, statutory and regulatory perspectives. All Board-approved policies, including corporate governance policies, are subject to periodic reviews whereas amendments are recommended for Board approval to ensure they remain updated and relevant. In 2018, the Board reviewed and discussed several policies and procedures applicable to the Bank in light of the changes in the laws and regulations. All Board members are prominent figures in Qatar and the region with track records and wide experience in all aspects of the Bank’s activities. 24
  21. They allocate sufficient time to perform their duties and assume their role independently by providing guidance , objective criticism and constructive contribution. The NEDs and INDs are appointed as members on the Board committees, namely the Audit Committee and the Corporate Governance, Nomination and Remuneration Committee. They provide impartial and independent opinion on strategic and business matters presented to the Board and monitor the performance of the Bank and its compliance with the corporate governance standards and applicable laws and regulations. All Board members put their skills and experiences at the disposal of al khaliji and allocate sufficient time to perform their duties on the Board through committed attendance. Board members, including all Board sub-committees chairpersons, participate together with the Chairman in the General Meetings to consider and respond to the queries of the shareholders. For details, please refer to section 3.4 entitled “Meetings and Attendance” under the “Corporate Governance Disclosures” section below. In addition to the Board TORs that define the functions and responsibilities of the Board, a Code of Conduct for the Board of Directors is developed to define and determine the professional and ethical duties of the directors. Each director has acknowledged and undertaken in writing to commit to his/her fiduciary duties and obligations and make necessary disclosures required under these documents. Under the Code of Conduct, the Board of Directors of al khaliji has a fiduciary responsibility to perform its duties with loyalty and act in good faith for the best interest of the Bank and its shareholders. Each director assumes the duty of caring for the financial and legal requirements of the Bank. The directors ensure that they do not have any conflicts of interest and that the interests of the Bank take precedence over their personal interests. Internal procedures were developed to manage any potential conflict that may arise at Board level. The Board, through the Corporate Governance, Nomination and Remuneration Committee, evaluates the performance of the Board and the directors and the extent of their compliance with the afore-mentioned duties, obligations and undertakings. 25 The Board Nomination and Election Policy requires a Board candidate to present an undertaking in writing to adhere by the applicable laws and regulations and make necessary disclosures required by law or under QCB and QFMA’s regulations as a condition precedent for his application to be considered. Chairman of the Board Pursuant to Article (37) of the al khaliji’s AoA, the Chairman of the Board is the president of the company and represents it before the courts and third parties. The Board TORs defines further the role and responsibilities of the Chairman of the Board in accordance with the applicable laws, regulations and the Bank’s AoA. HE Sheikh Hamad Bin Faisal Al Thani currently holds the position of Chairman and Managing Director in al khaliji. This combination is for strategic purposes that serve the high interests of the Bank. However, his Excellency does not carry out daily executive duties at al khaliji. The Group Chief Executive Officer, Mr. Fahad Al Khalifa, performs his duties as the chief of the executive management. The Managing Director acts as the link between the Board and the Senior Management. A clear segregation is in place between the positions of the Chairman/Managing Director and the GCEO in the Board TORs and CG Charter. The Chairman oversees the proper functioning of the Board whereas he makes sure all directors are efficiently engaged in directing the Bank whether through the periodic Board meetings or ongoing communications. He ensures each member receives all the necessary information and clear reports on all topics to be presented to the Board within sufficient time ahead of a Board meeting so the members can be well prepared for the meetings and are able to take informed decisions. The Chairman ensures each Board member receives the Board meeting invitation and agenda at least two weeks prior to a scheduled Board meeting so the members have the chance to review and request any item to be added to the agenda. At every Board meeting, the Chairman ensures that the members approve the agenda before proceeding in the meeting.
  22. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Article 48 of the Bank ’s AOA, the CG Charter and the Board TORs do not allow the Chairman to sit on any Board-subcommittee. Indeed, the Chairman of al khaliji is not part of any Board sub-committee. At shareholders level, the Chairman ensures permanent contacts are maintained with the shareholders particularly in the strategic matters. For further information about al khaliji’s Chairman, please refer to section 3.2 entitled “Board of Directors” under the “Corporate Governance Disclosures” section below. Board Committees and Delegation of Tasks APPLICATIONS The Board delegated parts of its responsibilities to a number of sub-committees: the Audit Committee (ACB), the Compliance and Risk Committee (CRC), and the Corporate Governance, Nomination and Remuneration Committee (CGNRC). Board committees were created in accordance with the provisions of the Governance Regulations and specific banking requirements. All Board subcommittees function within defined and written Terms of Reference approved by the Board. Decisions taken at sub-committees’ level are presented to the full Board for endorsement. For details, please refer to section 3.3 entitled “Board Committees” under the “Corporate Governance Disclosures” section below. Key Features of Board Process The Board functioning process in terms of invitation to meetings, number of meetings, decision making process and other procedural matters is defined in al khaliji’s AoA, in particular, Articles (38), (39), (40) and (43) thereof and the Board ToRs. The process is compliant with the Governance Regulations applicable in the State of Qatar. Below are the key features of the Board process: 26
  23. • A corporate calendar is approved within the end of each year. The corporate calendar determines the days for the Board and Board committees’ activities and meetings in the next year. In 2018, a total of 7 Board meetings were held within an average duration of 2.5 hours. The overall attendance rate in 2018 was 8 members per meeting (out of 9); • Invitation and agenda are sent to the Board members at least two weeks ahead of the meeting date followed by supporting documents and reports to enable directors to prepare for a discussion of each agenda item. Board members can request any relevant information through the Company Secretary at any time; • Board meeting date and main agenda items are disclosed to the Qatar Stock Exchange (“QSE”) at least two weeks ahead of each Board meeting; • The Group CEO presents a periodic report to the Board at each meeting on the Bank’s major events, activities, projects and initiatives. Key matters related to each department of the Bank are also discussed and departmental heads are invited to join the meetings to enhance the Board’s understanding of matters related to their respective business proposals; • In addition to Board meetings, the Chairman meets separately from management with individual directors and chairpersons of Board committees to discuss the performance of the management and other matters that need close oversight by the Board; •Board may seek advice from independent consultants at any time to enable the Board to discharge its duties and responsibilities; • Directors are required to disclose any direct or indirect interests in any business item on the agenda to be considered by the Board. They are also required not to participate in the discussions and not to vote for such items; • Major resolutions passed by the Board are disclosed immediately after each Board meeting to the QSE and published on al khaliji’s website and in local newspapers 27 Company/Board Secretary al khaliji has an independent Company Secretariat Function. The Company Secretary is appointed by Board Resolution No. 2/45/2013 with a direct reporting line to the Chairman. The Company Secretary’s mandate was renewed under the Board Resolution No. 3/78/2018 upon the election of the new Board by the AGM on 27 February 2018. The Board approved the Charter of the Company Secretary who works closely with the Chairman of the Board and the Chairpersons of the Board committees to arrange Board and Board Committees meetings. The Company Secretary plays a vital role in facilitating communication between the Board members and the Senior Management and supervises the implementation of the Group Corporate Governance framework. The Company Secretary role is currently assumed by Mr. Tony Merhej who holds a Master Degree in Legal Translation and Linguistics. He has an extensive experience in listed companies, legal, compliance and corporate governance matters gained from his work in the Bank’s Legal Department since 2008. Mr. Merhej held zero shares in al khaliji as of 31 December 2018. Performance Assessment At Board level, an annual assessment exercise for the performance of the Board and its committees is conducted by the Board Corporate Governance, Nomination and Remuneration Committee (CGNRC) in accordance with a specific evaluation process that takes into consideration, amongst others, the attendance and participation levels of a director in the Board and committees’ meetings. The outcome of the assessment together with recommendations for enhancement of the Board’s efficiency and functions are then escalated by the CGNRC to the full Board of Directors to take the necessary actions. The Chairman of the Board also meets separately with each director to discuss development plans for the Board and its committees. According to latest Board assessment made as at 31 December 2018, the results showed that the processes and dynamics of the Board and Board committees are functioning properly and there are no major areas of concern.
  24. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 APPLICATIONS At Senior Management and employees ’ level, a system was established to measure the overall performance of the Bank through the Balanced Scorecard that defines the financial and nonfinancial goals and targets of al khaliji Group. The targets and goals within the Scorecard are presented to the Board for discussion and approval at the beginning of each financial year. Regular updates are presented to the Board on the progress made in achieving the Bank’s agreed targets. The Balanced Scorecard methodology is used to distill the strategy, or long-term objectives, into measurable key performance indicators. The scorecard provides a unified practical view of the organization’s financial and non-financial achievements in a structured format. The organization’s compensation program is firmly linked to the scorecard. Individual awards are dependent on achievement of performance goals. At the end of each year, the final score achieved under the approved Balanced Scorecard is audited by the Internal Audit department and reports presented to the Board accordingly. For further details, please refer to section 3.4 entitled “Meetings and Attendance” and to section 3.7 entitled “Incentives and Remunerations” under the “Corporate Governance Disclosures” section below. Development, Learning and Awareness At Board level, the Board TORs ensure ongoing development and learning courses are in place for the directors in order to enhance their skills and knowledge and to remain fully updated on legal and regulatory innovations and latest international practices in all domains related to the Bank’s operations. In 2018, the Board received periodic reports on main developments in corporate governance, the relevant laws and regulations and the best international practices. The Board considered and discussed the main innovations in these legislations and their impact on the Bank. Where applicable, the Board took necessary actions in response to these developments. Furthermore, the Board Election and Nomination Policy approved by the General Meeting requires the Bank to provide an induction program for new joiners on the Board. To this end, an Induction 28
  25. Program for directors was developed that allows new directors to avail of all information , documents and details about the functioning of the Board and its sub-committees, the bank’s overall activities and business and an overview of their duties and obligations under the applicable laws and regulations and the Bank’s AOA. A “Board of Directors Manual” was also developed covering all the foregoing aspects. In 2018, upon the election of a new Board of Directors by the AGM held on 27 February 2018, an induction session was organized for newly elected and re-elected directors in accordance with the Program. It included individual meetings with Senior Management and introduction to the Bank’s strategy, activities and business. At the Senior Management and employees’ level, al khaliji created a dedicated Learning and Development unit within the Human Resources department in charge of developing and recommending training and development plans for Board approval and overseeing the implementation of such plans. The unit also developed an induction program for all new joiners to al khaliji family. For details, please refer to the section entitled “Group Human Resources and Administration Affairs” under “Internal Control and Support Functions” in the Annual Report, that forms an integral part of this Corporate Governance Report. 2.3 At Control Level Internal Control A robust internal control system is in place that fulfill the requirements of the applicable local laws and regulations and the best international practices. For details, please refer to sections 3.8, 3.9, 3.10 and 3.11 of “Corporate Governance Disclosures” section below and the “Internal Control and Support Functions” section in the Annual Report that forms an integral part of this Corporate Governance Report. 29 Risk Management The risk governance structure at al khaliji consists of five layers comprising of the following: Level 1: Board of Directors Level 2: Board Compliance and Risk Committee (Board CRC) Level 3: Senior management committees: Group Risk Committee (GRC), Credit and Investment Committee (CIC), Group Asset, Liability and Capital Committee (GALCCO), Group Special Investigations Committee (GSIC), and Security Steering Committee (SSC) Level 4: Group Risk Management: Enterprise Risk Management, Credit Risk Management including Credit Documentation, Remedial Management/Collections, Market Risk Management, Liquidity Risk Management, Operational Risk Management, Fraud Risk Management, Business Continuity Management, Insurance Management, and Security Risk Management Level 5: Business Units The overall responsibility for ensuring robust risk management rests with the Board of Directors (Level 1), while the execution of the oversight at Board level sits with the Board Compliance and Risk Committee (Level 2). The Board CRC has the overall responsibility of ensuring that adequate policies, procedures, and methodologies are in place for risk management, and that they are properly implemented. Supporting the Board CRC are the senior management committees (Level 3) that cover the various aspects of risk management. For details, please refer to the Group Risk Management section under “Internal Control and Support Functions” in the Annual Report that forms an integral part of this Corporate Governance Report.
  26. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Compliance and AML al khaliji has a dedicated Group Compliance and AML department that ensures compliance is embedded into every level of the organization and aligned with the Bank ’s business strategy. To ensure compliance activities retain their independent functioning, the Group Compliance and AML department reports directly to the Board Compliance and Risk Committee. Compliance/AML departments in the subsidiaries also report directly to their respective general managers and indirectly to the Group Compliance and AML department. For details, please refer to the Group Compliance and AML section under “Internal Control and Support Functions” in the Annual Report that forms an integral part of this Corporate Governance Report. APPLICATIONS Internal Audit The Group Internal Audit function (the “GIA”) is an independent division within al khaliji reporting directly to the Board Audit Committee. The GIA provides an independent and objective assurance to the Board of Directors and the Management on the design and operating effectiveness of the Bank’s corporate governance, risk management, and internal control frameworks. The GIA continuously promotes the awareness on risks and controls, provides advice on developing control solutions, and monitoring corrective actions, thereby safeguarding the assets of the Bank. For details, please refer to the Group Internal Audit section under “Internal Control and Support Functions” in the Annual Report that forms an integral part of this Corporate Governance Report. External Control Articles (70) to (74) of the Bank’s AoA set out the external control requirements for the Bank including, but not limited to, appointing an independent external auditor and determining its role and responsibilities. All these statutory requirements are in line with the local applicable Governance Regulations. In addition, the Board developed and approved a written External Auditor Policy that defines the responsibilities of external auditors and determines the basis on which an external 30
  27. auditor would be selected . The Audit Committee is mandated by the Board under the said policy to review and consider external auditors proposals and engagement letters and to deal with all matters related to external auditing. 2.4 At Transparency and Disclosure Level In its meeting of 27 February 2018, the Annual General Meeting (“AGM”) approved the Board/Audit Committee’s recommendation to appoint Deloitte and Touch as external auditors of the Bank for the fiscal year ended 31 December 2018 as they were the best bidders. Deloitte succeeded Ernst and Young who spent five consecutive years in auditing the Bank as at 31 December 2017. The AGM approved Deloitte’s appointment against auditing fees of QAR 1 million. The AGM also authorized the Board and/or the Audit Committee of the Board to approve any additional fees, if applicable, that might be incurred during the year because of contingent regulatory requirements provided that such fees are disclosed in the Annual Report. al khaliji discloses its quarterly and end-of-year financial results in accordance with the applicable laws and regulations. Furthermore, all information about the Chairman, the Board members and the members of the Senior Management as well as their respective stakes in the bank’s share capital, and the major shareholders who own 5% or more of the Bank’s capital are disclosed on the Bank’s website and in the Annual Corporate Governance Report. In 2018, at QCB instructions requiring banks to submit other financial audit reports to QCB through their external auditors on certain aspects of their operations, the Board/Audit Committee, based on the afore-mentioned mandate from the AGM, approved some engagements with Deloitte and Touch for these purposes. The total amount of these engagements was QAR 473,000. The external auditor conducts the review and the audit works and issued its reports in accordance with the applicable laws and regulations and relevant international standards. The external auditor attends the General Assembly meetings to present their report and answer the shareholder’s questions. As of 31 December 2018, no qualified reports were issued by the external auditors. For details or to check the external auditors’ reports, please refer to the relevant AGM/EGM minutes of meetings and the audited financial statements freely accessible on al khaliji’s website. 31 Disclosure Furthermore, the Board of Directors has adopted a Disclosure and Transparency Policy that complies with the Qatar Stock Exchange (“QSE”) rules and ensures disclosure of sensitive information to the market in a timely, accurate and transparent manner. The policy also sets the framework for dealing with rumors. al khaliji discloses the agenda of its Board meetings and all resolutions of a sensitive nature to the QSE before and after each Board meeting. In addition, al khaliji keeps its shareholders informed of all new products and business through periodic press releases published in the local newspapers and on the website of al khaliji and notifies QSE and relevant regulators of the same beforehand. During General Meetings, the shareholders enjoy their rights to ask any questions about al khaliji’s position and business. The Disclosure and Transparency Policy is available and accessible on al khaliji’s website. The Board discloses the quarterly and yearly financial statements only after making the necessary reviews and audits based on the independent report of the external auditors and the recommendations of the Audit Committee and the Senior Management that all disclosed information are accurate, correct and not misleading in all material aspects. Any other non-financial disclosures made are subject to the Disclosure and Transparency Policy approved by the Board that sets a process for the review of accuracy and appropriateness of any information or press releases before they are made public including a multilayer approval process of the Compliance department, Legal department, the GCEO and/or the Chairman of the Board, as the case may be.
  28. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 The audited financial statements are distributed to all shareholders with the Annual Report during the Annual General Meetings . They are also published in the local newspapers and are freely and permanently accessible on al khaliji and QSE’s websites. The Bank also discloses the annual remunerations of the members of the Board and Senior Management in its audited annual reports. Main activities and achievements of the Board are disclosed in the annual Board of Directors report submitted to the Annual General Meeting. Main activities and achievements of the Senior Management are disclosed also as part of the Bank’s departmental overviews in the Annual Report distributed to the shareholders in each Annual General Meeting. APPLICATIONS Overall, al khaliji makes all disclosures required under the applicable laws and regulations on its website or in its annual reports. For details, please refer to the section 3 below entitled “Corporate Governance Disclosures” and al khaliji’s website (www.alkhaliji.com). Conflict of Interest, Transparency and Related Party Transactions The General Meeting of shareholders adopted the conflict of interest management and the related party transactions frameworks under Article (38) of the Bank’s AoA. In addition, the Bank developed operating procedures to implement the said Article (38), set the procedures by which al khaliji or any of its subsidiaries may enter into a related party transaction or commercial activity and to set proper governance process around an identified related party transaction including accurate definition of a related party, approvals required to enter into such transactions and relevant reporting and disclosure requirements in accordance with the applicable laws and regulations, relevant international accounting standards and best international practices. Any Related Party Transaction must be approved at Board/Board sub-committee level and, at the General Assembly of Shareholders level for major transactions, as applicable, after producing 32
  29. the justifications for entering into such transactions depending on its type and ensuring it has followed the approved process for the management of conflict of interest . These operating procedures also describe the events of conflict of interest within the meaning of al khaliji’s CG Charter. It requires directors to disclose any direct or indirect interests in any business item on the agenda to be considered by the Board. They are also required not to participate in the discussions and not to vote for such items. Pursuant to the said approved procedures, each director is required to inform the Company Secretary as soon as practicable if there is any change that may affect his independent judgment and status or that may result in any event of conflict of interest. Moreover, each director has to declare his/her past and present financial interest or other interest in the company or its subsidiaries, or his/her connection with any of the Bank’s connected persons and related parties, if any. Each director has signed a written statement regarding his/her compliance with the regulatory conflict of interest requirements. Also, the afore-mentioned procedures set a framework for insider trading which prohibits trading based on material, non-public information regarding the al khaliji Group. It covers all stakeholders of al khaliji Group who have or may have access to inside information. A list of insiders was developed and approved by the Corporate Governance, Nomination and Remuneration Committee of the Board and presented to the Qatar Financial Market Authority and QSE. A copy of the afore-mentioned procedures is delivered to the Board members, senior management, all new employees and consultants upon the commencement of their relationships with al khaliji. Under this framework, al khaliji monitors the trading activities related to al khaliji shares by its directors and senior management. A monthly report on those activities is prepared by the Investor Relations unit and shared with the Group Head of Compliance and the Company Secretary. During the period covered under this report, no trading as per the said policy occurs during the Closed Period within the meaning of Article 173 of the Internal Regulation of Qatar Stock Exchange. 33 As of 31 December 2018, there were no major related party transactions in the bank’s book that require shareholders’ approval. There were, however, credit facilities granted to related parties. These facilities were granted at arm’s length basis in accordance with Qatar Central Bank relevant rules and regulations with no preferential terms and conditions. They were approved by the concerned credit committees at the Bank and the Corporate Governance, Nomination and Remuneration Committee of the Board in the absence of the relevant conflicted parties who did not participate in any negotiations, discussions or decisions related to such transactions. In all events, all related parties’ transactions, whether major transactions or otherwise, are disclosed in the Director Fees Report prepared in accordance with Article (122) of Qatar’s Commercial Companies Law No (11) of 2015 and Article (47) of the bank’s AoA and Article (26) of QFMA Code. They are also presented as part of the audited EOY financials to the General Meeting for endorsement. For details, please refer to the EOY Financial Statements as of 31 December 2018 at the end of the Annual Report which forms an integral part of this Corporate Governance Report. The Director Fees Report will be available for the shareholders review one week before the Annual General Meeting in the Corporate Secretariat office on the 7th floor of al khaliji’s head office in Al Jazzi Tower, West Bay. In order to be able to check the Director Fees Report, shareholders must produce an updated account statement of their shares from Qatar Stock Exchange/Qatar Central Securities Depository dated no more than one week together with a copy of their IDs (in case the shareholder is a natural person) or copy of the Commercial Registration (CR), Corporate Card and an authorization letter signed by an authorized signatory on the CR and on the Corporate Card (in case the shareholder is a legal person).
  30. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 2 .5 At Stakeholders’ Rights Level The Articles of Association of al khaliji guarantee respect of shareholders rights and principles. In particular, Chapter Four of the AoA and Articles (16), (22), (31), (38), (42), (46), (47), (82), (83) and (88) guarantee all the rights of the shareholders set forth under the applicable laws and regulations particularly the stipulations of Chapter Six of the QFMA Code. Below is an overview on the actions taken by al khaliji to put the rights of shareholders into effect: Communication with Shareholders and Investors APPLICATIONS al khaliji values open and transparent dialogue with its shareholders as well as institutional and private investors. An independent Investor Relations department is dedicated to serve as the primary contact with shareholders, investors and financial analysts. In addition, the Chairman ensures permanent contacts are maintained with the shareholders particularly in the strategic matters. Also, both the Group Chief Executive Officer (GCEO) and the Group Chief Finance Officer (GCFO) are available to address the concerns of shareholders’ and existing/potential investors and to share information related to al khaliji’s business and financials as permitted by the disclosure rules of the Qatar Stock Exchange. Furthermore, upon disclosure of quarterly results, the Bank organizes a conference call with investors and financial analysts on quarterly basis that includes the GCEO, GCFO and other members from Senior Management to provide further clarifications and explanations about the financial results achieved and to respond to all queries of the investors. 34
  31. Access to Information Dividend Distribution al khaliji created a dedicated website www .alkhaliji. com. as the main platform to publish and disclose all necessary information about the Bank. The website is subject to the Disclosure and Transparency Policy approved by the Board. All disclosures required by the local laws and regulations are published on the website. In addition, shareholders get free access to the information they are entitled to obtain under the applicable laws and regulations by contacting the Chairman Office or the Investor Relations department. The details of the members of the Board and Senior Management as well as the Bank’s constitutional documents including the Memorandum and Articles of Association, the Commercial Register, the QCB License, the minutes of General Meetings are freely accessible on the Bank’s website. For further details, please refer to section 2.4 above entitled “Disclosure”. The Bank’s AoA sets out the terms and conditions for the distribution of profits in accordance with the law. The audited financial statements presented to the Annual General Meeting for endorsement determines how the profits will be distributed. Dividend payout proposals, if applicable, are also presented for shareholders’ approval in every Annual General Meeting. Right to General Meetings The AoA of al khaliji affirms the right of shareholders to call ordinary or extraordinary general meetings and the right to add, discuss, decide and raise questions with respect to any items on the agenda of the general meetings. On 27 February 2018, al khaliji’s shareholders gathered in the annual meeting. The full minutes of the general meetings are published on the website of al khaliji (www.alkhaliji.com). Election of Board Members The Bank’s AoA sets out the main terms for directorship. In addition, the General Meeting held on 29 November 2017 adopted the Board Nomination and Election Policy upon a recommendation from the Board and the Board Corporate Governance, Nomination and Remuneration Committee. The policy ensures the shareholders get access to all information required about Board candidates. The policy is published on al khaliji’s website. 35 On 27 February 2018, the Annual General Meeting decided to distribute cash dividends in the rate of 7.5% of the nominal share value (QAR 0.75 per share) for the year ended 31 December 2017. In 2018, the Qatar Stock Exchange (QSE) continued its “Direct Dividend Payment Plan” initiative aimed at making direct payment of all dividends into the bank account of investors. This initiative, in which al khaliji participates, will ensure that investors receive all dividend payments. As such, by making direct dividend payments, investors can be secure in knowing that they will receive their dividends in an easy, fast and safe manner. Our branches assist investors updating their bank account information, by filling QSE’s form. Due to our new dividend payment system, al khaliji shareholders now have several dividend collection options in al khaliji branches including cash, cheque or deposit into the shareholder’s account, following the submission of all necessary documents. The shareholder can also do a transfer to any local or international bank account.
  32. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Rights in Major Transactions Article (57) of the Bank’s AoA guarantees the rights of the shareholders, in particular, the minorities in the event where the Bank enters into major transactions. Details on the shareholders’ base and evolution are disclosed in the Bank’s annual report. Major shareholders that own 5% or more of the Bank’s share capital are disclosed and updated regularly on the Bank’s website. For details, please check section 3.1 entitled “Our Shareholders” under the “Corporate Governance Disclosures” section below. Stakeholders Rights APPLICATIONS al khaliji Board of Directors has approved the Group HR Policy and the Group Code of Conduct which both ensure all stakeholders are treated according to the principles of fairness and equity without any discrimination whatsoever and all their rights stipulated under the applicable laws and regulations are respected and protected at all time. Furthermore, the Bank encourages its stakeholders to speak up and share incidents that suspected to be in violations to al khaliji values, policies and procedures. For this purpose a whistleblower policy and hotline service were established to enable stakeholders to make reports in good faith and confidence directly to the Group Head of Compliance who independently investigates these incidents and reports to the Board of Directors and Executive Management on the results and actions taken. To further strengthen controls, the Group Head of Internal Audit has access to the reports and independently verifies the actions taken by the management. To ensure the effectiveness of the hotline service, the Board granted protection to stakeholders who report, in good faith, of any suspected practice or transaction by appointing an independent third party to receive such reports. The whistleblower program is implemented in all jurisdictions where the Bank operates and in accordance with local legal requirements. A 36
  33. monthly reminder is sent to all employees on the program and the hotline service . To date, there was zero incident reported. On customers’ level, a Customer Complaint and Compliment policy was developed and a contact center created that is available 24/7 at +974 44940000 to receive and process any query or complaint escalated by customers. As at 31 December 2018, the contact center received a total of 1,036 reports that ranged between queries and complaints. All these reports were processed and solved either on the spot or within timeline of 1 day maximum depending on the complication of the case. All these reports were solved to the satisfaction of the customers. No complaint or report was filed with high-risk profile that would affect the financial position of the Bank or would require escalation to the Senior Management including the GCEO or to the Board. Community Rights The Board developed and approved a policy for Corporate Social Responsibility (CSR) that governs the Bank’s CSR initiatives and activities. According to the policy and as Qatar’s next generation bank, al khaliji is guided by progressive CSR in conjunction with its vision for growth. The core of the Bank’s CSR program is a conviction in its mission to drive sustainable economic, human, social and environmental development in line with the Qatar National Vision 2030. For details, please refer to the section entitled “Corporate Social Responsibility” in the Annual Report that forms an integral part of this Corporate Governance Report. 37
  34. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 CORPORATE GOVERNANCE DISCLOSURES 3 . Corporate Governance Disclosures 3.1 Our Shareholders As at 31 December 2018, al khaliji had 13,874 shareholders, comprising pension funds, banks, mutual funds, insurers, sovereign wealth funds, corporations, small and medium enterprises, and retail investors from Qatar, Oman, Bahrain, UAE, Kuwait and other Arab and foreign countries. 3.1.1 Evolution of Shareholder Base As at 31 December 2018, the percentage of al khaliji shares held by Qatar based shareholders remained flat at 86% of the Bank’s share capital, and shares owned by shareholders from other countries remained flat at 14% of the Bank’s share capital. 100% 90% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 86% 86% 86% 86% 86% 86% 86% 86% 86% 86% 86% 86% 86% Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 80% 70% 60% 50% 40% 30% 20% 10% 0% Qatar UAE Omani Kuwaiti Bahraini Other Arabs Graph (1): Evolution of shareholder base by nationality (Analysis of our share registers with the Qatar Central Securities Depository) 38 Other
  35. In 2018 , the total share of Qatar government entities remained unchanged at 47% of the Bank’s share capital. The percentage of capital retained by corporations decreased from 26% to 25%. The percentage of capital retained by banks/financial institutions (banks, funds, insurers, pension etc.) remained unchanged at 6%. The shares retained by retail investors increased from 21% at end-2017 to 22% as at 31 December 2018. Retail 22% Qatar Government 47% Corporations 25% Bank & FIs 6% Graph (2): Evolution of shareholder base by category (Analysis of our share registers with the Qatar Central Securities Depository) 39
  36. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 CORPORATE GOVERNANCE DISCLOSURES While the percentage of shares retained by retail investors increased , the consolidation in the number of retail shareholders continued in 2018. 14,250 14,150 14,050 13,950 13,850 13,750 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Graph (3): Number of shareholders (Analysis of our share registers with the Qatar Central Securities Depository) 40 Nov-18 Dec-18
  37. 3 .1.2 Major Shareholders As at 31 December 2018, al khaliji had 4 major shareholders who own 5% or more of the Bank’s share capital. The stake of Qatar Investment Authority (QIA), our largest shareholder, remained unchanged at 40.34% as at 31 December 2018. It holds the shares indirectly through its fully owned company, Qatar Holding LLC, and other related government entities. Our second largest shareholder, Al Faisal International Investment Company, increased its holding of the Bank’s share capital from 7.33% in 2017 to 7.48% as at 31 December 2018. It holds the shares directly and indirectly through related parties. This increase is in line with Article (11) of the Bank’s Articles of Association that allows Al Faisal International Investment Co. to own, directly or indirectly, up to 10% of the Bank’s share capital. The stake of Union Investment House (UIH), the third largest shareholder from Bahrain, remained unchanged at 6.67% of the Bank’s share capital as at 31 December 2018. Shares are owned directly by UIH and indirectly through related parties. The stake of the Pension Fund, General Retirement and Social Insurance Authority remained unchanged at 5.58% of the Bank’s share capital as at 31 December 2018. Al khaliji’s major shareholders held 60.04% of al khaliji capital as at 31 December 2018. Major Shareholders Category Domicile Shares Percent Qatar Investment Authority (QIA)* Government Qatar 145,212,161 40.34% Al Faisal International Investment Co.* Corporation Qatar 26,945,660 7.48% Union Investment House S.P.C.* Corporation Bahrain 24,000,000 6.67% Pension Fund-General Retirement and Social Insurance Authority Government Qatar 20,086,393 5.58% Total 216.244.214 60.04% *Directly or indirectly through related parties Table (1): al khaliji major shareholders as at 31 December 2018 (Extract from our share register with the Qatar Central Securities Depository 41
  38. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 CORPORATE GOVERNANCE DISCLOSURES 3 .1.3 Shareholders’ Concentration On 31 December 2018, 40 investors (holding each 1 million and more of shares) – owned 80% of al khaliji’s shares. Of these 40 shareholders, 14 are private investors, 6 are banks or financial institutions, 14 are corporations, and 6 are Qatar Government entities. The majority of shareholders are retail investors, holding less than 100,000 shares each. 120% 100% 100% 80.00% 80% 60% 40% 4.09% 20% 4.83% 3.27% 7.81% 250K-500K 100K-250K 1-100K 0% ≥ 1,000,000 5K-1,000K Graph (4): Shareholder concentration per number of shares (Analysis of our share register with the Qatar Central Securities Depository) 42 Total
  39. Breakdown al khaliji Shareholders Retail Banks and FIs Qatar Government Corporations Shares Number Investors % Investors % Investors % Investors % Investors % ≥ 1,000,000 40 80.00% 14 8.05% 6 4.15% 14 20.73% 6 47.07% 500 K - 1,000 K 21 4.09% 7 1.43% 5 0.83% 9 1.83% 0 0.00% 250 K - 500K 45 4.83% 26 2.78% 4 0.44% 14 1.48% 1 0.13% 100 K - 250K 69 3.27% 50 2.38% 8 0.40% 10 0.44% 1 0.05% 1 - 100K 13,699 7.81% 13,609 7.23% 25 0.12% 65 0.46% 0 0.00% Total 13,874 100% 13,706 21.87% 48 5.94% 112 24.94% 8 47.25% Table (2): Shareholder concentration per category (Analysis of our share register with the Qatar Central Securities Depository) 3.1.4 Trading Activity The monthly average number of transactions on al khaliji decreased by 33 % in the second half of 2018 (H2 2018) compared to the first half of 2018 (H1 2018). This follows the trend in the market/Qatar Exchange, in particular in the Banks and FIs sector, as the monthly average number of transactions on the Banks and FIs decreased by 14% in H2 2018 compared to H1 2018. Average number of transactions during: Qatar Stock Exchange H1 2018 87,104 30,081 515 H2 2018 86,727 25,746 345 Banks & FIs Table (3): Average number of transactions (H1 versus H2 2018) (Analysis of information provided by the Qatar Stock Exchange) 43 al khaliji
  40. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 CORPORATE GOVERNANCE DISCLOSURES 3 .1.5 Trading Volumes In general, the monthly average of al khaliji traded volumes decreased in the first half of 2018 especially in May 2018. This trend was similar for the average of QSE and Banks and FIs in the second half of the year 2018 especially in August 2018. 9,000,000 300,000,000 8,000,000 250,000,000 7,000,000 200,000,000 6,000,000 5,000,000 150,000,000 4,000,000 100,000,000 3,000,000 2,000,000 50.000.000 1,000,000 0 0 Dec-2017 Mar-2018 al khaliji Traded Volume (left scale) Jun-2018 Sep-2018 QSE Traded Volume (right scale) Dec-2018 Banks & FIs Traded Volume (right scale) Graph (5): Traded volumes (in number of shares) (Analysis of information provided by the Qatar Stock Exchange) 1200 160,000 140,000 1000 120,000 800 100,000 600 80,000 60,000 400 40,000 200 20,000 0 0 Dec-2017 Mar-2018 al khaliji Number of Transaction (right scale) Jun-2018 Sep-2018 QSE Number of Transaction (left scale) Dec-2018 Banks & FIs Number of Transaction (left scale) Graph (6): Number of transactions (Analysis of information provided by the Qatar Stock Exchange) 44
  41. 3 .1.6 Share Price and Volatility In 2018, al khaliji’s share price decreased by 18.73% (from QAR 14.20 at end-2017 to QAR 11.54 at end-2018), compared to 20.83% increase for the QSE Index and 42.84% increase for the Banks and FIs Index. 14.50 14.20 14.00 13.50 13.00 12.50 12.00 11.50 11.00 10.72 10.50 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Graph (7): al khaliji share price (December 2017 – December 2018) Throughout 2018, al khaliji share price’s volatility was in general moderate – below the average volatility of other Banks except in October 2018 when it was slightly higher than its peers. 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 al khaliji Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Banks Graph (8): Share price volatility: al khaliji versus other listed banks (Analysis of information provided by the Qatar Stock Exchange) 45 Nov-18 Dec-18
  42. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 .2 Board Of Directors CORPORATE GOVERNANCE DISCLOSURES The Board of Directors of al khaliji comprises 9 members. Five members shall be elected by secret ballot by the Ordinary General Assembly. The remaining four members, including the Chairman, shall be appointed by Qatar Investment Authority represented by Qatar Holding. On 27 February 2018, the Ordinary General Assembly of Shareholders elected a new Board of Directors for a three-year mandate ending 31 December 2020. Upon the elections, three new members joined the Board of al khaliji: Tariq Al Malki Al Jehani, Ebtesam Al Manai and Abdullah Al Kuwari. The former member Hesham Al Saie, the representative of the major shareholder Union Investment House (Bahrain) exited the Board. The rest of the members were either re-elected or re-appointed, as applicable, for the new three-year mandate. The current Board of Directors as of 31 December 2018 comprises 9 members (8 out of 9 are NEDs including 3 INDs) as follows: 46
  43. H .E. SH. Hamad Bin Faisal Bin Thani Al Thani Chairman and Managing Director - Qatar Joined al khaliji Board since 2009 and re-appointed on 27 February 2018 by QIA/Qatar Holding LLC (“QH”), State of Qatar Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 310,880 shares Number of shares held by QIA/QH and its related entities as of 31-Dec-18: 145,212,161 shares al khaliji’s Chairman is widely known in the region and regarded as one of Qatar’s most influential business figures. Holder of a Bachelor’s Degree in Political Science, the Chairman has held a number of prominent positions, including the post of Minister of Economy and Commerce of Qatar and Vice Chairman of Qatar National Bank (QNB), one of the region’s largest banks. Other senior positions previously held by His Excellency include: • Chairman of Qatar General Organization for Standard and Metrology • Member of Supreme Council for Economic Affairs and Investment • Director of Customs Department • Heir Apparent Office, Diwan Al Amiri The Chairman is also a very active member of the Qatar business community. In addition to his post as Chairman and Managing Director of al khaliji, he currently holds the following positions: • Vice Chairman, Qatari Investors Group • Board Member, Qatari Businessmen Association • Board Member, Qatar Insurance Company (QIC) • Board Member, Vodafone Qatar 47
  44. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Abdullah Nasser Al Misnad Vice Chairman – Non-Executive and NonIndependent Member, Qatar Joined al khaliji Board since 2007 and re-elected on 27 February 2018 Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 3,605,640 shares Mr. Abdullah Nasser Al Misnad is the Chairman of Al Misnad WLL, a leading organization in the private business sector since 1950’s. In addition to his position as Vice-Chairman of al khaliji’s Board, Mr. Al Misnad occupies chairmanship and directorship roles in other organizations: • Al Misnad WLL, Owner and Founder • Qatari Investors Group, Chairman • Vodafone Qatar, Chairman Mr. Al Misnad is holder of Bachelors degree in Aeronautics. 48
  45. Abdul Salam Bin Mohammed Al Murshidi Independent and Non-Executive Member – Oman Joined al khaliji Board since 2007 and re-elected on 27 February 2018 Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 0 share Mr. Al Murshidi is an Omani National and a prominent figure in Oman’s business community. Al Murshidi is the Executive President of the State General Reserve Fund of the Sultanate Oman since November 2012, the Chairman of the Board and Investment Committee of the Oman National Investments Development Company “Tanmia”, and a Board member of the Public Authority for Investment Promotion and Export Development “Ithraa”, Oman. In addition to his position as member of al khaliji’s Board, Mr. Al Murshidi is also Chairman of the Board of “Oman Brunei Investment Company” and “Uzbek-Oman Investment Company”. He is a member of numerous committees and also participates in the management of number of other public and economic organizations. H.E. Al Murshidi graduated with distinction from the University of Aberdeen, U.K. with a Master’s Degree of Science in Petroleum Geology (1996). He also holds a Bachelor of Science in Geophysics from the University of Arizona, USA (1989) 49
  46. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Tariq Ahmad AA AL-Jehani Independent and Non Executive Member – Qatar Joined al khaliji Board from 2007 until 2009. Elected to re-join the Board on 27 February 2018 Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 16,580 shares Mr. Tariq Al Malki Al Jehani is widely regarded as one of Qatar’s prominent business figures. His success has led to his appointment in various senior executive positions in some of Qatar’s most strategically important institutions. Having graduated in the US as a Bachelor of Business Administration from St Martins College, Olympia, Washington, Tariq joined Qatar Fertilizer Company (QAFCO). He soon took responsibility for the company’s marketing and commercial business. Through nine years of service at QAFCO, he has achieved remarkable success which has put him on a fast track at the company. Afterwards Tariq started to look for a new challenge and joined Qatar National Bank as a manager in its corporate banking division. From 1997 to 2003, he handled various functions and was quickly promoted to occupy the position of Assistant General Manager Corporate Banking over four years of time. In 2003, Tariq left QNB to work on his own ventures – though he was soon drawn back into boardroom life and financial advisory roles. Other senior positions previously held by Mr. Al Jehani include: • Financial Advisor to the former Prime Minister and Foreign Minister of the State of Qatar • Board member, Qatar Investment Authority (QIA) •Board member, Authority Qatar Financial Markets • Board member, Qatari Diar Not only has he enjoyed a long and successful career in corporate management and banking, Tariq has also proved himself as an entrepreneur. He currently works in the private sector and runs his owns business AREO NORWAY. 50
  47. Faisal Abdulla KH AL-Mana Independent and Non-Executive Member – Qatar Joined al khaliji Board on 25 February 2015 and Re-elected on 27 February 2018 Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 100,000 shares A Qatari national and an active member of the business and investment industries. Mr. Al Manaa is currently the Vice Chairman of Redco Constructions. He is also the Managing Director of Al Khalij Cement Company. He started his career in 1998 as Banking Supervisor in Qatar Central Bank before he joined the Ministry of Finance as WTO Affairs Officer. He then joined the Ministry of Economy and Commerce as Director of the Minister’s Office. In 2004, Mr. Al Mana joined QDB where he worked as Director of Project Development Department at QDB until 2009. In addition, Mr. Al Mana also holds the position of the Vice Chairman in a number of companies including BLUU, Qatar Electro Mechanical Group, Al Mana Industries, Al Madad Al Qatariya, Origins, The Maintainers, Al Jassra Corporate Services, BG2, Ammar Constructions and Al Jassra Ready Mix. He holds a Bachelor Degree in Economics from the University of Qatar. 51
  48. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Sheikh Mohammed Feisal Q F AL-Thani Non-Executive and Non-Independent Member – Qatar Joined al khaliji Board on 25 February 2015 and reelected on 27 February 2018, represents Al Faisal International for Investment, State of Qatar Number of shares held directly or indirectly (through family members or own companies other than AL Faisal) as at 31-Dec-18: 133,390 shares Number of shares held by Al Faisal International for Investment as of 31-Dec-18: 26,812,270 shares Sheikh Mohamed Bin Faisal is the Vice Chairman of Al Faisal Holding and Aamal Company, one of the largest public shareholding companies in Qatar. Sheikh Mohamed also occupies chairmanship and directorship roles in other organizations, as follows: • Qatari Businessmen Association, Board Member • Al Faisal International for Investment, Vice Chairman • Optimized Holding Co., Chairman • American University of Sharjah, Board member of trustees • BANIF Bank Malta, Deputy Chairman • Aamal Holding, Vice Chairman •Honorary President, Commerce in Qatar Italian Chamber of Sheikh Mohamed is holder of Bachelors degree in science and Business Administration from Carnegie Mellon University, Qatar. 52
  49. Sheikh Mohammed Mansoor M J AL-Thani Non-Executive and Non-Independent Member – Qatar Joined al khaliji Board on 25 February 2015 and re-appointed on 27 February 2018, by QIA/Qatar Holding LLC, State of Qatar Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 940 shares Number of shares held by QIA/QH and its related entities as of 31-Dec-18: 145,212,161shares Sheikh Mohamed joined the Board of al khaliji in February 2015. He has a good experience in economics and finance gained from his current work at Qatar Investment Authority. He also represented QIA on the Board of Directors of Al Rayyan Hospitality. Sheikh Mohamed has a Bachelor of Arts in Economics and Management Studies from the University of Sussex in the UK. He also holds the CFA designation and continues to drive for personal and professional excellence. 53
  50. Ebtesam Saleh HH Al Mannai Non-Executive and Non-Independent Member – Qatar Newly Appointed on 27 February 2018 by QIA/ Qatar Holding LLC, State of Qatar Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec-18: 81,632 shares Number of shares held by QIA/QH and its related entities as of 31-Dec-18: 145,212,161 shares Ms. Al-Mannai joined the Board of al khaliji in February 2018 with extensive professional and academic experiences in investment and finance fields. She joined Qatar Investment Authority (“QIA”) in 2007, where she occupied various leadership positions such as Head of Investment Support Operations and Deputy Director Finance. Currently she occupies the position of the Director of Finance Department and acting CFO. Prior to joining QIA she worked in College of Business and Economics at Qatar University. She currently occupies the following positions: 1-Board Member in some of Qatar Investment Authority’s subsidiaries. 2- A Member of Audit and Compliance Committee of the Board of regent – Qatar University 3- A Member of the Advisory Committee in some of Qatar Investment Authority’s subsidiaries. Ebtesam holds Bachelor’s degree in Administrative Sciences and Economics with specialization in Accounting and a Master’s degree in Business Administration from Qatar University. 54
  51. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Abdulla Ali M A AL-Kuwari , CFA Non-Executive and Non-Independent Member – Qatar Newly Appointed on 27 February 2018 by QIA/ Qatar Holding LLC, State of Qatar Number of shares held directly or indirectly (through own companies or family members) as of 31-Dec18: 0 share Number of shares held by QIA/QH and its related entities as of 31-Dec-18: 145,212,161 shares Mr. Abdulla joined the Board of al khaliji in February 2018 with a strong experience in the investments field gained from his current work at Qatar Investment Authority (“QIA”) in Financial Institutions Department. He is also appointed as representative director of QIA on the Boards of various investment funds, including Aventicum Capital Management Holding AG and Qatar Abu Dhabi Investment Company. In addition, Mr. AlKuwari is an active member in various academic programs and initiatives on both local and international levels, including the World Economic Forum. Mr. Al-Kuwari holds a Bachelor of Science in Business Administration with honors from Carnegie Mellon University as well as the Chartered Financial Analyst (CFA) designation, and continues to drive for personal and professional excellence. 55
  52. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 .3 Board Committees The Board delegated part of its duties to a number of committees: Audit Committee (ACB), Compliance and Risk Committee (CRC) as well as the Corporate Governance, Nomination and Remuneration Committee (CGNRC). Audit Committee (ACB) CORPORATE GOVERNANCE DISCLOSURES The Audit Committee is delegated by the Board to review and monitor the integrity of the financial statements and financial reporting, the internal control systems and related risks, financial control and accounting systems, audit responsibilities and internal and external audit matters. The Audit Committee comprises 3 members chaired by an Independent director Mr. Faisal Al Mana. The two other members are: Sheikh Mohamed Bin Feisal Bin Qassem Al Thani and Ebtesam Al Manai. All members have extensive financial and audit experience. All members are NEDs. The Committee shall hold at least 6 meetings a year as per its TOR. In 2018, the Committee held six meetings. To check the attendance records of the Committee’s members, please refer to section 3.4 entitled “Meetings and Attendance” below. The Board has approved terms of reference (TORs) for the Audit Committee which clearly defines its roles and responsibilities. Minutes of all meetings of the Committee are drafted and properly maintained in the company’s records. The TORs are available and accessible on the website of al khaliji (www.alkhaliji.com). During its regular meetings in 2018, the Committee considered and discussed matters related to the internal control system and relevant risks with Senior Management and took appropriate actions towards enhancing the controls and addressing weaknesses, if any. The Committee also met with the external auditors to discuss the quarterly and end-of-year financials and with the internal auditors to discuss and consider the main topics related to internal control and relevant risks. Ongoing coordination takes place between Internal 56
  53. Audit and the Bank ’s External Auditors in all auditrelated matters including, but not limited to, the coordination in preparing the External Auditor’s Management Letter presented to the Board/Audit Committee. In every Board meeting, the Chairperson of the Audit Committee presents a summary report on the Committee’s main activities and decisions to the full Board for endorsement. In 2018, the Board of Directors endorsed all resolutions and recommendations of the Committee. Below are the main activities and decisions of the Audit Committee in 2018: • Review and discuss the External Auditor’s reports on internal control, the quarterly and EOY financials for 2018 including the Management Letter • Review and recommend for Board approval the quarterly and EOY consolidated financials for 2018 •Review and discuss Internal Control over Financial Reporting • Review and adopt the Engagement Letter with External Auditors for 2018 based on the mandate from the General Meeting • Review and approve the External Audit Plan for 2018 • Review and discuss the periodic and annual internal audit reports on internal control system and internal audit activities and take necessary remedial actions where applicable • Approve the internal audit plan and strategy for 2018 • Review and discuss the proposals from external auditing firms and recommend to the Board the External Auditor for 2019 57 Compliance and Risk Committee (CRC) The CRC is a committee of the Board formed for the purpose of assisting the Board in fulfilling its oversight responsibilities in assessing and managing the various types of risk to which the Bank is exposed as well as approving risk framework, risk appetite, risk strategies and risk policies of the organization. The Committee also oversees compliance with all applicable regulatory and internal policy requirements, ensures that effective and appropriate measures are defined and implemented to promote good compliance culture, comply with regulatory requirements, prevent money laundering and financing of terrorism, prevent fraud and conflicts of interest, set forth a Group compliance framework and policies, criteria and control mechanisms. The CRC is chaired by an Independent director Mr. Tariq Al Malki Al Jehani and comprises 3 other members of the Board: ‘Abdulsalam Al Murshidi, Sheikh Mohamed Bin Mansoor Al Thani and Abdulla Al Kuwari. The Committee shall hold at least 4 meetings a year as per its TOR. In 2018, the Committee held 4 meetings. The Group CEO, Group Chief Risk Officer and the Group Head of Compliance regularly attend the Committee meetings and submit their periodic reports for review and discussion. To check the attendance records of the Committee’s members, please refer to section 3.4 entitled “Meetings and Attendance” below. The Board has approved terms of reference (TORs) for the Compliance and Risk Committee which clearly defines its roles and responsibilities. Minutes of all meetings of the Committee are drafted and properly maintained in the company’s records. The TORs are available and accessible on the website of al khaliji (www.alkhaliji.com).
  54. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 In every Board meeting , the Chairperson of the CRC presents a summary report on the Committee’s main activities and decisions to the full Board for endorsement. In 2018, the Board of Directors endorsed all resolutions and recommendations of the CRC. Below are the main activities and decisions of the CRC in 2018: • Review and discuss the periodic and annual Compliance reports and take necessary remedial actions, where applicable • Review and discuss the periodic and annual AML/CFT reports and take necessary remedial actions, where applicable CORPORATE GOVERNANCE DISCLOSURES • Consider and approve the Annual Compliance and AML plan and strategy •Endorse the appointment of the Group Compliance Officer and Money Laundering Reporting Officer (MLRO) • Endorse engagements with PEPs • Review, discuss and endorse periodic risk reports including, but not limited to, credit portfolio developments, provisioning, NPLs and take necessary remedial actions where applicable • Oversee the 2018 Capital Plan and ICAAP submissions exercise • Conduct the annual review of the Group Country Limits for 2018 • Review and discuss all legal and regulatory developments and take necessary actions where applicable • Review and amend risk policies and Compliance and AML policies 58
  55. Corporate Governance , Nomination and Remuneration Committee (CGNRC) The Board established the Corporate Governance, Nomination and Remuneration Committee to be in charge of all HR related matters including remuneration and incentives schemes and the Corporate Governance of the Bank. The Committee is chaired by HE Abdulla Al Misnad and comprises 3 other members: Tariq Al Malki Al Jehani, ‘Abdulsalam Al Murshidi and Abdulla Al Kuwari. The Committee shall hold 2 meetings at least a year as per its TORs. The CGNRC met twice in 2018. To check the attendance records of the Committee’s members, please refer to section 3.4 entitled “Meetings and Attendance” below. The Board has approved terms of reference (TORs) for the CGNRC which clearly defines its roles and responsibilities. Minutes of all meetings of the Committee are drafted and properly maintained in the company’s records. The TORs are available and accessible on the website of al khaliji (www.alkhaliji.com). In every Board meeting, the Chairperson of the CGNRC presents a summary report on the Committee’s main activities and decisions to the full Board for endorsement. In 2018, the Board of Directors endorsed all resolutions and recommendations of the CGNRC. Below are the main activities and decisions of the CGNRC in 2018: •Review and confirm the annual Balanced Scorecard results • Conduct the annual review of Group Incentives and Bonus Methodology for 2018 and recommend the Group Annual Bonus pool for Board approval •Review and approve various HR policies including the Bank’s policy for dealing with the provisions of the amended exit permit law No (13) of 2018 59 • Review the profiles of Board candidates for Board elections that took place in February 2018 and formulate recommendations to the Board accordingly • Recommend appointments at Management levels for Board approval Senior • Conduct the annual performance assessment of the Board and its committees and the annual evaluation of INDs •Conduct the annual review of the Board Remuneration policy and recommend Board remunerations for Board to recommend the same to the General Meeting • Develop and recommend the annual Corporate Governance Report for Board approval • Review and discuss updates to the corporate governance system and recommend necessary actions for Board’s approval • Review and adopt the list of insiders
  56. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 .4 Meetings and Attendance Date of Board Meeting Attendance 24 January 2018 All members 18 March 2018 7 members including the Chairman 19 April 2018 7 members including the Chairman 6 June 2018 7 members including the Chairman 19 July 2018 All members 23 October 2018 All members 5 December 2018 8 members including the Chairman Board of Directors CGNRC Audit Committee Compliance and Risk Committee 7 meetings in 2018 2 meetings in 2018 6 meetings in 2018 4 meetings in 2018 Sh. Hamad Bin Faisal Bin Thani Al Thani 7/7 N/A N/A N/A Abdullah Nasser Al Misnad 5/7 1/2 1/6* N/A Abdulsalam Al Murshidi  5/7 2/2 N/A 4/4 Tariq Al Malki Al Jehani 5/7 1/2 N/A 2/4 Faisal Al Manaa 7/7 1/2 5/6 1/4* Sh. Mohamed Faisal Qassem Al Thani 7/7 1/2* 5/6 1/4* Sh. Mohamed Bin Mansoor Al Thani 7/7 N/A 1/6* 3/4 Abdulla Al Kuwari 6/7 1/2 N/A 2/4 Ebtesam Al Manai 6/7 N/A 5/6 N/A Hesham Al Saie** (exited the Board after elections of 27 February 2018) 1/7 N/A 1/6* N/A Director’s Name *attended 1 meeting only of the Committee on 24 January 2018. Not a member of the Committee anymore upon the election of the new Board on 27 February 2018 60
  57. 3 .5 Senior Management and Management Committees Senior Executive Management 3.5.1 The Management Team The Group Chief Executive Officer is accountable for executing the al khaliji strategy and running the business on a day-to-day basis. The Group CEO reports directly to the Board and MD and keeps the Board fully informed of all key aspects of business performance. The Group CEO is supported by a Management team with extensive background in banking and financial matters in addition to management committees with defined roles and responsibilities. The main activities and achievements of the Management team in 2018 are disclosed under the respective sections of various departments and units of the Bank in the Annual Report that form an integral part of the Report herein. Fahad Al Khalifa Group Chief Executive Officer Shares held directly or indirectly in al khaliji as of 31-Dec-18: 10,940 shares Mr. Al Khalifa is a senior banker with over 20 years of experience. He started his career in 1994 with Qatar Central Bank (QCB). His professionalism and strong work ethics helped him develop swiftly, and grow his career in the finance and banking industry. In 2000, he moved to Qatar National Bank (QNB) Treasury Group, where he consistently moved up the ranks to become the Group Treasurer and GM Group Corporate & Institution Banking, before joining al khaliji as GCEO in September 2014. Mr. Al Khalifa was also a member of several committees and Boards at QNB and Affiliates. He holds a BSc in Finance from Seattle University in the United States of America. 61
  58. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Senior Executive Management Senior Executive Management Paul Maguire Hamad Al Kubaisi Shares held directly or indirectly in al khaliji as of 31-Dec-18 : 0 share Shares held directly or indirectly in al khaliji as of 31-Dec-18: 940 shares Mr. Maguire joined al khaliji in 2010 as Head of International Banking and is an experienced corporate finance professional with a wealth of knowledge of the Qatari and GCC markets having worked in these markets for the past 20 years. Prior to joining al khaliji, he worked for Mizuho Corporate Bank, Ltd and Barclays. At Mizuho, he had responsibility for managing a substantial corporate banking franchise across the Middle East and Africa. Paul worked in a variety of senior roles at Barclays including an assignment in the Risk Department at the bank’s global Head Office as well as assignments with Barclays in Egypt and the UAE. Paul holds the Chartered Institute of Bankers qualification from Kingston University. Mr. Al Kubaisi joined the Bank in 2011 with over than 15 years of experience. Hamad holds a Bachelor’s Degree in Computer Science and has proven experience in Human Resources, Administration, and IT functions in both the Public and Private Sectors. Throughout his career, Hamad held numerous leading positions within Qatar. Hamad’s direct responsibility includes Human Resources, Facilities and Procurement with oversight of these functions in Qatar, UAE and Paris. Group Chief Business Officer Group Chief HR and Administration Officer and Acting GCOO 62
  59. Senior Executive Management Senior Executive Management Shabbir Barkat Ali Oliver Schwarzhaupt Shares held directly or indirectly in al khaliji as of 31-Dec-18 : 0 share Shares held directly or indirectly in al khaliji as of 31-Dec-18: 0 share Mr. Ali has over 18 years of diverse work experience acquired working in finance and financial services sectors. Before joining al khalij in 2017, Shabbir worked with RBS, AB Kinnevik, Metropolitan Bank and PWC in a variety of roles in Finance, Audit and Risk consultancy. He is a fellow Chartered Accountant, and a member of the Association of Chartered Certified Accountants (ACCA), UK and Institute of Chartered Accountants of Pakistan (ICAP). Mr. Schwarzhaupt has proven track record with over than 22 years of experience in international banking and risk management. Throughout his career, Oliver held a number of senior roles including Chief Risk Officer in Maritime Bank (Vietnam) and Deputy Chief Risk Officer cum Head of Risk in Emirates NBD. Prior to joining Emirates NBD, Oliver worked for Commerzbank Group, where he headed the Rating Methods team responsible for Basel II IRB compliant scoring/rating models. Oliver holds a Master’s degree in Economics with majors in Finance, Capital Markets and Statistics/Econometrics. Group Chief Finance Officer Group Chief Risk Officer 63
  60. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Senior Executive Management Senior Executive Management Gilles Dermaux Michael Davakis Shares held directly or indirectly in al khaliji as of 31-Dec-18 : 0 share Shares held directly or indirectly in al khaliji as of 31-Dec-18: 0 share Mr. Dermaux has more than 25 years of experience in international banking, having worked successively at Banque Paribas where he gained a solid background in corporate Banking and at WestLB Paris branch where he was a Senior Banker in charge of the Global Energy & Utility sector. Prior to his current role in AKF, Gilles was the General Manager of Qatar National Bank, Paris branch. He holds an MBA degree from the State University of West Georgia (USA) and is a graduate from Lille university (France) with a degree in Economy and Finance. Mr. Davakis has over twenty years of experience in banking and debt capital markets gained from his work in various banks and financial institutions around the world. He joined Al Khaliji in November 2018 from FIMBank plc in Malta, a subsidiary of Kuwait’s KIPCO group, where he was Group Head of Treasury and Capital Markets. Previously, he was Head of Treasury at Piraeus Bank AD Belgrade, Serbia. Michael holds a Master’s Degree in Social and Economic Sciences from the University of Vienna. General Manager, Al Khaliji France S.A Group Head of Treasury 64
  61. Top Management Top Management Rana Al Asaad Omar Al Emadi hares held directly or indirectly in al khaliji as of 31Dec-18 : 54,959 shares Shares held directly or indirectly in al khaliji as of 31-Dec-17: 3,841 shares Ms. AL Asaad is a senior Personal Banking professional with over 19 years of experience. She started her banking career in 1997 with Commercial Bank of Qatar where she worked in various roles and gained significant experience and wealth of knowledge of Personal Banking and Qatari market. Rana is graduated from Qatar University with a Bachelor of Arts degree in English Literature. She also holds a Diploma in Business Management from London Metropolitan University, U.K. Mr. Al Emadi joined al khalij in 2015 with over 10 years of strong corporate banking experience in the Qatari market along with an access to a huge portfolio of corporate customer. Omar started his banking career in 1998 at the Commercial Bank of Qatar where he occupied various leadership roles including Assistant General Manager. He holds a BSc in Finance from California State University in USA. Head of Personal Banking Head of Corporate Banking 65
  62. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Top Management Top Management Hani Ghazal Michel Daillet Shares held directly or indirectly in al khaliji as of 31-Dec-18 : 2,910 shares Shares held directly or indirectly in al khaliji as of 31-Dec-17: 0 share Mr. Ghazal joined al khaliji in 2008 with over18 years of experience in Marketing, trademarks management, communication and public relations acquired from his previous roles as Sales and Marketing Manager at Qatar Information and Marketing Company and InterContinental Hotel – UAE. He holds a degree in Hotel Management from Switzerland. Mr. Daillet joined al khaliji in 2017 with over 20 years of experience in banking law, corporate and commercial law. Throughout his career, Mr. Daillet worked for a number of major and reputable law fimrs and companies in Europe before he joined the region to work for Qatar National Bank in 2010. He then started his own law business in Qatar Financial Centre. He holds different law degrees from highly reputable global universities including ESSEC Business School, Sorbonne University in Paris and King’s College, London. Acting Group Head of Corporate Affairs Head of Legal 66
  63. Advisor to the Board /Compliance and Risk Committee Advisor to Board/Audit Committee Mutaz Al Dana Amjad Siddique Shares held directly or indirectly in al khaliji as of 31-Dec-18: 0 share Shares held directly or indirectly in al khaliji as of 31-Dec-18: 0 share Mr. Al Dana joined al khaliji in 2014 and was appointed as Group Head of Compliance and MLRO in October 2018. Mutaz has over 15 years of banking experience. Prior to joining al khaliji, Mutaz has worked as Compliance and AML manager in Arab Bank in Jordan since 2008. He holds master degree in Finance Administration from the Arab Academy for Business and Accounting, Jordan, a Bachelor degree in Accounting from Al Yarmouk University and is a certified AML specialist. Mr. Siddique joined al khaliji in 2017 with rich experience in internal audit and financial control. Previously he worked with PwC, KPMG, Scotia Bank Canada, CIBC Canada and the Saudi Investment Bank in KSA. Amjad is a Chartered Member of Institute of Internal Auditors (CMIIA) of UK and also holds CIA, CPA, CGMA and QIAL designations from USA. Group Head of Compliance/MLRO Group Head of Internal Audit 67
  64. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 .5.2 Management Committees There are several management Committees as follows: a) Senior Management Executive Committee (ExCo): ExCo supports the Group CEO and the Senior Management in decision-making, reviewing developments within the businesses, managing the day-to-day operations of the Bank, discussing matters of Group strategy and formulating recommendations for the Board or relevant Board committees. CORPORATE GOVERNANCE DISCLOSURES b)Group Asset, Liability and Capital Committee (GALCCO): It supports the Group CEO and the Senior Management in managing and optimizing the asset, liability, and capital structure of al khaliji Group within the approved risk and operational boundaries articulated in the group policies. c)Credit and Investment Committee (CIC): It approves credits, investments and product programs as per the credit approval authorities delegated by the Board or the relevant Board committees. d) Group Risk Committee (GRC): strives to maintain effective governance and oversight of risk related developments and performance, monitoring the enforcement of the internal control framework, monitoring the implementation of the business continuity plan and making appropriate decisions and recommendations to help reduce operational risk, and enhance its value contribution. e) Security Steering Committee (SSC): maintains effective governance and oversight of security related matters. f) ICT Steering Committee (ICTSC): maintains effective governance and oversight of ICT related matters. g) Group Special Investigation Committee (GSIC): created as an independent advisory and recommending body to assist GCEO/EXCO in responding to events of impropriety and fraud incidents. Full governance structure can be checked in the Group Organizational Chart below. 68
  65. 3 .6 Group Organizational Chart Al Khaliji Commercial Bank PQSC (AKCB) Al Khaliji France S.A Board of Directors (100% owned by AKCB) AKCB Falcon (CDs SPV) & AKCB Finance Ltd (EMTN SPV) & AKCB Capital LTD (derivatives SPV) Board of Directors 100% Owned by AKCB AKF General Manager 1 Corporate & International Banking Managing Executive Committee (ExCo) CRC Internal Audit2 Compliance & AML2 Group Chief Business Officer (GCBO) 2 Group head of Treasury 2 Legal2 ACB SMEs Credit & Investment Co. Company Secratary CGNRC Group Chief Financial Officer (GCFO) 2 Personal Banking GALCCO Finance Various Management Committees1 Group Chief Executive Officer Group Chief Risk Officer (GCRO) 2&3 Investor Relations Group Risk Committee Risk Security Group Chief HR and A  dministration Officer (GCHRAO) 2 and Acting Group Cheif Operating Officer (AGCOO)2 Operations Security Steering Committee ICT Procurement & Facilities ICT Steering Committee Human Resources Corporate Affairs2 Group Special Investigation Com. 2 Have oversight roles over their equivalent functions in the Group’s subsidiaries subject to local legal and regulatory requirements in the jurisdictions where the subsidiaries operate 3 Indirect reporting line to the Board Compliance and Risk Committee 4 ACB= Audit Committe of the Board; CRC= Compliance and Risk Committee of the Board; CGNRC= Corporate Governance, Nomination and Remuneration Committe; AKCB= al khaliji Indirect reporting line Direct reporting line 69
  66. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 .7 Incentives and Remunerations Board Remuneration Policy Below is the policy that determines the basis and method of granting Board remunerations that we present herein for the General Meeting reendorsement as part of this Report noting that it remained unchanged since last year’s report: 1. Board remunerations shall conform with market practice, consider the long term objectives of the organization and be cognizant of risk; CORPORATE GOVERNANCE DISCLOSURES 2.Board remunerations must be based on the outcome of the Board performance assessment exercise without any kind of discrimination whatsoever vis-à-vis the race, religion, gender or otherwise; 3. Board remuneration in al khaliji is cash-based only and comprises the annual bonus and the sitting fees of the Board and committees’ meetings. It excludes the expenses incurred by the Bank as a result of conduct of work by a director (i.e. travel expenses, accommodation and so on); 4. Except for an executive director, if applicable, the total amounts received by each director including annual bonus, sitting fees and expenses shall not exceed QAR 2 million per single director per year in accordance with the relevant regulations by QCB. In all events, the total remunerations for all Board members shall not exceed 5% of the Bank’s net profit after deduction of depreciation, reserves, and distribution of dividends of no less than 5% of the chare capital; 5.The Corporate Governance, Nomination and Remuneration Committee shall conduct an annual performance assessment for the Board and its committees. Based on the assessment outcome, the Committee determines the remuneration amounts based on the principles of the said policy and recommend the same to the full Board. The Chairman of the Board shall have the casting vote in case of any dispute or conflict that may arise as a result of this exercise; 6.Remunerations of an executive director, if applicable, shall form part of the Executive 70
  67. Management incentives and remuneration scheme subject to necessary disclosures in accordance with the law ; 7.The total amount of Board remunerations including annual bonus and sitting fees determined in accordance with the aforementioned principles must be presented to the Annual General Meeting for approval; 8.Approved Board remunerations must only be disbursed upon obtaining QCB No Objection; 9.Payments to directors representing corporate entities on the Board will be made directly to the account of the corporate entity represented on the Board and not to its individual representative unless a No Objection Letter is received from that corporate entity; 10. Board remunerations must be disclosed in the audited financial statements. All amounts received by Board members, whether Independent, Non- Independent, Executive or Non-Executive, including, but not limited to, the proposed annual bonus, the sitting fees, the expenses or otherwise, must be disclosed in the Directors’ Remuneration, Publicity Fees And Donations Report prepared in accordance with Article (122) of the Companies Law No (11) of 2015 and Article (47) of the Bank’s AoA, signed by the Chairman, the Vice Chairman and the External Auditors, and ready for shareholders inspection at least one week prior to the scheduled date of the Annual General Meeting; 11. In the event where no sufficient profits are achieved in a specific year to distribute dividends or in case of loss, the General Meeting will decide whether or not to grant remunerations to the Board in accordance with the law and subject to necessary regulatory approvals; and 12.The policy herein must be presented on a yearly basis to the Annual General Meeting to be reconfirmed in its current form or to be amended where applicable 71 Proposed Board Remunerations for 2018: The Board made a proposal for Board remunerations based on the afore-mentioned policy. To check the total Board remunerations proposed for 2018, please refer to EY Financial Statements as of 31 December 2018 published at the very end of the Annual Report enclosed to the Report herein. Such financials are pending the endorsement of the Annual General Meeting to which the Report herein is addressed. Shareholders may check the Director Fees Report detailing all amounts received by the directors including proposed 2018 remunerations prepared in accordance with Article (122) of the Commercial Companies Law and Article (47) of the Bank’s Articles of Association one week before the Annual General Meeting in the Corporate Secretariat office on the 7th floor of al khaliji’s head office in Al Jazzi Tower, West Bay. In order to be able to check the Director Fees Report, shareholders must produce an updated account statement of their shares from Qatar Stock Exchange/Qatar Central Securities Depository dated no more than one week together with a copy of their IDs (in case the shareholder is a natural person) or copy of the Commercial Registration (CR), Corporate Card and an authorization letter signed by an authorized signatory on the CR and on the Corporate Card (in case the shareholder is a legal person).
  68. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Senior Management and Employees Remuneration and Incentives Policy Below is the policy that determines the basis and method of granting incentives and remunerations to the Senior Management and employees of al khaliji that we present herein for the General Meeting reendorsement as part of this Report noting that it remained unchanged since last year ’s report: 1.al khaliji’s employee remuneration package is comprised of four primary elements viz. basic salary, allowances, benefits and a performance bonus; CORPORATE GOVERNANCE DISCLOSURES 2. The basic salary, allowances and benefits are determined in accordance with market practices to ensure they are fit for purpose, competitive and compliant with regulatory/legal developments; 3. The performance bonus is discretionary and, if merited, is paid on an annual basis in arrears. It considers the long term objectives of the organization, is cognizant of risk and must be purely dependent on the collective and individual performance without any kind of discrimination whatsoever vis-à-vis the race, religion, gender or otherwise; 4.The Performance Bonus, which is calendar based, is calculated with reference to a prescribed methodology based on principles set by the Corporate Governance, Nomination and Remuneration Committee of the Board as advised, when needed, by independent industry experts. The main principle is a top down meritocracy-based model where the individual payout is determined by the employees’ performance assessment, their Departmental contribution and the Bank’s achievements during the year; 5.A Balanced Score Card (BSC) approach is utilized to gauge the achievement of the Bank and division. It sets goals and targets that must balance between projected revenues and the risks accompanying the revenues generated while maintaining compliance with internal controls and regulatory requirements; 72
  69. 6 . At the start of each year the Board sets a series of financial and non-financial objectives for the organization which are outlined in a BSC. This forms the driver for department level scorecards, the goals of the GCEO, and each Senior Manager and staff member in the Bank and distills such goals into measurable key performance indicators; 7. The Bank’s BSC objectives are carefully tracked and progress reports are periodically submitted to the Board. At year-end the results are subject to verification by internal audit; 8. The audited results, and proposed bonus pool, are presented to the Corporate Governance, Nomination and Remuneration Committee (CGNRC) for consideration and recommendation for Board final approval; 9.Individual payouts are subject to review and approval of the Department Head, Group Chief HR and Administration Officer, GCEO and Chairman as appropriate; 10. An employee’s bonus is pro-rated based on the duration of their employment during the calendar year. Claw-back provisions apply where an employee resigns, or ceases to be employed by the company, before the period of bonus calculation and or within a specific timeperiod following the bonus payment; 11.The performance bonus for members of Senior Management must be disbursed upon obtaining QCB No Objection only; 12.The Bank’s compensation philosophy, scheme design, and absolute outlay shall be evaluated by the Board/CGNRC at each year-end or whenever needed to ensure it remains fit for purpose, competitive and compliant with regulatory/ legal developments. The Committee may seek the assistance of an external consultant in this exercise; 13. Senior Management compensations must be disclosed in the audited financial statements; and 14.The policy herein must be presented on a yearly basis to the Annual General Meeting to be reconfirmed in its current form or to be amended where applicable 73 Proposed Senior Management Remunerations for 2018: The Board approved remunerations for Senior Management members based on the aforementioned policy. To check the total Senior Management remunerations for 2018, please refer to EY Financial Statements as of 31 December 2018 published at the very end of the Annual Report enclosed to this report herein. Such financials are pending the endorsement of the Annual General Meeting to which the Report herein is addressed.  3.8 Internal Control and Risk Management Internal controls form an integral part of al khaliji’s business and support functions’ processes. The Board of Directors has the overall and ultimate responsibility to maintain sound internal controls and to review their effectiveness. On an on-going basis, Internal Control is a critical responsibility undertaken by al khaliji management and staff, and includes the implementation of appropriate policies, procedures, segregation and delegation of duties, and the periodic assessment of controls to manage enterprise-wide risks. To this end, an internal control and risk management system has been established for the purpose of protecting al khaliji’s business and operations against abusive conduct, fraud, and inefficiency; ensuring accuracy and reliability in accounting and operations; securing compliance with the regulations and the approved policies of al khaliji; and evaluating the level of performance in all functions and units of al khaliji Group and its subsidiaries.
  70. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Key components of Internal Controls 1 . Audit Committee of the Board 2.An independent Internal Audit function which reports directly to the Audit Committee of the Board 3. Other internal control functions including: (1) The Compliance and AML department which reports directly to the Compliance and Risk Committee of the Board; (2) the Group Risk department; and (3) the Legal department CORPORATE GOVERNANCE DISCLOSURES 4.An independent Assurance Report to the shareholders, as mandated by QFMA, on effectiveness of design of internal controls over financial reporting 5. A dedicated Financial Planning and Control unit 6.Periodic reports to the Audit Committee by Internal Audit of the status of audit matters 7.Periodic reports to the Compliance and Risk Committee of the Board by Compliance and Risk departments on risk and compliance matters 8.Bank’s Policies approved by the Board of Directors 9. Monthly report to the Group CEO on the status of the internal control matters 10. Standard Operating Procedures (Instructions manuals) approved by the Senior Management 11. Delegation of Authority Matrix and Policy approved by the Board of Directors 12. Dual signatories required for significant and critical transactions 13.Approved organization charts for each function and enforcement of appropriate segregation of duties 14.Centralized Core Banking System that enhances controls’ environment 15.Identification of Key Risks Indicators (KRIs) 16. Appointment departments of Risk Champions in all 17.Business Continuity Plan and periodic testing of the Plan 74
  71. 18 . Internal plans and policies for In-house Risk Management Function, Compliance Function, Legal Function and Governance Function 19.Documented Job Descriptions for all employees For more details on internal control and risk management, please check the section entitled “Internal Control and Support Functions” in the Annual Report which forms an integral part of this Corporate Governance Report. risk of potential financial losses or damage to the Bank’s strategy and reputation. The cornerstone of the internal control framework lies within the layered organization structure. Accountability (3 lines of defense) can be defined as such: • 1st line of defense = Business and Operations – Identifies and reports risks • 2nd line of defense = Risk Management, Legal and Compliance – reviews, assesses, tests and monitors risks 3.9 Evaluation of Compliance with Internal Control and Risk Management Frameworks al khaliji is in the process of establishing an Enterprise-wide Risk Management framework. The Bank already has an effective and robust Internal Control, Operational Risk Management (ORM) and Compliance Framework designed to identify and manage risk, primarily facilitated by an established and maturing bank-wide control foundation. Compliance role as second line of defense is to establish and disseminate the compliance framework and regulatory requirements, test and monitor to ensure adherence by the line functions. The establishment of effective internal controls and ORM to identify and manage risk is primarily the responsibility of management with responsibility of oversight with the Board. Internal Audit undertakes periodic independent assessments of risks and related controls that mitigate risks and submits reports to Management and Board for timely action to ensure mitigation. The Board of Directors oversees the internal control framework through the Audit Committee, which in turn relies on the Internal Audit function to provide assurance. A comprehensive internal control framework supports the Bank in achieving the organizational goals and its objectives. The framework ensures that the Bank is in compliance with applicable laws and regulations and that it complements internal strategy, policies and procedures. The existence of such an effective control framework mitigates the 75 • 3rd line of defense = Internal Audit – scheduled annual evaluation of the corporate governance, risk management and internal control frameworks Thus, the previously mentioned important combination of management control and Internal Audit ensures that al khaliji maintains prudent standards of corporate governance, risk management and internal controls at all times. According to the evaluations conducted by internal Audit in 2018, the results show that the processes and mechanisms applicable at internal control and risk management levels are functioning properly and there are no major areas of concern.
  72. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 .10 Management’s Report on Internal Controls over Financial Reporting CORPORATE GOVERNANCE DISCLOSURES The Board of Directors of Al Khalij Commercial Bank (al khaliji) P.Q.S.C. and its consolidated subsidiaries (the “Group”) is responsible for establishing and maintaining adequate internal control over financial reporting (ICOFR). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Group’s consolidated financial statements for external reporting purposes in accordance with International Financial Reporting Standards (IFRS). ICOFR includes our disclosure controls and procedures designed to prevent misstatements. We have conducted an evaluation of the design of internal controls over financial reporting, as of December 31, 2018, based on the framework and the criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Group has excluded Al Khaliji France S.A. (wholly owned subsidiary) from its assessment of internal control over financial reporting as of December 31, 2018. The subsidiary had total assets of QAR 3,724 million and net profits of QAR 12.7 million, which are excluded from the assessment and represented approximately 7.1 percent and 2.1 percent, respectively, of the Group’s related consolidated financial statement amounts as of and for the year ended December 31, 2018. The Company’s auditor, Deloitte and Touche, an independent accounting firm, has issued a reasonable assurance report on our assessment of ICOFR. 76
  73. Risks in Financial Reporting The main risks in financial reporting are that either financial statements do not present a true and fair view due to inadvertent or intentional errors (fraud) or the publication of financial statements is not done on a timely basis. A lack of fair presentation arises when one or more financial statement amounts or disclosures contain misstatements (or omissions) that are material. Misstatements are deemed material if they could, individually or collectively, influence economic decisions that users make on the basis of the financial statements. To confine those risks of financial reporting, the Group has established ICOFR with the aim of providing reasonable but not absolute assurance against material misstatements and conducted an assessment of the effectiveness of the Group’s internal control over financial reporting based on the framework established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO recommends the establishment of specific objectives to facilitate the design and evaluate adequacy of a control system. The COSO Framework includes 17 basic principles, and five components: • Valuation / Measurement - assets, liabilities and transactions are recorded in the financial reports at the appropriate amounts. • Rights and Obligations and ownership - rights and obligations are appropriately recorded as assets and liabilities. • Presentation and disclosures - classification, disclosure and presentation of financial reporting is appropriate. However, any internal control system, including ICOFR, no matter how well conceived and operated, can provide only reasonable, but not absolute assurance that the objectives of that control system are met. As such, disclosure controls and procedures or systems for ICOFR may not prevent all errors and fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Organization of the Internal Control System Functions Involved in the System of Internal Control over Financial Reporting Controls within the system of ICOFR are performed by all business functions and infrastructure functions with an involvement in reviewing the reliability of the books and records that underlie the financial statements. As a result, the operation of ICOFR involves staff based in various functions across the organization. • Control environment • Risk assessment • Control activities • Information and communication •Monitoring Controls covering each of the 17 principles and five components have been identified and documented. As a result of establishing ICOFR, management has adopted the following financial statement objectives: • Existence / Occurrence - assets and liabilities exist and transactions have occurred. • Completeness - all transactions are recorded, account balances are included in the financial statements. 77
  74. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 Controls to Minimize the Risk of Financial Reporting Misstatement The system of ICOFR consists of a large number of internal controls and procedures aimed at minimizing the risk of misstatement of the financial statements . Such controls are integrated into the operating process and include those which: • are ongoing or permanent in nature such as supervision within written policies and procedures or segregation of duties, • operate on a periodic basis such as those which are performed as part of the annual financial statement preparation process, CORPORATE GOVERNANCE DISCLOSURES • are preventative or detective in nature, • have a direct or indirect impact on the financial statements themselves. Controls which have an indirect effect on the financial statements include entity level controls and IT general controls such as system access and deployment controls whereas a control with a direct impact could be, for example, a reconciliation which directly supports a balance sheet line item, • feature automated and/or manual components. Automated controls are control functions embedded within system processes such as application enforced segregation of duty controls and interface checks over the completeness and accuracy of inputs. Manual internal controls are those operated by an individual or group of individuals such as authorization of transactions. 78
  75. Measuring Design Effectiveness of Internal Control This being the first year of ICOFR reporting , the Group has undertaken a formal evaluation of the adequacy of the design of the system of ICOFR. This evaluation incorporates an assessment of the design of the control environment as well as individual controls which make up the system of ICOFR taking into account: •The risk of misstatement of the financial statement line items, considering such factors as materiality and the susceptibility of the particular financial statement item to misstatement. • The susceptibility of identified controls to failure, considering such factors as the degree of automation, complexity, and risk of management override, competence of personnel and the level of judgment required. These factors, in aggregate, determine the nature and extent of evidence that management requires in order to be able to assess whether or not the design of the system of ICOFR is effective. The evidence itself is generated from procedures integrated within the daily responsibilities of staff or from procedures implemented specifically for purposes of the ICOFR evaluation. Information from other sources also forms an important component of the evaluation since such evidence either may bring additional control issues to the attention of management or may corroborate findings. As a result of the evaluation, management has concluded that ICOFR is appropriately designed as of December 31, 2018 in all material respects and no significant gaps existed in the system that may affect the financial position of the Bank. 79
  76. al khaliji bank Annual Report 2018 CORPORATE GOVERNANCE REPORT 2018 3 . 11 Procedures followed by the Bank in addressing Internal Control failures: The effectiveness and compliance to the control framework is managed through the following Control vehicles: • RCSA = Risk and Control Self-Assessment (annual self-certification process) • KRI = Key Risk Indicators (reported within the Quarterly Risk Review Process) • Incident Management Process • An independent Internal Audit process CORPORATE GOVERNANCE DISCLOSURES The ongoing monitoring and effectiveness of controls is managed through a designated risk champion in each department, coordinated by Operational Risk and periodically and systematically audited by Internal Audit. The Board of Directors is responsible for ensuring that there is an appropriate control culture bankwide and oversees the adherence to the framework by all concerned through the regular reports submitted to the Board by the internal control functions (Compliance, Risk and Internal Audit). Senior Management is responsible for coordinating and facilitating the implementation of the control framework and addressing risk related issues. Senior Management ensures that all controls are functioning effectively at all times and coordinates with the Business, Operations, Support Services, Operational Risk, Compliance and Internal Audit to resolve control weaknesses reported by the control functions in a timely manner. Internal Audit has continuous involvement in the verification and reporting of the adequacy of the control framework. If Internal Audit identifies control weaknesses through the regular audit process or otherwise, Management will provide Internal Audit with its action plan for mitigation of identified deficiency. Each action plan will have a target due date for resolution and depending on the severity and potential impact of the risk to the organization, 80
  77. the remediation action is prioritized . The progress of the follow up is reported to the Group CEO in a monthly Status Report and the critical items to the Audit Committee bimonthly. As at 31 December 2018, no failures or weaknesses in the internal control system and no emergencies occurred that had a material adverse impact on the financial position of the Bank. For more details on internal control and risk management, please check the section entitled “Internal Control and Support Functions” in the Annual Report which forms an integral part of this Corporate Governance Report. 3. 12 Violations and Penalties No violations, breaches or penalties took place in al khaliji within the meaning of the provisions of Article (4)- clause (2) of the QFMA Code or that may impact the financial position of the Bank as at 31 December 2018. 3. 13 Compliance with Listing and Disclosure Rules In 2018, al khaliji was fully compliant with all listing and disclosure requirements set forth under the relevant laws and regulations. For details, please refer to section 2.4 entitled “At Transparency and Disclosure Level” above. 3. 14 Litigation/Legal Cases In 2018, no material litigations were started against al khaliji. However, the Bank started a number of legal cases against certain customers for defaulting on their loans and credit facilities in an attempt to recover its funds and protect its rights and the right of its shareholders and depositors. The said cases are still before the courts. They are dealt with in accordance with the banking secrecy regulations set forth by the Qatar Central Bank. 3. 15 Related Party Transactions Please refer to the paragraph entitled “Conflict of Interest, Transparency and Related Party Transactions” under section 2.4 “At Transparency and Disclosure Level” above. 3. 16 Board of Directors Report on assessment of compliance with Governance Regulations Based on the foregoing and the assessment procedures, the Board of Directors concludes that the Bank is compliant, in all material respects, with the Governance Regulations as at 31 December 2018. Sheikh Hamad Bin Faisal Bin Thani Al Thani Abdulla Nasser A Al-Misnad Chairman of the Board of Directors Chairperson of CGNRC 81
  78. CORE BANKING ACTIVITY
  79. al khaliji bank Annual Report 2018 CORE BANKING ACTIVITY Wholesale Banking Continued growth in our domestic franchise has meant that Wholesale Banking remains a major contributor to our profitability . Good client acquisition in Qatar and consistent development of Qatari staff were highlights of 2018. Wholesale Banking, made up of Corporate Banking, Small Medium Enterprises (SME) and Financial Institutions continues to offer an innovative and effective range of products and solutions, structured to the specific needs of individual clients with a focus on flawless execution and customer convenience. This commitment to providing the highest levels of service to our clients is where we seek to differentiate ourselves from our competitors. WHOLESALE BANKING For larger corporate customers, we at al khaliji, recognize that every company is unique. We therefore seek to create customized corporate banking solutions for our clients, supported by a team of dedicated relationship managers and business specialists. We truly seek to help clients to make the most of every business opportunity. For clients that need access to financial support to help their business grow, our robust balance sheet allows us to provide the required finance on a bilateral basis. Additionally, Corporate Banking continues to work with other financial institutions in arranging club and syndicated loans to support our larger clients. These are complemented by “value added” advisory services ranging from general advice relating to the optimization of our clients balance sheets including structuring club and syndicated loans, to providing advice on obtaining ratings from the world’s leading rating agencies, and then onto issuing bonds in international Debt Capital Markets. al khaliji was proud to be selected once again as a Joint Lead Manager and Book Runner for the State of Qatar’s successful $12bn bond issue in April 2018. Corporate Banking continued to support the Government, its related entities and strategic projects, as the 2022 FIFA World Cup draws closer. In 2018, closer relationship with the Government and Government Related Entities, led to increased 84
  80. exposure (loans and deposits) to this low risk sector. In addition, the Bank continues to support the Private Sector, in line with the goals of the 2030 Qatar National Vision (QNV). Corporate Banking also continued to source new investors to al khaliji as we diversify our funding base. In recognition of our relentless support to local entrepreneurs and Small and Medium Enterprises (SMEs) in Qatar, we were delighted (for the second consecutive time) to have been selected by Qatar Development Bank (QDB) for specific recognition, with the “Best Customer Satisfaction Award”. Through the Al Dhameen program (in partnership with the QDB), we support businesses in the Manufacturing, Education, Tourism, and Healthcare sectors in launching their SME ventures. This also contributes positively to the realization of the Qatar National Vision 2030 through investing in the country’s economic growth and diversification. Wholesale Banking’s measurable increase in new client acquisition, as well as fostering closer relationships with existing clients and delivering bespoke financial solutions has allowed us to develop our local franchise, whilst maintaining strong portfolio quality. In line with our strategy of being a Qatar centric bank, Wholesale Banking remains focused on serving our clients in Qatar and supporting their requirements internationally. In 2019, Wholesale Banking will continue to support our clients and to recruit and develop local Qatari talent as we seek to become the Employer of Choice. 85
  81. al khaliji bank Annual Report 2018 CORE BANKING ACTIVITY Personal Banking We remained focused on supporting our clients in 2018 and Personal Banking continues to increase its contribution to profitability . We continued to acquire new clients throughout the year and remain committed to the development of Qatari staff. Personal Banking continues to offer Premium and Private banking customers a range of products and services including debt finance, liquidity and asset management and specialized credit card offerings, which has allowed us to win quality business and acquisition of our preferred clients in 2018. PERSONAL BANKING Premium Banking continues to offer innovative solutions including doorstep banking and focuses on acquiring customers through “employee partnerships and New to Qatar programs” additionally supported by Refer & Reward program. Private Banking won the prestigious ‘Best Private Banking Services MENA – 2018’ by European Magazine, while the Premium banking in recognition of the relentless efforts over years to adapt to market challenges while introducing new products and services, has won the ‘Best Bank in Productivity’ Award at the New Age Banking Awards 2018. In terms of physical footprint in Qatar, the Bank has 4 branches, 2 service centers, and 52 ATMs supporting the needs of Corporate, SMEs and Personal customers. As the ‘Next Generation Bank’, we truly understand the needs of our valuable patrons and have a state-of-the-art Internet Banking facility that allows Corporate, SMEs and Personal customers a highly secure and convenient channel. 86
  82. al khaliji introduced and launched the state of the art humanoid robots for the very first time in the State of Qatar , this sets a new benchmark in adapting innovative technology. The Bank continues to recruit, develop and nurture Qatari talent to allow them to achieve their full potential. In 2019, Personal Banking will continue to nurture local Qatari talents, while continuing to expand our franchise and serve our customers through an exceptionally high level of service. 87
  83. al khaliji bank Annual Report 2018 CORE BANKING ACTIVITY Treasury Treasury is responsible for all financial marketrelated activities on behalf of the Bank , particularly the management of the overall liquidity position, wholesale funding, and the Bank’s proprietary investment portfolio. Treasury also manages the Sale of Treasury products to the Bank’s client base, to actively support the commercial franchise. In 2018, Treasury continued to positively contribute to the Bank’s profitability as well as in diversifying its funding sources at competitive levels. TREASURY AND CAPITAL MARKETS The banking system has successfully adjusted to the market situation following the diplomatic rift that was imposed on Qatar by its GCC neighbors in 2017 and Al Khaliji continued its funding diversification trajectory. Treasury has leveraged its network of financial counterparties and the excellent credit standing of Qatar and that of the Bank, to achieve a well-diversified funding mix in terms of sources, instruments, and tenors. We continue to work in the direction of reducing funding concentration risk by marketing our International Certificate of Deposit (CD) and Euro Commercial Paper (CP) Program to attract funding. Besides Euro CPs and CDs, Treasury continues to tap liquidity by issuing private placements under its Euro Medium Term Note (EMTN) program. In October 2018, the Bank successfully marketed and raised USD 500 million via a 5-year Senior Unsecured Fixed Rate Bond Issue which attracted c.3 times oversubscription from fixed income investors in Asia, the Middle East, Europe and the UK. The bond offers a coupon of 4.75% p.a. to its investors. Al Khaliji also settled its outstanding public bond issue that matured on 22nd October 2018. Treasury also actively supports the Balance Sheet via funding originated through the Repo desk, which remains one of the key funding tool. The funding strategy has yielded results and has contributed to keep funding pricing under strict control in order to maximize the Bank’s interest margin. 88
  84. Proprietary Investment Portfolios Strategic Developments Despite strict domestic regulatory requirements , the Bank has strategically maintained its fixed income portfolio, and focused mostly on Qatari bonds (Sovereign and GREs) while maintaining a high investment grade rating for overall portfolio. This portfolio helps us meet the Liquidity Coverage Ratio (LCR) driven by Basel III, as well as enabling us to attract Repo funding from the market at competitive levels. Repo funding remains one of the key funding sources for the bank. Treasury continues to embrace enhanced technology solutions in providing products and services to its esteemed clients’ base. Treasury has further engaged itself in widening its base for market participants and has been successful in forging new relationships by onboarding more counterparties, repo participants etc. The Bank’s Equity Portfolio is an important contributor to the profitability of the Treasury. The portfolio is driven from long-term investment objectives and has a steady flow of dividends. Treasury Sales The sale of foreign exchange and derivatives hedges remains the major source of income for the desk. The year 2018 witnessed buoyant FX activity and income. Al Khaliji remains one of the key players in meeting FX requirements emanating from local clients, as well as hedging activities from corporate clients, driven by developments in the US monetary policy. Asset Liability Management and Money Market Unit The desk plays a vital role in overseeing the overall liquidity and monitors the day-to-day flows of the Bank while complying with all regulatory ratios in check. We have successfully added new counterparties that enabled us to enhance our inter-bank dealings to manage short term funding requirements more efficiently. 89 The Investment book is being efficiently managed to increase the return on investment, as well as to positively contribute towards interest income for the bank, while maintaining similar weighted average portfolio rating.
  85. INTERNAL CONTROL AND SUPPORT FUNCTIONS
  86. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS The GIA Role The Group Internal Audit function (the “GIA”) is an independent division within al khaliji. The GIA provides an independent and objective assurance to the Board of Directors and the Management on the design and operating effectiveness of the Bank’s corporate governance, risk management, and internal control frameworks. The GIA continuously promotes the awareness on risks and controls, provides advice on developing control solutions, and monitoring corrective actions, thereby safeguarding the assets of the Bank. GROUP INTERNAL AUDIT In addition to providing assurance services on all processes of the Bank, the GIA also advises on various business initiatives assumed by the Management. At the request of the Board or the Management, we also undertake special audit engagements including investigations. In order to ensure its independence and objectivity, the GIA routinely assesses the impairment issue while providing advisory and consulting services to the Board and the management. The GIA actively supervises the Internal Audit functions of all the subsidiaries within the Group. The oversight primarily entails approving the audit plan, reviewing audit work, and reviewing the audit report before issuance. The GIA Team The GIA comprises of an enthusiastic team of professional auditors with extensive experience in a variety of subjects, i.e., banking regulations, banking risks, banking operations, accounting, and technology. The GIA team is fully committed on value creation and capacity building for the Bank, whilst remaining independent. The GIA is staffed by seven audit professional, headed by a Group Head of Internal Audit who reports into the Audit Committee of the Board. 92
  87. The GIA Framework The GIA ’s conduct and operations are in accordance with the: • Laws and regulations and international practices including but not limited to, QCB and QFMA rules, Basel and IIA guidelines; • Terms of Reference of the Audit Committee of the Board; • Internal Audit Charter approved by the Board of Directors/Audit Committee; • Internal Audit Policy and Instructions Manual As part of the GIA’s core process, an Internal Quality Assurance exercise is undertaken over the audit work performed as well as prior to issuance of each audit report. All audit work is documented electronically in ‘Teammate’, audit documentation repository. The GIA’s progress through 2018 • The GIA has been instrumental in strengthening the Bank’s control environment for all three streams, i.e., entity level; process level; and legal and compliance level • The GIA audited the entire processes culminating around, both, the banking book and the investment book. Additionally, the GIA also audited shared services activities, information and communication technology related activities, and cybersecurity risk management • The GIA successfully completed all the audit engagements out of approved audit plans for Qatar, UAE and France As an independent function, the GIA has adequate authority within the Bank, as articulated by the Internal Audit Charter. The Internal Audit Charter grants the GIA an unrestricted access to all records, data, systems and personnel of the Bank for audits and related assignments. The GIA fully adheres to Standards for the Professional Practice of Internal Auditing and the Code of Ethics issued by the Institute of Internal Auditors (IIA). The Internal Audit Process In compliance with the QCB, Basel and IIA guidelines, the GIA has developed a Risk-BasedInternal-Audit Approach (RBIA). The RBIA directs the GIA in prioritizing and allocating resources to business areas, where these are required the most. The GIA process consists of eight main phases: (1) annual risk assessment and development of annual audit plan, (2) deliberation and approval of audit plan by the Audit Committee of the Board, (3) audit fieldwork, (4) confirming the factual accuracies of audit deficiencies identified during the fieldwork, (5) issuing the draft audit report, and seeking the management action plans for audit deficiencies, (6) issuing the final audit report, (7) deficiency management process, and (8) monthly progress report to the Group CEO, and (9) comprehensive progress reports to the Audit Committee of the Board during its meetings (minimum six meetings per fiscal year). 93 The GIA’s strategy through 2019 • The GIA activities will be completely aligned with the Bank’s strategy • Use of Computer-Assisted Audit Techniques (CAATs): ACL software will be purchased to allow Internal Audit to analyse all routine transactions with minimum consumption of resources and time Internal Control Framework and Internal Audit Design and implementation of internal control framework is the responsibility of the Management of the Bank. The GIA, acting as a third line of defence, provides an independent assurance on the effectiveness of the implemented internal control framework. This arrangement, of in-compatible responsibilities, ensures that the Bank remains in control at all times.
  88. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS Risk Management Framework , Governance and Strategy al khaliji’s Risk Management Framework is based on the principle of “three lines of defense”. The first line of defense consists of the business functions, which are accountable for the dayto-day management and control of all risks at an operational level, and for implementing processes and controls in compliance with the Group’s approved Delegations of Authority, policies, and procedures. GROUP RISK MANAGEMENT The second line of defense consists of the control functions, primarily Risk Management, Compliance and Legal. These functions are responsible for ensuring that the activities of the Group are conducted with proper risk consideration and within the Risk Management framework, tools and methodologies, as well as complying with applicable legal and regulatory requirements. Regular monitoring and reporting to the Board of Directors and senior management committees are an integral part of these functions’ remit. The third line of defense is Internal Audit, which is responsible for independently evaluating the adequacy and effectiveness of key controls and assessing compliance with Group policies and procedures. The risk governance structure at al khaliji consists of five layers comprising of the following: Level 1: Board of Directors Level 2: Board Compliance and Risk Committee (Board CRC) Level 3: Senior management committees: Group Risk Committee (GRC), Credit and Investment Committee (CIC), Group Asset, Liability and Capital Committee (GALCCO), Group Special Investigations Committee (GSIC), and Security Steering Committee (SSC) 94
  89. Level 4 : Group Risk Management: Enterprise Risk Management, Credit Risk Management including Credit Documentation, Remedial Management/Collections, Market Risk Management, Liquidity Risk Management, Operational Risk Management, Fraud Risk Management, Business Continuity Management, Insurance Management, and Security Risk Management Level 5: Business Units The overall responsibility for ensuring robust risk management rests with the Board of Directors (Level 1), while the execution of the oversight at Board level sits with the Board Compliance and Risk Committee (Level 2). The Board CRC has the overall responsibility of ensuring that adequate policies, procedures, and methodologies are in place for risk management, and that they are properly implemented. Supporting the Board CRC are the senior management committees (Level 3) that cover the various aspects of risk management: Group Risk Committee (GRC) The Group Risk Committee is chaired by the Group Chief Risk Officer, and supports Executive Management in managing various types of risks the Group is exposed to, as well as recommending to the Board CRC the risk appetite, risk strategies, and relevant risk policies of the organization. The GRC meets regularly throughout the year to review the profile and coverage of risks such as credit risk including but not limited to concentration risk, country risk, counterparty risk, operational risk, fraud risk, business continuity management, and insurance management. Additional key risk information such as the risk appetite dashboard, the impact of regulatory developments, and IFRS 9 results/non-performing loans is also reviewed by the committee. 95 Credit and Investment Committees (CICs) A separate Credit and Investment Committee exists in each Group entity. The objectives of these committees are to approve credit and counterparty limits and credit product programs in their jurisdictions within their mandate. Group Asset, Liability and Capital Committee (GALCCO) The Group Asset, Liability and Capital Committee is chaired by the Group Chief Financial Officer, and supports Executive Management in managing the asset, liability, and capital structure of the Group. The objective of the GALCCO is to maintain an appropriate mix of assets, liabilities, and capital given the prevailing and potential future economic conditions. The committee is also responsible for monitoring and managing profitability, regulatory, and internal ratios; recommending policies related to market risk, liquidity risk, and capital management; and approving new funding products proposed by the Business and Treasury functions. Group Special Investigations Committee (GSIC) The Group Special Investigations Committee advises on, supervises, and monitors investigations into events of potential impropriety relating to internal and external fraud incidents. The committee has an advisory and recommending role in assisting the EXCO to respond to events of impropriety and fraud incidents and, where applicable, recommending to the EXCO the appropriate plan of action with respect to any ongoing investigation.
  90. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS Security Steering Committee (SSC) The Security Steering Committee, chaired by the Group Chief Executive Officer, oversees the Group’s security risk management program, including both IT and Physical Security. The committee meets quarterly to monitor progress of the security strategic plan and security related developments, review security risks, and mandate risk mitigation. Group Risk Appetite GROUP RISK MANAGEMENT In line with international best practice, the Group has articulated a Risk Appetite Statement stating the level and types of risk the Group is willing to accept, or avoid, in order to achieve its objectives. It includes both qualitative and quantitative elements. The Risk Appetite framework is the overall approach, including policies, processes, controls, and systems through which the risk appetite is established, communicated, and monitored. Group Risk Management Group Risk Management is fully independent from the commercial lines of business. The Group Chief Risk Officer reports directly to the Group Chief Executive Officer with an indirect reporting line to the Board Compliance and Risk Committee. The Group’s risk management framework includes a robust set of policies approved by the Board CRC, procedures and supporting documents. The main responsibilities of Group Risk Management are to manage credit and counterparty risk (including credit documentation), market & liquidity risk, IT and physical security risk, operational risk, business continuity, and fraud risk; and to ensure compliance with risk-related central bank regulations. Risk Management - Group entities The risk strategies and policies are developed at Group level, and adopted by each Group entity taking local regulatory requirements into consideration. In addition, risk models and methodologies are rolled out on a Group basis to ensure consistent measurement and reporting of risk exposures. 96
  91. The Heads of Risk at Al Khaliji France (Paris and UAE) have dual reporting lines, one to the General Manager and an indirect reporting line to the Group Chief Risk Officer. Al Khaliji France has a local risk committee to oversee the monitoring and management of risks. Enterprise Risk Management (ERM) The Enterprise Risk Management function is primarily responsible for risk analytics and credit portfolio management of the Group, including matters related to IFRS 9, Basel II, Basel III and Basel IV requirements. This is done through the development of credit models including risk ratings (probabilities of default [PD] models), estimations of loss given default (LGD) and estimations of exposures at default (EAD). These inputs are used for the estimation of expected loss to ensure the ECL calculations are adequate, as well as for riskadjusted performance measurement and stress testing purposes. ERM also ensures that there is a robust Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP reviews the Bank’s risk framework and governance, risk measurement tools and models, and capital adequacy by ensuring all the risks of the Bank are assessed adequately; and forms a key element of the Group’s capital planning and recovery planning process. Risks are identified through a group-wide risk assessment. The risks considered include credit and counterparty risk, market risk, and operational risk, as well as liquidity risk, concentration risk, interest rate risk in the banking book, strategic and reputational risks. These risks are measured against the available capital of the Bank in normal and under stress conditions, facilitating a rapid response to any unexpected changes in the risk and capital position of the Bank. Both the ICAAP policy and the ICAAP submission to the Qatar Central Bank are approved by the Board CRC. As part of the ICAAP, and an important part of overall risk management, ERM also developed and maintains the stress testing program to measure 97 the impact of credit, market, and liquidity stresses on the capital, funding, and earnings positions of the Group. Stress testing includes both regulatory stress scenarios as well as stringent internal risk requirements which are run regularly, monitored by the GRC and GALCCO, and approved by the Board CRC. A key focus of ERM in 2018 was the implementation of IFRS 9. This standard was introduced on the 1st January 2018, and required the development of IFRS 9-compliant rating models, re-rating of the entire credit portfolio, training of all relevant units in the Bank, strategic decisions related to the impact of the expected credit loss (ECL) calculation, and new processes crossing functions such as Risk, Business, ICT, and Finance. Credit Risk Management The Credit Risk Management function at al khaliji covers credit underwriting for Wholesale Banking and Personal Banking. The credit approval authorities are approved by the Board CRC with primary execution delegated to the CICs as the highest level of approval authorities in each jurisdiction, with lower levels of approval authority in the credit committees in each of the entities of the Group. The CICs also approve all product programs. Credit Risk Management ensures the segregation of credit analysis and assessment from the business origination functions. The Group Credit Approval Authority Policy designates the appropriate level for the approval of credit and counterparty limits depending on the risks of an individual facility. The Board CRC approves the Group Credit Risk Policy, which sets out the Group’s credit risk appetite and creates a framework for the lending activities of the Group, particularly regarding underwriting credit and investment risk, assessing acceptable support and collateral, recognizing and treating non-performing loans, as well as outlining the requirements for portfolio management, product programs, and remedial/collections management.
  92. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS The Group credit portfolio is monitored to ensure all aggregate exposures are in line with the Group ’s risk appetite and regulatory limits. This includes monitoring of portfolio characteristics such as portfolio risk ratings, capital consumption, tenor, country risks, currency, and industry concentrations, which are reported to the GRC. Non-performing exposures are monitored on an on-going basis, and these, along with the IFRS 9 results, NPL ratios and coverage ratios for all Group entities and the Group as a whole are reported to, and approved by, the GRC. Remedial Management and Collections GROUP RISK MANAGEMENT The Bank has established a timely monitoring and efficient remedial management process from soft collections through to legal recovery. The collections process is performed by a specialized team to optimize cash collections and collection income. Collection results are reported to the senior management and the GRC. The unit also handles and manages the process for criminal actions that are filed against delinquent clients. Market Risk Management The Market Risk Management function at al khaliji forms part of the Treasury Risk Department, which also incorporates the Liquidity Risk Management, Product Control, and Middle Office functions. These functions are independent of the Bank’s business units, including Treasury, thus ensuring clear segregation of duties in order to avoid conflicts of interest. The Board CRC approves the Group Market Risk Management policy in order to ensure transparency over its portfolios and to manage the Bank’s exposure to market risk based on recommendations made by GALCCO. This policy sets out a market risk appetite and accompanying market risk limits, and defines processes for identifying, aggregating, managing, monitoring and communicating market risks on a timely basis. 98
  93. The Market Risk Management function identifies existing and potential future market risks through active day-to-day portfolio monitoring and reporting , and through ongoing engagement with the business units. The function uses market standard valuation techniques, as well as hedge effectiveness tests and dealer/counterparty monitoring, to provide GALCCO and the business units with independent valuation and attribution analysis of the Bank’s financial instruments and investments. Additionally Market Risk Management performs regular stress tests of the Bank’s positions subject to interest rate and FX (Foreign Exchange) risks and reports the results to GALCCO. Furthermore, the Market Risk Management function supports the business units by providing analysis for new products and investment proposals, which includes identification of potential risk exposures, as well as suitable modeling and valuation techniques. Liquidity Risk Management The Board CRC at al khaliji approves the Group’s Liquidity Risk Management Strategy and Policy based on recommendations made by GALCCO. The Liquidity Risk Management function is independent of all business functions, including Treasury, and is responsible for the management of the Bank’s liquidity risks and funding risks as defined in the Group Liquidity Risk Management policy. Liquidity Risk Management is responsible for regular reporting, analyses and recommendations to GALCCO, and provides extensive analysis and reporting to the Treasury and other business units. This covers operational liquidity at an intraday level and tactical liquidity dealing with access to funding sources. An additional strategic perspective encompasses the maturity profile of all assets and liabilities. Stress tests based on internal and regulatory requirements are conducted to complement regular liquidity analysis and provide insight into the potential impact of a wide range of adverse scenarios. 99 al khaliji is aligned with QCB Basel III guidelines incorporating the calculation and reporting of the LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) on a monthly basis at Bank and Group levels.
  94. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS Operational Risk Management , Fraud Risk Management, BCM, and Insurance Management Operational Risk Management (ORM), Fraud Risk Management, Business Continuity Management (BCM) and Insurance Management are managed by one department within Risk. The Board of Directors at al khaliji approves the Operational Risk Management Framework and policies based on recommendations made by Group Operational Risk. The ORM, Fraud Risk Management, and BCM policies are reviewed annually as part of the Operational Risk Management framework. GROUP RISK MANAGEMENT Information on operational (including fraud) incidents and losses, key risk indicators (KRIs), risk and control self-assessments (RCSAs), and information on BCM and insurance management are reported to the GRC on a monthly basis. Operational Risk Management (ORM) ORM is responsible for the oversight of operational risk, including the risk of loss resulting from inadequate or failed internal processes and systems, human factors, or external events. The ORM function uses a comprehensive operational risk management tool. The tool is intranet-based and work-flow driven, enabling the Group to proactively manage the measurement, monitoring and reporting of operational risks using the modules for Incident Management, Loss Data Collection, RCSAs, and KRIs. Fraud Risk Management (FRM) The primary objective of Fraud Risk Management is to reduce the risk of fraud and misconduct occurring within the Group. It consists of an effective fraud risk management process and focuses on three major principles: fraud prevention, fraud detection, and fraud resolution. 100
  95. Fraud Risk Management includes a comprehensive Group Fraud Risk Management Policy and standardized operating procedures . Operating procedures are categorized and cover four fraud elements: Internal Fraud, External Fraud, Documentary Fraud, and Card Fraud. The Bank uses comprehensive card fraud monitoring tools driven by standard rules that enable card fraud detection and prevention. A key responsibility of FRM is to facilitate Groupwide fraud awareness through online and in-person training. Insurance Management (Risk Transfer) Insurance management plays a key role in operational risk management through risk transfer. The Group has a portfolio of insurance policies, of which the Bankers Blanket Bond covers significant Group risk transfer requirements. Emerging risks are monitored and escalated to the GRC for their consideration and decision. Additionally, any new banking product, service or outsourcing of a process is analyzed for additional operational risk exposure and for potential transfer of such risks. Security Risk Management Business Continuity Management (BCM) BCM supports the Group in the event of an emergency or business disruption, and provides plans and procedures to recover key business processes in a well-structured manner. The BCM policy and processes are in compliance with Qatar Central Bank regulations. The Group entities undertake an annual Business Impact Analysis to quantify the impact of disruption to the business. All businesses and functions within the Bank own a Business Continuity Plan, consisting of structured directive-based procedures for continuity of business during and following a disaster. The critical applications used by the Bank are covered by a Disaster Recovery Plan, which consists of procedures to undertake recovery of the Bank’s critical applications and states the Recovery Time Objectives and Recovery Point Objectives of the Bank’s critical applications and functions. In the event of a disaster, the Group’s operationallycritical staff move to alternate sites in order to support the expedient and efficient recovery of the Group’s key business processes. The Group has established a “Crisis Management Team”. The Bank’s BCM plans and procedures are subject to rigorous periodic tests and exercises to ensure seamless execution, and are certified by Qatar Central Bank on an annual basis. 101 The Security Risk Management function uses an Integrated Security Model, encompassing both IT and Physical Security, and provides direction, management and functional leadership for security within the Group. It acts as the enterprise-wide focal point for security matters, including cybersecurity. Security Risk Management is responsible for ensuring an effective security program, covering Security Framework (including strategies, policies and standards), performing periodic threat and risk assessments (including network penetration testing and system security analyses), providing security guidance in the design of technology solutions, compliance with relevant regulatory and operational requirements, deployment of security tools for identity management, network security management, malware protection, and cryptographic controls. Additional responsibilities include the delivery of enterprise-wide security communications and awareness programs, security management processes such as security monitoring and incident response, and quarterly reporting to the Security Steering Committee (SSC), which provides direction and oversight of security initiatives.
  96. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS Compliance We ’ve taken a number of measures to ensure compliance is embedded into every level of the organisation and aligned with the bank’s business strategy. As al khaliji operates across multiple jurisdictions we have assessed the regulatory requirements of the different local, regional and international regulatory authorities and incorporated any relevant requirements into the bank’s practices. As legislation continues to evolve, it is important to proactively monitor for any new regulations or amendments and mitigate any potential risks posed by regulatory changes as they emerge. GROUP COMPLIANCE AND ANTIMONEY LAUNDERING The process starts with us developing a strong understanding of the relevant compliance risks, based on an awareness of the regulatory environment in which we operate. From this starting point we create our risk-based priorities and then allocate resources and attention accordingly. Next, we divide our compliance program activities into three main pillars: advise, monitor and report. 102
  97. ENABLE BUSINESS UNITS TO WORK LEGALLY AND ETHICALLY Advise Monitor Report Regulatory Change Compliance Survey Program Board of Directors Products and Services Regulatory and Compliance Reviews Executive Management Internal Processes Info Reporting and Issues Management Regulatory Authorities Communication Breach Escalation Compliance Calendar Whistleblower Program Training Program EMBEDDING A COMPLIANCE PROGRAM COMPLIANCE RISK GROUPS Financial Stability Corporate Governance Credit Customers Relations Investments Systems and Controls Financial Crime Regulatory Scope Other Regulations LAWS AND REGULATIONS REQUIREMENTS 103
  98. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS These three pillars support the ability of the business to develop and grow both legally and ethically . By implementing a compliance culture across the organization, these pillars help us to earn the trust of regulators and key stakeholders. To ensure compliance activities retain their independent functioning, the group compliance department continues to report directly to the board compliance and risk committee. Compliance departments in the subsidiaries also report directly to the general manager and indirectly to the group compliance department. Internal auditing processes ensure that a robust compliance framework is being proactively implemented. GROUP COMPLIANCE AND ANTIMONEY LAUNDERING Each of the bank’s business functions has a dedicated compliance representative who reports into the compliance department. This enforces compliance ownership and development at a business level, and helps to better allocate the efforts and resources of compliance department. The compliance department’s resources have been realigned to match al khaliji’s business strategy. To achieve this we have assigned specialist senior resources to different areas of the business, such as wholesale banking, personal banking, and shared services. This will allow us to effectively service our business units in accordance with their growth ambitions, products, and service offerings. Emphasis has been placed on building and embedding a culture of compliance into al khaliji so that it forms a foundation for all of our programmes. We know the compliance environment is always changing. To thrive in this state of regulatory flux, the bank requires a dynamic and flexible tool that enables the compliance department to function effectively and efficiently at all times. By using the concept of Compliance Confidence Indicators (CCI), we have obtained “buy in” from management and provided the board compliance and risk committees with a measurable way to monitor compliance across the organization. Giving ownership to the management team encourages these key stakeholders to think about how to manage compliance as part of their daily operations. This helps embed compliance consideration into every part of the business and its day-to-day functioning. 104
  99. ENHANCE CCI SCORE Performance Management Key Compliance Indicators Mitigation Plans Board Defined Threshold Business Decisions External Reviews (Regulators/ External Auditors) Internal Reviews (compliance, Internal Audit) Business Units Self-Assessments Every department head has been assigned one CCI indicator as this helps ensure the concept of CCI is accepted within al khaliji. The Board Compliance and Risk Committee determines the minimum score that the business needs to achieve. CCIs now form part of the Department heads’ performance appraisal, which helps align compliance success factors with individual career goals. It’s another way to cement compliance into the business structure and strategy. 105
  100. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS Anti-money laundering terrorism financing and counter At al khaliji , the compliance function has responsibility for activities to combat money laundering and terrorism financing, as well as for performing ongoing risk assessments, defining mitigation strategies, monitoring transactions electronically, and reporting to different stakeholders. The bank takes a serious approach to meeting the legal requirements for all the jurisdictions in which it operates. al khaliji also participates in global efforts to combat financial crimes and terrorist financing. To do this we invest in the latest technologies, frameworks and qualified resources that enable us to develop and implement the best market practices and mitigation plans currently available. Our practices ensure that we prioritize all our activities and business relationships according to their associated risk levels, due diligence and monitoring procedures. Reduced DD Name Screening Know your systems Conduct Risk Assessment Enhanced DD Client Profiling Know your countries Know Your Risks Know Your Bank Know your clients 106 Decline Relationship Monitoring and Reporting Internal Risk Methodology Know your Response Know your products Transactions STR Reporting
  101. At al khaliji , every business relationship is assessed against defined risk parameters that comply with the relevant regulatory requirements for that jurisdiction. All our business relationships are subject to different ‘Know-Your-Customer’ procedures. They are then taken through a reduced, standard or enhanced due diligence exercise according to the level of risk they are judged to pose to the bank. The applied risk model ensures that we focus our efforts and resources on mitigating potential high risk relationships and activities Customer Geographic locations Products ASSESS PROFILE MITIGATE Relationship Initiation Methods Delivery Channels Default High Risk factors The bank avoids establishing business relationships with any customer before due diligence measures are performed. This includes the potential customer’s beneficial owner and business associates, which will need to be identified as part of the due diligence process. 107
  102. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS The Finance Department provides strategic financial support for the Group ’s business and operational planning. It is a major pillar in Group’s support infrastructure, providing day-to-day financial services and a multitude of reporting to meet internal and external requirements and obligations. It records financial transactions, performs analysis and prepares financial reports that inform top management, regulators, shareholders and investors about the Group’s financial position. The Finance Department also ensures that internal policies and procedures comply with applicable regulatory standards and acceptable industry practices. GROUP FINANCE AND INVESTOR RELATIONS The Group Finance department is responsible for the implementation and application of sound financial controls as well as: • • • External and regulatory reporting. Internal financial performance measurement and management information. Other analytics such as budgeting and scenario planning. External Reporting • • 108 Audited annual consolidated financial statements, in addition to a three quarterly sets of externally reviewed financial statements. Monthly and other periodic reporting to banking regulators, in Qatar, UAE and France.
  103. Internal Reporting and Management Information • • • • Investor Relations Develops and produces daily, weekly and monthly reporting to a variety of internal stakeholders that highlights key income movements and business drivers across business units, products, geographies and segments. Analyzes income performance and develops briefing packs for Senior Management and provides source data for presentations to management, rating agencies and investors. The department looks to continuously improve the quality and detail of data capture to support value added performance management reporting. Monitor, identify and analyze trends across specific divisions in order to understand business drivers, working closely with internal stakeholders in providing directions on matters of financial planning and budgeting processes. Group Asset, Liability and Capital Management Committee GALCCO is Chaired by the Group Chief Financial Officer and is mandated to strategically guide the Group’s asset, liability and capital structure taking into account prevailing and expected market and economic conditions within both external/regulatory and internal approved risk and operational boundaries, which includes supervisory oversight of the subsidiaries’ meetings. Other Analytics Budgeting, forecasting and scenario planning to support planning and strategy for the Group and the subsidiaries is managed by the Group Finance unit. 109 The Investor Relations (IR) team is mandated to integrate finance, public relations and communications, marketing and regulatory compliance to allow the most effective two-way communication between the Bank and its board members, the financial community, regulators, investors and shareholders. It also manages the relations with the Qatar Stock Exchange (QSE) where the shares of the Group are listed, with Qatar Central Securities Depository (QCSD) and with Qatar Financial Market Authority (QFMA). al khaliji’s IR function is one of the cornerstones in planning and organizing ordinary and extraordinary general assemblies, including regulatory disclosures, as well as securing the required quorum. Once approved for distribution, IR is also in charge of the dividend distribution mechanism. al khaliji’s IR function is engaged in attending investor conferences worldwide, participates in most of the investors’ conferences held in Qatar, organizes investor meetings, earnings conference calls and road shows to increase the visibility and transparency of the Bank.
  104. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS 2018 witnessed the continuation of our HR strategy developed to improve the work place environment towards becoming the employer of choice with the emphasis on the Qatari identity , thus creating a performance led culture where our values are reflected in our behavior and decisions. The outcome - a diverse tolerant, multi-cultural organization built on respect and integrity. During 2018, al khaliji succeeded in recruiting a number of Qatari talents, reflecting the bank’s commitment to Qatarization. and how alkhaliji fosters its ability to recruit, develop and maintain top qualified skills, in particular Qatari Nationals. GROUP HUMAN RESOURCES AND ADMINISTRATION AFFAIRS Also, In line with our Qatarization strategy, we have promoted a number of Qatari employees during 2018 in addition to confirming our Bank Trainees to full time functional positions. In 2018, we continued our Student Sponsorship program in collaboration with Qatar University. The objective is the sponsorship of talented undergraduate Qatari students from a variety of colleges such as Business and Economics, Art and Sciences and, Law and Engineering. In support of the next generation we have shown our commitment to developing young Qatari individuals and Qatar’s National Vision for 2030 which aims at transforming Qatar into an advanced country; capable of sustaining its own development, guaranteeing security, stability and equal opportunities. 110
  105. The Legal Department is responsible for : • • • • • Monitoring and mitigating legal, operational, and reputational Risk for the Group in conjunction with the Risk control functions; Providing legal advice and recommendations to the executive management and the Board as required; Providing legal support to all business and support functions; Managing and monitoring litigation matters for the Group; and Managing external lawyers appointed by the Group The Legal Department enhances the Group’s profile in the market and contributes to its profitability by ensuring the business functions are able to offer customers international standard transactional capabilities and bespoke legal documentation and execution services. The provision of efficient inhouse legal services and control of legal, operational and reputational risk contributes directly to the group’s bottom line, and the market value of the brand. LEGAL During 2018, the Legal Department pursued its efforts to provide a timely and competent legal support to all branches of the bank, particularly the customer-facing departments. It also monitored the litigation efforts of the bank, particularly recovery litigation, in various jurisdictions, sometimes in a challenging economic and political situation. Finally, the Legal Department supported the Bank in its international developments. 111
  106. al khaliji bank Annual Report 2018 INTERNAL CONTROL AND SUPPORT FUNCTIONS Operations During 2018 , Operations continued its extensive efforts in enabling deployment of AKB strategies and achieving its goals This has been practically practiced in two parallel directions; “changing the bank” as well as “running the bank” OPERATIONS AND ICT On “changing the bank” side, 2018 was quite congested with multiple strides AKB has taken in pursuit of sparing better banking to its cherished customers. Commenced with the migration of Central Cheques Printing to the “Security Printing Press” of MOI for better stringent security features from a side, and for complying with QCB directives from another. Operations also had a major contribution in other mandates like, the implementation of the “Common Reporting Standards – CRS”, SWIFT system upgrade, PCI certification while the pivotal role was in the Core Banking System (T-24) upgrade for which painstaking efforts have been exerted in testing, validating, and post go live monitoring. On “Running the Bank” side, we do pride ourselves for ending the second consecutive year with zero Operation losses along with delivering a problem free operational performance to all our internal and external customers . this has been tangibly evidenced throughout the KPI’s of our “Service Level Agreements” as well as our Complaints Register which indicates a high level of customers’ satisfaction. On the same front, new stringent control measures have been added to our Standard Operational Procedures – SOPs in pursuit to improving the efficiency and effectiveness of all Operational functions. Finally, 2018 also witnessed a continuation of embedding more Operations Excellence within our day-to-day practice through a system of monthly reporting, risk-based supervision, snap check examinations, regular constructive meetings with service providers, stakeholders, internal and external auditors. 112
  107. ICT ICT Department continued its extensive efforts to provide technology leadership for the Bank both at strategic and operational levels . One of the most notable undertakings during 2018 was the full fledge upgrade of the Core Banking System. This project was part of ICT’s continuous commitment to keep the Bank’s technology stack up to date, in order to maintain scalable, cost efficient and flexible solutions to meet business and customer needs as fast and as effective as possible. The project was successfully completed during November 2018. Another critical accomplishment during 2018 was Banks’ acquisition of the Certification of the Compliance for the Payment Card Industry (PCI) Data Security Standard. The PCI Data Security Standard is used by all major Card Brands as the common security standard for their compliance programs. With this certification, the Bank has reached another milestone on its continuous efforts to maintain the highest Information Security standards. Other system enhancements and modifications covered various product lines and system functionalities and regulatory mandates, such as enhancements in Cards Management systems, Merchant Acquiring systems, SWIFT system upgrades and various Qatar Central Bank lead’ initiatives. 113
  108. CORPORATE SOCIAL RESPONSIBILITY
  109. al khaliji bank Annual Report 2018 CORPORATE SOCIAL RESPONSIBILITY al khaliji , Qatar’s next generation bank, in line with Qatar National Vision 2030, has been consistently demonstrating its promise to community development in Qatar, and is striving to support initiatives and programs that raise public awareness of important social issues. For al khaliji, Corporate Social Responsibility (CSR) is more than just charity, but about balancing economic, social and environmental obligations. As a financial institution, al khaliji regards CSR as an essential investment for the future of both Qatar and for the growth of its business. CORPORATE SOCIAL RESPONSIBILITY The Bank’s commitment is reflected internally through its employee, health, and environment policies, and externally through its observance of human rights for workers, community development programs, and its adherence to fair competition guidelines. As important as helping build a healthy, productive society is to al khaliji’s community development goals, extending a helping hand to the underprivileged and those in need always comes first in the Bank’s CSR program. This year, al khaliji extended its support to IHSAN Center, one of Qatar Foundation for Social Work (QFSW) affiliated Centers that seeks to empower the elderly and promote solidarity between generations. In continuation to this, the Bank has recently donated to the Qatar Society for Rehabilitation of Special Needs, a local humanitarian organization that aims to support and develop the skills and capabilities of people with disabilities. The targeted audience of the population will enormously benefit from this donation and will definitely improve health conditions. al khaliji also had made a donation to the Shafallah Center to purchase medical equipment for the local establishment. Based on the mission of Qatar Foundation for social Work, Shafallah Center helps people with intellectual disabilities and autism by providing model services in the state of Qatar, in the areas of education, rehabilitation, community awareness, and human rights support in order to achieve a more independent life and to activate their inclusion in the society. al khaliji has been supporting targeted social programs for different 116
  110. communities in the country . By helping for such cause, al khaliji envisions building a world that provides equal opportunities for all, and developing & nurturing skills & capabilities of differently abled people is a major step towards achieving the goal. Working towards holistic growth of employees In another initiative, the Bank organized the Breast Cancer Awareness session for its employees, which demonstrates the Bank’s support to the campaign to create awareness in general public and reach out to the youth of Qatar. During this seminar, a breast cancer specialist presented a lecture on the symptoms, stages and prevention methods as well as the steps needed to be taken once the patient is diagnosed with breast cancer. She also discussed early breast cancer diagnosis. In tackling cancer, it is often crucial to respond powerfully and swiftly through a grassroot campaign and that is what prompted al khaliji to host one for its employees and indirectly to their family members. With a view to raise an awareness about the importance of healthy habits among their employees and their families, al khalij organized “Individual Health Assessment” program in association with VLCC for its employees. VLCC is global brand, recognized for fitness and natural products, mostly for body care. Besides carrying out vital health test, this assessment also helped employees gain insights into easy healthcare care & maintenance tips in their busy schedules. The tests included Protein Level Assessment; Skeletal Mass; Waist to Hip Ratio & Fitness Score; Fat Percentage; Mineral; Water Percentage, etc. An integral component of al khaliji’s corporate social responsibility purpose over the years has been the buildup and empowerment of a local pool of talents that can lead and shape the next transformative era for the State of Qatar. To this end, al khaliji has mapped out a strategic course of action fostering an environment of creativity, entrepreneurial and educational latitude for the national workforce both inside its organization and among members of the Qatari community at large. 117 Sports and Fitness With the aim to promote health and wellness to its community members, al khaliji hosted its Annual Football Tournament for the 4thyear in a row in 2018. The initiative was held in support of Qatar’s National Sport Day and comes as part of al khaliji’s Corporate Social Responsibility program. The event saw the participation of teams from several organizations and served as a platform to foster the values of community, sportsmanship and positive team spirit among participants. The competing teams were from leading institutions such as Qatar Airways, Qatar Petroleum, Nakilat, Q-Chem, Al- Mannai, Gulf English School, Carnegie Mellon University, HBK, Doha Insurance, Bima Insurance, Regency Travel and al khaliji’s team. Team Gulf English School claimed the first place, while Q-Chem and Qatar Airways came in second and third place, respectively. The Bank also celebrated the 7thQatar National Sports Day by organizing a Ping Pong tournament. The sporting activity had already received an overwhelming response from the local community. The Bank’s activity at the Doha Festival City attracted huge participation, players turned up at the venue on the first day of the competition, putting their opponents hustle to the test to counter each swing of the paddle in a battle of agility and coordination.
  111. al khaliji bank Annual Report 2018 CORPORATE SOCIAL RESPONSIBILITY Meanwhile , the newly launched Instagram competition #PlayForQatar, saw a big wave of engagement, having the first draw online on Instagram, of which a winner was drawn out from the correct answers pool and the second winner just after the Ping Pong tournament was completed, leaving two lucky winners heading home with an IPHONE X each. CORPORATE SOCIAL RESPONSIBILITY Akhalij also organized its 6th“Annual Clay Shooting Competition” at the Lusail Shooting Club. The competition welcomed numerous local and international corporate banks and companies to participate in the occasion. Launched in 2012, the first shooting event was met with great success and led to an annual tradition between al khaliji and clients. At this year’s event, al khaliji welcomed teams such as Qatar Investment Authority, Qatar National Bank, Al Fardan, Ali Bin Ali, CCC, Doha Insurance, Supplement House and al khaliji Team as a host. A total of 10 teams made up of five members each participated in the Woqod followed by Al Fardan in second place and Supplement House in third place. Empowering the nation’s next generation of leaders In its next phase of growth with an intent to contribute towards the empowerment of a new generation, al khaliji, in collaboration with Qatar Finance and Business Academy (QFBA) organized a lecture on corporate banking and its contribution to the Qatari economy, to students of Northumbria University in Qatar. The session was hosted by Mr. Paul Maguire, al khaliji’s Group Chief Business Officer, who discussed in detail how al khaliji’s is a ‘trusted advisor’ to its corporate clients as well as how the corporate team, work with clients to support their longer term growth plans. Similarly, in a joint effort between al khaliji and HEC Paris in Qatar, al khaliji Bank invited all private banking customers to attend an exclusive masterclass session on one of the most crucial topics ‘Managing in Challenging Times’. The masterclass was presented by the renowned HEC Paris Professor Roger Hallowell, the Academic Director of ‘Leading Strategies for Outstanding 118
  112. Performance ’. This path breaking session emphasized on the skills required to best prepare businesses for turbulent times, finest practices and leading change during both stormy and ordinary times. The Bank also hosted an informative session on Risk Management for the students of Qatar University, and offered insights into the nuances of managing financial risks and mitigating potential losses. The session was moderated by Oliver Schwarzhaupt, Group Chief Risk Officer of al khaliji Bank, who discussed in detail on the importance of risk management and offered ways to deal with financial crises. This session was aimed at honing the skills of aspiring professionals and make them ‘future ready’ to take the best business decision. The Bank participated at The Gulf English School’s Annual Career Fair as the event’s Silver Sponsor for the 3rd consecutive year. This participation come as part of the bank’s continuous efforts to bridge the gap between the education field and the sector’s job market. The fair witnessed the participation of numerous leading public and private sector institutions from Qatar, and attracted a large audience of Qatari youth seeking to tweak their interests in possible future careers. The Bank also participated in the 2018 edition of Qatar University’s (QU) annual Career Fair. al khaliji’s participation at the QU Career Fair is part of the Bank’s wider human development and capacity building program, which aims to power its network of branches with the best-in-class staff and banking professionals, while raising the bar for the banking and financial sector in Qatar. al khaliji offers scholarships for promising young university students at Qatar University, who are guaranteed employment with the bank after completion of their degree. Through this endeavor, the Bank aims to attract talented Qataris with the bank’s financial incentives and professional development opportunities. In line with the Bank’s commitment to play a more active role in supporting educational and social responsibility initiatives in Qatar and beyond, Mr. Shabbir Barkat Ali, Chief Financial Officer of al khaliji Bank, recently attended a focus group meeting at 119 the College of North Atlantic - Qatar (CNA-Q), and shared his expertise & experiential knowledge on the matters related to finance. The focus group was a meeting of industry professionals tasked to analyze the local labour market needs and professional trends related to the College’s Business Management – Account diploma program. Going forward, al khaliji will continue to initiate different programs that introduce students and young talents to the finance and banking sector, while pushing forward the Bank’s vision of converging human capital, technology and business to unlock future opportunities and achieve social, economic and environmental prosperity for the society.
  113. SUBSIDIARIES
  114. al khaliji bank Annual Report 2018 SUBSIDIARIES Al Khaliji France S .A. is a fully owned subsidiary of Al khalij Commercial Bank-Qatar, headquartered in Paris with a network of four branches in the Emirates: Abu Dhabi, Dubai, Sharjah and Ras al Khaimah. Business Throughout 2018, the Bank kept on following a prudent approach to risk with rigorous management controls to keep the Bank safe, and to support sustainable business growth. AL KHALIJI FRANCE In the UAE, we revisited our business direction and adopted a more passive growth strategy to avoid the downside of uncertainty. The Bank stayed away from unsecured lending and only customers with low level of vulnerability were added to the Bank’s portfolio. In 2018, the Bank strengthened further its Corporate Governance with a focus on Risk . A new Al Khaliji France Governance Framework as well as new Unified Committees (Management, Asset/Liability, Risk) were adopted to better fit increasing needs for better communication with and integration of UAE Branches in all AKF strategic and operational decisions, and ensure at all times full adherence with regulatory requirements. The Bank faced successfully the challenges of complying with the new regulations from 2018 onwards and has prepared itself to comply with the upcoming regulatory requirements that will become effective during 2019. Central to Al Khaliji France’s strategy remains its dedication to attract and develop skilled and capable staff members, with in particular the aim to recruit young local talents in the UAE. AKF is also committed to enhance knowledge awareness of its staff via internal or external trainings and raise consciousness on major compliance topics like FATCA or AML. 122
  115. Finance Al Khaliji France total assets decreased from EUR 1 .1bio at end-December 2017 to EUR 0.9bio endDecember 2018. This decrease is explained by a difficult operating environment in the countries of presence. At the same time, Al Khaliji France strengthened its lending portfolio and structure itself in accordance with the situation that prevails in the markets it operates in and in line with the strategy developed at group level. At the capitalization level, Al Khaliji France still maintains good level of CET 1 (Capital Equity Tier 1) of EUR 181 mio at end December 2018. Subsequently, the Bank Capital ratio was at a comfortable level recording 19% at end-December 2018, well in excess of the minimum regulatory ratio. The Bank’s liquidity position remained satisfactory and Management believes that the Bank’s funding capacity is sufficient to meet its on and off-balance sheet obligations through both normal and stress periods. 2019 and beyond The year 2019 will see the continuation and solidification of the above with willingness to further diversify on both assets and liabilities. AKF will continue to cement its position as the bank of choice for Qatari clients and in particular will enhance partnerships with first class institutions that can add value to our clients’ portfolios. During 2019 and beyond, the Bank will pursue its objectives to develop its core activities and will work on further developing areas such as Syndicated Loans or private banking services targeting high net-worth individuals. Furthermore, the Bank aims to leverage on its European license out of its Head office in Paris and benefit from the high quality financing opportunities in other European countries provided by some Qatar State owned corporations through their investments in a number of high value sectors. 123 We are also eager to further extend our relationship network of regional and international banks, by accessing new markets in the Middle East and Africa to increase our trade finance volume of transactions. AKF will also look at opportunities for new credit exposure to selected sovereign and Financial Institution names. Al Khaliji France looks at the future with confidence as the Bank is well positioned for growth. We have the people, the financial strength, support of our shareholders and on top of this we are committed to capture opportunities and to do the necessary to achieve our goals.
  116. CONSOLIDATED FINANCIAL STATEMENT
  117. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 To the Shareholders Al Khalij Commercial Bank (al khaliji) P.Q.S.C. Doha, Qatar Report on the audit of consolidated financial statements Opinion INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AL KHALIJ COMMERCIAL BANK (AL KHALIJI) P.Q.S.C. We have audited the consolidated financial statements of Al Khalij Commercial Bank (al khaliji) P.Q.S.C. (the “Bank”) and its subsidiaries (collectively “the Group”), which comprise the consolidated statement of financial position as at 31 December 2018, and consolidated income statement, the consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2018, and its consolidated income statement, its consolidated statement of comprehensive income and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) and the applicable provisions of the Qatar Central Bank regulations. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the State of Qatar, and we have fulfilled our other ethical responsibilities. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
  118. Other matter The consolidated financial statements of the Group for the year ended 31 December 2017 were audited by another auditor who expressed an unmodified opinion on those consolidated financial statements on 6 February 2018 . Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. • inadequate data, as well as lack of uniformity in the data are used which makes it difficult to develop models, which are sufficient for IFRS 9 impairment requirements. Refer to the following notes of the consolidated financial statements: • Note 3a – Significant accounting policies on financial assets and financial liabilities • Note 4 – Financial risk management • Note 7 – Accounting and classification of financial assets and liabilities • Note 8 – Cash and balances with central bank • Note 9 – Due from banks • Note 10 – Loans and advances to customers • Note 11 – Investment securities We identified the following key audit matters: • Note 13 – Other assets First-time adoption of IFRS 9: Financial Instruments Impairment of financial assets The Group adopted IFRS 9: Financial Instruments from 1 January 2018, which resulted in changes in accounting policies and adjustments to amounts previously recognised in the consolidated financial statements. As permitted by transitional provisions of IFRS 9, the Group elected not to restate the comparative figures and recorded an adjustment of QAR 974.9 million to the opening retained earnings as at 1 January 2018. The Group’s financial assets, both on and off balance sheet, amount to QAR 68.7 billion and QAR 76.4 billion as at 31 December 2018 and 2017 respectively. In addition, the expected credit loss (ECL) provisioning recognized for the year ended December 31, 2018 amounted to QR. 190.1 million. The changes required to processes, systems and controls to comply with IFRS 9 were complex and significant, as the standard requires a fundamental change to the way, when Expected Credit Losses (ECL) are recognised and how these are measured. There was a risk that: • judgements, assumptions and estimates, which includes adopting a ‘default’ definition and developing PDs at origination, lifetime-PDs, and macroeconomic models with a number of scenarios and probabilities for each scenario and other post-model adjustments and management overlays are inadequate; The Group has adopted IFRS 9 from January 1, 2018, which is a complex accounting standard that requires considerable judgements, which were key in the development of new models to measure expected credit losses on financial assets carried either at amortized cost or at FVOCI (debt instruments). There is a risk that financial assets are impaired and inadequate impairment provisions are provided which are not in accordance with the requirements of IFRS 9 and the applicable provisions of Qatar Central Bank regulations. Financial assets might be inaccurate due to: • The methodologies used to develop probability of default (PD); loss given default (LGD); and (exposure at default EAD) are inappropriate. • Inappropriate segmentation of portfolios is used to develop risk parameters.
  119. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 •The number and range of forward-looking scenarios are not representative of an appropriate range of possible outcomes. •Extrapolation techniques used to project scenarios and parameters (PD, LGD, and EAD) in future periods are inappropriate. • The methodology used to allocate a probability to each scenario is inappropriate or unsupported. INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AL KHALIJ COMMERCIAL BANK (AL KHALIJI) P.Q.S.C. • Significant increases (or reductions) in credit risk (movements between Stage 1, Stage 2 and Stage 3) are not completely or accurately identified on a timely basis. • Assumptions incorporated in the ECL model are not updated on a timely basis. Refer to the following notes of the consolidated financial statements: • Note 3a – Significant accounting policies on financial assets and financial liabilities • Note 4 – Financial risk management • Note 7 – Accounting and classification of financial assets and liabilities • Note 8 – Cash and balances with central bank • Note 9 – Due from banks • Note 10 – Loans and advances to customers • Note 11 – Investment securities • Note 13 – Other assets 128
  120. IT systems and controls over financial reporting We identified IT systems and controls over financial reporting as an area of focus because the Bank ’s financial accounting and reporting systems are vitally dependent on complex technology. The extensive volume and variety of transactions processed daily raises a risk that automated accounting procedures and related internal controls are not accurately designed and operating effectively. A particular area of focus related to logical access management and segregation of duties. The underlying principles are important because they ensure that changes to applications and data are appropriate, authorised and monitored. In particular, the incorporated relevant controls are essential to limit the potential for fraud and error as a result of change to an application or underlying data. How the matter was addressed in our audit We updated our understanding of the Group’s adoption of IFRS 9 and identified the internal controls including entity level controls adopted by the Group for the accounting, processes and systems under the new accounting standard. In addition, our work performed include the below procedures: • evaluated the appropriateness of key technical decisions, judgments and accounting policy elections made by the Group to ensure compliance with IFRS 9 impairment requirements. • evaluated, with the assistance of our specialists, the reasonableness of management’s key judgements and estimates made in the ECL calculation, which include but not limited to the selection of methods, models, assumptions and data sources. • evaluated the appropriateness and testing the mathematical accuracy of the ECL model applied. • tested the IT controls related to the credit impairment process and verified the integrity of data used as input to the models 129 • evaluated system-based and manual controls over the recognition and measurement of impairment allowances. •evaluated post model adjustments and management overlays in order to assess the reasonableness of these adjustments. • assessed the reasonableness of forward looking information incorporated into the impairment calculations Further, we ensured that the component auditors of the Group’s significant component have performed consistent audit procedures as per the above, as applicable. We have also assessed whether the related disclosures of this area were adequate in accordance with the requirements of International Financial Reporting Standards and applicable provision of Qatar Central Bank regulations. We have assessed and tested the design and operating effectiveness of the relevant controls over data governance, methodologies, inputs and assumptions used by the Group in calculating impairment allowances. In addition, our work performed included the below procedures, among others on the Group’s IFRS 9 ECL model: • For a selection of individual exposures, performed a detailed credit review and challenged the Group’s staging and impairment allowance calculation. • Review and assessment of the appropriateness of the data, assumptions and methodologies used within the Bank’s IFRS9 ECL model (PD, LGD, and EAD) and customer internal rating systems. • Assessment on whether significant increase in credit risk (SICR) indicators are present for the loans and advances portfolio based on IFRS 9 and Qatar Central Banks guidance and the possible implications on the ECL staging and expected provisioning. • Assessment of the ECL methodology, macroeconomic scenarios weightage, model validation/testing, on a sample basis
  121. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Further , we ensured that the component auditors of the Group’s significant component have performed consistent audit procedures as per the above, as applicable. INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AL KHALIJ COMMERCIAL BANK (AL KHALIJI) P.Q.S.C. (CONTINUED) We have assessed whether the related disclosures of this area are adequate in accordance to the requirements of International Financial Reporting Standards and Qatar Central Bank, as applicable. Our audit approach relies on automated controls and therefore procedures were designed to test access and control over IT systems. Our audit procedures included: • Obtain the understanding on IT applications relevant to financial reporting including the T24 Temenos core banking system, Treasury system, and the Swift messaging and the infrastructure supporting these applications; • Testing the key automated input / processing and output controls relevant to business processes. •Testing the IT general controls relevant to automated controls and computer-generated information covering access security, program changes, data centre and network operations; •Assessing accuracy and completeness of computer generated information used in financial reporting; Other information The Board of Directors is responsible for the other information. The other information comprises the Board of Directors’ report, Annual Corporate Governance Report and supplementary information prior to the date of this auditor’s report, and the remaining information of the annual report is expected to be made available to us after that date. The other information does not include the consolidated financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance or conclusion thereon. 130
  122. In connection with our audit of the consolidated financial statements , our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the remaining information of the annual report of the Group, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. 131 Auditors’ responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: •Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  123. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 INDEPENDENT AUDITORS ’ REPORT TO THE SHAREHOLDERS OF AL KHALIJ COMMERCIAL BANK (AL KHALIJI) P.Q.S.C. (CONTINUED) •Conclude on the appropriateness of the management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 132
  124. We communicate with those charged with governance regarding , among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 133 Report on other legal and regulatory requirements We are also of the opinion that proper books of account were maintained by the Bank. We have obtained all the information and explanations which we consider necessary for the purpose of our audit. We further confirm that the consolidated financial information included in the Board of Directors’ report addressed to the General Assembly is in agreement with the books and records of the Bank. We confirm that we are not aware of any contraventions by the Bank of its Articles of Association, the applicable provisions of Qatar Central Bank Law No. 13 of 2012 and of the Qatar Commercial Companies Law No. 11 of 2015, during the financial year that would materially affect the Group’s financial performance or its financial position. For Deloitte & Touche January XX, 2019 Qatar Branch Walid Slim Partner License No. 319 QFMA Auditor License No. 120156 Doha – Qatar
  125. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Al Khalij Commercial Bank (al khaliji) P.Q.S.C. Consolidated Statement of Financial Position As at 31 December 2018 Notes 2018 QAR’000 2017 QAR’000 2,880,505 2,587,253 Assets 8 Cash and balances with central banks Due from banks 9 6,084,725 6,617,364 Loans and advances to customers 10 31,309,462 35,093,547 Investment securities 11 10,662,891 12,506,146 Property and equipment 12 334,964 235,247 Intangible assets 13 143,258 155,950 Other assets 14 686,638 689,284 52,102,443 57,884,791 15 9,495,141 10,597,251 588,207 87,414 16 28,601,211 32,682,810 Total assets Liabilities Due to banks Certificate of deposits and commercial papers Customer deposits Other borrowings 17 2,352,215 1,701,863 Debt securities issued 18 2,523,466 3,844,863 Subordinated debt 19 104,133 109,234 Other liabilities 20 1,861,490 1,569,855 45,525,863 50,593,290 Total liabilities Shareholders’ equity Issued capital 21a 3,600,000 3,600,000 Legal reserve 21b 1,399,473 1,338,633 Risk reserve 21c 153,331 766,657 Fair value and other reserve 21d 45,897 44,402 Foreign currency translation reserve 21e Retained earnings Total equity attributable to shareholders of the Bank Instrument eligible as additional capital 21h Total equity Total liabilities and equity (32,764) (18,609) 410,643 560,418 5,576,580 6,291,501 1,000,000 1,000,000 6,576,580 7,291,501 52,102,443 57,884,791 The consolidated financial statements have been approved by the Board of Directors on 20 January 2019, and signed on its behalf by: Hamad Bin Faisal Bin Thani Al-Thani Faisal Abdulla KH AL-Mana Chairman of the Board of Directors Director/ Chairperson of Audit Committee Fahad Al Khalifa Group Chief Executive Officer The accompanying notes 1 to 35 form an integral part of these consolidated financial statements. 134
  126. Al Khalij Commercial Bank (al khaliji) P.Q.S.C. Consolidated Income Statement As at 31 December 2018 Notes 2018 QAR’000 2017 QAR’000 Interest income 22 2,088,690 2,008,755 Interest expense 23 (1,173,554) (1,024,290) 915,136 984,465 Fee and commission income 24 206,358 192,725 Fee and commission expense 24 Net interest income Net fee and commission income Foreign exchange gain 25 Income from investment securities 26 Other operating income Net operating income Staff costs Depreciation and amortisation Net impairment losses on loans and advances to customers (16,674) (10,807) 189,684 181,918 38,471 39,423 54 9,214 111 9 1,143,456 1,215,029 27 (179,796) (193,534) 12, 13 (20,210) (26,096) 11a (207,200) (300,655) Net impairment reversal( losses) on investment securities (debt) 4,371 (18,010) Net impairment on loan commitments and financial guarantees (18,958) - 31,670 - (129,413) (115,133) 623,920 561,601 (15,516) (11,080) 608,404 550,521 1.54 1.38 360,000,000 360,000,000 Net impairment reversal (losses) on due from banks Other expenses 28 Profit before tax Tax expense 29 Profit for the year Earnings per share 30 Basic and diluted earnings per share (QAR per share) Weighted average number of shares outstanding The accompanying notes 1 to 35 form an integral part of these consolidated financial statements. 135
  127. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Al Khalij Commercial Bank (al khaliji) P.Q.S.C. Consolidated Statement of Comprehensive Income As at 31 December 2018 2018 QAR’000 2017 QAR’000 608,404 550,521 (14,155) 40,871 5,886 - (11,026) - 6,226 2,730 Net change in fair value - 3,988 Net amount transferred to consolidated income statement - (627) 12,501 - (568) 46,962 607,836 597,483 Profit for the year Items that may be reclassified subsequently to Consolidated Income Statement Foreign currency translation differences for foreign operations Movement in fair value reserve (debt instruments – IFRS 9): Net change in fair value Net amount transferred to consolidated income statement Effective portion of changes in fair value of cash flow hedges Movement in fair value reserve (available-for-sale financial assets – IAS 39): Items that will not be reclassified subsequently to Consolidated Income Statement Net change in fair value of equity investments designated at FVOCI (IFRS 9) Other comprehensive (loss) / income for the year, net of tax Total comprehensive income for the year The accompanying notes 1 to 35 form an integral part of these consolidated financial statements. 136
  128. Al Khalij Commercial Bank (al khaliji) P.Q.S.C. Consolidated Statement of Changes in Shareholders’ Equity As at 31 December 2018 Equity attributable to shareholders of the Bank Foreign Issued capital QAR’000 Balance as at 1 January 2018 (Audited) Adoption of IFRS 9 Legal reserve QAR’000 3,600,000 1,338,633 - - Fair value currency Risk and other translation Retained reserve reserve reserve earnings QAR’000 QAR’000 QAR’000 QAR’000 766,657 44,402 - (12,092) Transfer of risk reserve to retained - ( 766,657) earnings Restated balance as at 1 3,600,000 1,338,633 January 2018 (18,609) Instrument eligible as additional Total capital QAR’000 QAR’000 Total equity QAR’000 560,418 6,291,501 1,000,000 7,291,501 - (974,928) (987,020) - (987,020) - - - 32,310 (18,609) 766,657 - - 352,147 5,304,481 1,000,000 6,304,481 - - - - - 608,404 608,404 - 608,404 - - - 13,587 (14,155) - (568) - (568) - - - 13,587 (14,155) 608,404 607,836 - 607,836 Transfer to legal reserve - 60,840 - - - (60,840) - - - Transfer to risk reserve - - 153,331 - - (153,331) - - - - - - - - 4,473 4,473 - 4,473 - - - - - (15,210) (15,210) - (15,210) - - - - - (270,000) (270,000) - (270,000) - - Profit for the year Other comprehensive income / (loss) Total comprehensive income for the year Realized profit of FVOCI equity investment Contribution to Social and Sports Fund (note 21f) Dividends for the year 2017 (note 21g) Distribution for Tier 1 Capital notes - - - - Balance as at 31 December 2018 (55,000) (55,000) (55,000) 3,600,000 1,399,473 153,331 45,897 (32,764) 410,643 5,576,580 1,000,000 6,576,580 Balance as at 1 January 2017 3,600,000 1,283,581 817,276 38,311 (59,480) 353,093 6,032,781 1,000,000 7,032,781 Profit for the year - - - - - 550,521 550,521 - 550,521 Other comprehensive income - - - 6,091 40,871 - 46,962 - 46,962 Total comprehensive income for the year - - - 6,091 40,871 550,521 597,483 - 597,483 Transfer to legal reserve - 55,052 - - - (55,052) - - - Transfer to risk reserve - - (50,619) - - 50,619 - - - - - - - - (13,763) (13,763) - (13,763) - - - - - (270,000) (270,000) - (270,000) - - - - - - 3,600,000 1,338,633 766,657 44,402 (18,609) Contribution to Social and Sports Fund (note 21f) Dividends for the year 2016 (note 21g) Distribution for Tier 1 Capital notes Balance as at 31 December 2017 (55,000) (55,000) 560,418 6,291,501 1,000,000 7,291,501 The accompanying notes 1 to 35 form an integral part of these consolidated financial statements. 137 (55,000)
  129. al khaliji bank Annual Report 2018 CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2018 Al Khalij Commercial Bank (al khaliji) P.Q.S.C. Consolidated Statement of Cash Flows As at 31 December 2018 Cash flows from operating activities: Profit for the year before tax Adjustments for: • Net impairment loss on loans and advances to customers • Net impairment (reversal) / loss on investment securities and other assets • Net impairment on loan commitments and financial guarantees • Net impairment reversal on due from banks • Provision for staff benefits • Depreciation and amortisation • Loss on disposal of property and equipment • Net loss / (gain) on sale of investment securities Profit before changes in operating assets and liabilities Changes in operating assets and liabilities: • Change in regulatory reserves with central banks • Change in due from banks • Change in loans and advances to customers • Change in other assets • Change in due to banks • Change in certificate of deposits and commercial papers • Change in customer deposits • Change in other liabilities Cash used in operations Income tax paid Staff benefits paid Net cash used in operating activities Cash flows from investing activities Acquisition of investment securities Proceeds from sale/maturities of investment securities Net acquisition of property and equipment Acquisition of intangible assets Net cash from investing activities Notes 20a 12,13 26 20a 12 13 2018 QAR’000 2017 QAR’000   623,920 561,601 207,200 (4,371) 18,958 (31,670) 12,314 20,210 6,655 853,216 300,655 18,010 11,081 26,096 1,939 (17,383) 901,999 149,093 (1,423,908) 2,731,629 2,646 (1,102,110) 500,793 (4,081,599) 105,336 (2,264,904) 23,008 320,445 (214,095) (69,738) (2,301,760) (750,609) 487,595 (802,396) (2,405,551) (14,023) (10,847) (2,289,774) (29,603) (17,067) (2,452,221) (3,336,001) 5,194,785 (109,063) (4,510) 1,745,211 (2,128,149) 5,238,858 (59,164) (2,191) 3,049,354 Cash flows from financing activities Proceeds from debt securities issued 2,073,992 313,480 Repayment of debt securities issued (3,391,535) (144,630) Proceeds from other borrowings 1,487,715 1,155,700 Repayment of other borrowings (837,363) (1,000,204) (282,194) (949,385) (260,505) (1,493,948) 660,974 Cash and cash equivalents as at 1 January 7,043,029 6,343,383 Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents as at 31 December (13,658) 5,535,423 7,043,029 Dividends paid Net cash (used in) /from financing activities 21h Net (decrease) / increase in cash and cash equivalents 32 The accompanying notes 1 to 35 form an integral part of these consolidated financial statements. 138 63,841 38,672
  130. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 . Incorporation And Principal Activities Al Khalij Commercial Bank (al khaliji) P.Q.S.C. (the “Bank”) was incorporated in January 2007 as a Public Qatari Shareholding Company under Commercial Registration No. 34548, with its registered head office in Doha. The shares of al khaliji are listed on the Qatar Exchange. al khaliji and its subsidiaries (the “Group”) are engaged in commercial banking and related activities. The Group operates primarily in Qatar via the parent company and in France and the United Arab Emirates via its subsidiary and branches. The legal subsidiaries of the Group are as follows: Company’s Name Country of Incorporation Al Khaliji France S.A. France AKCB Finance Limited AKCB Falcon Limited Share Capital Acquired/ Percentage Set up Owned Principal Activities EUR 104,000,000 2008 100% Banking Cayman Islands USD 1 2013 100% Debt Issuance Cayman Islands USD 1 2015 100% Debt Issuance 139
  131. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 . Basis Of Preparation (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), the applicable provisions of the Qatar Central Bank (“QCB”) regulations and the applicable provision of the Qatar Commercial Companies Law No. 11 of 2015. (b) Basis of measurement BASIS OF PREPARATION The consolidated financial statements have been prepared on the historical cost basis except for the following, which are measured at fair value: • Financial investments measured at fair value through other comprehensive income (‘FVTOCI’) (2018) / Available-for-sale financial investments (2017); •Assets and liabilities that are hedged are measured at fair value in respect of the risk that is being hedged; and • Derivatives financial instrument. (c) Functional and presentation currency These consolidated financial statements are presented in Qatari Riyal (“QAR”), which is the Bank’s functional currency. Except as otherwise indicated, financial information presented in QAR has been rounded to the nearest thousand. (d) Use of estimates and judgments The preparation of the consolidated financial statements, in conformity with IFRS, requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of 140
  132. estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in note 5 . 3 Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements except for the effects of adoption of IFRS 9 and IFRS 15 on 1 January 2018, as described in note 3(a), and have been applied consistently by the Group. Additionally, the Group has adopted consequential amendments to IFRS 7 Financial Instruments: Disclosures that are applied to disclosures for 2018, but have not been applied to the comparative information. (a) New standards, amendments and interpretations New standards, amendments and interpretations effective from 1 January 2018 The following standards, amendments and interpretations, which became effective as of 1 January 2018, are relevant to the Group: IFRS 9 Financial Instruments 1-Jan-18 IFRS 15 Revenue from Contracts with 1-Jan-18 Customers IFRIC 22 Foreign Currency Transactions and Advance Consideration 1-Jan-18 The adoption of the above did not result in any changes to previously reported net profit or equity of the Group, except as mentioned below. (i) IFRS 9 Financial Instruments The Group has adopted IFRS 9, as issued by the IASB in July 2014 with a date of transition of 1 January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the consolidated financial statements as of and for the year ended 31 December 2017. The adoption of IFRS 9 has resulted in changes in the accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 ‘Financial Instruments: Disclosures’. Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never bifurcated. Instead, the whole hybrid instrument is assessed for classification. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognised in the consolidated income statement, under IFRS 9 fair value changes are generally presented as follows: • The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and • The remaining amount of change in the fair value is presented in the consolidated income statement 141
  133. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impairment of financial assets IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The new impairment model also applies to certain loan commitments and financial guarantee contracts but not to equity investments. Under IFRS 9, credit losses are recognised earlier than under IAS 39. The Group applies three-stage approach to measuring expected credit losses (ECL) on financial assets carried at amortised cost and debt instruments classified as FVOCI. Assets migrate through the following three stages based on the change in credit quality since initial recognition. SIGNIFICANT ACCOUNTING POLICIES Stage 1: 12 months ECL - not credit impaired. Stage 1 includes financial assets on initial recognition and that do not have a significant increase in credit risk since the initial recognition or that have low credit risk. For these assets, ECL are recognised on the gross carrying amount of the asset based on the expected credit losses that result from default events that are possible within 12 months after the reporting date. Interest is computed on the gross carrying amount of the asset. Stage 2: Lifetime ECL - not credit impaired Stage 2 includes financial assets that have had a significant increase in credit risk (SICR) since initial recognition but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Stage 3: Lifetime ECL - credit impaired Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised. For an explanation of how the Group classifies financial liabilities under IFRS 9. Refer to Note 3 (d) (ii). 142
  134. Hedge accounting The general hedge accounting requirements of IFRS 9 retain the three types of hedge accounting mechanisms in IAS 39 . However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify as hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is no longer required. The Group has also elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9. Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below. (a) As permitted by the transitional provisions of IFRS 9 and QCB regulations, the Group elected not to restate comparative figures. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented for 2018 under IFRS 9. (b) The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. • The determination of the business model within which a financial asset is held. • The designation of certain investments in equity instruments not held for trading as at FVOCI. • If a debt security had low credit risk at the date of initial application of IFRS 9, then the Group has assumed that credit risk on the asset had not increased significantly since its initial recognition. 143
  135. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (a) Impact of adopting IFRS 9 The impact from the adoption of IFRS 9 as at 1 January 2018 has been to decrease retained earnings by QAR 974.9 million and decrease the fair value reserve by QAR 12.1 million: Retained earnings QAR’000 Fair value reserve QAR’000 560,418 44,402 26,545 (26,545) (38,266) - (15,398) 14,454 (845,256) - (102,554) - (1,001,474) 14,454 Transfer from risk reserve 766,657 - Opening balance under IFRS 9 on date of initial application of 1 January 2018 352,146 32,311 Closing balance under IAS 39 (31 December 2017) Impact on reclassification and remeasurements Investment securities (equity) from available-for-sale to those measured at fair value through other comprehensive income Impact on recognition of Expected Credit Losses Due from banks Investment Securities (debt) at fair value through other comprehensive income Loans and Advances to Customers Loan Commitments and Financial Guarantees 144
  136. (b) Classification and Measurement of Financial Instruments The Group performed a detailed analysis of its business models for managing financial assets as well as analysing their cash flow characteristics. The below table reconciles the original measurement categories and carrying amounts of financial assets in accordance with IAS 39 and the new measurement categories under IFRS 9 as at 1 January 2018. Impact of IFRS 9 Original carrying Re-measurRe- New carrying amount ement classification amount QAR’000 QAR’000 QAR’000 QAR’000 Original classification under IAS 39 New classification under IFRS 9 Cash and balances with central banks Loans and receivables Amortised cost 2,587,253 - - 2,587,253 Due from banks Loans and receivables Amortised cost 6,617,364 (38,266) - 6,579,098 Loans and advances to customers Loans and receivables Amortised cost 35,093,547 (845,256) - 34,248,291 Investment securities – debt Available-for-sale Amortised cost 189,268 (944) - 188,324 Investment securities – debt Available-for-sale FVOCI 12,205,678 (14,454) - 12,191,224 Investment securities – equity Available-for-sale FVOCI 111,200 - - 111,200 Loans and receivables Amortised cost 408,405 - - 408,405 FVTPL FVTPL 176,620 - - 176,620 Loans and receivables Amortised cost 30,499 - - 30,499 57,419,834 (898,920) - 56,520,914 Financial assets Accrued interest receivable Derivatives with positive fair value Others 145
  137. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Financial liabilities There were no changes to the classification and measurement of financial liabilities . (c) Expected credit loss/ impairment allowances The following table reconciles the closing impairment allowance for financial assets in accordance with IAS 39 as at 31 December 2017 to the opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018. 31 December 2017 QAR’000 Remeasurement QAR’000 1 January 2018 QAR’000 Loans and Advances to Customers under IAS 39/ financial assets at amortised cost under IFRS 9 825,721 845,256 1,670,977 Available-for-sale debt investment securities under IAS 39/ debt financial assets at FVOCI under IFRS 9 - 15,398 15,398 Loan Commitments and Financial Guarantees - 102,554 102,554 Due from banks - 38,266 38,266 825,721 1,001,474 1,827,195 IFRS 15 ‘Revenue from Contracts with Customers ’ The Group implemented this new revenue recognition standard with effect from 1 January 2018. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for performance obligations as they are satisfied. The Group has assessed the impact of IFRS 15 and concluded that the standard has no material effect on the consolidated financial statements of the Group 146
  138. Standards issued but not yet effective A number of standards and amendments to standards are issued but not yet effective and the Group has not adopted these in the preparation of these consolidated financial statements . The below standards may have a significant impact on the Group’s consolidated financial statements, however, the Group is currently evaluating the impact of these new standards. The Group will adopt these new standards on the respective effective dates. New and revised IFRSs Effective for annual periods beginning on or after IFRS 16 Leases 1 January 2019 Annual Improvements to IFRSs 2015–2017 Cycle amending IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing costs. 1 January 2019 IFRIC 23 Uncertainty over Income Tax Treatments 1 January 2019 Amendments in IFRS 9 Financial Instruments relating to prepayment features with negative compensation. 1 January 2019 Amendment to IAS 19 Employee Benefits relating to amendment, curtailment or settlement of a defined benefit plan 1 January 2019 Amendments in IAS 28 Investments in Associates and Joint Ventures relating to long-term interests in associates and joint ventures. 1 January 2019 Amendments to References to the Conceptual Framework in IFRS Standards amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32 to update those pronouncements with regard to references to and quotes from the framework or to indicate where they refer to a different version of the Conceptual Framework 1 January 2020 Amendment to IFRS 3 Business Combinations relating to definition of a business 1 January 2020 Amendments to IAS 1 and IAS 8 relating to definition of material 1 January 2020 IFRS 17 Insurance Contracts 1 January 2021 Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) relating to the treatment of the sale or contribution of assets from and investor to its associate or joint venture. Effective date deferred indefinitely. Adoption is still permitted. Management anticipates that these new standards, interpretations and amendments will be adopted in the Bank’s consolidated financial statements as and when they are applicable and adoption of these new standards, interpretations and amendments, except for IFRS 16 as highlighted in next paragraphs, may have no material impact on the financial statements of the Company in the period of initial application. 147
  139. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IFRS 16 Leases The Group will adopt IFRS 16 Leases on its mandatory adoption date of 1 January 2019 . The new standard will result in some leases being recognised on the statement of financial position by lessees, as the distinction between operating and finance leases is removed. SIGNIFICANT ACCOUNTING POLICIES Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are shortterm and low-value leases. The Group intends to apply the simplified transition approach and does not expect to restate comparative amounts for the year prior to first adoption. Right-of-use assets will be measured on transition as if the new rules had always been applied. Management is currently performing a detailed analysis of the impact of the application of these Standards and hence has not yet quantified the extent of the impact which is expected to be immaterial. (b) Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at the end of the reporting period. Subsidiaries are all entities (including structured entities) over which the Group has control. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Specifically, the Group controls an entity 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. 148
  140. 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 arrangements; and other contractual business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business. For acquisitions meeting the definition of a business, the acquisition method of accounting is used as at the acquisition date, which is the date on which control is transferred to the Group. • the Group’s voting rights and potential voting rights. The Group measures goodwill at the acquisition date as the total of: The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three 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 income statement from the date the Group gains control until the date the Group ceases to control the subsidiary. • the fair value of the consideration transferred; plus When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. When this total is negative, a bargain purchase gain is recognised immediately in the consolidated income statement. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. (i) Business combinations Accounting for business combinations only applies if it is considered that a business has been acquired. Under IFRS 3, “Business Combinations”, a business is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to policyholders or participants. A 149 • the recognised amount of any non-controlling interest in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in consolidated income statement. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in consolidated income statement.
  141. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For acquisitions not meeting the definition of a business , the Group allocates the cost between the individual identifiable assets and liabilities. The cost of acquired assets and liabilities is determined by: (a) accounting for financial assets and liabilities at their fair value at the acquisition date; and (b) allocating the remaining balance of the cost of purchasing the assets and liabilities to the individual assets and liabilities, other than financial instruments, based on their relative fair values at the acquisition date. (ii) Subsidiaries SIGNIFICANT ACCOUNTING POLICIES Subsidiaries are entities controlled by the Bank. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (iii) Transactions eliminated on consolidation Intra-group balances, and income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (iv) Special Purpose Entities Special purpose entities (“SPEs”) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group, the Group concludes that it controls the SPE. 150
  142. The following circumstances may indicate a relationship in which , in substance, the Group controls and consequently consolidates an SPE: • the activities of the SPE are being conducted on behalf of the Group according to its specific business needs so that the Group obtains benefits from the SPE’s operation; • the Group has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an “autopilot” mechanism, the Group has delegated these decision-making powers; • the Group has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incidental to the activities of the SPE; • the Group retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities. The assessment of whether the Group has control over an SPE is carried out at inception and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE, or additional transactions between the Group and the SPE. Day-to-day changes in market conditions normally do not lead to a reassessment of control. However, sometimes changes in market conditions may alter the substance of the relationship between the Group and the SPE and in such instances, the Group determines whether the change warrants a reassessment of control based on the specific facts and circumstances. (c) Foreign currency Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Nonmonetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences resulting from the settlement of foreign currency transactions and arising on translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in consolidated income statement. (ii) Foreign operations The results and financial position of all the Group’s entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the reporting date; • income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are recognised in other comprehensive income. (i) Foreign currency transactions and balances Foreign currency transactions that are transactions denominated or that require settlement in a foreign currency are translated into the respective functional currencies of the operations at the spot exchange rates at the dates of the transactions. 151
  143. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Exchange differences arising from the above process are reported in shareholders ’ equity as “foreign currency translation reserve”. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to “Other comprehensive income”. When a foreign operation is disposed of, or partially disposed of, such exchange differences are recognised in the consolidated income statement as part of the gain or loss on sale. SIGNIFICANT ACCOUNTING POLICIES Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of the net investment in the foreign operation and are recognised in other comprehensive income, and presented in the foreign currency translation reserve in shareholders’ equity. (d) Financial assets and financial liabilities (i) Recognition and initial measurement The Group initially recognises loans and advances to customers, due from / to banks, certificate of deposits and commercial papers, customer deposits, debt securities issued and other borrowings on the date at which they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. 152
  144. (ii) Classification Business model assessment Financial assets – Policy applicable from 1 January 2018 On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL. The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: • The stated policies and objectives for the portfolio and the operation of those policies in practice; • The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and • How the performance of the portfolio is evaluated and reported to the Group’s management; • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: • The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-byinvestment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL, if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. 153 • The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; • How managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); and • The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group’s stated objective for managing the financial assets is achieved and how cash flows are realised. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
  145. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Assessment whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment , ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. SIGNIFICANT ACCOUNTING POLICIES In assessing whether the contractual cash flows are solely payments of principal and interest (“the SPPI test”), the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers contingent events that would change the amount and timing of cash flows, prepayment and extension terms, terms that limit the Group’s claim to cash flows from specified assets and features that modify consideration of the time value of money. Instruments failing SPPI will be measured at FVTPL. Reclassifications Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. The reclassification takes place from the start of the first reporting period following the change. 154
  146. Financial assets - applicable up to 31 December 2017 At inception or on initial recognition a financial asset is classified in one of the following categories : Financial liabilities The Group has classified and measured its financial liabilities at amortized cost. (iii) De-recognition • loans and receivables (LaR); • held to maturity (HTM); • available-for-sale (AFS); and • at fair value through profit or loss (FVTPL), either as: held for trading; or FVTPL on initial designation Financial assets held for trading A financial asset is classified as held-for-trading if it is: • acquired or incurred principally for the purpose of selling or repurchasing it in the near term; • on initial recognition, part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or • a derivative, except for a derivative that is a designated and effective hedging instrument. Financial assets designated as at FVTPL In addition to financial assets held for trading, financial assets are classified in the FVTPL category on initial recognition, to designate such instruments as a FVTPL using the fair value option in one of the following circumstances: The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for de-recognition that is created or retained by the Group is recognised as a separate asset or liability in the statement of financial position. On de-recognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) is recognised in consolidated income statement. From 1 January 2018, any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in the consolidated income statement on derecognition of such securities. A financial asset (in whole or in part) is derecognised where: When doing so results in more relevant information because either: • the rights to receive cash flows from the asset have expired; •it eliminates or significantly reduces a measurement or recognition inconsistency that would result from measuring assets or liabilities or recognising gains or losses on them on different bases (an “accounting mismatch”); or • a group of financial assets or liabilities (or both) is managed and its performance is evaluated on a fair value basis in accordance with the entity’s document risk management or investment strategy and information is provided by key management personnel on this basis. • the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of ownership or (b) when it has neither transferred or retained substantially all the risks and rewards and when it no longer has control over the financial asset, but has transferred control of the asset. 155
  147. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING POLICIES The Group enters into transactions whereby it transfers assets recognised on its consolidated statement of financial position , but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to repurchase transactions as the Group retains all or substantially all the risks and rewards of ownership of such assets. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (iv) Modification of financial assets and liabilities Financial Assets If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value, and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purpose, including for the purpose of determining whether a significant increase in credit risk has occurred. Policy applicable from 1 January 2018 If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset based on the revised cash flows 156
  148. of the financial assets and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in the consolidated income statement . If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income. Policy applicable up to 31 December 2017 If the terms of a financial asset were modified because of financial difficulties of the borrower and the asset was not derecognised, then impairment of the asset was measured using the premodification interest rate. (vi) Measurement principles Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment loss. The calculation of effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate (EIR). Fair value measurement Financial Liabilities The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in the consolidated income statement. (v) Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS and when approved by the QCB, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. 157 ‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.
  149. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING POLICIES The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. 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 158
  150. 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 measures the fair value of listed investments at the market closing price for the investment. For unlisted investments, the Group recognises any increase in the fair value, when they have reliable indicators to support such an increase. These reliable indicators are limited to the most recent transactions for the specific investment or similar investments made in the market on a commercial basis between desirous and informed parties who do not have any reactions which might affect the price. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction. (vi) Impairment Policy applicable from 1 January 2018 The Group recognises loss allowances for expected credit losses (ECL) on the following financial instruments that are not measured at FVTPL: • Financial assets that are debt instruments; and • Loan commitments and financial guarantee contracts. 159 No impairment loss is recognised on equity investments. The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: • debt investment securities that are determined to have low credit risk at the reporting date; and • other financial instruments on which credit risk has not increased significantly since their initial recognition 12-month ECL are the portion of ECL that result from default events on financial instruments that are possible with the 12 months after the reporting date. Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows: • Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); • Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; • Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and • Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover
  151. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Restructured financial assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower , then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows. • If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. SIGNIFICANT ACCOUNTING POLICIES •If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI are credit impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data: • Significant financial difficulty of the borrower or issuer; • A breach of contract such as a default or past due event; • The restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; • It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or • The disappearance of an active market for a security because of financial difficulties. 160
  152. Policy applicable up to 31 December 2017 At each reporting date the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired . A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. loss and reflected in an allowance account against loans and advances to customers. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist The Group considers evidence of impairment loss for loans and advances to customers and held-tomaturity investment securities at both a specific asset and collective level. All individually significant loans and advances to customers and held-tomaturity investment securities are assessed for specific impairment. All individually significant loans and advances to customers and held-tomaturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances to customers and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances to customers and held-tomaturity investment securities with similar risk characteristics. For listed investments, a decline in the market value from cost by 20% or more, or a decline in the market value from cost for a continuous period of 9 months or more, are considered to be indicators of impairment. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Impairment losses are recognised in profit or 161 Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. In subsequent periods, the appreciation of fair value of previously impaired available-for-sale equity investment securities is recorded in fair value reserve.
  153. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (d) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in management of its short-term commitments. Mandatory cash reserves with central banks are not available for operational purposes and not included as part of cash and cash equivalents. SIGNIFICANT ACCOUNTING POLICIES (e) Loans and advances to customers Loans and advances to customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term. Loans and advances to customers, cash and balances with central banks and due from banks are classified as “loans and receivables”. Loans and advances to customers are initially measured at the transaction price which is the fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. When the Group purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date (reverse repo or stock borrowing), the arrangement is accounted for as a loan or advance, and the underlying asset is not recognised in the Group’s financial statements. 162
  154. (f) Investment securities Policy applicable from 1 January 2018 The ‘investment securities’ includes: •Debt investment securities measured at amortised cost; these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; • Debt and equity investment securities mandatorily measured at FVTPL or designated as at FVTPL; these are at fair value with changes recognised immediately in profit or loss; • Debt securities measured at FVOCI; and • Equity investment securities designated as at FVOCI. For debt securities measured at FVOCI, gains and losses are recognised in OCI, except for the following, which are recognised in profit or loss in the same manner as for financial assets measured at amortised cost: • Interest income using the effective interest method; • Expected credit losses and reversals; and • Foreign exchange gains and losses. When a debt security measured at FVOCI is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to consolidated income statement. The Group elects to present in OCI changes in the fair value of certain investments in equity instruments that are not held for trading. The election is made on an instrument by instrument basis on initial recognition and is irrevocable. Gains and losses on such equity instruments are never subsequently reclassified to consolidated income statement, including on disposal. Impairment 163 losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in consolidated income statement, unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised in OCI. Cumulative gains and losses recognised in OCI are transferred to retained earnings on disposal of an investment. Policy applicable from 31 December 2017 Subsequent to initial recognition investment securities are accounted for depending on their classification as either “held-to-maturity”, “fair value through profit or loss”, or “available-for-sale”. Interest income is recognised in consolidated income statement using the effective interest method. Dividend income is recognised in profit or loss when the Group becomes entitled to the dividend. Foreign exchange gains or losses on debt security investments are recognised in consolidated income statement. (i) Held-to-maturity financial assets Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold to maturity, and which were not designated as at fair value through profit or loss or as available-for-sale. Held-to-maturity investments are carried at amortised cost using the effective interest method. (ii) Fair value through profit or loss The Group has classified its investments as held for trading where such investments are managed for short-term profit taking or designated certain investments as fair value through profit or loss. Fair value changes on these investments are recognised immediately in consolidated income statement.
  155. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (iii) Available-for-sale financial investments Available-for-sale investments are non-derivative investments that are designated as availablefor-sale or are not classified as another category of financial assets. Unquoted equity securities are carried at cost less impairment, and all other available-for-sale investments are carried at fair value. Other fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are reclassified to consolidated income statement as a reclassification adjustment. SIGNIFICANT ACCOUNTING POLICIES A non-derivative financial asset may be reclassified from the available-for-sale category to the loans and receivables category if it otherwise would have met the definition of loans and receivables and if the Group had the intention and ability to hold that financial asset for the foreseeable future or until maturity. (g) Derivatives (i) Derivatives held for risk management purposes (including hedge accounting) Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair value on the consolidated statement of financial position. The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationship between the hedging derivative instrument(s) and hedged item(s), including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to whether the hedging instrument(s) is (are) expected to be highly effective in offsetting the changes in the 164
  156. fair value or cash flows of the respective hedged item (s) during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125 percent. These hedging relationships are discussed below: Cash flow hedges – qualifying for hedge accounting During the period, the Group commenced the application of cash flow hedge accounting for qualifying interest rate caps and interest rate swaps. When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income in the fair value reserve. The amount recognised in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect consolidated income statement , and in the same line item in the statement of comprehensive income. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in consolidated income statement . If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction, the cumulative amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to the consolidated income statement as a reclassification adjustment. 165 Fair value hedges – qualifying for hedge accounting When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in consolidated income statement together with changes in the fair value of the hedged item that are attributable to the hedged risk. If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item, for which the effective interest method is used, is amortised to consolidated income statement as part of the recalculated effective interest rate of the item over its remaining life. Hedging derivatives – not qualifying for hedge accounting When a derivative is held for risk management purposes but, due to the characteristics of the derivative (e.g. where it includes embedded options), it does not qualify for hedge accounting, all changes in its fair value are recognised immediately in consolidated income statement. Also included in this category are foreign exchange derivatives (such as forward exchange contracts and cross currency swaps) that are used to hedge foreign currency risks arising between lending and funding activities and interest rate options. (ii) Derivatives held for trading purposes The Group’s derivative trading instruments includes primarily forward foreign exchange contracts and interest rate swaps, which the Group sells to customers in order to enable them to transfer, modify or reduce current and future risks. These derivative instruments are fair valued as at the end of reporting date and the corresponding fair value changes are recognised in the consolidated income statement.
  157. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (h) Property and equipment (i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and capitalised borrowing costs. SIGNIFICANT ACCOUNTING POLICIES Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and is recognised in other income/other expenses in consolidated income statement. (ii) Subsequent costs The cost of replacing a component of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in consolidated income statement as incurred. (iii) Depreciation Depreciable amount is the cost of property and equipment, or other amount substituted for cost, less its residual value. Depreciation is recognised in consolidated income statement s on a straightline basis over the estimated useful lives of each part of an item of property and equipment since 166
  158. this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset and is based on cost of the asset less its estimated residual value . Land is not depreciated. The estimated useful lives for the current and comparative years are as follows: Buildings 20 years Leasehold improvements 7 years Furniture and equipment 3 to 5 years Motor vehicles 3 years Freehold land Stated at cost, not depreciated Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted prospectively, if appropriate. (i) Intangible assets (i) Goodwill Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is tested at each reporting date for impairment by comparing the present value of the expected future cash flows from a cash generating unit with the carrying value of its net assets, including attributable goodwill and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. 167 (ii) Computer software Costs associated with the development of software for internal use are capitalised if the software is technically feasible and the Group has both the intent and sufficient resources to complete the development. Costs are only capitalised, if the asset can be reliably measured and will generate future economic benefits to the Group. Only costs that are directly attributable to bringing the software into working condition for its intended use are capitalised. These costs include all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in a manner intended by management. Other development expenditure is recognised in the consolidated income statement as an expense when incurred. Capitalised development expenditure and purchased software is stated at cost less accumulated amortisation and impairment losses. Once the software is ready for use, the capitalised costs are amortised over their expected lives, generally between three to seven years. Capitalised software is assessed for impairment where there is an indication of impairment. Where impairment exists, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss recognised in the consolidated income statement. The amortisation charge for the asset is then adjusted to reflect the asset’s revised carrying amount. Subsequent expenditure is only capitalised when it increases the future economic benefits embodied in the specific asset to which it relates.
  159. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (j) Impairment of non-financial assets The carrying amounts of the Group’s non-financial assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives, the recoverable amount is estimated each year at the same time. An impairment loss is recognised if the carrying amount of an asset or its Cash Generating Unit (“CGU”) exceeds its estimated recoverable amount. SIGNIFICANT ACCOUNTING POLICIES The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. Impairment losses are recognised in consolidated income statement. Impairment losses recognised in respect of CGUs are allocated first to reduce 168
  160. the carrying amount of any goodwill allocated to the CGU (group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. this amortised amount and the present value of any expected payment when a payment under the guarantee has become probable. Financial guarantees are included within other liabilities. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. (m) Employees’ benefits An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (k) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote. (l) Financial guarantees Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognised initially at their fair value, and the initial fair value is amortised over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of 169 (i) End of service benefits The Group provides for end of service benefits payable to its employees, based on the individual’s period of service at the reporting date in accordance with the employment policy of the Group and the provisions in Qatar Labour Law. The expected costs of these benefits are accrued over the period of employment, and included as part of other liabilities in the consolidated statement of financial position. The Group provides for its contribution to the State administered retirement fund for Qatari employees in accordance with the retirement law, and the resulting charge is included within the personnel cost under general administration expenses in the consolidated income statement. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised when they are due. (ii) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profitsharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
  161. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (n) Issued capital and reserves (i) Share issue costs Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. (ii) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Group’s shareholders. Dividends for the year that are declared after the date of the consolidated statement of financial position are dealt with in the subsequent events note. SIGNIFICANT ACCOUNTING POLICIES (o) Interest income and expense Interest income and expense are recognised in consolidated income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes all transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income and expense presented in the consolidated statement of income include: • the interest on financial assets and financial liabilities measured at amortised cost; • the interest on available-for-sale, held to maturity and designated at fair value through profit or loss investment securities; and • the interest on derivatives that are designated as qualifying hedges. 170
  162. (p) Fees and commission income and expense (r) Dividend income Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. (q) Income from investment securities (i) Investment securities Gains or losses on the disposal of investment securities are recognised in consolidated income statement as the difference between fair value of the consideration received and carrying amount of the investment securities. Unrealised gains or losses on fair value changes from re-measurement of investment securities classified as held for trading or designated as fair value through profit or loss are recognised in consolidated income statement. From 1 January 2018, any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in the consolidated income statement on derecognition of such securities but may be reclassified to another class of equity. (ii) Derivatives This includes all fair value changes on derivatives whether qualifying hedges or not. In addition, interest income and expense arising on derivatives that are not designated as qualifying hedges are also included. 171 Dividend income is recognised when the right to receive income is established. (s) Tax expense Tax expense comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using the tax rates enacted or substantively enacted at the reporting date. The Group operations inside Qatar are not subject to income tax. Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax liabilities are recognised for taxable temporary differences. Deferred tax assets and liabilities are measured using the tax rate and applicable legislation enacted or substantively enacted as at the reporting date. (t) Earnings per share Basic earnings per share (“EPS”) is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank, further adjusted for the distribution for instrument eligible for additional Tier 1 Capital, if any, by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.
  163. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (u) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers (i.e. the Group Executive Board). The Board is responsible for allocating resources to each segment and assessing its performance, and for which discrete financial information is available. The Group has the following business segments: Wholesale Banking, Personal Banking, Group Treasury and Central Functions. (v) Repossessed collateral SIGNIFICANT ACCOUNTING POLICIES Repossessed collaterals against settlement of customers’ debts are stated within the consolidated statement of financial position under “Other assets” at their acquisition value net of allowance for impairment. (w) Comparatives Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative information. 172
  164. 4 . Financial Risk Management (a) Introduction and overview The identification, measurement and management of risk is a strategic priority for the Group. The overall responsibility for ensuring a robust risk management infrastructure rests with the Board of Directors. The Group has established a risk management framework covering accountability, oversight, measurement and reporting to maintain relevant standards. The risk governance structure at al khaliji consists of five layers comprising of the following: FINANCIAL RISK MANAGEMENT Level 1: Board of Directors Level 2: Board Committees - Compliance and Risk Committee Level 3: Senior Management Committees – Group Credit and Investment Committee; Group Asset, Liability and Capital Committee (“GALCCO”); Group Risk Committee Level 4: Risk Function - Units for Corporate Credit, Business Banking Credit, Consumer Credit, Market Risk, Fraud Risk, Security Risk and Operational Risk Level 5: Business Units - Risk awareness culture, desktop level procedures, systems and controls Internal audit provides an independent assessment of the adequacy of risk management and compliance with its policies, procedures, and reports to the audit committee of the board. The Group has exposure to the following key risks from the use of financial instruments: • • • • • 173 Credit risk Liquidity risk Market risk Operational risk Interest rate risk
  165. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS These risks occur as a part of normal business activities and are identified , monitored and managed through a framework of controls. These controls include transaction analysis and suitability, risk ratings, risk limits, approval authorities and periodic reporting. Risks are reviewed on a transaction as well as portfolio basis by senior management, relevant committees and the Board of Directors. The risk management process encompasses all businesses and functions through an organizationwide culture of ‘risk awareness’. The Group remains cognizant of the market environment and calibrates its risk appetite and risk controls in light of changing conditions. FINANCIAL RISK MANAGEMENT (b) Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s loans and advances to customers, due from banks and investment securities, excluding equity investments The Group manages limits and controls concentrations of credit risk wherever they are identified, with specific emphasis to individual counterparties and groups, and to industries and countries and mitigates its exposure to credit risk through collateral, by taking security for funds advanced, and uses approved guidelines on the acceptability of specific classes of collateral or credit risk mitigation. 174
  166. (i) Maximum exposure to credit risk before collateral held or other credit enhancements The following table provides the maximum exposure to credit risk (at net carrying amounts) for all financial position and off-financial position items where credit risk exposures exist. This maximum exposure depicts the gross worst-case amount before considering the effect of collateral, master netting agreements or other mitigation: 2018 QAR’000 2017 QAR’000 Due from central banks – excluding cash 2,750,353 2,444,014 Due from banks 6,084,725 6,617,364 Loans and advances to customers 31,309,462 35,093,547 Investment securities 10,554,775 12,394,946 641,388 615,524 51,340,703 57,165,395 Guarantees 8,365,909 9,263,974 Letters of credit 1,908,339 2,151,902 Credit exposure relating to on-financial position items: Other assets Total on-financial position credit exposure Credit exposure relating to off-financial position items: Unutilised credit facilities 7,114,989 7,857,907 Total off-financial position credit exposure 17,389,237 19,273,783 Total credit exposure 68,729,940 76,439,178 175
  167. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (ii) Concentration of risks of financial assets with credit risk exposure Geographical sectors The following tables break down the Group’s credit risk exposure at their net carrying amounts (without taking into account any collateral held or other credit support), as categorized by geographical region. For this table, the Group has allocated exposures to regions based on the country of domicile of its counterparties. Qatar QAR’000 Other GCC QAR’000 UK and Europe QAR’000 Rest of the World QAR’000 Total QAR’000 Due from central banks – excluding cash 2,433,565 214,430 102,358 - 2,750,353 Due from banks 4,385,209 297,813 332,828 1,068,875 6,084,725 22,658,979 3,758,915 1,681,120 3,210,448 31,309,462 9,577,271 686,268 - 291,236 10,554,775 348,926 69,167 139,120 84,175 641,388 39,403,950 5,026,593 2,255,426 4,654,734 51,340,703 Due from central banks – excluding cash 1,795,119 544,873 104,022 - 2,444,014 Due from banks 5,080,670 282,307 376,067 878,320 6,617,364 Loans and advances to customers 24,874,970 4,652,721 2,343,101 3,222,755 35,093,547 Investment securities 11,296,911 766,342 - 331,693 12,394,946 356,309 74,727 140,071 44,417 615,524 43,403,979 6,320,970 2,963,261 4,477,185 57,165,395 At 31 December 2018 Loans and advances to customers Investment securities Other assets Total exposure At 31 December 2017 Other assets Total exposure 176
  168. (iii) Concentration of risks of financial assets with credit risk exposure – off balance sheet Qatar QAR’000 Other GCC QAR’000 UK and Europe QAR’000 Rest of the World QAR’000 Total QAR’000 6,417,369 809,072 175,388 964,080 8,365,909 674,035 39,666 - 1,194,638 1,908,339 6,187,592 286,626 210,047 430,724 7,114,989 13,278,996 1,135,364 385,435 2,589,442 17,389,237 Guarantees 6,140,396 1,117,748 233,573 1,772,257 9,263,974 Letters of credit 1,093,023 38,590 - 1,020,289 2,151,902 Unutilised credit facilities 6,195,463 1,323,862 159,588 178,994 7,857,907 13,428,882 2,480,200 393,161 2,971,540 19,273,783 At 31 December 2018 Guarantees Letters of credit Unutilised credit facilities Total exposure At 31 December 2017 Total exposure Industry sector The following table breaks down the Group’s main credit exposure at their net carrying amounts, as categorised by the industry sectors of our counterparties: 2018 QAR’000 2017 QAR’000 Government 8,874,428 11,880,121 Government agencies 5,033,346 5,114,714 Industry 1,857,030 2,640,676 Commercial 3,825,762 3,678,335 19,547,278 20,284,667 Contracting 2,075,388 2,485,444 Real Estate 8,928,189 8,809,342 Personal 2,510,285 2,977,887 98,650 119,930 Contingent liabilities 17,479,664 19,273,783 Gross exposure 70,230,020 77,264,899 Allowance for impairment (1,500,080) (825,721) Total exposure 68,729,940 76,439,178 Funded and Unfunded Services Others 177
  169. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Total maximum exposure net of tangible collateral is QAR 28 billion (2017: QAR 27 billion). The types of collateral obtained include cash, mortgages over real estate properties and pledges of shares. i) Credit quality Pursuant to the adoption of IFRS 9, the Bank has mapped its internal credit rating scale to Moody’s rating scale, the table below provides an analysis of counterparties by rating grades and credit quality of the Bank’s credit risk, based on Moody’s ratings (or their equivalent) as at 31 December 2018. The following table sets out information about the credit quality of financial assets, commitments and financial guarantees Stage 1 QAR’000 2018 Stage 2 QAR’000 Stage 3 QAR’000 2018 Total QAR’000 2017 Total QAR’000 AAA to AA- 3,576,375 - - 3,576,375 2,491,887 A+ to A- 4,282,868 - - 4,282,868 4,027,944 26,449 - - 26,449 540,106 719,034 236,949 955,983 634,306 - - - - 1,367,135 8,604,726 236,949 - 8,841,675 9,061,378 (2,967) (3,630) - (6,597) - - - - - - 8,601,759 233,319 8,835,078 9,061,378 Cash and Balances with Central Banks (Excluding Cash on Hand) and Due from Banks BBB to BBBBB+ to BUnrated Total Expected Credit losses (IFRS 9) Impairment (IAS 39) Carrying amount 178
  170. Stage 1 QAR ’000 2018 Stage 2 QAR’000 Stage 3 QAR’000 2018 Total QAR’000 2017 Total QAR’000 AAA to AA- 4,901,051 - - 4,901,051 5,334,426 A+ to A- 4,089,619 151,092 - 4,240,711 814,324 BBB to BBB- 6,236,756 547,895 - 6,784,651 844,270 12,273,382 1,818,772 - 14,092,154 705,505 76,774 2,145,955 615,092 2,837,821 27,533,071 27,577,582 4,663,714 615,092 32,856,388 35,231,596 (173,748) (717,360) (511,408) (1,402,516) - - - - - (825,721) 27,403,834 3,946,354 103,684 31,453,872 34,405,875 AAA to AA- 8,120,961 - - 8,120,961 7,203,937 A+ to A- 1,510,069 - - 1,510,069 1,590,346 BBB to BBB- 179,338 - - 179,338 741,676 BB+ to B- 646,397 98,010 - 744,407 683,059 - - - - 2,175,928 10,456,765 98,010 - 10,554,775 12,394,946 (8,246) (2,780) - (11,026) - - - - - - 10,448,519 95,230 - 10,543,749 12,394,946 AAA to AA- 227,201 - - 227,201 4,176 A+ to A- 633,655 - - 633,655 285,316 BBB to BBB- 2,399,344 7,262 - 2,406,606 17 BB+ to B- 4,537,587 2,154,709 - 6,692,296 524,769 228,190 86,300 - 314,490 10,601,598 8,025,977 2,248,271 - 10,274,248 11,415,876 (48,365) (42,062) - (90,427) - - - - - - 7,977,612 2,206,209 - 10,183,821 11,415,876 Loans and Advances to Customers BB+ to BUnrated Total Expected Credit losses (IFRS 9) Impairment (IAS 39) Carrying amount Investment Securities Unrated Total Expected Credit losses (IFRS 9) Impairment (IAS 39) Carrying amount Loan commitments and financial guarantees Unrated Total Expected Credit losses (IFRS 9) Impairment (IAS 39) Carrying amount 179
  171. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (iv) Collateral The Group obtains collateral and other credit enhancements in ordinary course of business from counterparties. On an overall basis, during the year there was no discerable deterioration in the quality of collateral held by the Group. In addition, there were no changes in collateral policies of the Group. The fair value of the collateral held against creditimpaired loans and advances as at 31 December 2018 is QR. 15 million (2017: QR. 18 million). (v) Write-off policy FINANCIAL RISK MANAGEMENT The Group writes off a loan or an investment debt security balance, and any related allowances for impairment losses, when the Group Credit and Investment Committee determines that the loan or security is uncollectible and after QCB approval. This determination is made after considering information such as the occurrence of significant changes in the borrower’s/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardised loans, write-off decisions generally are based on a product specific past due status. (vi) Inputs, assumptions and techniques used for estimating impairment Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis including internal credit risk grading system, external risk ratings, where available, delinquency status of accounts, credit judgement and, where possible, relevant historical experience. The Group may also determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators 180
  172. that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis . In determining whether credit risk has increased significantly since initial recognition following criteria’s are considered: i. Two notches downgrade for ratings from Aaa to Baa or one notch downgrade for ratings from Ba to Caa ii.Facilities restructured during previous twelve months iii. Facilities overdue by 30 days as at the reporting date Credit risk grades Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Exposures are subject to on-going monitoring, which may result in an exposure being moved to a different credit risk grade. Generating the term structure of Probability of Default (PD) The Group employs statistical models to analyse the data collected and generate estimates of PD of exposures and how these are expected to change as a result of the passage of time. This analysis includes the identification and calibration of relationships between changes in default rates and changes in key macro-economic factors, across various geographies in which the Group has exposures. Renegotiated financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value. Where possible, the Group seeks to 181 restructure loans rather than to take possession of collateral, if available. This may involve extending the payment arrangements and documenting the agreement of new loan conditions. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The accounts which are restructured due to credit reasons in past 12 months will be classified under Stage 2. Definition of default The Group considers a financial asset to be in default when: •the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or • the borrower is past due more than 90 days on any material credit obligation to the Group; or • the borrower is rated 9 or 10. In assessing whether a borrower is in default, the Group also considers indicators that are: • quantitative – e.g. overdue status and nonpayment on another obligation of the same issuer to the Group; and • based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Group for regulatory capital purposes. Incorporating forward looking information increases the level of judgement as to how changes in these macroeconomic factors will affect the Expected Credit Loss (ECL) applicable to the stage 1 and stage 2 exposures which are considered as performing. The methodologies and assumptions involved, including any forecasts of future economic conditions, are reviewed periodically
  173. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Forward-looking information incorporated in the ECL models The assessment of SICR and the calculation of ECL both incorporate forward-looking information . The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses for each portfolio. FINANCIAL RISK MANAGEMENT The Group employs statistical models to incorporate macro-economic factors on historical default rates. In the case that none of the macro–economic parameters are statistically significant or the results of forecasted PDs are too deviated from the present forecast of the economic conditions, qualitative PD overlay is used by management based on portfolio analysis. Incorporating forward looking information increases the level of judgement as to how changes in these macroeconomic factors will affect the ECL applicable to the stage 1 and stage 2 exposures. The methodologies and assumptions involved, including any forecasts of future economic conditions, are reviewed periodically. These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. Expert judgment has also been applied in this process. Forecasts of these economic variables (the “base economic scenario”) are based on available information and include mean reversion approaches for long-term forecasts.. The impact of these economic variables on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these variables have had historically on default rates and on the components of LGD and EAD. In addition to the base economic scenario, other possible scenarios are assessed along with scenario weightings. The number of other scenarios used is set based on the analysis of each major product type to ensure non-linearities are captured. At 1 January 2018 and 31 December 2018, the Group concluded that three scenarios appropriately captured non-linearities for all portfolios. The scenario weightings are determined by a 182
  174. combination of statistical analysis and expert credit judgement , taking account of the range of possible outcomes each chosen scenario is representative of. The assessment of SICR is performed using the Lifetime PD under each of the base, and the other scenarios, multiplied by the associated scenario weighting, along with qualitative and backstop indicators (see note 5.2.2.1). This determines whether the whole financial instrument is in Stage 1, Stage 2, or Stage 3 and hence whether 12-month or lifetime ECL should be recorded. Following this assessment, the Group measures ECL as either a probability weighted 12 month ECL (Stage 1), or a probability weighted lifetime ECL (Stages 2 and 3). These probability-weighted ECLs are determined by running each scenario through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs). As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes Economic variable assumptions The most significant period-end assumption used for the ECL estimate as at 31 December 2018 is the oil price index, given the high level of correlation between this and other economic indicators. The scenarios “base”, “upside” and “downside” were used for all portfolios. The weightings assigned to each economic scenario at 31 December 2018 were as follows: All portfolios Base Upside Downside 70% 15% 15% 183 Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on a quarterly basis. Grouping of instruments for measured on a collective basis losses No instruments are measured on a collective basis. Measurement of ECL The key inputs into the measurement of ECL are the term structure of the following variables: • probability of default (PD); • loss given default (LGD); • exposure at default (EAD). These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forwardlooking information as described above. PD estimates are estimates at a certain date, which are calculated based on statistical rating models. These statistical models are primarily based on internally compiled data comprising both quantitative and qualitative factors and are supplemented by external credit assessment data where available. LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on a consistent rate for unsecured facilities and considers the impact of collateral for secured facilities.
  175. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Loss allowance The following tables show reconciliations from the opening to the closing balance of the loss allowance by class of financial instruments . Comparative amounts represent allowance account for credit losses and reflect measurement basis under IAS 39. Stage 1 QAR’000 Stage 2 QAR’000 Stage 3 QAR’000 Total QAR’000 - Loans and Advances to Customers 27,577,582 4,663,714 615,092 32,856,388 - Investment Securities (Debt) 10,456,773 98,010 - 10,554,783 - Loan Commitments and Financial Guarantees 8,025,977 2,248,271 - 10,274,248 - Due from Banks and Central Banks 8,604,726 236,949 - 8,841,675 54,665,058 7,246,944 615,092 62,527,094 174,281 670,975 825,721 1,670,977 Exposure subject to ECL Opening Balance (Day 1 impact) - as at 1 January 2018 - Loans and Advances to Customers - Investment Securities (Debt) 10,042 5,356 - 15,398 - Loan Commitments and Financial Guarantees 58,245 44,309 - 102,554 - Due from Banks 27,143 11,123 - 38,266 269,711 731,763 825,721 1,827,195 - - (955) (955) - - (474,706) (474,706) Foreign Currency Translation for the Period - Loans and Advances to Customers Written Off for the period - Loans and Advances to Customers - Loan Commitments and Financial Guarantees (31,085) (31,085) (505,791) (505,791) Charge (Reversal) for the Period (net) - Loans and Advances to Customers - Investment Securities (Debt) - Loan Commitments and Financial Guarantees - Due from Banks (533) 46,385 161,348 207,200 (1,796) (2,575) - (4,371) (9,880) (2,247) 31,085 18,958 (24,176) (7,494) - (31,670) (36,385) 34,069 192,433 190,117 173,748 717,360 511,408 1,402,516 Closing Balance - as at 31 December 2018 - Loans and Advances to Customers - Investment Securities (Debt) - Loan Commitments and Financial Guarantees - Due from Banks 184 8,246 2,780 - 11,026 48,365 42,062 - 90,427 2,967 3,630 - 6,597 233,326 765,832 511,408 1,510,566
  176. across various geographies in which the Group has exposures . Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis including internal credit risk grading system, external risk ratings, where available, delinquency status of accounts, credit judgement and, where possible, relevant historical experience. The Group may also determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis. In determining whether credit risk has increased significantly since initial recognition following criteria’s are considered: i. Two notches downgrade for ratings from Aaa to Baa or one notch downgrade for ratings from Ba to Caa ii.Facilities restructured during previous twelve months iii. Facilities overdue by 30 days as at the reporting date, rebutted to 60 days for certain portfolios Credit risk grades Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Exposures are subject to on-going monitoring, which may result in an exposure being moved to a different credit risk grade. Generating the term structure of Probability of Default (PD) The Group employs statistical models to analyse the data collected and generate estimates of PD of exposures and how these are expected to change as a result of the passage of time. This analysis includes the identification and calibration of relationships between changes in default rates and changes in key macro-economic factors, 185 Renegotiated financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value. Where possible, the Group seeks to restructure loans rather than to take possession of collateral, if available. This may involve extending the payment arrangements and documenting the agreement of new loan conditions. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The accounts which are restructured due to credit reasons in past 12 months will be classified under Stage 2. Definition of default The Group considers a financial asset to be in default when: • The borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or • The borrower is past due more than 90 days on any material credit obligation to the Group; or • The borrower is rated 9 or 10. In assessing whether a borrower is in default, the Group also considers indicators that are: • quantitative – e.g. overdue status and nonpayment on another obligation of the same issuer to the Group; and • based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Group for regulatory capital purposes.
  177. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (c) Liquidity Risk FINANCIAL RISK MANAGEMENT Liquidity risk is the risk that the Group is unable to meet its obligations when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows, such as debt maturities or margin calls for derivatives etc. Such outflows would deplete available cash resources for client lending, trading activities and investments. In extreme circumstances, lack of liquidity could result in losses on sales of assets, or potentially an inability to fulfil lending commitments. The risk that the Group will be unable to do so is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters. The aim of liquidity management is to honour the payment obligations and to minimise the costs of funding of the Group’s activities. Liquidity management is divided with respect to maturity into following two categories: • Operational liquidity: day-to-day management of cash and the Group’s accounts with other banks • Medium-term and long-term liquidity: to manage expected cash flows generated by on- and offfinancial position items and to provide sufficient funds for the Group’s business activities. Two categories of tools are used to measure liquidity risk, the liquidity ratio approach and expected cashflow approach. Both aim to quantify the current and expected gap between cash inflows (from new funding or asset maturities / sales) and outflows (funding maturities / withdrawals and new assets). Cognizance is taken of the difference between nominal and actuarial or expected maturities of assets and liabilities. Stress testing for different scenarios is also performed. The liquidity coverage ratio maintained by the Group as at 31 December 2018 is 176.0% (2017: 149.8%), as against the minimum requirement of 100% for the year ended 31 December 2018 (90% for 31 December 2017) as per QCB regulations. 186
  178. (i) Exposure to liquidity risk One key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose, net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks, certificate of deposits and commercial papers, debt securities, other borrowings and commitments maturing within the next month. A similar but not identical calculation is used to measure the Group’s compliance with the 100% liquidity ratio limit imposed by the Group’s lead regulator, the QCB. (ii) Maturity analysis (including all assets and liabilities) The following table illustrates the maturity profile of the Group’s financial assets and liabilities based on contractual maturities. The contractual maturities of assets and liabilities have been determined based on the remaining period at the reporting date to the contractual maturity date and do not take account of the liquid nature of assets nor the Group’s deposit retention history. Up to 1 month QAR’000 1 to 3 month QAR’000 3 to 12 month QAR’000 1 to 5 years QAR’000 More than 5 years QAR’000 Carrying amount QAR’000 Cash and balances with central banks 1,617,260 - - - 1,263,245 2,880,505 Due from banks 4,612,809 352,857 1,119,059 - - 6,084,725 Loans and advances to customers 4,635,253 1,298,710 4,330,198 11,653,544 9,391,757 31,309,462 Investment securities 114,510 - 1,548,100 6,639,943 2,360,338 10,662,891 All other assets 429,219 154,199 67,701 35,711 478,030 1,164,860 Total assets 11,409,051 1,805,766 7,065,058 18,329,198 13,493,370 52,102,443 Due to banks 4,962,039 1,699,882 2,257,399 575,821 - 9,495,141 - 146,267 441,940 - - 588,207 11,622,272 9,192,412 7,653,445 133,082 - 28,601,211 Other borrowings - 546,000 677,040 1,129,175 - 2,352,215 Debt securities issued - - 457,523 2,065,943 - 2,523,466 Subordinated debt - - - - 104,133 104,133 Other liabilities 295,755 289,897 987,636 187,267 100,935 1,861,490 Total liabilities 16,880,066 11,874,458 12,474,983 4,091,288 205,068 45,525,863 Financial position maturity gap (5,471,015) (10,068,692) (5,409,925) 14,237,910 13,288,302 6,576,580 At 31 December 2018 Certificate of deposits and commercial papers Customer deposits 187
  179. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Up to 1 month QAR ’000 1 to 3 month QAR’000 3 to 12 month QAR’000 1 to 5 years QAR’000 More than 5 years QAR’000 Carrying amount QAR’000 Cash and balances with central banks 1,174,915 - - - 1,412,338 2,587,253 Due from banks 5,846,035 22,074 326,913 422,342 - 6,617,364 Loans and advances to customers 6,756,359 1,629,261 4,012,074 12,131,544 10,564,309 35,093,547 Investment securities 454,272 428,830 1,853,119 6,548,170 3,221,755 12,506,146 All other assets 213,739 159,420 155,484 95,809 456,029 1,080,481 14,445,320 2,239,585 6,347,590 19,197,865 15,654,431 57,884,791 5,884,706 3,067,397 1,499,446 - 145,702 10,597,251 87,414 - - - - 87,414 12,436,669 13,351,260 6,838,432 56,449 - 32,682,810 Other borrowings 182,163 - 473,200 1,046,500 - 1,701,863 Debt securities issued 119,675 54,600 3,202,842 467,746 - 3,844,863 - - - - 109,234 109,234 219,725 447,433 681,337 181,750 39,610 1,569,855 Total liabilities 18,930,352 16,920,690 12,695,257 1,752,445 294,546 50,593,290 Financial position maturity gap (4,485,032) (14,681,105) (6,347,667) 17,445,420 15,359,885 7,291,501 At 31 December 2017 Total assets Due to banks Certificate of deposits and commercial papers Customer deposits Subordinated debt Other liabilities The table below summarises contractual expiry dates of the Group’s off-financial position financial instruments: No later than 1 year QAR’000 1 to 5 years QAR’000 More than 5 years QAR’000 Total QAR’000 Unutilised credit facilities 6,956,603 158,386 - 7,114,989 Guarantees and letters of credit 6,066,374 4,138,022 69,852 10,274,248 13,022,977 4,296,408 69,852 17,389,237 Unutilised credit facilities 7,755,568 102,339 - 7,857,907 Guarantees and letters of credit 6,736,442 4,148,579 530,855 11,415,876 14,492,010 4,250,918 530,855 19,273,783 At 31 December 2018 Contingent liabilities At 31 December 2017 Contingent liabilities 188
  180. The following table summarises the maturity profile of the Group ’s financial liabilities and derivatives based on contractual undiscounted payment obligations: More Total 1 to 5 than undiscounted years 5 years cash flows QAR’000 QAR’000 QAR’000 Up to 1 month QAR’000 1 to 3 month QAR’000 3 to 12 month QAR’000 Carrying amount QAR’000 4,975,579 1,728,406 2,318,260 644,719 - 9,666,964 9,495,141 - 147,420 443,061 - - 590,481 588,207 11,671,012 9,337,246 7,907,081 141,282 - Other borrowings - 576,090 709,922 1,239,481 - 2,525,493 2,352,215 Debt securities issued - - 481,006 2,506,709 - 2,987,715 2,523,466 Subordinated debt - - - - 104,133 104,133 104,133 16,646,591 11,789,162 11,859,330 4,532,191 104,133 At 31 December 2018 Non-derivative financial instruments Due to banks Certificate of deposits and commercial papers Customer deposits Total liabilities 29,056,621 28,601,211 44,931,407 43,664,373 Derivative financial instruments Outflow 93,349 693,589 778,461 224,887 - 1,790,286 (93,719) (678,690) (748,702) (219,312) - (1,740,423) Total liabilities and derivatives 16,646,221 11,804,061 11,889,089 4,537,766 104,133 44,981,270 10,680,943 10,597,251 Inflow At 31 December 2017 Non-derivative financial instruments Due to banks Certificate of deposits and commercial papers Customer deposits 5,902,209 3,092,049 1,519,236 - 167,449 87,387 - - - - 12,526,936 13,514,181 6,992,011 61,474 - 87,387 87,414 33,094,602 32,682,810 Other borrowings 182,609 - 499,827 1,094,178 - 1,776,614 1,701,863 Debt securities issued 121,514 55,696 3,521,525 490,427 - 4,189,162 3,844,863 - - - - 109,234 109,234 109,234 18,820,655 16,661,926 12,532,599 1,646,079 276,683 1,691,956 285,747 - 5,021,219 Inflow (1,540,597) (1,503,687) (1,711,925) (285,747) - (5,041,956) Total liabilities and derivatives 18,818,516 16,663,297 12,512,630 1,646,079 276,683 49,917,205 Subordinated debt Total liabilities 49,937,942 49,023,435 Derivative financial instruments Outflow 1,538,458 1,505,058 189
  181. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (d) Market Risk Market risk is the risk arising from changes in the value of financial instruments due to changes in interest rates, foreign exchange rates, as well as equity and commodity prices. Market risk management ensures that risk exposures from the generic risk factors do not exceed the risk appetite of the Group, as articulated in the risk limits, policies and product programs. These controls define permissible conduct, and also specify the types of financial instruments which the Group can acquire as part of its trading and investment activities. (i) Interest rate risk FINANCIAL RISK MANAGEMENT The primary market risk to which the banking and trading portfolios are exposed to is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. Interest rate risk is managed through monitoring interest rate gaps and using off-balance sheet instruments, primarily interest rate swaps, where appropriate. GALCCO is the monitoring body for compliance with these limits and is assisted by Risk Management in its day-to-day monitoring activities. A summary of the Group’s interest rate gap position on non-trading portfolios, using the shorter of maturity or re-pricing periods is as follows: 190
  182. Within 3 months QAR ’000 3 months to 1 year QAR’000 1 to 5 Years QAR’000 More than Non-interest 5 years bearing QAR’000 QAR’000 Total carrying amount QAR’000 Effective interest rate At 31 December 2018 Cash and balances with central banks 1,272,253 - - - 1,608,252 2,880,505 0.36% Due from banks 4,811,320 1,035,118 67,120 - 171,167 6,084,725 2.57% 27,094,891 1,801,138 808,074 1,453,418 151,941 31,309,462 4.83% 150,960 1,507,364 6,620,401 2,084,400 299,766 10,662,891 3.46% Other assets - - - - 1,164,860 1,164,860 Total assets 33,329,424 4,343,620 7,495,595 3,537,818 3,395,986 52,102,443 6,938,526 2,306,463 135,235 - 114,917 9,495,141 2.45% Loans and advances to customers Investment securities Due to banks Certificate of deposits Customer deposits Other borrowings Debt securities issued Subordinated debt Other liabilities Shareholders' equity Total liabilities and shareholders' equity Financial position re-pricing gap Derivatives 146,267 441,940 - - - 588,207 1.42% 17,772,769 8,031,318 216,280 204 2,580,640 28,601,211 2.61% 1,988,215 364,000 - - - 2,352,215 3.19% 72,800 384,723 2,065,943 - - 2,523,466 3.37% - - - 104,133 - 104,133 10,704 - - - 1,850,786 1,861,490 - - - - 6,576,580 6,576,580 26,929,281 11,528,444 2,417,458 104,337 11,122,923 52,102,443 6,400,143 (7,184,824) 5,078,137 5,733,513 3,433,481 (7,726,937) (198,245) (4,348,452) Interest rate re-pricing gap 12,133,656 (7,383,069) 729,685 (1,186,816) Cumulative interest rate re-pricing gap 12,133,656 4,750,587 5,480,272 7,726,937 742,163 - - - - 2,246,665 (7,726,937) At 31 December 2017 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Other assets Total assets Due to banks Certificate of deposits Customer deposits 1,845,090 2,587,253 0.1% 5,801,205 400,492 109,234 306,433 6,617,364 1.4% 27,975,744 2,237,692 2,224,084 1,937,211 718,816 35,093,547 4.2% 883,960 1,849,313 6,408,352 2,908,280 456,241 12,506,146 2.8% - - - - 1,080,481 1,080,481 35,403,072 4,487,497 8,741,670 4,845,491 4,407,061 57,884,791 9,131,237 1,374,280 - - 91,734 10,597,251 1.5% 87,414 - - - - 87,414 0.0% 23,313,756 6,834,305 56,449 - 2,478,300 32,682,810 2.1% Other borrowings 1,337,863 364,000 - - - 1,701,863 1.6% Debt securities issued 1,488,171 1,961,745 394,947 - - 3,844,863 2.9% Subordinated debt Other liabilities Shareholders' equity Total liabilities and shareholders' equity Financial position re-pricing gap - 109,234 - - - 109,234 9,355 - - - 1,560,500 1,569,855 - - - - 7,291,501 7,291,501 35,367,796 10,643,564 451,396 - 11,422,035 57,884,791 35,276 (6,156,067) 8,290,274 4,845,491 (7,014,974) Derivatives 3,828,779 1,726,357 (3,809,348) (1,745,788) - Interest rate re-pricing gap 3,864,055 (4,429,710) 4,480,926 3,099,703 (7,014,974) Cumulative interest rate re-pricing gap 3,864,055 (565,655) 3,915,271 7,014,974 191
  183. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (ii) Net Interest income sensitivity The following table illustrates the effect of a reasonable possible change in interest rates, with all other variables held constant, on the consolidated statement of income. The sensitivity of the consolidated statement of income is the effect of the assumed changes in interest rates on the net interest income for one year, based on the changing rate of financial assets and liabilities, including the effect of hedging instruments. The sensitivity of comprehensive income is calculated by revaluing available-for-sale investments, including the effect of any associated hedges. Percentage Change Currency Increase / Decrease Parallel Sensitivity of income Increase QAR’000 Sensitivity of comprehensive income Decrease QAR’000 Increase QAR’000 Decrease QAR’000 At 31 December 2018 QAR +1% / -1% 123,572 (123,572) (124,879) 124,879 USD +1% / -1% (37,971) 37,971 (7,636) 7,636 AED +1% / -1% 1,114 (1,114) - - EUR +1% / -1% (7,756) 7,756 - - Other minor currencies +1% / -1% (476) 476 - - Total +1% / -1% 78,483 (78,483) (132,515) 132,515 QAR +1% / -1% 99,501 (99,501) (108,971) 108,971 USD +1% / -1% (72,903) 72,903 (17,554) - AED +1% / -1% 3,821 (3,821) - - EUR +1% / -1% (1,868) 1,868 - - Other minor currencies +1% / -1% (11,352) 11,352 - - Total +1% / -1% 17,199 (17,199) (126,525) 108,971 At 31 December 2017 192
  184. (iii) Foreign exchange risk The Group takes on exposures to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Group has a set of limits on the level of currency exposure, which are monitored continually. The Group had the following significant net exposures: QAR QAR’000 EUR QAR’000 USD QAR’000 AED QAR’000 Other QAR’000 Total QAR’000 29,072,370 1,112,682 19,863,462 1,577,613 476,316 52,102,443 (1,563,783) (27,389,163) (1,841,722) At 31 December 2018 Financial position items: Assets Liabilities and shareholders’ equity Financial position currency exposure (20,355,480) 8,716,890 (451,101) (7,525,701) (264,109) (13,152,220) (490,990) (2,442,639) (1,095,911) 27,946,077 1,160,356 25,548,722 2,689,804 (1,310,741) (29,519,585) (1,717,767) (952,295) (52,102,443) (475,979) - Off-financial position items: Contingent liabilities (207,477) (17,389,237) At 31 December 2017 Financial position items: Assets Liabilities and shareholders’ equity Financial position currency exposure (21,081,121) 6,864,956 (150,385) (3,970,863) 972,037 (13,620,032) (458,956) (2,967,670) (1,971,491) 539,832 57,884,791 (4,255,577) (57,884,791) (3,715,745) - Off-financial position items: Contingent liabilities 193 (255,634) (19,273,783)
  185. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (iv) Foreign currency sensitivity analysis On-balance sheet foreign currency positions are managed within the Group’s risk management policy via foreign exchange derivative contracts. The following table illustrates the effect of a reasonable possible change of the relevant foreign currencies against the Qatari Riyal, with all other variables held constant, on the consolidated statement of income. An equal decrease in each of the below mentioned currencies against the Qatari Riyal is expected to have an equal but opposite impact. FINANCIAL RISK MANAGEMENT Percentage change 2018 QAR’000 2017 QAR’000 Euro +3% 22,634 11,282 Other currencies +3% 244 187 The Qatari Riyal, the Saudi Arabian Riyal (SAR) and the United Arab Emirates Dirham (AED) are both officially pegged against the US Dollar (USD). No sensitivity analysis has been calculated for these exposures as the exposures are not considered subject to significant fluctuation. (v) Equity price risk Equity price risk is the risk that the fair values of equity investments decrease as a result of changes in the levels of equity indices and the value of individual stocks. The effect on the other comprehensive income due to a reasonable possible change in equity indices, with all other variables held constant, is as follows: Qatar Exchange Percentage change 2018 QAR’000 2017 QAR’000 +10% 10,812 11,120 An equal decrease in each of the above mentioned equity indices is expected to have an equal but opposite impact. 194
  186. (e) Operational Risk Operational risk is defined as the risk of direct or indirect loss resulting from an event or action causing failure of technology, process infrastructure, personnel and other risks having an operational impact. The Group seeks to minimize actual or potential losses from operational failures through a framework of policies and procedures that identify, asses, control, manage and report those risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes. 195
  187. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (f) Capital management (i) Regulatory Capital The Group’s policy is to maintain a strong capital base so as to ensure investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. FINANCIAL RISK MANAGEMENT The Group and its individually regulated operations have complied with all externally imposed capital requirements throughout the year. The capital adequacy ratio of the Group is calculated in accordance with the Basel III Committee guidelines as adopted by the QCB. The Group is currently in the process of analysing new capital requirements for Interest Rate Risk on Banking Book (IRRBB) and will start setting aside capital based on new standard under Pillar II from 2019 onwards. 196
  188. The Group ’s regulatory capital position under Basel III and QCB regulations at 31 December was as follows: 2018 QAR’000 Basel III 2017 QAR’000 Basel III Common Equity Tier 1 (CET) Capital 4,895,128 5,653,793 Additional Tier 1 Capital 1,000,000 1,000,000 Additional Tier 2 Capital 477,357 - 6,372,485 6,653,793 2018 QAR’000 Basel III 2017 QAR’000 Basel III 35,431,546 37,863,072 15,495 30,025 2,230,189 1,972,015 37,677,230 39,865,112 Total Eligible Capital (ii) Risk weighted assets Risk weighted assets for credit risk Risk weighted assets for market risk Risk weighted assets for operational risk Risk weighted assets CET 1 ratio without capital conservation buffer CET 1 ratio including capital conservation buffer Tier 1 capital ratio including capital conservation buffer Total capital including capital conservation buffer and domestic systematic important bank buffer Total capital including conservation buffer, domestic systematic important bank buffer and ICAAP Pillar II capital charge Actual 13.0% 13.0% 15.6% 16.9% 16.9% Minimum limit as per QCB 6.0% 8.5% 10.5% 12.5% 14.0% 197
  189. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5 . USE OF ESTIMATES AND JUDGMENTS (a) Key sources of estimation uncertainty The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. USE OF ESTIMATES AND JUDGMENTS (i) Allowances for impairment Policy applicable from 1 January 2018 Assessment of whether credit risk on the financial assets has increased significantly since initial recognition and incorporation of forward looking information in the measurement of ECL, refer to note 4(b)(vi) Policy applicable up to 31 December 2017 Assets accounted for at amortised cost are evaluated for impairment on a basis described in the accounting policy note. The specific counterparty component of the total allowances for impairment applies to financial assets evaluated individually for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about the counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. Minimum impairment on specific counterparties are determined based on the QCB regulations. 198
  190. Collectively assessed impairment allowances cover credit losses inherent in portfolios of loans and advances to customers and investment securities measured at amortised cost with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired financial assets , but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on the estimates of future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances. (ii) Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. (b) Critical accounting judgements in applying the Group’s accounting policies (i) Valuation of financial instruments The Group’s accounting policy on fair value measurements is discussed in the significant accounting policies section. The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. 199 Level 1:Quoted market price (unadjusted) in an active market for an identical instrument (observable inputs). Level 2:Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3:Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Group determines fair values using valuation techniques. Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist, Black-Scholes and polynomial option pricing models and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date, that would have been determined by market participants acting at arm’s length.
  191. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The table below analyses financial instruments measured at fair value at the end of the reporting period , by the level in the fair value hierarchy into which the fair value measurement is categorised: Level 1 Level 2 Total 6,724,724 3,806,038 10,530,762 - 160,918 160,918 6,724,724 3,966,956 10,691,680 Derivatives - (66,412) (66,412) Total liabilities at fair value - (66,412) (66,412) 8,657,915 3,848,231 12,506,146 - 176,620 176,620 8,657,915 4,024,851 12,682,766 Derivatives - (81,220) (81,220) Total liabilities at fair value - (81,220) (81,220) At 31 December 2018 Investment securities measured at FVOCI (IFRS 9) Derivatives Total assets at fair value At 31 December 2017 Available-for-sale investment securities Derivatives Total assets at fair value 200
  192. (ii) Financial asset and liability classification (iv) Impairment of investments in equity and debt securities Policy applicable from 1 January 2018 Policy applicable from 1 January 2018 Assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and interest on the principal amount outstanding. Refer to note 3 (aa) for further information. Assessment of whether credit risk on the financial asset has increased significantly since initial recognition and incorporation of forward-looking information in the measurement of ECL. Refer to note 4 Inputs, assumptions and techniques used for estimating impairment of financial assets for more information. Policy applicable up to 31 December 2017 Policy applicable up to 31 December 2017 The Group’s accounting policies provide scope for assets and liabilities to be designated at inception into different accounting categories in certain circumstances: • In classifying financial assets or liabilities as trading, the Group has determined that it meets the description of trading assets and liabilities set out in accounting policies. • In designating financial assets at fair value through profit or loss, the Group has determined that it has met one of the criteria for this designation set out in accounting policies. • In classifying financial assets as held-tomaturity, the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by accounting policies. Details of the Group’s classification of financial assets and liabilities are given in note 7. (iii) Qualifying hedge relationships When designating financial instruments in qualifying hedge relationships, the Group has determined that it expects the hedges to be highly effective over the period of the hedging relationship. 201 Investments in equity and debt securities are evaluated for impairment on the basis described in the significant accounting policies section. (v) Useful lives of property and equipment The Group’s management determines the estimated useful life of property and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset, physical wear and tear, technical or commercial obsolescence. (vi) Useful lives of intangible assets The Group’s management determines the estimated useful life of its intangible assets for calculating amortisation. This estimate is determined after considering the expected economic benefits to be received from the use of intangible assets.
  193. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 . OPERATING SEGMENTS The Group is organised into four main operating segments for management purposes, which comprise Wholesale Banking, Personal Banking, Group Treasury and Central Functions. The segments offer different products and services, and are managed separately based on the Group’s management and internal reporting structure. For each segment, the Group Senior Management reviews internal management reports on at least a quarterly basis. The following describes the operations in each of the Group’s reportable segments. OPERATING SEGMENTS Wholesale Banking Includes loans, deposits and other transactions and balances with corporate customers Personal Banking Includes loans, deposits and other transactions and balances with retail customers Group Treasury Undertakes the Group’s funding and centralised risk management activities through borrowings, issues of debt securities, use of derivatives for risk management purposes and investing in liquid assets such as short-term placements and corporate and government debt securities Central Functions Comprises the costs of all central support departments such as Finance, Risk Management, and Operations etc. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit after tax, as included in the internal management reports that are reviewed by the Group’s Management. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm’s length basis. 202
  194. (i) Information about operating segments The results of each of the operating segments which are reviewed regularly by the Group’s management are as follows: Wholesale Banking QAR’000 Personal Banking QAR’000 Group Treasury QAR’000 Central Functions QAR’000 Total QAR’000 Net interest income 527,500 215,393 172,243 - 915,136 Net fee and commission income 144,481 53,914 (8,711) - 189,684 2,989 249 35,233 - 38,471 - 54 - 54 At 31 December 2018 Foreign exchange gain Income from investment securities Other operating income 90 - 21 - 111 Net operating income 675,060 269,556 198,840 - 1,143,456 Profit / (loss) for the year 400,240 193,550 195,207 (180,593) 608,404 Total Assets 24,147,702 8,661,595 18,810,089 483,057 52,102,443 Total Liabilities 26,813,353 2,757,291 15,175,274 779,945 45,525,863 Net interest income 590,367 231,582 162,516 - 984,465 Net fee and commission income 157,944 38,162 (14,188) - 181,918 3,976 338 35,109 - 39,423 Income from investment securities - - 9,214 - 9,214 Other operating income - - 9 - 9 Net operating income 752,287 270,082 192,660 - 1,215,029 Profit / (loss) for the year 467,137 98,518 162,151 (177,287) 550,519 Total Assets 27,243,095 9,122,729 21,045,061 473,906 57,884,791 Total Liabilities 31,202,522 2,513,891 16,526,829 350,048 50,593,290 31 December 2017 Foreign exchange gain 203
  195. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (ii) Geographical areas The geographical analysis of net operating income, total loans and advances to customers and total assets are based on the location of the entity in which the transactions and assets are recorded. Net operating income QAR QAR’000 Total loans and advances to customers Share % QAR QAR’000 Total assets QAR QAR’000 Share % 91.8% 48,378,105 92.9% Share % At 31 December 2018 Qatar 1,003,589 87.8% 28,748,975 United Arab Emirates 95,845 8.4% 1,362,213 4.4% 1,889,953 3.6% France 44,022 3.8% 1,198,274 3.8% 1,834,385 3.5% Total 1,143,456 100.0% 31,309,462 100.0% 52,102,443 100.0% 1,029,978 84.8% 31,733,505 90.4% 53,104,412 91.75% 31 December 2017 Qatar United Arab Emirates France Netherlands Total 134,336 11.0% 1,857,767 5.3% 2,612,943 4.51% 50,051 4.1% 1,502,275 4.3% 2,167,436 3.74% 664 0.1% - 0.0% - 0.00% 100.0% 57,884,791 100.00% 1,215,029 100.0% 35,093,547 7. FINANCIAL ASSETS AND LIABILITIES (a) Accounting classifications and fair values The table below sets out the carrying amounts and fair values of the Group’s financial assets and financial liabilities: 204
  196. Fair value Fair value through through PnL-Debt PnL-Equity QAR ’000 QAR’000 Fair value Fair value through through OCI-Debt OCI-Equity QAR’000 QAR’000 Amortised Cost QAR’000 Total carrying amount QAR’000 Fair value QAR’000 At 31 December 2018 Cash and balances with central banks - - - - 2,880,505 2,880,505 2,880,505 Due from banks - - - - 6,084,725 6,084,725 6,084,725 Loans and advances to customers - - - - 31,309,462 31,309,462 31,309,462 Investment securities - - 10,422,646 108,108 Total Financial Assets - - 10,422,646 108,108 40,406,829 50,937,583 50,934,168 Due to banks - - - - 9,495,141 9,495,141 9,495,141 Certificate of deposits - - - - 588,207 588,207 589,242 Customer deposits - - - - 28,601,211 28,601,211 28,601,211 Other borrowings - - - - 2,352,215 2,352,215 2,352,215 Debt securities issued - - - - 2,523,466 2,523,466 2,530,454 Subordinated debt - - - - 104,133 104,133 104,133 Total Financial Liabilities - - - - 43,664,373 43,664,373 43,672,396 Cash and balances with central banks - - 2,587,253 - - 2,587,253 2,587,253 Due from banks - - 6,617,364 - - 6,617,364 6,617,364 Loans and advances to customers - - 35,093,547 - - 35,093,547 35,093,547 Investment securities - - - 12,506,146 - 12,506,146 12,506,146 Total Financial Assets - - 44,298,164 12,506,146 - 56,804,310 56,804,310 Due to banks - - 1,115,474 - Certificate of deposits - - - - Customer deposits - - 754,896 Other borrowings - - - - 1,701,863 1,701,863 1,701,863 Debt securities issued - - - - 3,844,863 3,844,863 3,846,926 Subordinated debt - - - - 109,234 109,234 109,234 81,220 - 1,870,370 132,137 10,662,891 10,659,476 At 31 December 2017 Total Financial Liabilities 9,481,777 10,597,251 10,597,251 87,414 87,414 75,973 - 31,927,914 32,682,810 32,682,810 - 47,153,065 49,023,435 49,014,057 The fair value hierarchy of due from banks, derivative assets and liabilities and investment securities classified as available-for-sale are disclosed in Note 5(b)(i). The fair value hierarchy of investment securities classified as held-to-maturity issued are categorised as level 1, while loans and advances to customers are categorised as level 2. 205
  197. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8 . CASH AND BALANCES WITH CENTRAL BANKS 2018 QAR’000 2017 QAR’000 130,152 143,239 1,265,272 501,908 221,836 529,768 Included in cash and cash equivalents (note 32) 1,617,260 1,174,915 Mandatory cash reserves with QCB 1,168,293 1,293,211 94,952 119,127 2,880,505 2,587,253 2018 QAR’000 2017 QAR’000 497,433 435,162 Deposits 3,420,730 5,432,952 Balances with banks included in cash and cash equivalents (note 32) 3,918,163 5,868,114 Long term deposits 1,369,920 156,646 803,239 592,604 (6,597) - 6,084,725 6,617,364 Cash Balances with QCB other than mandatory cash reserves Balances with other central banks other than mandatory cash reserves Mandatory cash reserves with other central banks Cash and balances with central banks Mandatory cash reserves with central banks are not available for use in the Group’s day-to-day operations. 9. DUE FROM BANKS Demand accounts Loans and advances to banks Less: Net impairment losses Total due from banks 206
  198. 10 . LOANS AND ADVANCES TO CUSTOMERS a) By type 2018 QAR’000 2017 QAR’000 28,005,037 28,916,169 3,779,627 6,172,936 Acceptances 921,701 708,187 Bills discounted 150,023 260,025 32,856,388 36,057,317 Expected credit losses of loans and advances to customers – Performing (Stage 1 and 2) (891,108) - Expected credit losses of loans and advances to customers – Non performing (Stage 3) (511,408) (825,721) Interest in suspense (144,410) (138,049) 31,309,462 35,093,547 Loans Overdrafts Gross loans and advances Total net loans and advances to customers The total non-performing loans and advances to customers amounted to QAR 615.1 million (2017: QAR 698.1 million), representing 1.88% (2017: 1.94%) of the total gross loans and advances to customers. 207
  199. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS b ) By industry Loans QAR’000 Bills discounted and Overdrafts acceptances QAR’000 QAR’000 Total QAR’000 At 31 December 2018 Government and related agencies 3,508,574 1,233,321 - 4,741,895 Industry 1,616,632 136,969 8,539 1,762,140 Commercial 2,863,936 273,529 651,788 3,789,253 Services 8,223,543 555,513 202,662 8,981,718 Contracting 1,074,502 756,319 208,735 2,039,556 Real estate 8,480,658 373,627 - 8,854,285 Personal 2,022,967 431,838 - 2,454,805 69,815 18,511 - 88,326 27,860,627 3,779,627 1,071,724 32,711,978 Government and related agencies 3,311,238 3,051,559 - 6,362,797 Industry 2,330,470 155,187 17,972 2,503,629 Commercial 2,784,056 485,792 381,435 3,651,283 Services 8,411,361 513,494 265,707 9,190,562 Contracting 1,061,297 1,064,047 303,098 2,428,442 Real estate 8,381,440 347,695 - 8,729,135 Personal 2,398,331 542,032 - 2,940,363 99,927 13,130 - 113,057 28,778,120 6,172,936 968,212 35,919,268 Others Gross loans and advances At 31 December 2017 Others Gross loans and advances 208
  200. c ) By internal business segment Corporates 2018 SMEs Retail Real estate mortgages Total Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 QAR QAR QAR QAR QAR QAR QAR QAR QAR QAR QAR QAR QAR QAR QAR ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 Balance at 1 January 2018 - - 557,013 - - 38,881 Adjustments as a result of adopting IFRS 9 143,551 165,851 - 27,204 263,904 - Adjusted balance at beginning year 143,551 165,851 557,013 27,204 263,904 38,881 Net impairment losses during the year 5,585 48,711 60,329 (7,292) (81,743) 200,094 - - 225,252 - - - 156 11,934 3,370 229,286 225,252 156 11,934 3,370 229,286 4,575 - - 825,721 - 174,281 670,975 - 4,575 174,281 670,975 825,721 (112) 71,496 (98,754) 1,286 7,921 (321) (533) 46,385 161,348 Written off during the year - - (337,864) - - (14,509) - - (122,333) - - - - - (474,706) Foreign currency translation and adjustments - - - - - - (261) - - (5) - - 3,258 300,782 3,904 1,442 19,855 (644) Balance at 31 December 2018 149,136 214,562 278,834 (45) 19,912 182,161 224,421 (955) 4,249 173,748 717,360 511,408 Corporates SMEs Retail Real estate mortgages Total QAR ‘000 QAR ‘000 QAR ‘000 QAR ‘000 QAR ‘000 Balance at 1 January 2017 457,044 31,445 105,911 4,606 599,006 Net impairment losses during the year 163,045 14,349 123,292 (31) 300,655 Written off during the year (31,525) (5,898) (309) - (37,732) Foreign currency translation and adjustments (31,551) (1,015) (3,642) - (36,208) Balance at 31 December 2017 557,013 38,881 225,252 4,575 825,721 2017 209
  201. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11 . INVESTMENT SECURITIES a) By category Investment securities measured at FVOCI (IFRS 9) Available-for-sale financial investments (IAS 39) Investment securities measured at amortised cost (IFRS 9) Gross financial investments Less allowance for impairment of debt securities Net financial investments As a result of the sale on December 2017 certain “Held-to-maturity” (HTM) investments portfolio, the remaining of the portfolio was reclassified to the “Available-for-sale” (AFS) category in line with IFRS requirements. At 31 December 2017, the carrying amount of QAR 1,489 million, previously held in HTM by the Group has been transferred to AFS at the fair value of QAR 1,477 million and the resulting loss of QAR 11.6 million has been transferred to the fair value reserve in Equity. Debt securities with a carrying value of QAR 5,297.1 million (2017: QAR 6,477.3 million) were pledged as collateral under repurchase and other borrowing agreements with other banks. 210 2018 QAR’000 (Reviewed) 2017 QAR’000 (Audited) 10,530,762 - - 12,506,146 132,669 - 10,663,431 12,506,146 (540) - 10,662,891 12,506,146
  202. b ) By type 2018 Quoted QAR’000 2017 Unquoted QAR’000 State of Qatar debt securities 2,570,418 3,806,030 Debt securities guaranteed by the State of Qatar 1,637,163 - 262,954 - 1,789,143 - Other debt securities 356,938 - Equities 108,108 8 Other GCC Government debt securities 75,760 - GCC financial institutions and corporate debt securities 54,300 - - 2,069 6,854,784 3,808,107 2018 Quoted QAR’000 2017 Unquoted QAR’000 State of Qatar debt securities 3,355,716 3,848,222 Debt securities guaranteed by the State of Qatar 2,058,199 - 397,819 - 2,350,118 - Other debt securities 384,872 - Equities 111,191 9 State of Qatar debt securities - - Debt securities guaranteed by the State of Qatar - - Other GCC Government debt securities - - GCC financial institutions and corporate debt securities - - Other debt securities - - 8,657,915 3,848,231 Investment securities measured at FVOCI (IFRS 9) Other GCC Government debt securities GCC financial institutions and corporate debt securities Investment securities measured at amortised cost (IFRS 9) State of Qatar debt securities Debt securities guaranteed by the State of Qatar Other debt securities Total investment securities Available-for-sale Other GCC Government debt securities GCC financial institutions and corporate debt securities Held-to-maturity Total investment securities 211
  203. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS c ) By interest rate 2018 QAR’000 Investment securities measured at FVOCI (IFRS 9) Fixed rate 10,386,217 Floating rate 36,429 Investment securities measured at amortised cost (IFRS 9) Fixed rate – net 132,129 Total interest bearing 10,554,775 Equities 108,116 Total investment securities 10,662,891 2017 QAR’000 Available-for-sale Fixed rate 12,394,946 Held-to-maturity Fixed rate – net - Total interest bearing 12,394,946 Equities 111,200 Total investment securities 12,506,146 212
  204. 12 . PROPERTY AND EQUIPMENT Land and Leasehold Furniture and buildings improvements equipment QAR’000 QAR’000 QAR’000 Motor Workvehicles in-progress QAR’000 QAR’000 Total QAR’000 At 31 December 2018 Cost: Balance at beginning of the year 143,667 91,529 152,277 1,885 84,984 474,342 17 60 1,341 - 107,645 109,063 Transfers (note 13) - 29 606 - (721) (86) Disposals / write off - 120 (34) - - 86 (317) (284) (153) 2 - (752) 143,367 91,454 154,037 1,887 191,908 582,653 Balance at beginning of the year 7,272 85,349 144,718 1,757 - 239,096 Charged during the year 1,779 1,892 5,124 110 - 8,905 - 120 (34) - - 86 (54) (227) (119) 2 - (398) 8,997 87,134 149,689 1,869 - 247,689 134,370 4,320 4,348 18 191,908 334,964 133,688 91,805 149,090 1,892 39,838 416,313 - - 2,089 - 57,075 59,164 9,217 - 1,224 - (10,526) (85) - (836) (466) - (1,350) (2,652) 864 726 397 - (17) 1,970 143,769 91,695 152,334 1,892 85,020 474,710 Balance at beginning of the year 3,491 84,886 135,708 1,627 - 225,712 Charged during the year 1,842 2,225 9,431 135 - 13,633 - (391) (322) - - (713) 126 542 165 (2) - 831 5,459 87,262 144,982 1,760 - 239,463 138,310 4,433 7,352 132 85,020 235,247 Additions Foreign currency translation Total cost Accumulated Depreciation: Disposals /write off Foreign currency translation Total accumulated depreciation Net carrying amount At 31 December 2017 Cost: Balance at beginning of the year Additions Transfers (note 13) Disposals / write off Foreign currency translation Total cost Accumulated Depreciation: Disposals/write off Foreign currency translation Total accumulated depreciation Net carrying amount 213
  205. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13 . INTANGIBLE ASSETS Goodwill QAR’000 Software QAR’000 Total QAR’000 124,853 141,296 266,149 At 31 December 2018 Cost: Balance at beginning of the year Additions - 4,510 4,510 Write-off - (3,724) (3,724) (5,831) (329) (6,160) 119,022 141,753 260,775 Balance at beginning of the year - 110,195 110,195 Charged during the year - 11,305 11,305 Write-off - (3,724) (3,724) Foreign currency translation - (259) (259) Total accumulated amortisation - 117,517 117,517 119,022 24,236 143,258 108,927 161,393 270,320 Additions - 2,191 2,191 Transfers (note 12) - 85 85 Foreign currency translation Total cost Accumulated amortisation: Net carrying amount At 31 December 2017 Cost: Balance at beginning of the year Foreign currency translation 15,926 - 15,926 124,853 163,669 288,522 Balance at beginning of the year - 120,077 120,077 Charged during the year - 12,463 12,463 Foreign currency translation - 32 32 - 132,572 132,572 124,853 31,097 155,950 Total cost Accumulated amortisation: Total accumulated amortisation Net carrying amount The Goodwill (amounting to EUR 28 million) arose on the acquisition of Al Khaliji France S.A. Annual impairment tests were performed in December 2018 and December 2017. The recoverable amounts of Al Khaliji France S.A. were determined to exceed the carrying value of the investment (including goodwill), accordingly, no impairment is required. The recoverable amount is the higher of an asset’s or CGU’s fair value less cost at disposal and its value in use, using a discounted cash flow approach. The value in use calculation is most sensitive to assumptions regarding interest margins, projected growth rates and discount rates. Each of these assumptions were based primarily on historic values over the past three years combined with management’s views of future changes due to anticipated market conditions over the duration of the estimates. A discount rate of 11.00% (2017: 9.86%) and a terminal growth rate of 5% (2017: 5%) were used to estimate the recoverable amount. 214
  206. 14 . OTHER ASSETS 2018 QAR’000 2017 QAR’000 Accrued interest receivable 474,168 408,405 Derivatives with positive fair value (note 33) 160,918 176,620 Prepaid expenses 11,877 13,853 Other receivables 39,675 90,406 686,638 689,284 2018 QAR’000 2017 QAR’000 207,505 127,302 Repurchase agreements 4,562,877 5,812,981 Term deposits, residual maturity less than 1 year 4,724,759 4,656,968 Total due to banks 9,495,141 10,597,251 2018 QAR’000 2017 QAR’000 2,778,611 2,698,396 65,143 54,954 Term deposits 25,757,457 29,929,460 Total customer deposits 28,601,211 32,682,810 Government and related agencies 13,584,946 14,296,671 Non-banking financial institutions 8,774,946 10,902,944 Corporate 3,847,578 5,028,713 Individuals 2,393,741 2,454,482 28,601,211 32,682,810 Total other assets 15. DUE TO BANKS Demand and call deposits 16. CUSTOMER DEPOSITS by type: Current and call accounts Saving accounts By sector: Total customer deposits 215
  207. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17 . OTHER BORROWINGS Other borrowings are USD bi-lateral floating rate loans that are priced at spreads over USD LIBOR and which have the following residual maturities: 2018 QAR’000 2017 QAR’000 Up to 1 year 1,223,040 655,363 Between 1 and 3 years 1,129,175 1,046,500 Total other borrowings 2,352,215 1,701,863 2018 QAR’000 2017 QAR’000 Balance at 1 January 3,844,863 3,658,683 New issues 2,073,992 313,480 Repayments (3,391,535) (144,630) (3,854) 17,330 2,523,466 3,844,863 2018 QAR’000 2017 QAR’000 109,234 95,301 (5,101) 13,933 104,133 109,234 18. DEBT SECURITIES ISSUED The Group has issued debt securities under its EMTN program with the following movements: Other movements Balance at 31 December 19. SUBORDINATED DEBT The subordinated debt consists of a loan amounting to EUR 25 million for an undetermined maturity period, and carries interest at EONIA monthly rate (Euro Overnight index average) payable in arrears on a quarterly basis. This loan will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. Balance at the beginning of the year Foreign currency translation Balance at the end of the year 216
  208. 20 . OTHER LIABILITIES 2018 QAR’000 2017 QAR’000 2,712 5,003 Accounts payable 85,702 101,974 Derivatives with negative fair value (note 33) 66,412 80,930 Provision for staff benefits (note 20a) 43,407 41,983 Accrued interest payable 392,528 384,325 Acceptances 921,701 708,187 Other payables 258,601 247,453 90,427 - 1,861,490 1,569,855 2018 QAR’000 2017 QAR’000 Balance at the beginning of the year 41,983 47,957 Provided during the year (note 27) 12,314 11,081 (10,847) (17,067) (43) 12 43,407 41,983 2018 QAR’000 2017 QAR’000 360,000,000 360,000,000 Deferred income Expected credit losses on loan commitments and financial guarantees Total other liabilities (a) Provision for staff benefits Utilised during the year Foreign currency translation Balance at the end of the year 21. CAPITAL AND RESERVES (a) Issued capital Issued as at 31 December The authorised, issued and fully paid up capital of the Group totalling QAR 3,600 million consists of 360 million ordinary shares of QAR 10 each. Qatar Holding L.L.C. holds 27.24% (2017: 27.24%). Other Qatar Government related entities hold another 20.02% (2017: 20.01%), with the remaining 52.74% (2017: 54.09%) held by institutional investors and members of the public. All shares in issue are of the same class and carry equal rights. 217
  209. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (b) Legal reserve In accordance with Qatar Central Bank’s Law No. 13 of 2012 as amended, 10% of the net profit for the year is required to be transferred to legal reserve until the legal reserve equals 100% of the paid up capital. This reserve is not available for distribution except in circumstances specified in the Qatar Commercial Companies’ Law No. 11 of 2015 and is subject to the approval of QCB. During the year, the appropriation made to the legal reserve amounts to QAR 60.8 million (2017: QAR 55.1 million). The legal reserve includes share premium received on issuance of new shares in accordance with Qatar Commercial Companies’ Law No. 11 of 2015. (c) Risk reserve CAPITAL AND RESERVES In accordance with QCB regulations, a risk reserve should be created to cover contingencies on both the public and private sector, with a requirement of 2.5% of the total direct facilities granted by the Group after the exclusion of specific provisions, suspended interest, finance provided to or guaranteed by Government and exposures covered by cash collateral. On adoption of IFRS 9 effective January 1, 2018, a total amount of QAR 766.6 million was transferred with the approval of the QCB from the risk reserve to retained earnings, against the initial impact of adoption of IFRS 9. This amount of QAR 766.6 million will be progressively rebuilt by yearly transfers from retained earnings to the risk reserve. The first of such transfer of QAR 153.3 million was done in 2018 (2017: from the risk reserve the total amount of QAR 50.6 million was transferred to the retained earnings). 218
  210. (d) Fair value and other reserve Fair value reserve comprises the cumulative change in fair value of investment securities measured at FVOCI (2017: Available-for-sale investments) until these assets are derecognised. Other reserve represents the effective portion of the cash flow hedge until reclassification to the statement of income when the hedged item affects consolidated income statement. The movements in the fair value reserve during the year are as follows: Balance at beginning of the year IFRS 9 Adoption Net gain on revaluation Net amount transferred to the consolidated statement of income Net change in fair value Investment securities measured at FVOCI (IFRS 9) Net change in fair value of available-for-sale investments Add effective portion of cash flow hedge Balance at the end of the year (e) Foreign currency translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations as well as from the translation of liabilities and gains and losses on derivatives that hedge the Group’s net investment in foreign operations. (f) Contribution to Social and Sports Fund Pursuant to Qatar Law No. 13 of 2008 and further clarification of the law issued in 2010, the Group made appropriation of QAR 15.2 million (2017: QAR 13.8 million) from the retained earnings for its contribution to the Social and Sports Activities Support Fund of Qatar. This amount represents 2.5% of the net profit earned from the Group’s consolidated operations for the financial year. 219 2018 QAR’000 2017 QAR’000 44,402 38,311 (12,092) - 18,387 3,988 (11,026) (627) (4,731) - - 3,361 6,226 2,730 45,897 44,402
  211. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS g ) Dividends A cash dividend of 7.5% (QAR 0.75 per share) relating to the year ended 31 December 2017, amounting to QAR 270 million, was approved by the shareholders at the Annual General Assembly held on 27 February 2018 (2016: 7.5% or QAR 0.75 per share). (h) Instrument eligible as additional capital In March 2016, the Group has issued regulatory Tier 1 capital notes (the “Notes”) totalling QAR 1 billion. The Notes are perpetual, subordinated, unsecured and has been issued at a fixed interest rate for the first five years and shall be re-priced thereafter. The coupon is discretionary and the event of nonpayment is not considered as an event of default. The Notes carry no maturity date and have been classified under Tier 1 capital. 22 INTEREST INCOME 2018 QAR’000 2017 QAR’000 Due from banks 134,966 96,310 Investment securities 394,906 429,299 Loans and advances to customers 1,558,818 1,483,146 Total interest income 2,088,690 2,008,755 2018 QAR’000 2017 QAR’000 Due to banks, other borrowings, CD and CP 300,840 200,815 Customer deposits 776,360 687,245 Net interest (income) expense from hedge accounted derivatives (1,158) 25,810 Debt securities issued 97,512 110,420 1,173,554 1,024,290 23 INTEREST EXPENSE Total interest expense 220
  212. 24 . NET FEE AND COMMISSION INCOME 2018 QAR’000 2017 QAR’000 109,620 98,015 Indirect credit facilities 66,271 76,128 Bank service fees 30,467 18,582 Total fee and commission income 206,358 192,725 Fee and commission expense (16,674) (10,807) Net fee and commission income 189,684 181,918 2018 QAR’000 2017 QAR’000 38,471 39,423 2018 QAR’000 2017 QAR’000 (6,655) 17,383 577 (12,694) 6,132 4,525 54 9,214 2018 QAR’000 2017 QAR’000 167,033 181,933 12,314 11,081 449 520 179,796 193,534 Fee and commission income Loans and advances to customers 25. FOREIGN EXCHANGE GAIN Dealing in foreign currencies & revaluation of spot asset 26. INCOME FROM INVESTMENT SECURITIES Net (loss)/ gain on sale of investment securities Net gain/(loss) on derivatives Dividend income Total income from investment securities 27. STAFF COSTS Wages and salaries Employees’ end of service benefits (note 20a) Training Total staff costs 221
  213. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28 . OTHER EXPENSES 2018 QAR’000 2017 QAR’000 Directors’ remuneration and meeting attendance fees 6,400 3,204 Advertising, marketing and promotional expenses 9,406 8,913 Legal and professional fees 25,003 25,542 Rent and maintenance 31,075 29,911 Computer and IT costs 30,068 28,409 Travelling expenses 1,571 565 Licences and subscriptions 6,017 4,941 19,873 13,648 129,413 115,133 2018 QAR’000 2017 QAR’000 482 14,867 Deferred tax expense / (income) arising from temporary difference 15,033 (3,787) Total income tax expense 15,515 11,080 Other expenses Total other expenses 29. TAX EXPENSE Current tax expense According to the laws and regulations effective in France and the United Arab Emirates, net income tax expense of QAR 15.5 million (2017: income benefit expense QAR 11.1 million) was calculated for the subsidiary companies in France and United Arab Emirates for the year ended 31 December 2018. 222
  214. 30 . EARNINGS PER SHARE Earnings per share of the Bank is calculated by dividing profit for the year attributable to the equity holders of the Bank, further adjusted for the distribution for instrument eligible for Additional Tier 1 Capital, by the weighted average number of ordinary shares in issue during the year: 2018 2017 Profit attributable to equity holders of the Bank (in QAR’000) 608,404 550,521 Less: Distribution for Tier 1 Capital notes (in QAR’000) (55,000) (55,000) Net profit for the year attributable to the equity holders of the Bank (in QAR’000) 553,404 495,521 360,000,000 360,000,000 1.54 1.38 Basic weighted average number of shares in issue (shares) Basic and diluted earnings per share (in QAR) No potential dilutions of ordinary shares existed at 31 December 2018 (2017: none). 223
  215. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 . CONTINGENT LIABILITIES AND OTHER COMMITMENTS To meet the financial needs of customers, the Group issues various commitments and contingent liabilities. Even though these obligations may not be recognised in the consolidated statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group. In many instances, the amount recognised in the consolidated statement of financial position for incurred obligations do not represent the potential loss of the arrangement in full. The total outstanding commitments and contingent liabilities are as follows: 2018 QAR’000 2017 QAR’000 Unutilised credit facilities 7,114,989 7,857,907 Guarantees 8,365,909 9,263,974 Letters of credit 1,908,339 2,151,902 17,389,237 19,273,783 Capital commitments 63,013 152,000 Lease commitments 9,841 21,958 Foreign exchange contracts (note 33) 1,430,752 2,571,523 Interest rate swaps (note 33) 8,451,745 10,802,494 309,671 1,990,701 10,265,022 15,538,676 a) Contingent liabilities Total contingent liabilities b) Other commitments Cross currency swaps (note 33) Total other commitments 224
  216. (i) Unutilised credit facilities Commitments to extend credit represent contractual commitments to make loans and revolving credits. The majority of these expire within 1 year. Since commitments may expire without being drawn upon, the total contractual amounts do not necessarily represent future cash requirements. 32 CASH AND CASH EQUIVALENTS Cash and cash equivalents for purpose of the consolidated statement of cash flows comprise the following: 2018 2017 QAR’000 QAR’000 (ii) Guarantees and letters of credit Guarantees and letters of credit commit the Group to make payments on behalf of customers in the event of a specific event. Guarantees and standby letters of credit carry the same credit risk as loans. (iii) Litigation and claims The Group has legal claims against it arising in the ordinary course of business amounting to QAR 1.0 million (2017: QAR 13.0 million). Based on legal advice, the Group does not expect the outcome of the legal claims to have a material effect on the Group’s financial position. (iv) Lease commitments Non-cancellable operating lease rentals are payable as follows: 2018 2017 QAR’000 QAR’000 Less than one year 3,364 11,099 Between one and five years 6,477 10,859 Total operating lease commitments 9,841 21,958 The Group leases a number of branches and office premises under operating leases. The leases typically run for a period of between 3 and 5 years, with an option to renew the lease after that period at new rates to reflect market rentals. 225 Cash and balances with central banks (note 8) 1,617,260 1,174,915 Due from banks (note 9) 3,918,163 5,868,114 Cash and cash equivalents 5,535,423 7,043,029 Cash and balances with central banks do not include mandatory cash reserves. 33. DERIVATIVES The Group transacts in derivatives as principal either as a trading activity or to manage risk. The Group’s objectives and policies on managing the risks that arise in connection with derivatives are included in note 4 under the headings Market Risk, Credit Risk and Liquidity Risk. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the consolidated statement of financial position but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or market risks. The fair value of a derivative contract represents the amount at which that contract could be exchanged in an arms-length transaction, calculated at market rates ruling at the reporting date. The fair values and notional amounts of derivative instruments are set out in the following table:
  217. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notional amount Fair Value Asset QAR ’000 Liability QAR’000 Gross QAR’000 Notional amount by term to maturity Within 3 months QAR’000 3 months to 1 year QAR’000 1 to 5 years QAR’000 Over 5 years QAR’000 At 31 December 2018 Derivatives held for trading Interest rate swaps 23,184 (23,184) 2,718,232 - - 2,718,232 - 613 (24,223) 1,430,752 772,409 605,439 52,904 - 2,498 (4,386) 309,671 - 143,263 166,408 - 134,623 (14,619) 5,733,513 120,120 200,200 4,226,377 1,186,816 160,918 (66,412) 10,192,168 892,529 948,902 7,163,921 1,186,816 Derivatives not qualifying as accounting hedges Foreign exchange contracts Interest rate swaps Cross currency swaps Derivatives qualifying as accounting hedges Interest rate swaps Foreign exchange contracts Cross currency swaps Total derivative assets/ (liabilities) At 31 December 2017 Derivatives held for trading Interest rate swaps 24,212 (24,212) 3,220,300 - - 1,292,961 1,927,339 35,215 (7,314) 886,091 357,887 528,204 - - 1,656 (900) 353,228 - 192,252 91,000 69,976 26,938 (4,760) 533,040 146,793 52,432 333,815 - 87,985 (38,333) 7,228,966 109,200 1,723,874 3,720,080 1,675,812 Foreign exchange contracts 447 (5,411) 1,685,432 554,144 1,131,288 - - Cross currency swaps 167 - 1,457,661 1,457,661 - - - (80,930) 15,364,718 2,625,685 3,628,050 5,437,856 3,673,127 Derivatives not qualifying as accounting hedges Foreign exchange contracts Interest rate swaps Cross currency swaps Derivatives qualifying as accounting hedges Interest rate swaps Total derivative assets/(liabilities) 176,620 226
  218. The Group uses interest rate swaps and cross currency swaps to hedge its exposure to changes in the fair value of fixed rate loans and investments and fixed rate borrowings . Where required, as part of the risk management policy, hedge accounting has been adopted. Foreign exchange contracts are used to hedge mismatches between loans and deposits denominated in different currencies. 34. RELATED PARTIES The Group has carried out transactions in the ordinary course of business with directors and members of the senior management team, their close family members, and affiliated companies which have significant influence in the Group’s financial and operating decisions. These transactions include loans, financing activities, deposits and foreign currency transactions. The related party transactions and balances included in these consolidated financial statements are as follows: (a) Statement of financial position items Key management QAR’000 Others QAR’000 Total QAR’000 Loans and advances 1,635 1,519,991 1,521,626 Customer deposits 3,737 6,075,899 6,079,636 Subordinated debt - 104,133 104,133 Loans and advances 1,898 1,570,114 1,572,012 Customer deposits 3,640 6,664,809 6,668,449 Subordinated debt - 109,234 109,234 31 December 2018 31 December 2017 227
  219. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (b) Off-balance sheet items Key management QAR’000 Others QAR’000 Total QAR’000 - - - 643 32,531 33,174 - 514 514 683 35,048 35,731 Key management QAR’000 Others QAR’000 Total QAR’000 Interest income 76 90,673 90,749 Interest expense (62) (133,072) (133,134) 10 2,664 2,674 Interest income 59 90,222 90,281 Interest expense (62) (54,992) (55,054) 13 8,254 8,267 2018 QAR’000 2017 QAR’000 40,210 31,468 831 763 41,041 32,231 31 December 2018 Guarantees and letter of credits Unutilised credit facilities 31 December 2017 Guarantees and letter of credits Unutilised credit facilities (c) Statement of income items Year ended 2018 Fee and commission income Year ended 2017 Fee and commission income Included in the above tables under the ‘Others’ column are the balances of any entity which owns more than 5% of the issued share capital of the Group. Details of the balances with the Government of Qatar and its related Agencies, which jointly owns 47.26% (2017: 47.26%) of the Group, are disclosed in notes 10 and 16. The transactions are on substantially the same terms as comparable transactions with unrelated parties. (d) Compensation of key management personnel Salaries, allowances and other benefits End of service benefits Total compensation paid to key management personnel 228
  220. 35 . SPECIAL PURPOSE ENTITIES (SPEs) The Group has exposure to a structured entity through issuance of collateralized loans. These structured entity generally finance the purchase of assets by obtaining a loan from the counterparties that are collateralised by, or indexed to, the assets held by the entity. The structured entity activities includes obtaining issuance of loan notes to clients that are referenced to debt securities. The assets and the liabilities of this entity relating to the Group are ring-fenced from other assets and liabilities of the structured entity in a ‘silo’ structure. The Group’s exposure consists of receivables amounting to US$ 57.0 million (31 December 2017: US$ 43.5 million) and is recorded under the caption “Loans and advances to customers” in the Group’s consolidated statement of financial position. The maximum exposure to credit loss is the current carrying value plus any accrued interest. 229
  221. FINANCIAL STATEMENTS OF PARENT BANK (a) Statement of Financial Position Parent bank 2018 QAR’000 2017 QAR’000 2,547,668 1,921,545 As at 31 December Assets Cash and balances with central banks Due from banks 5,666,608 6,622,886 Loans and advances to customers 28,748,975 31,725,130 Investment securities 10,530,754 12,316,869 Investments in subsidiaries 913,583 892,216 Property and equipment 327,512 226,237 18,313 23,835 Other assets 628,799 652,445 Total assets 49,382,212 54,381,163 9,030,861 9,737,406 588,207 87,414 26,602,010 30,535,806 Other borrowings 2,352,215 1,519,700 Debt securities issued 2,523,466 3,844,863 Intangible assets Liabilities Due to banks Certificate of deposits Customer deposits Other liabilities 1,708,873 1,364,473 Total liabilities 42,805,632 47,089,662 Issued capital 3,600,000 3,600,000 Legal reserve 1,399,473 1,338,633 153,331 766,657 45,897 44,402 Foreign currency translation reserve (32,764) (18,609) Retained earnings 410,643 560,418 Total equity attributable to shareholders of the Bank 5,576,580 6,291,501 Instrument eligible as additional capital 1,000,000 1,000,000 Total equity 6,576,580 7,291,501 49,382,212 54,381,163 Shareholders' equity Risk reserve Fair value reserve Total liabilities and equity 230
  222. (b) Income Statement - Parent bank 2018 QAR’000 2017 QAR’000 Interest income 1,939,577 1,803,805 Interest expense (1,134,477) (971,840) Net interest income 805,100 831,965 Fee and commission income 178,095 160,306 Fee and commission expense (14,914) (9,371) Net fee and commission income 163,181 150,935 35,233 38,525 Income from investment securities 54 9,208 Other operating income 21 9 Net operating income 1,003,589 1,030,642 (141,777) (148,382) (15,901) (21,197) (164,184) (247,365) Net impairment reversal( losses) on investment securities (debt) 4,371 (18,010) Net impairment on loan commitments and financial guarantees (18,958) - 31,670 - (103,108) (90,224) 595,702 505,464 12,702 45,057 608,404 550,521 For the year ended 31 December Foreign exchange gain Staff costs Depreciation and amortisation Net impairment losses on loans and advances to customers Net impairment reversal (losses) on due from banks Other expenses Profit before results of subsidiaries Results of subsidiaries, net of tax Profit for the year 231
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