Al Rajhi Bank: Consolidated Financial Statements 31-December-2018

Transcription

1. AL RAJHI BANKING AND INVESTMENT CORPORATION (A SAUDI JOINT STOCK COMPANY) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 TOGETHER WITH THE INDEPENDENT AUDITORS’ REPORT
13. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 1. GENERAL a) Incorporation and operation Al Rajhi Banking and Investment Corporation, a Saudi Joint Stock Company, (the “Bank”), was formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (corresponding to June 29, 1987) and in accordance with Article 6 of the Council of Ministers’ Resolution No. 245, dated 26 Shawal 1407H (corresponding to June 23, 1987). The Bank operates under Commercial Registration No. 1010000096 and its Head Office is located at the following address: Al Rajhi Bank 8467 King Fahd Road - Al Muruj Dist. Unit No 1 Riyadh 12263 - 2743 Kingdom of Saudi Arabia The objectives of the Bank are to carry out banking and investment activities in accordance with its Articles of Association and By-Laws, the Banking Control Law and the Council of Ministers’ Resolution referred to above. The Bank is engaged in banking and investment activities inside and outside the Kingdom of Saudi Arabia through 581 branches (2017: 599) including the branches outside the Kingdom and 13,532 employees (2017: 13,077 employees). The Bank has established certain subsidiary companies (together with the Bank hereinafter referred to as "the Group") in which it owns all or majority of their shares as set out below (Also see note 3(b)): Name of subsidiaries Beneficial Shareholding % 2017 2018 Al Rajhi Development Company KSA 100% 100% Al Rajhi Corporation Limited – Malaysia 100% 100% 6 A limited liability company registered in the Kingdom of Saudi Arabia to support the mortgage programs of the Bank through transferring and holding the title deeds of real estate properties under its name on behalf of the Bank, collection of revenue of certain properties sold by the Bank , provide real estate and engineering consulting services, provide documentation service to register the real estate properties and overseeing the evaluation of real estate properties. A licensed Islamic Bank under the Islamic Financial Services Act 2013, incorporated and domiciled in Malaysia.
14. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 1. GENERAL (continued) a) Incorporation and operation (continued) Al Rajhi Capital Company – KSA Beneficial Shareholding % 2017 2018 100% 100% Al Rajhi Bank – Kuwait 100% 100% Al Rajhi Bank – Jordan 100% 100% Al Rajhi Takaful Agency Company – KSA 99% 99% Al Rajhi Company for management services – KSA 100% 100% Name of subsidiaries A limited liability company registered in the Kingdom of Saudi Arabia to act as principal agent and/or to provide brokerage, underwriting, managing, advisory, arranging and custodial services. A foreign branch registered with the Central Bank of Kuwait. A foreign branch operating in Hashemie Kingdom of Jordan, providing all financial, banking, and investments services and importing and trading in precious metals and stones in accordance with Islamic Sharia’a rules and under the applicable banking law. A limited liability company registered in the Kingdom of Saudi Arabia to act as an agent for insurance brokerage activities per the agency agreement with Al Rajhi Cooperative Insurance Company. A limited liability company registered in the Kingdom of Saudi Arabia to provide recruitment services. The subsidiaries are wholly or substantially owned by the Bank and therefore, the noncontrolling interest which is insignificant is not disclosed. All the above-mentioned subsidiaries have been consolidated. As of 31 December 2018 and 2017, interests in subsidiaries not directly owned by the Bank are owned by representative shareholders for the beneficial interest of the Bank. b) Shari’a Authority As a commitment from the Bank for its activities to be in compliance with Islamic Shari’a legislations, since its inception, the Bank has established a Shari’a Authority to ascertain that the Bank’s activities are subject to its approval and control. The Shari’a Authority had reviewed several of the Bank’s activities and issued the required decisions thereon. 7
15. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 2. BASIS OF PREPARATION a) Statement of compliance The consolidated financial statements of the Bank (Group) have been prepared; - - b) in accordance with ‘International Financial Reporting Standards (IFRS) as modified by SAMA for the accounting of zakat and income tax’ (relating to the application of International Accounting Standard (IAS) 12 “Income Taxes” and IFRIC 21 “Levies” in so far as these relate to accounting for Saudi Arabian zakat and income tax); and in compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and By-laws of the Bank. Basis of measurement and preparation The consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of investments held as fair value through income statement (“FVSI”) and fair value through other comprehensive income (“FVOCI”) investments. The Bank presents its statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non–current) is presented in note 27-2. c) Functional and presentation currency The consolidated financial statements are presented in Saudi Arabian Riyals (“SAR”), which is the Bank’s functional currency and are rounded off to the nearest thousand except where otherwise indicated. d) Critical accounting judgments, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgments in the process of applying the Bank’s accounting policies. Such estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of revision and in future periods if the revision affects both current and future periods. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Bank based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Bank. Such changes are reflected in the assumptions when they occur. Significant areas where management has used estimates, assumptions or exercised judgments is as follows: 8
16. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 2. BASIS OF PREPARATION (continued) d) Critical accounting judgments, estimates and assumptions (continued) i) Impairment losses on financial assets The measurement of impairment losses both under IFRS 9 and IAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include:       ii) The Bank’s internal credit grading model, which assigns PDs to the individual grades The Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a Lifetime ECL basis and the qualitative assessment The segmentation of financial assets when their ECL is assessed on a collective basis Development of ECL models, including the various formulas and the choice of inputs Determination of associations between macroeconomic scenarios and, economic inputs and collateral values, and the effect on PDs, EADs and LGDs Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models Fair value of financial instruments The Group measures financial instruments at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • • In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 9
17. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 2. d) BASIS OF PREPARATION (continued) Critical accounting judgments, estimates and assumptions (continued) All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: - - iii) Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 — Inputs other than quoted prices included within Level 1 that are observable 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 in which all significant inputs are directly or indirectly observable from market data. Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. Determination of control over investees The control indicatorsare subject to management’s judgements that can have a significant effect in the case of the Bank’s interests in investments funds. Investment funds The Group acts as Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the Fund (comprising any carried profits and expected management fees) and the investor’s rights to remove the Fund Manager. As a result the Group has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated these funds. iv) Provisions for liabilities and charges The Bank receives legal claims against it in the normal course of business. Management has made judgments as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amounts of possible outflow of economic benefits. Timing and cost ultimately depends on the due process being followed as per the Law. v) Going concern The consolidated financial statements have been prepared on a going concern basis. The Bank’s management has made an assessment of the Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. 10
18. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below. a) Change in accounting policies The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December, 2017 except for the adoption of the following new standards and other amendments to existing standards and a new interpretation mentioned below. Except for adoption of IFRS 9, these amendments and adoption has had no material impact on the consolidated financial statements of the Group on the current period or prior periods. The impact and disclosures pertaining to adoption of IFRS 9 has been disclosed in the later part of these financial statements. Adoption of New Standards Effective 1 January 2018, the Group has adopted the following accounting standards and the impact of the adoption of these standards is explained below. Except for the adoption of the following new accounting standards, several other amendments and interpretations apply for the first time in 2018, but do not have impact on the consolidated financial statements of the Bank. Adoption of IFRS 15 – Revenue from contracts with customers The Bank adopted IFRS 15 ‘Revenue from Contracts with Customers’ resulting in a change in the revenue recognition policy of the Bank in relation to its contracts with customers. IFRS 15 was issued in May 2014 and is effective for annual periods commencing on or after 1 January 2018. IFRS 15 outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes current revenue guidance, which is found currently across several Standards and Interpretations within IFRSs. It established a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. IFRS 15 also includes a comprehensive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The Bank has assessed that the impact of IFRS 15 is not material on the consolidated financial statements of the Group as at the initial adoption and the reporting date. 11
19. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) a) Change in accounting policies (continued) Adoption of IFRS 9 – Financial instruments The Bank has adopted IFRS 9 - Financial Instruments issued in July 2014 with a date of initial application of 1 January 2018. The requirements of IFRS 9 represent a significant change from IAS 39 Financial Instruments: Recognition and Measurement. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. The key changes to the Bank's accounting policies resulting from its adoption of IFRS 9 are summarized below. Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVOCI”) and fair value through profit or loss (“FVSI”). This 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. 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 recognized in profit or loss, 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 profit or loss. Impairment of financial assets IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' model (“ECL”). The new impairment model also applies to certain loan commitments and financial guarantee contracts but not to equity investments. The allowance is based on the ECLs associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination. If the financial asset meets the definition of purchased or originated credit impaired (POCI), the allowance is based on the change in the ECLs over the life of the asset. POCI assets are financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest income is subsequently recognised based on a credit-adjusted EIR. ECLs are only recognised or released to the extent that there is a subsequent change in the expected credit losses. Under IFRS 9, credit losses are recognized earlier than under IAS 39. IFRS 7- Financial Instruments: Disclosures To reflect the differences between IFRS 9 and IAS 39, IFRS 7 Financial Instruments: Disclosures was updated and the Bank has adopted it, together with IFRS 9, for year beginning 1 January 2018. Changes include transition disclosures as shown in Note 3, detailed qualitative and quantitative information about the ECL calculations such as the assumptions and inputs used are set out in Note 27. 12
20. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) a) Change in accounting policies (continued) Reconciliations from opening to closing ECL allowances are presented in Notes 7. Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below.   Comparative periods have not been restated. A difference in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized 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. The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. i. The determination of the business model within which a financial asset is held. ii. The designation and revocation of previous designated financial assets and financial liabilities as measured at FVSI. iii. The designation of certain investments in equity instruments not held for trading as FVOCI. It is assumed that the credit risk has not increased significantly for those debt securities which carry low credit risk at the date of initial application of IFRS 9. 13
21. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A) Financial assets and financial liabilities i) Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Bank’s financial assets and financial liabilities as at 1 January 2018. Original classification under IAS 39 Financial assets Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks Due from banks and other financial institutions New classification under IFRS 9 Original New carrying carrying value value under under IAS 39 IFRS 9 SAR in ‘000’ Loans and Receivables (L&R) (L&R) Amortised cost 48,282,471 48,282,471 Amortised cost 10,709,795 10,705,849 Held to Maturity (HTM) (HTM) Amortised cost Amortised cost FVTPL 23,452,869 9,805,139 800,000 23,437,245 9,775,876 800,000 Investments held as FVSI Equity investments Mutual funds FVSI FVSI FVOCI FVTPL 23,487 389,193 23,487 389,193 Available-for-sale investments Equity investments Mutual funds AFS AFS FVOCI FVTPL 771,293 1,034,286 771,293 1,034,286 Financings, net (L&R) Amortised cost 233,535,573 328,804,106 230,701,718 325,921,418 Amortised cost Amortised cost 5,522,567 5,522,567 Amortised cost Amortised cost Amortised cost Amortised cost 273,056,445 8,786,598 273,056,445 8,786,598 287,365,610 287,365,610 Investments held at amortized cost Murabaha with Saudi Government and SAMA Sukuk Financial liabilities Due to banks and other financial institutions Customers’ deposits Other liabilities 14
22. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A) Financial assets and financial liabilities (continued) ii) Reconciliation of carrying amounts under IAS 39 to carrying amounts under IFRS 9 at the adoption of IFRS 9 The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9 on transition to IFRS 9 on 1 January 2018. IAS 39 carrying amount as at 31 December 2017 Reclassification Remeasurement IFRS 9 carrying amount as at 1 January 2018 SAR in ‘000’ Financial assets Amortized cost Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks: Opening balance Closing balance Due from banks and other financial institutions Opening balance Remeasurement (ECL allowance) (Note 1) Closing balance Financings - Net: Opening balance Remeasurement (ECL allowance) (Note 1) Closing balance Investment: Opening balance To FVTPL Remeasurement (ECL allowance) (Note 1) Closing balance Total financial assets 48,282,471 48,282,471 - - - - - 48,282,471 - 10,709,795 - - - - (3,946) - (3,946) 10,705,849 10,709,795 233,535,573 - - - - - (2,833,855) (2,833,855) 230,701,718 34,058,008 - - - - - - 34,058,008 (800,000) (800,000) (44,887) (44,887) 33,213,121 326,585,847 (800,000) (2,882,688) 322,903,159 233,535,573 - - - Note 1: Impairment allowance is increased due to change from incurred to expected credit loss (ECL). 15
23. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A) Financial assets and financial liabilities (continued) ii) Reconciliation of carrying amounts under IAS 39 to carrying amounts under IFRS 9 at the adoption of IFRS 9 (continued) IAS 39 carrying amount as at 31 December 2017 Reclassification Re-measurement IFRS 9 carrying amount as at 1 January 2018 SAR in ‘000’ Financial assets Available for sale Investment: Opening balance Transferred to: FVOCI – equity (Note 1) FVSI (Note 2) Total available for sale FVSI Investment: Opening balance From available for sale (Note 2) From amortised cost (Note 3) Transfer to FVOCI (Note 1) Total FVSI FVOCI Investment: Opening balance From available for sale From FVSI Total FVOCI 1,805,579 - - - - (771,293) (1,034,286) (1,805,579) - - - 1,805,579 - - - - 412,680 - - - - - - - 1,034,286 800,000 - - - (23,487) - - 412,680 1,810,799 - 2,223,479 - - - - - - - - - 771,293 23,487 794,780 - - 794,780 - 5,522,567 273,056,445 8,786,598 287,365,610 - - - Financial liabilities At Amortized cost Due to banks and other financial institutions Customers deposits Other liabilities Total at amortized cost 5,522,567 273,056,445 8,786,598 287,365,610 - Note 1: The Bank has elected to irrevocably designate equity investments of SAR771.293 million in a portfolio of non trading equity securities at FVOCI as permitted under IFRS 9. These securities were previously classified as available-for-sale. Upon disposal of equity investment, any balances within the OCI reserve (fair value movement) for these investments will no longer be reclassified to profit or loss. Moreover, equity investments amounting to SAR23.487 million was reclassified from FVSI to FVOCI. 16
24. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 Note 2: The Bank holds a portfolio of mutual funds that failed to meet the solely payments of principal and interest (SPPI) requirement for Amortized cost / FVOCI classification under IFRS 9. As a result, 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) these funds which amounted to SAR1,034,286 million were classified as FVSI from the date of initial application. Note 3: The Bank holds investment in certain Sukuk that failed to meet the solely payments of principal and interest (SPPI) requirement. As a result, these Sukuk amounted to SAR800 million were classified as FVSI from the date of initial application. iii) Impact on retained earnings and other reserves Closing balance under IAS 39 (31 December 2017) Reclassifications under IFRS 9 Recognition of expected credit losses under IFRS 9 Retained Other reserves earnings SAR in ‘000’ 13,906,736 5,281,682 129,789 (129,789) (2,882,688) - Opening balance under IFRS 9 (1 January 2018) 11,153,837 5,151,893 The following table reconciles the provision recorded as per the requirements of IAS 39 to that of IFRS 9:   The closing impairment allowance for financial assets in accordance with IAS 39; to The opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018. 31 December 2017 (IAS 39) Allowance for impairment Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS-9) Due from banks and other financial institutions Financings - net: Investments Total 5,555,210 5,555,210 17 Remeasurement SAR in ‘000’ 3,946 2,833,855 44,887 2,882,688 1 January 2018 (IFRS 9) 3,946 8,389,065 44,887 8,437,898
25. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A) Financial assets and financial liabilities (continued) iv) The following table provides the carrying value of financial assets and financial liabilities in the statement of financial position. 31 December 2018 Mandatorily FVOCI – Amortized Total at FVSI equity cost carrying investments amount SAR in ‘000’ Financial assets Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other central banks - - 43,246,043 43,246,043 - - 30,808,011 30,808,011 and SAMA - - 22,477,145 22,477,145 Sukuk - - 17,395,957 17,395,957 Due from banks and other financial Institutions Investments held at amortized Cost Murabaha with Saudi Government Investments held as FVSI Mutual funds 1,141,584 - - 1,141,584 800,000 - - 800,000 FVOCI investments Equity investments - 1,103,463 - 1,103,463 Financings, net - - 234,062,789 234,062,789 1,941,584 1,103,463 347,989,945 351,034,992 Sukuk Total financial assets Financial liabilities Due to banks and other financial institutions - - 7,289,624 7,289,624 Customers’ deposits - - 293,909,125 293,909,125 Other liabilities - - 15,251,063 15,251,063 Total financial liabilities - - 316,449,812 316,449,812 18
26. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A) Financial assets and financial liabilities (continued) iv) The following table provides carrying value of financial assets and financial liabilities in the statement of financial position (Continued) 31st December 2017 Note Trading Designated Held to Loans and Available Other Total as at FVSI maturity receivables for sale amortized carrying cost amount SAR in ‘000’ Financial assets Cash and balances with Saudi Arabian Monetary Authority (“SAMA”) and other - - - 48,282,471 - - 48,282,471 - - - 10,709,795 - - 10,709,795 - - 23,452,869 - - - 23,452,869 - - - - - 10,605,139 Equity investments - 23,487 - - - 23,487 Mutual funds - 389,193 - - - - 389,193 - - - 771,293 - 771,293 - - - 1,034,286 - 1,034,286 central banks Due from banks and other financial institutions Investments held at amortized cost Murabaha with Saudi Government and SAMA Sukuk 10,605,139 Investments held as FVSI - Available-for-sale investments Equity investments - Mutual funds - Financings, net - - - 233,535,573 - - 233,535,573 - 412,680 34,058,008 292,527,839 1,805,579 - 328,804,106 - - - - 5,522,567 5,522,567 Customers’ deposits - - - - 273,056,445 273,056,445 Other liabilities - - - - 8,786,598 8,786,598 Total financial liabilities - - - - 287,365,610 287,365,610 Total financial assets Financial liabilities Due to banks and other financial institutions 19 -
27. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 1) Classification of financial assets On initial recognition, a financial asset is classified and measured at: amortized cost, FVOCI or FVSI. Financial Asset at amortised cost A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVSI:   the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; 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. Financial Asset at FVOCI A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVSI:   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. Equity Instruments: On initial recognition, for an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an instrument-by-instrument (i.e. share-by-share) basis. Financial Asset at FVSI All other financial assets are classified as measured at FVSI. In addition, on initial recognition, the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVSI if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets. Business model assessment The Bank 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:  the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management's strategy focuses on earning contractual profit revenue, maintaining a particular profit rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realizing cash flows through the sale of the assets; 20
28. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 (continued) Business model assessment (continued)     how the performance of the portfolio is evaluated and reported to the Bank's management; 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 Bank's stated objective for managing the financial assets is achieved and how cash flows are realized. The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Bank's original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. Financial assets that are held for trading and whose performance is evaluated on a fair value basis are measured at FVSI because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Assessments whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, 'principal' is the fair value of the financial asset on initial recognition. 'Interest' is the consideration for the time value of money, the credit and other basic lending risk associated with the principal amount outstanding during a particular period and other basic lending costs (e.g. liquidity risk and administrative costs), along with profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank 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 Bank considers:      contingent events that would change the amount and timing of cash flows; leverage features; prepayment and extension terms; terms that limit the Bank's claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and features that modify consideration of the time value of money- e.g. periodical reset of interest rates. Reclassification The Bank reclassifies the financial assets between FVSI, FVOCI and amortized cost if and only if under rare circumstances its business model objective for its financial assets changes so its previous business model assessment would no longer apply. 21
29. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 (continued) Financing and Investment The Bank offers profit based products including Mutajara, installment sales, Murabaha and Istisnaa to its customers in compliance with Shari’a rules. The Bank classifies its Principal financing and Investment as follows Financing : These financing represents loans granted to customers. These financings mainly constitute four broad categiries i.e. Mutajara, Installment sales, Murabaha and credit cards. The Bank classifies these financings at amortised cost. Due from banks and other financial institutions : These consists of placements with financial Institutions (FIs). The Bank classifies these balances due from banks and other financial institutions at amortised cost as they are held to collect contractual cash flows and pass SPPI criterion. Investments (Murabaha with SAMA) : These investments consists of placements with Saudi Arabian Monetary Agency (SAMA). The Bank classifies these investments at amortised cost as they are held to collect contractual cash flows and pass SPPI criterion. Investments (Sukuk) : These investments consists of Investment in various Sukuk. The Bank classifies these investment at amortised cost except for those Sukuk which fails SPPI criterion, are classified at FVSI. Equity Investments : These are the strategic equity investments which the Bank does not expect to sell, for which Bank has made an irrevocable election on the date of initial recognition to present the fair value changes in other comprehensive income. Investments (Mutual Funds) : The investments consist of Investment in various Mutual Funds. The Bank classifies these investment at FVSI as these investments fail SPPI criterion. 22
30. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2) Classification of financial liabilities The Bank classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortized cost. All amounts due to banks and other financial institutions and customer deposits are initially recognized at fair value less transaction costs. Subsequently, financial liabilities are measured at amortized cost, unless they are required to be measured at fair value through profit or loss. 3) Derecognition a- Financial assets The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognized) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in OCI is recognized in profit or loss. From 1 January 2018, any cumulative gain/loss recognized in OCI in respect of equity investment securities designated as at FVOCI is not recognized in profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability. In transactions in which the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. b- Financial liabilities The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expired. 4) Modifications of financial assets and financial liabilities a- Financial assets If the terms of a financial asset are modified, the Bank 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 derecognized and a new financial asset is recognized at fair value. If the cash flows of the modified asset carried at amortized cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset and recognizes the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. If such a 23
31. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 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. b- Financial liabilities The Bank derecognizes 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 recognized at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognized in profit or loss. 5) Impairment The Bank recognizes loss allowances for ECL on the following financial instruments that are not measured at FVSI:     financial assets that are debt instruments; lease receivables; financial guarantee contracts issued; and loan commitments issued. No impairment loss is recognized on equity investments. The Bank 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 The Bank considers a debt security to have low credit risk when their credit risk rating is equivalent to the globally understood definition of 'investment grade'. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Measurement of ECL ECL are a probability-weighted estimate of credit losses. It is 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 Bank 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 Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Bank expects to recover. 24
32. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 (continued) 5) Impairment (continued) 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 derecognized 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. 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 Bank assesses whether financial assets carried at amortized cost are creditimpaired. A financial asset is 'credit-impaired' when one or more events that have 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 Bank on terms that the Bank would not consider otherwise; it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; or the disappearance of an active market for a security because of financial difficulties. A loan that has been renegotiated due to deterioration in the borrower's condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered impaired. In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors.      The market's assessment of creditworthiness as reflected in the yields. The rating agencies' assessments of creditworthiness. The country's ability to access the capital markets for new debt issuance. The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. The international support mechanisms in place to provide the necessary support as 'lender of last resort' to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms 25
33. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 (continued) 5) Impairment (continued) and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows:   financial assets measured at amortized cost: as a deduction from the gross carrying amount of the assets; where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision. Write-off Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank's procedures for recovery of amounts due. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to credit loss expense. Collateral valuation To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The Bank’s accounting policy for collateral assigned to it through its lending arrangements under IFRS 9 is the same as it was under IAS 39. Collateral, unless repossessed, is not recorded on the Bank’s statement of financial position. However, the fair value of collateral affects the calculation of ECL. It is generally assessed, at a minimum, at inception and re-assessed on a periodic basis. However, some collateral, for example, cash or market securities relating to margining requirements, is valued daily. To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as mortgage brokers, or based on housing price indices. Collateral repossessed The Bank’s accounting policy under IFRS 9 remains the same as it was under IAS 39. The Bank’s policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset. Assets for which selling is determined to be a better option are transferred to assets held 26
34. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 (continued) 5) Impairment (continued) for sale at their fair value (if financial assets) and fair value less cost to sell for non-financial assets at the repossession date in, line with the Bank’s policy. 6) Financial guarantees and loan commitments 'Financial guarantees' are contracts that require the Bank to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. 'Loan commitments' are firm commitments to provide credit under pre-specified terms and conditions. Financial guarantees issued or commitments to provide a loan at a below-market profit rate are initially measured at fair value and the initial fair value is amortized over the life of the guarantee or the commitment. Subsequently, they are measured as follows:   from 1 January 2018: at the higher of this amortized amount and the amount of loss allowance; and Before 1 January 2018: at the higher of this amortized amount and the present value of any expected payment to settle the liability when a payment under the contract has become probable. The Bank has issued no loan commitments that are measured at FVSI. For other loan commitments:   from 1 January 2018: the Bank recognizes loss allowance; Before 1 January 2018: the Bank recognizes a provision in accordance with lAS 37 if the contract was considered to be onerous. 7) Foreign Currencies The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for the effective profits rate and payments during the year and the amortized cost in foreign currency translated at the exchange rate at the end of the year. Realized and unrealized gains or losses on exchange are credited or charged to the interim condensed consolidated statement of comprehensive income. Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of available-for-sale equity instruments (before 1 January 2018) or equity investments in respect of which an election has been made to present subsequent changes in fair value in OCI (from 1 January 2018) are recognised in OCI. 27
35. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B) POLICIES APPLICABLE FROM 1 JANUARY 2018 (continued) 7) Foreign Currencies (continued) The monetary assets and liabilities of foreign subsidiaries are translated into SAR at rates of exchange prevailing at the date of the interim condensed consolidated statement of financial position. The statements of income of foreign subsidiaries are translated at the weighted average exchange rates for the year. 8) Rendering of services The Bank provides various services to its customer. These services are either rendered separately or bundled together with rendering of other services. The Bank has concluded that revenue from rendering of various services related to payment service system, share trading services, remittance business, SADAD and Mudaraba (i.e. subscription, management and performance fees), should be recognized at the point when services are rendered i.e. when performance obligation is satisfied. 28
36. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C) POLICIES APPLICABLE BEFORE 1 JANUARY 2018 1) Financing and Investment The Bank offers non-profit based products including Mutajara, installment sales, Murabaha and Istisnaa to its customers in compliance with Shari’a rules. The Bank classifies its principal financing and investment as follows: i. Held at amortized cost - such financing and certain investments which meets the definition of loans and receivables under IAS 39, are classified as held at amortized cost, and comprise Mutajara, installment sale, Istisnaa, Murabaha and credit cards operations accounts balances. Investments held at amortized cost are initially recognized at fair value and subsequently measured at amortized cost (using effective yield basis) less any amounts written off, and allowance for impairment. Financing are non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments. Financing are recognised when cash is advanced to borrowers. They are derecognized when either borrower repays their obligations, or the financings are sold or written off, or substantially all the risks and rewards of ownership are transferred. All financings are initially measured at fair value, plus incremental direct transaction costs (above certain threshold) and are subsequently measured at amortised cost using effective yield basis. Following the initial recognition, subsequent transfers between the various classes of financings is not ordinarily permissible. The subsequent period-end reporting values for various classes of financings are determined on the basis as set out in the following paragraphs. ii. Held to Maturity - Investments having fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognized at fair value including direct and incremental transaction costs and subsequently measured at amortized cost, less provision for impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition using an effective yield basis. Any gain or loss on such investments is recognized in the consolidated statement of income when the investment is derecognized or impaired. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Group’s ability to use this classification. However, sales and reclassifications in any of the following circumstances would not impact the Group’s ability to use this classification. • Sales or reclassifications that are so close to maturity that the changes in market rate of commission would not have a significant effect on the fair value. • Sales or reclassifications after the Group has collected substantially all the assets’ original principal. • Sales or reclassifications attributable to non-recurring isolated events beyond the Group’s control that could not have been reasonably anticipated iii. Held as FVSI - Investments in this category are classified as either investment held for trading or those designated as FVSI on initial recognition. Investments classified as trading are acquired principally for the purpose of selling or repurchasing in the short term. These investments comprise mutual funds and equity investments. Such investments are measured at 29
37. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C) POLICIES APPLICABLE BEFORE 1 JANUARY 2018 (continued) 1) Financing and Investment (continued) fair value and any changes in the fair values are charged to the consolidated statement of income. Transaction costs, if any, are not added to the fair value measurement at initial recognition of FVSI investments and are expensed in the consolidated financial statements. Investment income and dividend income on financial assets held as FVSI are reflected under other operating income in the consolidated statement of income. Investments at FVSI are not reclassified subsequent to their initial recognition, except that nonderivative FVSI instruments, other than those designated as FVSI upon initial recognition, may be reclassified out of the FVSI (i.e. trading) category if they are no longer held for the purpose of being sold or repurchased in the near term, and the following conditions are met: • If the financial asset would have met the definition of financing and receivables, if the financial asset had not been required to be classified as held for trading at initial recognition, then it may be reclassified if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity. • If the financial asset would not have met the definition of financing and receivables, and then it may be reclassified out of the trading category only in ‘rare circumstances’. iv. Available-for-sale - Available-for-sale investments are those non-derivative equity securities which are neither classified as Held to maturity investments, financing nor designated as FVSI, that are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as “available-for-sale” are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Unrealized gains or losses arising from changes in fair value are recognised in other comprehensive income until the investment is de-recognised or impaired whereupon any cumulative gain or loss previously recognized in other comprehensive income are reclassified to consolidated statement of income. A security held as available-for-sale may be reclassified to “Other investments held at amortized cost” if it otherwise would have met the definition of “Other investments held at amortized cost” and if the Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. 2) Impairment of financial assets Held at amortised cost An assessment is made at the date of each consolidated statement of financial position to determine whether there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset or a group of financial assets and that a loss event(s) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the difference between the assets carrying amount and the present value of estimated future cash flows is calculated and any impairment loss, is recognized for changes in the asset’s carrying amount. The carrying amount of the financial assets held at amortized cost, is adjusted either directly or through the use of an allowance for impairment account, and the amount of the adjustment is included in the consolidated statement of income. 30
38. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C) POLICIES APPLICABLE BEFORE 1 JANUARY 2018 (continued) 2) Impairment of financial assets (continued) A specific provision for credit losses due to impairment of a financing or any other financial asset held at amortised cost is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective yield rate. Considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required. Such estimates are essentially based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such allowance for impairment. In addition to the specific allowance for impairment described above, the Bank also makes collective impairment allowance for impairment, which are evaluated on a group basis and are created for losses, where there is objective evidence that unidentified losses exist at the reporting date. The amount of the provision is estimated based on the historical default patterns of the investment and financing counter-parties as well as their credit ratings, taking into account the current economic climate. In assessing collective impairment, the Bank also uses internal loss estimates and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Loss rates are regularly benchmarked against actual outcomes to ensure that they remain appropriate. The criteria that the Bank uses to determine that there is an objective evidence of impairment loss include:  Delinquency in contractual payments of principal or profit.  Cash flow difficulties experienced by the customer.  Breach of repayment covenants or conditions.  Initiation of bankruptcy proceedings against the customer.  Deterioration of the customer’s competitive position.  Deterioration in the value of collateral. When financing amount is uncollectible, it is written-off against the related allowance for impairment. Such financing is written-off after all necessary procedures have been completed and the amount of the loss has been determined. Financing whose terms have been renegotiated are no longer considered to be past due but are treated as new financing. Restructuring policies and practices are based on indicators or criteria which, indicate that payment will most likely continue. The financing continue to be subject to an individual or collective impairment assessment, calculated using the financing’s original effective yield rate. Financing are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a revised rate of commission to genuinely distressed borrowers. This results in the asset continuing to be overdue and individually impaired as the renegotiated payments of commission and principal do not recover the original carrying amount of the financing. In other cases, renegotiation lead to a new agreement, this is treated as a new financing. 31
39. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C) POLICIES APPLICABLE BEFORE 1 JANUARY 2018 (continued) 2) Impairment of financial assets (continued) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the customer’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance for impairment account. The amount of the reversal is recognized in the statement of income as impairment charge. Financial assets are written-off only in circumstances where effectively all possible means of recovery have been exhausted. Collectively assessed impairment allowances are provided for:   Portfolios of homogenous assets mainly relating to the retail financing portfolio that are individually not significant. On the corporate portfolio for financing where losses have been incurred but not yet identified, by using historical experience, judgment and statistical techniques. Available for-sale equity investments For equity investments held as available-for-sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through the statement of income as long as the asset continues to be recognized i.e. any increase in fair value after impairment has been recorded can only be recognized in equity. On derecognition, any cumulative gain or loss previously recognized in equity is included in the consolidated statement of income for the year. 3) De-recognition of financial assets and financial liabilities  A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognized when the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for de-recognition.  A financial liability (or a part of a financial liability) can only be derecognized when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expired. 4) Guarantees In the ordinary course of business the Bank gives guarantees which include letters of credit, letters of guarantee, acceptances and stand-by letters of credit. Initially, the received margins are recognized as liabilities at fair value, being the value of the premium received and included in customers’ deposits in the consolidated financial statements. Subsequent to the initial recognition, the Bank's liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligations arising as a result of guarantees. Any increase in the liability relating to the financial guarantee is taken to the consolidated statement of income in "impairment charge for credit losses, net". The premium received is recognised in the consolidated statement of income under "Fees from banking services, net" on a straight line basis over the life of the guarantee. 32
40. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C) POLICIES APPLICABLE BEFORE 1 JANUARY 2018 (continued) 5) Foreign currencies The consolidated financial statements are presented in Saudi Arabian Riyals (“SAR”), which is also the Bank’s functional currency. Each entity determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are translated into SAR at exchange rates prevailing on the dates of the transactions. Monetary assets and liabilities at the year-end (other than monetary items that form part of the net investment in foreign operations are translated into SAR at exchange rates prevailing on the reporting date. 5) Foreign currencies (continued) The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for the effective profits rate and payments during the year and the amortised cost in foreign currency translated at exchange rate at the end of the year. Foreign exchange gains or losses from settlement of transactions and translation of period end monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. As at the reporting date, the assets and liabilities of foreign operations are translated into SAR at the rate of exchange as at the statement of financial position date, and their statement of incomes are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are recognized in the statements of other comprehensive income. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the statement of income as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. 33
41. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) Basis of consolidation These consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as set out in note 1 to these financial statements (collectively referred to as “the Group”). The financial statements of subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. The consolidated financial statements have been prepared using uniform accounting policies and valuation methods for like transactions and other events in similar circumstances. Specifically, the Group controls an investee if and only if the Group has:  Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);  Exposure, or rights, to variable returns from its involvement with the investee; and  The ability to use its power over the investee to affect amount of its returns. When the Group has less than majority of the voting or similar rights of an investee entity, the Bank considers all relevant facts and circumstances in assessing whether it has power over the entity, including: - The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Bank’s voting rights and potential voting rights granted by equity instruments such as shares 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. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Bank loses control over a subsidiary, it: - derecognises the assets and liabilities of the subsidiary derecognises the cumulative translation differences recorded in shareholder’s equity recognises the fair value of the consideration received recognises the fair value of any investment retained recognises any surplus or deficit in profit or loss - reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate as would be required if the Bank had directly disposed of the related assets or liabilities. Intra group balances and any income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. Investment in associate An associate is an entity over which the Bank exercises significant influence (but not control), over financial and operating policies and which is neither a subsidiary nor a joint arrangement. Investments in associates are initially recognized at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at 34
42. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) Basis of consolidation (continued) the lower of the equity-accounted or the recoverable amount. Equity-accounted value represents the cost plus post-acquisition changes in the Bank's share of net assets of the associate (share of the results, reserves and accumulated gains/losses based on latest available financial statements) less impairment, if any. The previously recognized impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of the investment in the statement of financial position remains at the lower of the equity-accounted (before provision for impairment) or the recoverable amount. On derecognition the difference between the carrying amount of investment in the associate and the fair value of the consideration received is recognized in the consolidated statement of income. c) Trade date All regular way purchases and sales of financial assets are recognized and derecognized on the trade date (i.e. the date on which the Bank commits to purchase or sell the assets). Regular way purchases or sales of financial assets require delivery of those assets within the time frame generally established by regulation or convention in the market place. All other financial assets and financial liabilities (including assets and liabilities designated at fair value through statement of income) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. d) Offsetting financial instruments Financial assets and financial liabilities are offset and are reported net in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts, and when the Group intends to settle on a net basis, or to realize the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. e) Revenue recognition The following specific recognition criteria must be met before revenue is recognized. Income from Mutajara, Murabaha, investments held at amortized cost, installment sale, Istisna’a financing and credit cards services is recognized based on the effective yield basis on the outstanding balances. The effective yield is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset (or, where appropriate, a shorter period) to the carrying amount of the financial asset . When calculating the effective yield, the Group estimates future cash flows considering all contractual terms of the financial instrument but excluding future credit losses. Fees and commissions are recognized when the service has been provided. Financing commitment fees that are likely to be drawn down and other credit related fees are deferred (above certain threshold) and, together with the related direct cost, are recognized as an adjustment to the effective yield on the financing. When a financing commitment is not expected to result in the draw-down of a financing, financing commitment fees are recognised on a straightline basis over the commitment period. 35
43. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. e) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition (continued) Fee and commission income that are integral to the effective interest rate on a financial asset or financial liability are included in the effective interest rate. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, over the period when the service is being provided i.e. related performance obligation is satisfied. Fees received for asset management, wealth Management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognized over the period when the service is being provided i.e. related performance obligation is satisfied . Asset management fees related to investment funds are recognized over the period the service is being provided. The same principle applies to Wealth management and Custody Services that are continuously recognized over a period of time. Dividend income is recognised when the right to receive income is established which is generally when the shareholders approve the dividend. Dividends are reflected as a component of net trading income, net income from FVSI financial instruments or other operating income based on the underlying classification of the equity instrument. Foreign currency exchange income / loss is recognized when earned / incurred. Net trading income results from trading activities and include all realised and unrealised gains and losses from changes in fair value and related gross investment income or expense, dividends for financial assets and financial liabilities held for trading and foreign exchange differences. Net income from FVSI financial instruments relates to financial assets and liabilities designated as FVSI and includes all realised and unrealised fair value changes, investment income, dividends and foreign exchange differences. f) Other real estate The Bank, in the ordinary course of business, acquires certain real estate against settlement of financing. Such real estate are considered as assets held for sale and are initially stated at the lower of net realisable value of due financing and the current fair value of the related properties, less any costs to sell (if material). No depreciation is charged on such real estate. Rental income from other real estate is recognised in the consolidated statement of income. Subsequent to initial recognition, any subsequent write down to fair value, less costs to sell, are charged to the consolidated statement of income. Any subsequent revaluation gain in the fair value less costs to sell of these assets, to the extent this does not exceed the cumulative write down previously recognized are recognised, in the consolidated statement of income. Gains or losses on disposal are recognised in the consolidated statement of income. g) Investment properties Investment properties are held for long-term rental yield and are not occupied by the Group. They are carried at cost, and depreciation is charged to the consolidated statement of income. The cost of investment properties is depreciated using the straight-line method over the estimated useful life of the assets. 36
44. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) h) Property and equipment Property and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Land is not depreciated. The cost of other property and equipment is depreciated using the straight-line method over the estimated useful life of the assets, as follows: Leasehold land improvements over the lesser of the period of the lease or the useful life Buildings 33 years Leasehold building improvements over the lease period or 3 years, whichever is shorter Equipment and furniture 3 to 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the date of each statement of financial position. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in consolidated statement of income. All assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. h) Customers’ deposits Customer deposits are financial liabilities that are initially recognized at fair value less transaction cost, being the fair value of the consideration received, and are subsequently measured at amortized cost. i) Provisions Provisions are recognized when the Bank has present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. j) Accounting for leases 1. Where the Group is the lessee Leases that do not transfer to the Group substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Consequently, all of the leases entered into by the Bank are all operating leases. Payments made under operating leases are charged to the consolidated statement of income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty, net of anticipated rental income (if any), is recognised as an expense in the period in which termination takes place. The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately. 37
45. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) k) Accounting for leases (continued) 1. Where the Group is the lessor When assets are transferred under a finance lease, including assets under Islamic lease arrangements (e.g. Ijara Muntahia Bittamleek or Ijara with ownership promise) (if applicable) the present value of the lease payments is recognised as a receivable and disclosed under “Financing”. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. k) Cash and cash equivalents For the purposes of the consolidated statement of cash flows, ‘cash and cash equivalents’ include notes and coins on hand, balances with SAMA (excluding statutory deposits) and due from banks and other financial institutions with original maturity of 90 days or less from the date of acquisition which are subject to insignificant risk of changes in their fair value. l) Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. m) Special commission excluded from the consolidated statement of income In accordance with the Shari’a Authority’s resolutions, special commission income (non-Shari’a compliant income) received by the Bank, is excluded from the determination of financing and investment income of the Bank, and is transferred to other liabilities in the consolidated statement of financial position and is subsequently paid-off to charities institution. n) Provisions for employees’ end of service benefits The provision for employees’ end of service benefits is accrued using actuarial valuation according to the regulations of Saudi labor law and local regulatory requirements. o) Share-based payments The Bank’s founders had established a share-based compensation plan under which the entity receives services from the eligible employees as consideration for equity instruments of the Bank which are granted the employees. p) Mudaraba funds The Group carries out Mudaraba transactions on behalf of its customers, and are treated by the Group as being restricted investments. These are included as off balance sheet items. The Group’s share of profits from managing such funds is included in the Group’s consolidated statement of income. q) Zakat As per the SAMA Circular no. 381000074519 dated 11 April 2017 and subsequent amendments through certain clarifications relating to the accounting for zakat and income tax (“SAMA Circular”), the Zakat and Income tax are to be accrued on a quarterly basis through shareholders equity under retained earnings. 38
46. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) r) Investment management services The Bank provides investment management services to its customers, through its subsidiary which include management of certain mutual funds. Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the Group’s consolidated financial statements. The Group’s share of these funds is included under FVSI investments. Fees earned are disclosed in the consolidated statement of income. s) Bank’s products definition The Bank provides its customers with banking products based on interest avoidance concept and in accordance with Shari’a regulations. The following is a description of some of the financing products: Mutajara financing: It is a financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, accordingly the client becomes debtor to the Bank with the sale amount and for the period agreed in the contract. Installment sales financing: It is a financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price. Accordingly the client becomes a debtor to the Bank with the sale amount to be paid through installments as agreed in the contract. Istisnaa financing: It is a financing agreement whereby the Bank contracts to manufacture a commodity with certain known and accurate specifications according to the client’s request. The client becomes a debtor to the Bank for the manufacturing price, which includes cost plus profit. Murabaha financing: It is a financing agreement whereby the Bank purchases a commodity or asset and sells it to the client with a price representing the purchase price plus a profit known and agreed by the client which means that the client is aware of the cost and profit separately. 39
47. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 4. CASH AND BALANCES WITH SAMA AND OTHER CENTRAL BANKS Cash and balances with SAMA and central banks as of 31 December comprise of the following: (SAR‘000) 2017 2018 Cash in hand Statutory deposit Current account with SAMA Mutajara with SAMA Total 8,133,635 19,444,194 293,214 15,375,000 43,246,043 8,595,037 17,952,252 425,071 21,310,111 48,282,471 In accordance with the Banking Control Law and regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA and other central banks at stipulated percentages of its customers’ demand deposits, customers’ time investment and other customers’ accounts calculated at the end of each Gregorian month. The above statutory deposits are not available to finance the Bank’s day-to-day operations and therefore are not considered as part of cash and cash equivalents (note 24) when preparing consolidated statement of cash flows. 5. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Due from banks and other financial institutions as of 31 December comprise the following: (SAR’000) 2017 2018 825,908 778,769 9,883,887 30,029,242 10,709,795 30,808,011 Current accounts Mutajara Total The tables below depict the quality of due from banks and other financial institutions as at 31 December: Investment grade (credit rating (AAA to BBB-)) Non-investment grade (credit rating (BB+ to B-)) Unrated Total (SAR’000) 2017 2018 10,142,259 29,801,590 436,360 750,591 131,176 255,830 10,709,795 30,808,011 The credit quality of due from banks and other financial institutions is managed using external credit rating agencies. The above due from banks and other financial institutions balances are neither past due nor impaired. 40
48. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 6. INVESTMENTS, NET a) Investments comprise the following as of 31 December: (SAR’000) 2017 2018 124,825 172,753 Investment in an associate Investments held at amortized cost Murabaha with Saudi Government and SAMA Sukuk Less: Impairment (Stage 1) Total investments held at amortized cost 22,477,145 17,395,957 (28,337) 39,844,765 23,452,869 10,605,139 34,058,008 Investments held as FVSI Equity investments Mutual funds Sukuk Total investments held as FVSI 1,141,584 800,000 1,941,584 23,487 389,193 412,680 FVOCI investments Equity investments Mutual funds Total FVOCI investments 1,103,463 1,103,463 771,293 1,034,286 1,805,579 43,062,565 36,401,092 Investments The designated FVSI investments included above are designated upon initial recognition as FVSI and are in accordance with the documented risk management strategy of the Bank. 41
49. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 6. INVESTMENTS, NET (continued) All investments held at amortized cost are neither past due nor impaired as of 31 December 2018. Equity investment securities designated as at FVOCI At 1 January 2018, the Bank designated its equity securities as at FVOCI. In 2017, these investments were classified as available-for-sale and FVSI. The FVOCI designation was made because the investments are expected to be held for the long-term for strategic purposes. The Bank does not hold these equity investments for trading purposes. None of the material strategic investments were disposed of during 2018, and there were no transfers of any cumulative gain or loss within equity relating to these investments. Investment in an associate The Bank owns 22.5% (31December 2017: 22.5%) shares of Al Rajhi Company for Cooperative Insurance, a Saudi Joint Stock Company. b) The analysis of the composition of investments is as follows: 2018 Quoted Murabaha with SAMA Sukuk Equities Mutual funds Total 1,251,854 1,251,854 2017 Quoted Murabaha with SAMA Sukuk Equities Mutual funds Total c) 896,118 896,118 (SAR‘000) Unquoted 22,477,145 18,167,620 24,362 1,141,584 41,810,711 Total 22,477,145 18,167,620 1,276,216 1,141,584 43,062,565 (SAR‘000) Unquoted 23,452,869 10,605,139 23,487 1,423,479 35,504,974 Total 23,452,869 10,605,139 919,605 1,423,479 36,401,092 The analysis of unrecognized gains and losses and fair values of investments are as follows: 2018 (SAR’000) Murabaha with SAMA Sukuk Equities Mutual funds Total Gross Gross Gross carrying unrecognized unrecognized value gains losses 22,477,145 1,813 18,195,957 134,960 1,276,216 1,141,584 43,090,902 1,813 134,960 42 Fair value 22,478,958 18,060,997 1,276,216 1,141,584 42,957,755
50. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 6. INVESTMENTS, NET (continued) 2017 (SAR’000) Murabaha with SAMA Sukuk Equities Mutual funds Total d) Gross Gross Carrying unrecognized unrecognized value gains losses 23,452,869 6,984 10,605,139 45,503 919,605 1,423,479 36,401,092 6,984 45,503 Fair value 23,459,853 10,559,636 919,605 1,423,479 36,362,573 Credit quality of investments (SAR’000) Murabaha with SAMA Sukuk - Investment grade Total 2018 22,477,145 18,195,957 40,673,102 2017 23,452,869 10,605,139 34,058,008 Investment Grade includes those investments having credit exposure equivalent to Standard and Poor's rating of AAA to BBB. The unrated category only comprise of unquoted sukuk. Fitch has assigned A+ rating to KSA as a country, as at 31 December, 2018. e) f) The following is an analysis of foreign investments according to investment categories as at 31 December: 2018 2017 (SAR‘000) Investments held at amortized cost Sukuk 1,539,271 1,545,059 Investments held as FVSI Equity investments Mutual funds Total 21,282 562,477 2,123,030 21,300 347,180 1,913,539 The following is an analysis of investments according to counterparties as at 31 December: (SAR‘000) Government and quasi government Companies Banks and other financial institutions Mutual funds Less: Impairment Net investments 2018 23,840,814 1,279,065 16,829,439 1,141,584 (28,337) 43,062,565 43 2017 24,820,739 971,969 9,184,905 1,423,479 36,401,092
51. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 7. FINANCING, NET 7–1 Financing a. Net financing as of 31 December comprises the following: (SAR‘000) 2018 Allowance for Non-performing impairment Performing Mutajara Installment sale Murabaha Credit cards Total 47,552,342 175,407,901 14,671,326 1,973,379 239,604,948 1,024,320 591,541 662,570 11,881 2,290,312 (SAR‘000) 2017 Allowance for Non-performing impairment Performing Mutajara Installment sale Murabaha Credit cards Total (2,562,159) (4,024,656) (1,219,747) (25,909) (7,832,471) 48,729,890 172,631,262 15,058,355 901,097 237,320,604 1,052,534 521,289 175,196 21,160 1,770,179 (2,387,590) (1,938,279) (1,221,817) (7,524) (5,555,210) Net financing 46,014,503 171,974,786 14,114,149 1,959,351 234,062,789 Net financing 47,394,834 171,214,272 14,011,734 914,733 233,535,573 b. The net financing by location, inside and outside the Kingdom, as of 31 December is as follows: (SAR’000) 2018 Description Mutajara Installment sale Murabaha Inside the Kingdom Outside the Kingdom Gross financing Allowance for impairment Net financing 48,576,662 48,576,662 (2,562,159) 46,014,503 171,615,775 4,383,667 175,999,442 (4,024,656) 171,974,786 11,108,714 4,225,182 15,333,896 (1,219,747) 14,114,149 Credit cards Total 1,978,461 6,799 1,985,260 (25,909) 1,959,351 233,279,612 8,615,648 241,895,260 (7,832,471) 234,062,789 2017 Description Mutajara Installment sale Murabaha Credit cards Total Inside the Kingdom Outside the Kingdom Gross financing Allowance for impairment Net financing 49,782,424 49,782,424 (2,387,590) 47,394,834 168,822,412 4,330,139 173,152,551 (1,938,279) 171,214,272 10,192,559 5,040,992 15,233,551 (1,221,817) 14,011,734 917,103 5,154 922,257 (7,524) 914,733 229,714,498 9,376,285 239,090,783 (5,555,210) 233,535,573 44
52. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 7. FINANCING, NET (continued) 7-1 Financing (continued) The table below depicts the categories of financing as per main business segments at 31 December: 2018 Retail (SAR’000) Corporate Total Mutajara Installment sale Murabaha Credit cards 320,987 169,178,633 373,612 1,985,260 48,255,675 6,820,809 14,960,284 - 48,576,662 175,999,442 15,333,896 1,985,260 Financing, gross Less: Allowance for impairment Financing, net 171,858,492 (4,050,565) 167,807,927 70,036,768 (3,781,906) 66,254,862 241,895,260 (7,832,471) 234,062,789 Retail 2017 (SAR’000) Corporate Total Mutajara Installment sale Murabaha Credit cards 132,645 164,893,047 414,109 922,257 49,649,779 8,259,504 14,819,442 - 49,782,424 173,152,551 15,233,551 922,257 Financing, gross Less: Allowance for impairment Financing, net 166,362,058 (2,023,434) 164,338,624 72,728,725 (3,531,776) 69,196,949 239,090,783 (5,555,210) 233,535,573 c. The table below summarizes financing balances at 31 December that are neither past due nor impaired, past due but not impaired and impaired, as per the main business segments of the Group: 2018 (SAR’000) Neither past due nor impaired Retail Corporate Total 170,978,735 62,082,584 233,061,319 Past due but not impaired 276,300 6,267,329 6,543,629 Impaired Total 603,457 171,858,492 1,686,855 70,036,768 2,290,312 241,895,260 45 Allowance for impairment Net financing (4,050,565) 167,807,927 (3,781,906) 66,254,862 (7,832,471) 234,062,789
53. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 7. FINANCING, NET (continued) 7-1 Financing (continued) (SAR’000) 2017 Retail Corporate Total Neither past due nor impaired Past due but not impaired Impaired Total 165,405,592 67,503,558 232,909,150 414,018 3,997,436 4,411,454 542,448 1,227,731 1,770,179 166,362,058 72,728,725 239,090,783 Allowance for impairment Net financing (2,023,434) 164,338,624 (3,531,776) 69,196,949 (5,555,210) 233,535,573 Financing past due for less than 90 days is not treated as impaired, unless other available information proves otherwise. ‘Neither past due nor impaired’ and ‘past due but not impaired’ comprise total performing financing. 7-2 Allowance for impairment of financing: a. The movement in the allowance for impairment of financing for the years ended 31 December is as follows: 2018 Retail Closing allowance as at 31st December 2017 (calculated under IAS 39) Amounts restated through opening retained earnings 3A(iii) Opening impairment allowance as at 1 January 2018 (calculated under IFRS 9) Charge for the year, net Bad debts written off against provision Balance at the end of the year 3,531,776 5,555,210 1,863,397 1,019,291 2,882,688 3,886,831 1,774,673 (1,610,939) 4,050,565 4,551,067 982,523 (1,751,684) 3,781,906 8,437,898 2,757,196 (3,362,623) 7,832,471 Retail 3,088,691 1,575,624 (2,640,881) 2,023,434 46 Total 2,023,434 2017 Balance at beginning of the year Charge for the year, net Bad debts written off against provision Balance at the end of the year (SAR’000) Corporate (SAR’000) Corporate 3,544,010 1,063,367 (1,075,601) 3,531,776 Total 6,632,701 2,638,991 (3,716,482) 5,555,210
54. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 7. FINANCING, NET (continued) 7-1 Financing (continued) b. The following table shows reconciliations from the opening to the closing balance of the impairment allowance for financings to customers at amortized cost 31 December 2018 12 month ECL Lifetime ECL not credit impaired Lifetime ECL credit impaired Total SAR in ‘000’ Financings to customers at amortized cost Balance at 1 January 2018 Transfer to 12 month ECL Transfer to Lifetime ECL not credit impaired Transfer to Lifetime ECL credit impaired Charge for the period Write-offs Balance as at 31 December 2018 2,643,679 411,893 4,094,076 (411,893) 1,700,143 - 8,437,898 - (38,177) 112,134 (73,957) - (8,766) 138,418 (497,701) 2,649,346 (329,629) 361,338 (465,137) 3,360,889 338,395 2,468,622 (2,399,785) 2,033,418 2,968,378 (3,362,623) 8,043,653 Closing balance as 31 December 2018 includes impairment allowance related to off balance amounting to SAR 211M which is accounted for in other liabilities. Closing balance of Lifetime ECL credit impaired differs from total reported Non Performing Loans (NPL) due to IFRS 9 implementation. 7-3 Impairment charge movement The details of the impairment charge on financing for the year recorded in the consolidated statement of income is as follows: (SAR’000) 2018 2,968,378 (211,182) (1,226,250) 1,530,946 Charge for the year for on balance sheet Charge for the year for off balance sheet Recovery of written off financing, net Allowance for impairment, net 2017 2,638,991 (1,091,414) 1,547,577 7-4 Financing include finance lease receivables, which are as follows: 2018 2017 Gross receivables from finance leases 30,551,173 33,802,769 Less than 1 year 1 to 5 years Over 5 years 4,485 22,201,101 8,345,587 30,551,173 (4,593,105) 25,958,068 1,234,258 24,357,231 8,211,280 33,802,769 (4,903,943) 28,898,826 Unearned future finance income on finance leases Net receivables from finance leases 47
55. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net comprises the following as of 31 December: Land Buildings Leasehold land & buildings Equipment improvements and furniture Total COST At 1 January 2017 Additions Disposals At 31 December 2017 Additions Disposals At 31 December 2018 2,009,863 310,996 (263) 2,320,596 23,229 2,343,825 3,219,265 459,651 (429) 3,678,487 502,482 4,180,969 932,383 9,288 941,671 34,242 (26,159) 949,754 4,533,276 1,034,027 (39,284) 5,528,019 959,949 (35,391) 6,452,577 10,694,787 1,813,962 (39,976) 12,468,773 1,519,902 (61,550) 13,927,125 ACCUMULATED DEPRECIATION At 1 January 2017 Charge for the year Disposals At 31 December 2017 Charge for the year Disposals At 31 December 2018 - 352,187 58,684 (430) 410,441 65,388 475,829 888,632 14,403 903,035 13,628 916,663 2,968,806 367,479 (39,115) 3,297,170 363,155 (23,279) 3,637,046 4,209,625 440,566 (39,545) 4,610,646 442,171 (23,279) 5,029,538 NET BOOK VALUE At 31 December 2018 At 31 December 2017 2,343,825 2,320,596 3,705,140 3,268,046 33,091 38,636 2,815,531 2,230,849 8,897,587 7,858,127 Buildings include work-in-progress amounting to SAR 2,172 million as at 31 December 2018 (2017: SAR 1,803 million). Equipment and furniture includes information technology-related assets having net book value of SAR 2,573 million as at 31 December 2018 (2017: SAR 2,082 million). 9. INVESTMENT PROPERTIES, NET Investment properties consist of properties acquired by the Group in the year 2016. The net book value of the investment properties approximates the fair value. 48
56. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 10. OTHER ASSETS, NET Other assets, net comprise the following as of 31 December: (SAR‘000) Receivables, net Prepaid expenses Assets in transit subject to financing Accrued income Cheques under collection Advance payments Other real estate Others, net Total 2018 2017 879,916 393,317 574,905 273,846 324,636 266,634 72,106 843,885 3,629,245 1,270,554 714,996 574,921 497,979 494,009 407,982 147,106 907,917 5,015,464 11. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions comprise the following as of 31 December: (SAR‘000) 2017 2018 Current accounts Banks’ time investments Total 1,066,474 4,456,093 5,522,567 925,945 6,363,679 7,289,624 12. CUSTOMERS’ DEPOSITS Customers’ deposits by type comprise the following as of 31 December: (SAR‘000) 2017 2018 Demand deposits Customers’ time investments Other customer accounts Total 268,416,842 18,689,225 6,803,058 293,909,125 251,729,768 15,917,263 5,409,414 273,056,445 The balance of the other customers’ accounts includes margins on letters of credit and guarantees, checks under clearance and transfers. Customers’ deposits by currency comprise the following as of 31 December: 2018 Saudi Arabian Riyals Foreign currencies Total (SAR‘000) 2017 282,460,829 11,448,296 293,909,125 49 260,388,240 12,668,205 273,056,445
57. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 13. OTHER LIABILITIES Other liabilities comprise the following as of 31 December: (SAR‘000) 2018 Accounts payable Provision for employees’ end of service benefits (see note 25) Accrued expenses Charities (see note 32) Zakat payable Other Total 3,602,605 901,970 974,599 56,350 6,348,660 3,366,879 15,251,063 2017 3,436,195 848,422 837,597 16,854 3,647,530 8,786,598 14. SHARE CAPITAL The authorized, issued and fully paid share capital of the Bank consists of 1,625 million shares of SAR 10 each (2017: 1,625 million shares of SAR 10 each). 15. STATUTORY AND OTHER RESERVES The Banking Control Law in Saudi Arabia and the By-Laws of the Bank require a transfer to statutory reserve at a minimum of 25% of the annual net income for the year. Such transfers continue until the reserve equals the paid up share capital. This reserve is presently not available for distribution. Previously, the bank was recording the amount of Zakat it calculates in other reserves until the final amount of Zakat payable can be determined. As a major event, during the year the Bank reach a settlement agreement with the General Authority for Zakat & Income Tax (GAZT), to settle the Zakat Liability amounting to SAR 5,405,270,925 for previous years and until the end of the financial year 2017. The settlement agreement requires the Bank to settle the 20% of the agreed Zakat Liability in the current year and the remaining to be settled over the period of five years. Accordingly the Bank have adjusted Zakat for the previous years and until the end of financial year 2017 through its retained earnings. As a result of the settlement agreement the Bank have agreed to withdraw all of the previous appeals which were filed with the competent authority with respect to Zakat. Furthermore, Zakat for 2018 is amounted to SAR 943,389,178. In addition, there is 48 million has been paid related to ZAKAT 2017 and other payment In addition, other reserves includes FVOCI investments reserve, foreign currency translation reserve and employee share plan. 50
58. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 15. STATUTORY AND OTHER RESERVES (continued) The movements in FVOCI investments, foreign currency reserves, and employee share plan are summarized as follows: 2018 (SAR‘000) Foreign Employee FVOCI currency share investments translation plan Balance at beginning of the year Impact of adopting IFRS 9 Net change in fair value Exchange difference on translation of foreign operations Balance at the end of the year (80,130) (129,789) (49,798) (74,311) - 37,110 - (117,331) (129,789) (49,798) (259,717) (52,637) (126,948) 37,110 (52,637) (349,555) 2017 Availablefor-sale investments Balance at beginning of the year Net change in fair value Net amount transferred to consolidated statement of income Exchange difference on translation of foreign operations Balance at the end of the year 2018 Total (SAR‘000) Foreign Employee currency share translation plan 2017 Total 58,179 201,825 (147,935) - 37,110 - (52,646) 201,825 (340,134) - - (340,134) (80,130) 73,624 (74,311) 37,110 73,624 (117,331) 16. COMMITMENTS AND CONTINGENCIES a) Legal proceedings As at 31 December 2018, there were certain legal proceedings outstanding against the Bank in the normal course of business including those relating to the extension of credit facilities. Such proceedings are being reviewed by the concerned parties. Provisions have been made for some of these legal cases based on the assessment of the Bank’s legal advisors. b) Capital commitments As at 31 December 2018, the Bank had capital commitments of SAR 170 million (2017: SAR 629 million) relating to contracts for computer software update and development, and SAR 65 million (2017: SAR 410 million) relating to building new workstation, and development and improvement of new and existing branches. c) Credit related commitments and contingencies The primary purpose of these instruments is to ensure that funds are available to customers as required. Credit related commitments and contingencies mainly comprise letters of guarantee, standby letters of credit, acceptances and unused commitments to extend credit. Guarantees and 51
59. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 16. COMMITMENTS AND CONTINGENCIES (continued) c) Credit related commitments and contingencies (continued) standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet his obligations to third parties, carry the same credit risk as financing. Letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate, and therefore, carry less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be presented before being reimbursed by the customers. Cash requirements under guarantees and letters of credit are considerably less than the amount of the commitment because the Bank does not expect the third party to draw necessarily funds under the agreement. Commitments to extend credit represent unused portions of authorization to extended credit, principally in the form of financing, guarantees and letters of credit. With respect to credit risk d) Credit related commitments and contingencies relating to commitments to extend unused credit, the Bank is potentially exposed to a loss in an amount which is equal to the total unused commitments. The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire without being funded. 1. The contractual maturities of the Bank’s commitments and contingent liabilities are as follows at 31 December: 2018 (SAR‘000) Less than 3 From 3 to From 1 to Over 5 months 12 months 5 years years Total Letters of credit Acceptances Letters of guarantee Irrevocable commitments to extend credit Total 562,899 261,183 1,270,202 2,459,684 417,925 208,706 2,405,041 2,901,726 1,945 1,159,962 855,965 41,956 265,061 982,769 469,889 4,877,161 6,482,436 4,553,968 5,933,398 2,017,872 307,017 12,812,255 2017 Less than 3 months Letters of credit Acceptances Letters of guarantee Irrevocable commitments to extend credit Total From 3 to 12 months (SAR‘000) From 1 to 5 years Over 5 years Total 1,027,240 313,137 1,790,856 82,382 117,327 1,986,680 68,626 1,183,423 8,396 1,178,248 430,464 4,969,355 875,279 4,006,512 2,983,742 5,170,131 2,969,064 4,221,113 161,284 169,680 6,989,369 13,567,436 52
60. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 2. The analysis of commitments and contingencies by counter-party is as follows as at 31 December: (SAR‘000) 2017 2018 Corporates Banks and other financial institutions Total c) 11,704,696 1,107,559 12,812,255 10,728,656 2,838,780 13,567,436 Operating lease commitments The future minimum lease payments under non-cancelable operating leases, where the Bank is the lessee, are as follows as at 31 December: (SAR‘000) 2017 2018 Less than 1 year One 1 to 5 years Over 5 years Total 400 234,652 52,458 287,510 53 41,163 197,712 56,362 295,237
61. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 17. NET FINANCING AND INVESTMENT INCOME Net financing and investment income for the years ended 31 December comprises the following: 2018 Financing Corporate Mutajara Installment sale Murabaha Investments and other Murabaha with SAMA Mutajara with banks Income from sukuk Gross financing and investment income Return on customers’ time investments Return on due to banks and financial institutions’ time investments Return on customers’, banks’ and financial institutions’ time investments Net financing and investment income (SAR‘000) 2017 2,176,364 9,055,152 684,999 2,049,915 8,533,438 691,807 1,092,878 563,249 186,815 13,759,457 (346,796) (159,928) 673,238 517,212 115,394 12,581,004 (360,084) (191,503) (506,724) 13,252,733 (551,587) 12,029,417 18. FEE FROM BANKING SERVICES, NET Fee from banking services, net for the years ended 31 December comprise the following: 2018 (SAR’000) 2017 Fee income: Financing related Drafts and remittances Credit cards Other electronic channel related Brokerage and Asset Management Others Total fee income 1,334,378 397,142 499,007 920,795 398,725 362,150 3,912,197 1,060,165 437,953 400,823 821,598 335,706 358,759 3,415,004 Fee expenses: ATM Interchange related Fee from banking services, net (810,911) 3,101,286 (717,796) 2,697,208 54
62. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 19. OTHER OPERATING INCOME Other operating income for the years ended 31 December comprises the following: (SAR’000) 2017 2018 Dividend income (Loss) / Gain on sale of property and equipment, net Rental income from investment property Share in earnings of associate Gain / (loss) on investments held as FVSI Income from sale of various investments Loss on sale of other real state Gain on sale of equity investment Other income, net Total 39,852 (115) 115,280 47,928 14,600 (32,000) 24,150 209,695 30,176 594 81,592 35,545 12,635 3,374 72,144 100,330 336,390 20. SALARIES AND EMPLOYEES’ RELATED BENEFITS The following tables provide an analysis of the salaries and employees’ related benefits for the years ended 31 December: 2018 (SAR’000) Number of Fixed employees compensation Variable compensations paid Cash Shares Executives Employees engaged in risk taking activities Employees engaged in control functions Other employees 17 1,460 463 11,592 31,515 391,876 146,484 1,876,868 18,352 57,459 32,964 197,110 35,712 15,818 15,534 18,360 Total Accrued fixed compensations in 2018 Other employees’ costs Gross total 13,532 2,446,743 148,136 214,570 2,809,449 305,885 305,885 85,424 13,532 55 85,424
63. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 20. SALARIES AND EMPLOYEES’ RELATED BENEFITS (continued) 2017 (SAR’000) Number of employees Fixed compensation Variable compensations paid Cash Shares Executives Employees engaged in risk taking activities Employees engaged in control functions Other employees 18 1,486 363 11,210 29,328 384,212 169,956 1,769,152 18,588 63,815 27,097 171,720 30,577 17,155 12,221 17,468 Total Accrued Fixed compensations in 2017 Other employees’ costs Gross total 13,077 2,352,648 241,622 219,648 2,813,918 281,220 281,220 77,421 77,421 13,077 Salaries and employees’ related benefits include end of services, General Organization for Social Insurance, business trips, training and other benefits. As the Kingdom of Saudi Arabia is part of the G-20, instructions were given to all financial institutions in the Kingdom to comply with the standards and principles of Basel II and the Financial Stability Board. SAMA, as the regulatory for financial institutions in Saudi Arabia, issued regulations on compensations and bonus in accordance with the standards and principles of Basel II and the Financial Stability Board. In light of the above SAMA’s regulations, the Bank issued compensation and bonuses policy which was implemented after the Board of Directors approval. The scope of this policy is extended to include the Bank and its subsidiary companies (local and international) that are operating in the financial service sector. Accordingly it includes all official employees, permanent and temporary contracted employees and service providers (contribution in risk position if SAMA allows the use of external resources). For consistency with other banking institutions in the Kingdom of Saudi Arabia, the Bank has used a combination of fixed and variable compensation to attract and maintain talent. The fixed compensation is assessed on a yearly basis by comparing it to other local banks in the Kingdom of Saudi Arabia including the basic salaries, allowance and benefits which is related to the employees’ ranks. The variable compensation is related to the employees performance and their compatibility to achieve the agreed on objectives. It includes incentives, performance bonus and other benefits. Incentives are mainly paid to branches’ employees whereby the performance bonuses are paid to head office employees and others who do not qualify for incentives. These bonuses and compensation are approved by the Board of Directors as a percentage of the Bank’s income. 56
64. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 21. OTHER GENERAL AND ADMINISTRATIVE EXPENSES Other general and administrative expenses for the years ended 31 December comprises the following: (SAR’000) 2017 2018 Communications & Utilities Expenses Maintenance & Security Expenses Cash Feeding & Transfer Expenses Software & IT Support Expenses Other Operational Expenses Total 356,061 415,660 327,112 178,317 648,368 1,925,518 310,007 400,168 329,331 161,396 470,150 1,671,052 22. EARNINGS PER SHARE Earnings per share for the years ended 31 December 2018 and 2017 have been calculated by dividing the net income for the year by the weighted average number of shares outstanding. The weighted average number of ordinary shares outstanding during the year is the number of ordinary shares outstanding at the beginning of the year, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor, if any. The time-weighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the year. 23. PAID AND PROPOSED DIVIDENDS The Bank distributed dividends for the first half of 2018 amounting to SAR 3,250,000 thousand (i.e. SAR 2 per share) (2017: SAR 2,437,500 thousand (i.e. SAR 1.5 per share). Also the Bank proposed final dividends for the year 2018 amounting to SAR 3,656,250 thousand (i.e. SAR 2.25 per share) (2017: SAR 4,062,500 thousand i.e. SAR 2.5 per share). 57
65. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 24. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: Cash in hand Due from banks and other financial institutions maturing within 90 days from the date of purchased Balances with SAMA and other central banks (current accounts) Mutajara with SAMA Total (SAR’000) 2017 2018 8,595,037 8,133,635 5,984,654 293,214 15,375,000 29,786,503 891,976 425,071 21,310,111 31,222,195 25. EMPLOYEE BENEFIT OBLIGATION 25.1 General description The Bank operates an End of Service Benefit Plan for its employees based on the prevailing Saudi Labor Laws. Accruals are made in accordance with the actuarial valuation under the projected unit credit method while the benefit payments obligation is discharged as and when it falls due. 25.2 The amounts recognized in the statement of financial position and movement in the obligation during the year based on its present value are as follows: Defined benefit obligation at the beginning of the year Current service cost Financing cost Benefits paid Remeasurement loss / (gain) Defined benefit obligation at the end of the year 2018 SAR’ 000 848,422 107,685 85,995 (140,132) 901,970 2017 SAR’ 000 761,671 97,475 34,579 (74,824) 29,521 848,422 25.3 Charge /(reversal) for the year 2018 SAR’ 000 106,152 1,533 107,685 Current service cost Past service cost 58 2017 SAR’ 000 97,475 97,475
66. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 25. EMPLOYEE BENEFIT OBLIGATION (continued) 25.4 Re-measurement recognised in Other comprehensive income Gain/loss from change in demographic assumptions Gain/loss from change in experience assumptions Gain/loss from change in financial assumptions 2018 SAR’ 000 - 2017 SAR’ 000 601 20,094 8,826 29,521 25.5 Principal actuarial assumptions (in respect of the employee benefit scheme) 2018 Discount rate Expected rate of salary increase Normal retirement age 5.00% 3.00% 60 years for male employees and 55 for female employees 2017 4.50% 3.50% 60 years for male employees and 55 for female employees Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in the region. 25.6 Sensitivity of actuarial assumptions The table below illustrates the sensitivity of the Defined Benefit Obligation valuation as at 31 December, 2018 to the discount rate (5.00%), salary escalation rate (3.00%), withdrawal assumptions and mortality rates. 2018 Base Scenario Discount rate Expected rate of salary increase Normal retirement age 2017 Base Scenario Discount rate Expected rate of salary increase Normal retirement age SAR 000’ Impact on defined benefit obligation – Increase / (Decrease) Change in Increase in Decrease in assumption assumption assumption +/- 100 basis points (96,511) 115,452 +/- 100 basis points 117,256 (99,217) Increase or decrease 9,020 (10,824) by 20% SAR 000’ Impact on defined benefit obligation – Increase / (Decrease) Change in Increase in Decrease in assumption assumption assumption +/- 100 basis points (84,916) 121,031 +/- 100 basis points 120,796 (86,419) Increase or decrease 13,800 (3,252) by 20% The above sensitivity analyses are based on a change in an assumption holding all other assumptions constant. 59
67. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 25. EMPLOYEE BENEFIT OBLIGATION (continued) 25.7 Expected maturity Expected maturity analysis of undiscounted defined benefit obligation for the end of service plan is as follows: As at December 31, 2018 901,970 Less than a year 61,300 1-2 years 2-5 years 71,836 244,884 Over 5 years 572,808 Total 950,828 The weighted average duration of the defined benefit obligation is 15 years. 26. OPERATING SEGMENTS The Bank identifies operating segments on the basis of internal reports about the activities of the Bank that are regularly reviewed by the chief operating decision maker, principally the Chief Executive Officer, in order to allocate resources to the segments and to assess its performance. For management purposes, the Bank is organized into the following four main businesses segments: Retail segment: Includes individual customer deposits, credit facilities, customer debit current accounts (overdrafts) and fees from banking services. Corporate segment: Incorporates deposits of VIP, corporate customers deposits, credit facilities, and debit current accounts (overdrafts). Treasury segment: Includes treasury services, Murabaha with SAMA and international Mutajara portfolio and remittance business. Investment services and brokerage segments: Includes investments of individuals and corporates in mutual funds, local and international share trading services and investment portfolios. Transactions between the above segments are on normal commercial terms and conditions. Assets and liabilities for the segments comprise operating assets and liabilities, which represents the majority of the Bank’s assets and liabilities. 60
68. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 26. OPERATING SEGMENTS (continued) a) The Bank’s total assets and liabilities, together with its total operating income and expenses, and net income, as of and for the years ended 31 December for each segment are as follows: (SAR’000) 2018 Total assets Total liabilities Financing & investments income from external customers Inter-segment operating income/ (expense) Gross financing & investment income Return on customers’, banks’ and financial institutions’ time investments Net financing & investment income Fees from banking services, net Exchange income, net Other operating income, net Total operating income Depreciation Impairment charge for financing, net Other operating expenses Total operating expenses Net income for the year Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total 187,897,978 273,503,541 62,102,390 18,947,567 111,970,301 23,868,335 3,033,161 130,369 365,003,830 316,449,812 8,968,075 2,790,552 1,976,310 24,520 13,759,457 (457,379) - - 1,518,931 24,520 13,759,457 (159,928) (8,250) (506,724) 1,154,739 (697,360) 10,122,814 2,093,192 (124,676) (213,870) 9,998,138 1,879,322 1,359,003 16,270 13,252,733 1,848,899 143,513 25,019 12,015,569 (415,035) (1,177,409) 570,304 40,892 2,490,518 (7,358) (302,894) 283,358 571,399 62,699 2,276,459 (14,009) (50,643) 398,725 121,977 536,972 (5,769) - 3,101,286 755,804 209,695 17,319,518 (442,171) (1,530,946) (4,095,037) (5,687,481) (322,513) (632,765) (490,076) (554,728) (141,908) (147,677) (5,049,534) (7,022,651) 1,721,731 389,295 10,296,867 6,328,088 1,857,753 61
69. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 26. OPERATING SEGMENTS (continued) (SAR’000) Retail segment Corporate segment Treasury segment Total assets 183,869,949 63,535,245 92,783,499 2,927,835 343,116,528 Total liabilities 249,429,672 21,288,466 16,107,112 540,360 287,365,610 8,230,257 2,862,192 1,466,239 22,316 12,581,004 - - 22,316 12,581,004 2017 Financing & investments income from external customers Inter-segment operating income/ (expense) Gross financing & investment income Return on customers’, banks’ and financial institutions’ time investments Net financing & investment income Fees from banking services, net Exchange income, net Other operating income, net Total operating income Depreciation Impairment charge for financing, net Other operating expenses Total operating expenses Net income for the year b) Investment services and brokerage segment 984,000 (648,377) 9,214,257 (335,623) 2,213,815 (75,531) 1,130,616 Total (240,145) (235,911) - (551,587) 9,138,726 1,758,574 427,996 131,306 11,456,602 (410,957) 1,973,670 573,605 50,714 2,597,989 (10,866) 894,705 37,114 363,129 105,063 1,400,011 (12,834) 22,316 327,915 100,021 450,252 (5,910) 12,029,417 2,697,208 841,839 336,390 15,904,854 (440,566) (1,191,115) (3,985,776) (5,587,847) (355,917) (460,695) (827,478) (545) (218,634) (232,013) (130,880) (136,790) (1,547,577) (4,795,985) (6,784,128) 5,868,755 1,770,511 1,167,998 313,462 9,120,726 The Group’s credit exposure by business segments as of 31 December is as follows: (SAR’000) 2018 Consolidated balance sheet assets Commitments and contingencies excluding irrevocable commitments to extend credit Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total 158,519,040 52,392,321 94,463,095 2,558,909 307,933,365 - 6,329,819 - - 6,329,819 62
70. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 26. OPERATING SEGMENTS (continued) (SAR’000) 2017 Retail segment Consolidated balance sheet assets 164,609,073 Commitments and contingencies excluding irrevocable commitments to extend credit - Investment services and brokerage segment Corporate segment Treasury segment 62,660,677 51,727,163 2,927,835 281,924,748 6,776,468 - - 6,776,468 Total 27. FINANCIAL RISK MANAGEMENT The Bank's activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an inevitable consequence of participating in financial markets. The Bank's aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance. The Bank's risk management policies, procedures and systems are designed to identify and analyze these risks and to set appropriate risk mitigates and controls. The Bank reviews its risk management policies and systems on an ongoing basis to reflect changes in markets, products and emerging best practices. Risk management is performed by the Credit and Risk Management Group (“CRMG”) under policies approved by the Board of Directors. The CRMG identifies and evaluates financial risks in close co-operation with the Bank's operating units. The most important types of risks identified by the Bank are credit risk, liquidity risk and market risk. Market risk includes currency risk, profit rate risk, operational risk and price risk 27-1 Credit risk Credit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally from financing (credit facilities provided to customers) and from cash and deposits held with other banks. Further, there is credit risk in certain off-balance sheet financial instruments, including guarantees relating to purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the CRMG which sets parameters and thresholds for the Bank's financing activities. 63
71. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement i) Financing The Bank has structured a number of financial products which are in accordance with Sharia law in order to meet the customers demand. These products are all classified as financing assets in the Bank's consolidated statement of financial position. In measuring credit risk of financing at a counterparty level, the Bank considers the overall credit worthiness of the customer based on a proprietary risk methodology. This risk rating methodology utilizes a 10 point scale based on quantitative and qualitative factors with seven performing categories (rated 1 to 7) and three non-performing categories (rated 8-10). The risk rating process is intended to advise the various independent approval authorities of the inherent risks associated with the counterparty and assist in determining suitable pricing commensurate with the associated risk. Specific provisions are evaluated individually for all different types of financing, whereas additional provisions are evaluated based on collective impairment of financing, and are created for credit losses where there is objective evidence that the unidentified potential losses are present at the reporting date. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The collective provision is based upon deterioration in the internal credit ratings allocated to the borrower or group of borrowers. These internal grading take into consideration factors such as the current economic condition in which the borrowers operate. Any deterioration in country risk, industry, as well as identified structural weaknesses or deterioration in cash flows. ii) Credit risk grades For corporate exposures, the Bank allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of default and applying experienced credit judgment. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between credit risk grades 1 and 2 is smaller than the difference between credit risk grades 2 and 3. Each corporate exposure is allocated to a credit risk grade at initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. The monitoring of corporate exposure involves use of the following data.    Information obtained during periodic review of customer files – e.g. audited financial statements, management accounts, budgets and projections. Data from credit reference agencies, press articles, changes in external credit ratings Actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities 64
72. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement (continued) iii) Generating the term structure of PD Credit risk grades are a primary input into the determination of the term structure of PD for exposures. The Bank collects performance and default information about its customers analyzed by segment as well as by credit risk grading. The Bank employs analytical techniques incorporating internal default estimates backed by transition matrices published by external agencies to construct PD term structures that can be applied to each exposure based on the its remaining lifetime. These PD termn structures are then adjusted to incorporate the impact of macroeconomic outlook to arrive at a forward looking estimate of PD across the lifetime. For retail exposure, borrower and loan specific information collected at the time of application, repayment behavior etc. are used to construct risk based segmentation using Chi-square Automatic Interaction Detection (CHAID) (or Decision Tree) technique. Risk segments are constructed to identify and aggregate customer with similar risk characteristics. For each risk segment thus formed, PD term strucures are constructed using historical data that can be applied to each exposure based on its remaining lifetime. Based on consideration of a variety of external actual and forecast information from published sources, the Bank formulates a forward looking adjustment to PD term structures to arrive at forward looking PD estimates across the lifetime using macroeconomic models. Risk Rating 1 Exceptional - Obligors of unquestioned credit standing at the pinnacle of credit quality. Risk Rating 2 Excellent - Obligors of the highest quality, presently and prospectively. Virtually no risk in lending to this class, Cash flows reflect exceptionally large and stable margins of protection. Projected cash flows including anticipated credit extensions indicate strong liquidity levels and debt service coverage. Balance Sheet parameters are strong, with excellent asset quality in terms of value and liquidity. Risk Rating 3 Superior - Typically obligors at the lower end of the high quality range with excellent prospects. Very good asset quality and liquidity. Consistently strong debt capacity and coverage. There could however be some elements, which with a low likelihood might impair performance in the future. Risk Rating 4 Good - Typically obligors in the high end of the medium range who are definitely sound with minor risk characteristics. Elements of strength are present in such areas as liquidity, stability of margins, cash flows, diversity of assets, and lack of dependence on one type of business. 65
73. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement (continued) Risk Rating 5 Satisfactory - These are obligors with smaller margins of debt service coverage and with some elements of reduced strength. Satisfactory asset quality, liquidity, and good debt capacity and coverage. A loss year or declining earnings trend may occur, but the borrowers have sufficient strength and financial flexibility to offset these issues. Risk Rating 6 Adequate - Obligors with declining earnings, strained cash flow, increasing leverage and/ or weakening market fundamentals that indicate above average risk, such borrowers have limited additional debt capacity, modest coverage, average or below average asset quality and market share. Present borrower performance is satisfactory, but could be adversely affected by developing collateral quality/ adequacy etc. Risk Rating 7 Very high risk - Generally undesirable business constituting an undue and unwarranted credit risk but not to the point of justifying a substandard classification. No loss of principal or profit has taken place. Potential weakness might include a weakening financial condition, an unrealistic repayment program, inadequate sources of funds, or a lack of adequate collateral, credit information or documentation. The entity is undistinguished and mediocre. No new or incremental credits will generally be considered for this category. Risk Rating 8 Substandard - Obligors in default and 90 Days Past Due on repayment of their obligations. Unacceptable business credit. Normal repayment is in jeopardy, and there exists well defined weakness in support of the same. The asset is inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral. Specific provision raised as an estimate of potential loss. Risk Rating 9 Doubtful - Obligors in default and 180 Days Past Due (DPD) on their contracted obligations, however in the opinion of the management recovery/ salvage value against corporate and real estate obligors is a possibility, and hence write-off should be deferred. Full repayment questionable. Serious problems exist to the point where a partial loss of principle is likely. Weaknesses are so pronounced that on the basis of current information, conditions and values, collection in full is highly improbable. Specific provision raised as an estimate of potential loss. However, for retail obligors (except real estate) and credit cards, total loss is expected. A 100% Specific Provisioning must be triggered followed by the write-off process should be effected as per Al Rajhi Bank write-off policy. Risk Rating 10 Loss - Obligors in default and 360 Days Past Due (DPD) on their obligations. Total loss is expected. An uncollectible assets which does not warrant classification as an active asset. A 100% Specific Provisioning must be triggered followed by the write-off process should be effected as per Al Rajhi Bank write-off policy. 66
74. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement (continued) iv) ECL - Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank's historical experience and expert credit assessment and including forward-looking information. For Corporate portfolio, the Bank’s assessment of significant increase in credit risk is based on facility level except for watch-list accounts whereby Bank assessment is based on counterparty. Significant increase in credit risk assessment for retail loans is carried out at customer level within same product family. All the exposures which are considered to have significantly increased in credit risk are subject to lifetime ECL. The Bank considers all investment grade debt securities issued by sovereigns including Gulf Corporation Council (GCC) countries to have low credit risk. v) Determining whether credit risk has increased significantly In determining whether credit risk has increased significantly since initial recognition, the Bank uses its internal credit risk grading system, external risk ratings, quantitative changes in PDs , delinquency status of accounts, expert credit judgement and, where possible, relevant historical experience. The credit risk of a particular exposure is deemed to have increased significantly since initial recognition base on quantitative assessment and / or using its expert credit judgment and, where possible, relevant historical experience, the Bank may determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis. As a backstop, the Bank considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower. The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that: • • • the criteria are capable of identifying significant increases in credit risk before an exposure is in default; the criteria do not align with the point in time when an asset becomes 30 days past due; and there is no unwarranted volatility in loss allowance from transfers between 12-month PD (stage 1) and lifetime PD (stage 2). 67
75. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement (continued) The Bank classifies its financial instruments into stage 1, stage 2 and stage 3, based on the applied impairment methodology, as described below: Stage 1: for financial instruments where there has not been a significant increase in credit risk since initial recognition and that are not credit-impaired on origination, the Bank recognises an allowance based on the 12-month ECL. All accounts at origination would be classified as Stage 1. Stage 2: for financial instruments where there has been a significant increase in credit risk since initial recognition but they are not credit-impaired, the Bank recognises an allowance for the lifetime ECL for all financings categorized in this stage based on the actual / expected behavioral maturity profile including restructuring or rescheduling of facilities. Stage 3: for credit-impaired financial instruments, the Bank recognises the lifetime ECL. Default identification process i.e. DPD of 90 or more is used as stage 3. vi) Modified 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 derecognized and the renegotiated loan recognized as a new loan at fair value in accordance with the accounting policy. The Bank renegotiates loans to customers in financial difficulties (referred to as 'forbearance activities' to maximize collection opportunities and minimize the risk of default. Under the Bank's forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms usually include extending the maturity, changing the timing of profit payments and amending the terms of loan covenants. Both retail and corporate loans are subject to the forbearance policy. Forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired/in default. A customer needs to demonstrate consistently good payment behavior over a period of 12 months before the exposure is no longer considered to be credit-impaired/ in default. 68
76. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement (continued) vii) Definition of ‘Default’ The Bank considers a financial asset to be in default when: • the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realizing security (if any is held); or • the borrower is past due more than 90 days on any material credit obligation to the Bank. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding. In assessing whether a borrower is in default. the Bank considers indicators that are: • qualitative- e.g. breaches of covenant; • quantitative- e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; 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. viii) Incorporation of forward looking information The Bank incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. Based on consideration of a variety of external actual and forecast information from published sources, the Bank formulates a forward looking adjustment to PD term structures to arrive at forward looking PD estimates across the lifetime using macroeconomic models. The Bank considers scenarios in range of 3-5 years horizon (consistent with forecast available from public sources) beyond which long term average macroeconomic conditions prevail. Externally available macroeconomic forecast from International Monetary Fund (IMF) and Saudi Arabian Monetary Authority (SAMA) are used for making base case forecast. For other scenarios, adjustment are made to base case forecast based on expert judgement. The base case represents a most-likely outcome as published by external sources. The other scenarios represent more optimistic and more pessimistic outcomes. Economic Indicators Weightage 2018 GDP growth rate Government expenditure to GDP 56.29%. 43.71%. Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analyzing historical data. 69
77. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 ix) Measurement of ECL The Bank measures an ECL at an individual instrument level taking into account the projected cash flows, PD, LGD, CCF and discount rate. The key inputs into the measurement of ECL are the term structure of the following variables: i. ii. iii. 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 forward-looking information as described above. PD estimates are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. If a counterparty or exposure migrates between ratings classes, then this will lead to a change in the estimate of the associated PD. PDs are estimated considering the contractual maturities of exposures and estimated prepayment rates. For Retail portfolio, bank uses internal LGD models to arrive at the LGD estimates. For Corporate portfolio, bank used supervisory estimates of LGD. EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortization. The EAD of a financial asset is its gross carrying amount. For lending commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. The period of exposure limits the period over which possible defaults are considered and thus affects the determination of PDs and measurement of ECLs (especially for Stage 2 accounts with lifetime ECL). 70
78. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) a) Credit risk measurement (continued) x) Credit quality analysis a) The following table sets out information about the credit quality of Financings measured at amortized cost. 31 December 2018 12 month ECL Life time ECL not credit impaired Lifetime ECL credit impaired Total SAR in ‘000’ Carrying amount distribution by Grades Grade 1-3 / (Aaa - A3) Grade (4-6) / (Baa1 - B3) Grade 7- Watch list / (Caa1 – C) Non-performing Total Corporate and non-performing Total Retail (un-rated) Total Carrying amount xi) 8,322,229 44,981,511 53,213,740 168,182,212 221,395,952 12,217,422 2,918,751 15,136,173 3,072,823 18,208,996 1,686,855 8,322,229 57,198,933 2,918,751 1,686,855 1,686,855 603,457 2,290,312 70,036,768 171,858,492 241,895,260 Financings a) The net financing concentration risks and the related provision, by major economic sectors at 31 December are as follows: (SAR’000) Allowance 2018 Nonfor Description Performing Performing impairment Net financing Commercial Industrial Building and construction Consumer Services Agriculture and fishing Others Total Collective allowance for impairment Balance 19,670,493 28,007,663 3,442,028 171,255,069 16,295,853 467,960 465,882 239,604,948 71 746,180 774,347 71,682 603,423 80,751 13,929 2,290,312 (618,139) (696,112) (82,411) (470,400) (75,584) (6) (1,942,652) (5,889,819) (7,832,471) 19,798,534 28,085,898 3,431,299 171,388,092 16,301,020 467,960 479,805 239,952,608 (5,889,819) 234,062,789
79. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) (SAR’000) 2017 Description Commercial Industrial Building and construction Consumer Services Agriculture and fishing Others Total Collective allowance for impairment Balance Performing NonPerforming 26,967,699 19,443,855 3,504,017 165,819,609 20,099,055 1,464,247 22,122 237,320,604 513,822 564,975 107,193 542,448 41,741 1,770,179 Allowance for impairment (263,818) (518,704) (178,804) (641,327) (25,689) (1,628,342) (3,926,868) (5,555,210) Net financing 27,217,703 19,490,126 3,432,406 165,720,730 20,115,107 1,464,247 22,122 237,462,441 (3,926,868) 233,535,573 b) The tables below set out the aging of financing past due but not impaired as of 31 December: 2018 Age Mutajara up to 30 days 31-60 days 61-90 days Total Fair value of collateral 5,640,509 338,418 288,367 6,267,294 485,726 2017 Age Mutajara up to 30 days 31-60 days 61-90 days Total Fair value of collateral 2,645,513 437,734 914,189 3,997,436 594,752 (SAR’000) Installment Credit sale cards 180,122 40,829 26,209 247,160 - 12,700 16,475 29,175 - (SAR’000) Installment Credit sale cards 256,582 82,667 51,569 390,818 - 10,627 12,573 23,200 - Total 5,820,631 391,947 331,051 6,543,629 485,726 Total 2,902,095 531,028 978,331 4,411,454 594,752 The banks in the ordinary course of lending activities hold collaterals as security to mitigate credit risk in financings . These collaterals mostly include time, demand, and other cash deposits, financial guarantees, local and international equities, real estate and other fixed assets. Real estate collaterals against financing are considered as held for sale and included in other assets. The collaterals are held mainly against commercial and consumer loans and are managed against relevant exposures at their net realizable values. For financial assets that are credit impaired at the 72
80. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 reporting period, quantitative information about the collateral held as security is needed to the extent that such collateral mitigates credit risk. 28. FINANCIAL RISK MANAGEMENT (continued) c) The table below sets out gross balances of individually impaired financing, together with the fair value of related collateral held by the Group as at 31 December: 2018 (SAR’000) Retail Corporate Total Individually impaired financing Fair value of collateral 603,457 - 2017 Retail Individually impaired financing Fair value of collateral 542,448 - 1,686,855 485,726 2,290,312 485,726 (SAR’000) Corporate Total 1,227,731 594,752 1,770,179 594,752 d) The table below stratify credit exposures from corporate financing by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the financing or the amount committed for loan commitments to the value of the collateral. The gross amounts exclude any impairment allowance. (SAR’000) 2018 Less than 50% 51-70% 71-90% 91-100% More than 100% Total exposure 7,368,209 12,531,682 20,630,702 17,198,582 2,492,999 60,222,174 2017 2,965,647 5,490,525 8,113,447 35,060,621 986,265 52,616,505 b) Settlement risk The Bank is also exposed to settlement risk in its dealings with other financial institutions. This risk arises when the Bank pays its side of the transaction to the other bank or counterparty before receiving payment from the third party. The risk is that the third party may not pay its obligation. While these exposures are short in duration but they can be significant. The risk is mitigated by dealing with highly rated counterparties, holding collateral and limiting the size of the exposures according to the risk rating of the counterparty. c) Risk limit control and mitigation policies The responsibility for credit risk management is enterprise-wide in scope. Strong risk management is integrated into daily processes, decision making and strategy setting, thereby making the understanding and management of credit risk the responsibility of every business segment. The following business units within the Bank assist in the credit control process:  Corporate Credit Unit. 73
81. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017  Credit Administration, Monitoring and Control Unit.  Remedial Unit. 28. FINANCIAL RISK MANAGEMENT (continued) c) Risk limit control and mitigation policies   Credit Policy Unit. Retail Credit Unit. The monitoring and management of credit risk associated with these financing are made by setting approved credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified - in particular, to individual customers and groups, and to industries and countries. Concentrations of credit risks arise when a number of customers are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risks indicate the relative sensitivity of the Bank's performance to developments affecting a particular industry or geographical location. The Bank seeks to manage its credit risk exposure through diversification of its financing to ensure there is no undue concentration of risks with to individuals or groups of customers in specific geographical locations or economic sectors. The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually by the executive committee. Exposure to credit risk is also managed through regular analysis on the ability of customers and potential customers to meet financial and contractual repayment obligations and by revising credit limits where appropriate. Some other specific control and mitigation measures are outlined below: c-1) Collateral The Bank implements guidelines on the level and quality of specific classes of collateral, The principal collateral types are:    Mortgages over residential and commercial properties. Cash, shares, and general assets for customer. Shares for Murabaha (collateralized share trading) transactions. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as traditional banking products of the Bank. Documentary and commercial letters of credit - which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying goods to which they relate, and therefore, risk is partially mitigated. 74
82. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) c-1) Collateral (continued) Commitments to extend credit represent unused portions of authorizations to extend credit in the form of further financing products, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards d) Impairment and provisioning policies Allowance for impairment is recognized for financial reporting purposes only for stage 3 losses that have been incurred at the statement of financial position date based on objective evidence of impairment, and management judgment. The table below sets out the maximum exposure to credit risk at the reporting date without considering collateral or other credit enhancements and includes the off-balance sheet financial instruments involving credit risks as at 31 December: (SAR‘000) On-balance sheet items Investments: Murabaha with Saudi Government and SAMA Sukuk Due from banks and other financial institutions Financing, net Corporate Retail Total on-balance sheet items Off-balance sheet items: Letters of credit and acceptances Letters of guarantee Irrevocable commitments to extend credit Total off-balance sheet items Maximum exposure to credit risk 2018 2017 22,477,145 18,195,957 30,808,011 23,452,869 10,605,139 10,709,795 66,254,862 167,807,927 305,543,902 69,196,949 164,338,624 278,303,376 1,452,658 4,877,161 6,482,436 12,812,255 318,356,157 1,608,712 4,969,355 6,989,368 13,567,435 291,870,811 The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2018 and 2017, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position. 75
83. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) 27-2 Liquidity risks Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay deposits and financing parties and fulfill financing commitments. Liquidity risk can be caused by market disruptions or by credit downgrades, which may cause certain sources of funding to become unavailable immediately. Diverse funding sources available to the Bank help mitigate this risk. Assets are managed with liquidity in mind, maintaining a conservative balance of cash and cash equivalents. Liquidity risk management process The Bank’s liquidity management process is as monitored by the Bank’s Asset and Liabilities Committee (ALCO), includes:      Day-to-day funding, managed by Treasury to ensure that requirements can be met and this includes replenishment of funds as they mature or are invested; Monitoring balance sheet liquidity ratios against internal and regulatory requirements; Managing the concentration and profile of debt maturities; Maintain diversified funding sources; and Liquidity management and asset and liability mismatching. Monitoring and reporting take the form of analyzing cash flows of items with both contractual and non-contractual maturities. The net cash flows are measured and ensured that they are within acceptable ranges. The Treasury / ALCO also monitors, the level and type of undrawn lending commitments, usage of overdraft facilities and the potential impact of contingent liabilities such as standby letters of credit and guarantees may have on the Bank’s liquidity position. The tables below summarize the maturity profile of the Bank’s assets and liabilities, on the basis of the remaining maturity as of the consolidated statement of financial position date to the contractual maturity date. Management monitors the maturity profile to ensure that adequate liquidity is maintained, Assets available to meet all of the liabilities and to cover outstanding financing commitments include cash, balances with SAMA and due from banks. Further, in accordance with the Banking Control Law and Regulations issued by SAMA, the Bank maintains a statutory deposit equal to a sum not less than 7% of total customers’ deposits, and 4% of total other customers’ accounts. In addition to the statutory deposit, the Bank maintains a liquid reserve of not less than 20% of the deposit liabilities, in the form of cash, gold or assets which can be converted into cash within a period not exceeding 30 days. Also, the Bank has the ability to raise additional funds through special financing arrangements with SAMA including deferred sales transactions. 76
84. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) The contractual maturities of financial assets and liabilities as of 31 December based on discounted cash flows are as follows. The table below reflect the expected cash flows indicated by the deposit retention history of the Group. Management monitors rolling forecast of the Group’s liquidity position and cash and cash equivalents on the basis of expected cash flows. This is carried out in accordance with practice and limits set by the Group and based on the pattern of historical deposit movement. In addition, the Group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans. 2018 (SAR’000) Less than 3 months Assets Cash and balance with SAMA and central banks Due from banks and other financial institutions Financing, net Corporate Mutajara Installment sale Murabaha Credit cards Investments Investment in an associate Investments held at amortized cost Investments held as FVSI FVOCI investments Other assets, net Total Liabilities Due to banks and other financial institutions Demand deposits Customers' time investments Other customer accounts Other liabilities Total Liabilities Gap 3 to 12 months 1 to 5 years Over 5 years No Fixed Maturity Total 35,490,644 10,569,683 8,273,620 10,908,457 - 7,755,399 1,056,251 43,246,043 30,808,011 14,480,073 10,769,129 1,193,548 1,959,351 15,127,724 30,019,044 4,462,625 - 13,950,532 101,794,885 5,665,908 - 2,456,174 29,391,728 2,792,068 - - 46,014,503 171,974,786 14,114,149 1,959,351 370,447 74,832,876 213,900 1,941,584 60,038,498 14,118,036 146,437,818 25,142,380 1,103,463 61,058,566 172,753 13,824,422 22,636,073 172,753 39,844,765 1,941,584 1,103,463 13,824,422 365,003,830 3,951,361 19,701,796 17,027,753 1,662,667 42,343,577 32,489,299 2,583,028 32,451,597 173,021,496 1,661,472 1,359,251 3,781,140 38,055,348 176,802,636 21,983,150 (30,364,818) 43,241,953 43,241,953 17,816,613 755,235 15,251,063 16,006,297 6,629,775 7,289,624 268,416,842 18,689,225 6,803,058 15,251,063 316,449,812 48,554,019 77
85. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) 2017 (SAR’000) Less than 3 months Assets Cash and balance with SAMA and central banks Due from banks and other financial institutions Financing, net Corporate Mutajara Installment sale Murabaha Credit cards Investments Investment in an associate Investments held at amortized cost Investments held as FVSI FVOCI investments Other assets, net Total Liabilities Due to banks and other financial institutions Demand deposits Customers' time investments Other customer accounts Other liabilities Total Gap 3 to 12 months 1 to 5 years Over 5 years No Fixed Maturity Total 39,758,880 - - - 8,523,591 48,282,471 1,240,890 6,019,134 1,349,887 1,123,040 976,844 10,709,795 3,496,901 3,252,120 4,812,673 914,733 31,085,237 37,121,858 3,318,574 - 6,603,136 109,151,183 3,173,356 - 6,209,560 21,689,108 2,707,131 - - 47,394,834 171,214,269 14,011,734 914,733 999,925 54,476,122 7,135,000 389,193 77,544,806 127,801,755 25,923,083 1,829,066 59,480,988 124,825 2,262,542 11,887,802 124,825 34,058,008 389,193 1,829,066 2,262,542 331,191,470 4,772,259 18,476,965 14,502,218 1,322,061 7,921,322 46,994,825 7,481,297 30,434,129 1,415,045 1,080,801 32,929,975 44,614,828 40,553,666 40,553,666 18,927,322 750,308 750,308 11,137,494 5,522,567 251,729,768 15,917,263 5,409,414 7,921,322 286,500,334 44,691,136 162,265,008 3,006,552 165,271,560 (37,469,805) - The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at 31 December: 2018 Less than 3 months Due to banks and other financial institutions Customer deposits Other liabilities Total 3,957,968 41,238,211 45,196,179 3 to 12 months Due to banks and other financial institutions Customer deposits Other liabilities Total 4,780,239 39,389,542 44,169,781 No fixed maturity Total 2,602,328 763,202 7,323,498 36,835,111 175,521,784 43,065,449 - 296,660,555 - 15,276,565 15,276,565 39,437,439 175,521,784 43,065,449 16,039,767 319,260,618 2017 Less than 3 months (SAR’000) Over 5 1 to 5 years years 3 to 12 months (SAR’000) Over 5 1 to 5 years years 33,037,784 160,724,895 42,449,658 33,037,784 160,724,895 42,449,658 No fixed maturity Total 757,436 5,537,675 - 275,601,879 7,934,568 7,934,568 8,692,004 289,074,122 The cumulative maturities of commitments & contingencies are given in note 16-c-1 of the consolidated financial statements. 78
86. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) 27-3 Market risks The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Market risk exposures are monitored by Treasury / Credit & Risk department and reported to ALCO on a monthly basis. ALCO deliberates on the risks taken and ensure that they are appropriate. a. Market risks - speculative operations The Bank is not exposed to market risks from speculative operations. The Bank is committed to Sharia guidelines which does not permit it to enter into contracts or speculative instruments such as hedging, options, forward contracts and derivatives. b. Market risks - banking operations The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. - Profit rate risk Cash flow profit rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market profit rates. The Bank does not have any significant exposure to the effects of fluctuations in prevailing level of market profit rates on its future cash flows as a significant portion of profit earning financial assets and profit bearing liabilities are at fixed rates and are carried in the financial statements at amortized cost. In addition to this, a substantial portion of the Bank’s financial liabilities are non-profit bearing. Commission rate risk arises from the possibility that the changes in profit rates will affect either the fair values or the future cash flows of the financial instruments. The Board has established commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses gap management strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonable possible change in profit rates, with other variables held constant, on the Bank’s statement of income or equity. The sensitivity of the income is the effect of the assumed changes in profit rates on the net income for one year, based on the floating rate non-trading financial assets and financial liabilities held as at 31 December 2018 and 2017. The sensitivity of equity is same as sensitivity of income since the Bank does not have fixed rate FVOCI financial assets as at 31 December 2018 and 2017. All the banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in SAR million. 79
87. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) 2018 Currency SAR Currency SAR SAR in Million Increase in basis +25 Decrease in basis -25 Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum 201 204 216 193 Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum (201) (204) (216) (193) 2017 Currency SAR Currency SAR SAR in Million Increase in basis +25 Decrease in basis -25 Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum 202 191 209 169 Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum (202) (191) (209) (169) * Profit rate movements affect reported equity through retained earnings, i.e. increases or decreases in financing and investment income. 80
88. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27-FINANCIAL RISK MANAGEMENT (continued) Commission sensitivity of assets, liabilities and off balance sheet items (SAR’000) 2018 Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years Non Commission Sensitive Over 5 years Total Assets Cash and balance with SAMA Due from banks and other financial institutions 35,112,408 11,306,178 987,681 7,810,067 9,647,834 - 8,133,635 1,056,251 43,246,043 30,808,011 Investments Investment in an associate Investments held at amortized cost Investments held as FVSI Available-for -sale investments 23,952,560 - - - 13,318,036 - 2,574,169 1,941,584 1,103,463 172,753 - 172,753 39,844,765 1,941,584 1,103,463 Financing, net Corporate Mutajara Installment sale Murabaha Credit cards Other assets 17,239,834 13,409,580 4,064,638 1,959,351 - 19,924,825 13,669,220 4,406,381 - 3,958,429 21,812,332 182 - 4,891,415 99,409,717 4,784,157 - 23,673,937 858,791 - 13,824,422 46,014,503 171,974,786 14,114,149 1,959,351 13,824,422 107,044,549 38,988,108 33,581,010 132,051,159 30,151,944 23,187,061 365,003,830 6,534,389 - - - - 755,235 7,289,624 53,768,764 12,293,302 23,253,246 179,101,531 - - 268,416,843 Other customer accounts Other liabilities 17,027,753 1,362,776 - 213,057 311,575 - 1,448,415 589,356 - 4,539,350 - - 15,251,063 18,689,225 6,803,057 15,251,063 Total liabilities 78,693,681 12,817,934 25,291,017 183,640,881 - 16,006,298 316,449,812 Gap Profit Rate Sensitivity - On Statement of Financial Positions Profit Rate Sensitivity - Off Statement of Financial Positions 28,350,868 26,170,174 8,289,993 (51,589,722) 28,350,868 439,043 26,170,174 - 8,289,993 - (51,589,722) - Total Profit Rate Sensitivity Gap 27,911,825 26,170,174 8,289,993 Cumulative Profit Rate Sensitivity Gap 27,911,825 54,081,999 62,371,992 Total Assets Liabilities Due to banks and other financial institutions Customer deposits Customers' time investments 81 30,151,944 30,151,944 7,180,763 48,554,018 48,554,018 - 7,180,763 - (51,589,722) 30,151,944 7,180,763 48,114,975 10,782,270 41,990,464 48,114,975 90,228,289 439,043
89. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) The Bank manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market commission rates on its financial position and cash flows. The Board sets limits on the level of mismatch of commission rate reprising that may be undertaken, which is monitored daily by Bank Treasury. The table below summarizes the Bank’s exposure to profit rate risks. Included in the table are the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates. The Bank is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Bank manages this risk by matching the re-pricing of assets and liabilities through risk management strategies. (SAR’000) 2017 Less than 3 months Assets Cash and balance with SAMA Due from banks and other financial institutions Investments Investment in an associate Investments held at amortized cost Investments held as FVSI Available-for -sale investments Financing, net Corporate Mutajara Installment sale Murabaha Credit cards Other assets Total Assets Liabilities Due to banks and other financial institutions Customer deposits Customers' time investments Other customer accounts Other liabilities Total liabilities Gap Profit Rate Sensitivity - On Statement of Financial Positions Profit Rate Sensitivity - Off Statement of Financial Positions Total Profit Rate Sensitivity Gap Cumulative Profit Rate Sensitivity Gap 3 to 6 months 6 to 12 months 1 to 5 years Non Commission Sensitive Over 5 years Total 39,687,434 2,217,734 113,993 5,905,141 1,349,887 - 8,595,037 1,123,040 48,282,471 10,709,795 23,300,000 - 2,025,000 - - 7,135,000 - 1,598,008 389,193 1,829,066 124,825 - 124,825 34,058,008 389,193 1,829,066 15,075,878 19,190,499 3,768,368 914,733 104,154,647 19,326,741 10,039,850 2,666,288 34,171,873 3,443,515 18,901,845 1,687,143 29,937,642 7,637,634 104,625,719 3,178,456 123,926,696 1,911,066 18,456,359 2,711,479 26,895,171 4,537,079 14,379,981 47,394,834 171,214,272 14,011,734 914,733 4,537,079 333,466,010 4,772,259 50,426,040 14,885,092 1,083,604 71,166,995 11,529,046 91,881 247,747 11,868,674 21,807,626 940,423 468,623 23,216,672 167,967,056 3,609,439 171,576,495 - 750,308 - 8,455,319 9,205,627 5,522,567 251,729,768 15,917,263 5,409,414 8,455,319 287,034,463 32,987,652 32,987,652 472,420 32,515,232 32,515,232 22,303,199 22,303,199 22,303199 50,538,583 6,720,970 6,720,970 6,720,970 58,740,173 (47,649,799) (47,649,799) (47,649,799) 13,056,216 26,895,171 26,895,171 26,895,171 41,907,813 5,174,354 5,174,354 5,174,354 - 46,431,547 46,431,547 472,420 45,959,127 87,071,372 82 -
90. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) The tables below summarize the Bank’s exposure to foreign currency exchange rate risk at 31 December 2018 and 2017 and the concentration of currency risks, Included in the table are the Bank’s financial instruments at carrying amounts, categorized by currency: 2018 UAE Japanese Dirham Yen Euro (SAR’000) Malaysian Ringgit US Dollar Pound Sterling Other Total ASSETS Cash and cash equivalents Due from banks and other financial institutions Financing, net Investments Fixed assets Other assets, net Total Assets 25,946 117,748 5,302 29,291 145,528 193,088 520,081 568,393 1,979,909 15,538 30,803 1,226 144,919 5,302 375 6,578 1,258 183,029 4,564,609 1,305,296 41,423 174,711 6,799,208 5,077,371 1,132,989 269,965 63,244 9,091,871 - 3,778,869 13,420,848 - 255,390 2,694,050 993 36,782 356,966 332 17,209 256,754 47,665 5,313,890 21,585,885 LIABILITIES Due to banks and other financial institutions Customer deposits Other liabilities Total Liabilities Net 71 9,629 17,305 27,005 117,914 2,284 699 2,983 2,319 5,169 569,557 109,079 5,146,634 97,032 117,000 211,280 5,833,192 (28,250) 966,017 3,304,930 1,268,627 695,523 5,269,080 3,822,791 17 (564,139) 3,315,605 48,735 4,863,308 11,448,296 8,882 196,799 1,133,241 57,634 4,495,969 15,897,143 (9,969) 817,921 5,688,743 2017 ASSETS Cash and cash equivalents Due from banks and other financial institutions Financing, net Investments Fixed assets Other assets, net Total Assets LIABILITIES Due to banks and other financial institutions Customer deposits Other liabilities Total Liabilities Net UAE Japanese Dirham Yen Euro (SAR’000) Malaysian Ringgit US Dollar Pound Sterling 1,336,273 3,520,994 Other Total 587,309 1,384,791 25,828 - 23,232 356,412 370,979 72,459 55 98,342 3,393 3,393 195,812 393 5,174 655 225,266 858,354 1,634,458 5,522,749 42,091 191,139 8,605,203 554,364 864,990 4,389,826 142,676 61,125 6,383,960 33,096 705,180 2,422,658 - 257,432 2,757,273 - 3,724,296 13,636,871 549 36,702 227,247 (24) 34,003 286,898 54,652 5,344,922 20,715,738 12,176 3,711 13,926 29,813 68,529 2,639 910 3,549 (156) 2,085 186,830 60,415 249,330 (24,064) 1,100,092 6,865,588 91,245 8,056,925 548,278 493,262 1,054,707 414,488 1,962,457 4,421,503 18 501,812 2,109,445 56,596 4,498,133 12,668,204 7,750 218,845 807,579 64,364 5,218,790 15,585,228 (9,712) 126,132 5,130,510 83 21,031 504,016 721,623
91. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) - Foreign currency risks Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The Bank management has set limits on positions by currencies, which are regularly monitored to ensure that positions are maintained within the limits. The table below shows the currencies to which the Bank has a significant exposure as at 31 December 2018 on its non-trading monetary assets and liabilities and forecasted cash flows. The analysis calculates the effect of reasonable possible movement of the currency rate against SAR, with all other variables held constant, on the statement of income (due to the fair value of the currency sensitive non-trading monetary assets and liabilities) and equity. A positive effect shows a potential increase in the statement of income statement of income or equity, whereas a negative effect shows a potential net reduction in the statement of income or statement of changes in shareholders’ equity. (SAR in million) Currency Exposures Change in Currency Effect on Net Income As at 31 December 2018 Rate in % AED USD EUR INR PKR +/-2 +/-2 +/-5 +/-5 +/-5 2,358 76,146 -768 1,813 547 (SAR in million) Currency Exposures Change in Currency Effect on Net Income As at 31 December 2017 Rate in % AED USD EUR INR PKR +/-2 +/-2 +/-5 +/-5 +/-5 Effect on Equity 2,358 76,146 -768 1,813 547 Effect on Equity 2.12 88.66 -0.98 0.40 0.87 2.12 88.66 -0.98 0.40 0.87 Currency position The Bank manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. At the end of the year, the Bank had the following significant net exposures denominated in foreign currencies: US Dollar Japanese Yen Euro Pound Sterling Others Total 84 2018 SAR '000 Long/(short) 2017 SAR '000 Long/(short) 3,807,308 2,319 (15,364) (7,569) 282,013 4,068,707 4,432,919 (157) (19,569) (9,713) 115,844 4,519,324
92. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 27. FINANCIAL RISK MANAGEMENT (continued) c. Price risk The Bank has certain investments which are carried at fair value through the income statement (FVSI) and includes investments in quoted mutual funds and other investments. Price risk arises due to changes in quoted market prices of these mutual funds. As these investments are in a limited number of funds and are not significant to the total investment portfolio, the Bank monitors them periodically and determines the risk of holding them based on changes in market prices. Other investments have little or no risks as these are bought for immediate sales. Investments are made only with a confirmed sale order and therefore involve minimal risk.  Equity Price Risk Equity risk refers to the risk of decrease in fair values of equities in the Bank’s non-trading investment portfolio as a result of reasonable possible changes in levels of equity indices and the value of individual stocks. The effect on the Bank’s equity investments held as FVOCI / available-for-sale due to reasonable possible change in prices, with all other variables held constant is as follows: d. Local Market Indices 31 December 2018 Effect Change in in SAR Equity price % Million 31 December 2017 Effect Change in in SAR Equity price % Million Local Share Equity + /- 10 + /- 10 +/- 107,910 +/- 77,129 Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events. Operational risk is inherent in most of the Bank’s activities this necessitates an integrated approach to the identification, measurement and monitoring of operational risk. An Operational Risk Management Unit (ORMU) has been established within the Credit and Risk Management Group which facilitates the management of Operational Risk within the Bank. ORMU facilitates the management of Operational Risk by setting policies, developing systems, tools and methodologies, overseeing their implementation and use within the business units and providing ongoing monitoring and guidance across the Bank. The three primary operational risk management processes in the Bank are Risk Control Self Assessment, Operational Loss Database and eventual implementation of Key Risk Indicators which are designed to function in a mutually reinforcing manner. 85
93. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 28. GEOGRAPHICAL CONCENTRATION a) The distribution by the geographical region of the major categories of assets, liabilities, commitments, contingencies and credit exposure accounts as of 31 December is as follows: 2018 Assets Cash and balances with SAMA and central banks Due from banks and other financial institutions Financing, net Corporate Mutajara Installment sale Murabaha Credit cards Investments, net Investment in an associate Investments held at amortized cost Investments held as FVSI FVOCI investments Total Liabilities Due to banks and other financial institutions Customer deposits Total Commitments and contingencies Credit exposure (stated at credit equivalent value) (SAR‘000) North Europe America Kingdom of Saudi Arabia Other GCC and Middle East South East Asia Other Countries 43,169,276 9,224,158 56,311 19,835,928 755,337 61,154 20,456 919,489 11,945 43,246,043 30,808,011 42,890,888 167,591,118 9,018,760 1,952,552 1,023,541 2,885,814 1,932,928 5,575 2,100,074 - - 1,497,854 3,162,461 1,224 - 46,014,503 171,974,786 14,114,149 1,959,351 172,753 38,132,001 1,896,758 1,103,463 315,151,727 349,095 33,234 26,122,426 375 2,855,786 61,154 1,363,669 11,217 6,976,370 11,945 172,753 39,844,765 1,941,584 1,103,463 351,179,408 6,401,763 284,200,248 290,602,011 6,141,044 44,133 4,847,634 4,891,767 98,315 2,262 329,267 329,267 - 514,461 4,860,064 5,374,525 88,198 1,179 1,179 - 7,289,624 293,909,125 301,198,749 6,329,819 4,401,104 - - - 2,081,332 - 6,482,436 86 Total
94. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 28. GEOGRAPHICAL CONCENTRATION (continued) 2017 Assets Cash and balances with SAMA and central banks Due from banks and other financial institutions Financing, net Corporate Mutajara Installment sale Murabaha Credit cards Investments, net Investment in an associate Investments held at amortized cost Investments held as FVSI FVOCI investments Total Liabilities Due to banks and other financial institutions Customer deposits Total Commitments and contingencies Credit exposure (stated at credit equivalent value) (SAR‘000) North Europe America Kingdom of Saudi Arabia Other GCC and Middle East South East Asia Other Countries 47,364,215 2,873,774 563,370 6,298,191 233,716 271,962 354,887 1,030,678 1,474 48,282,472 10,709,795 45,733,013 166,922,446 9,003,654 889,808 2,553,313 1,167,348 3,789 1,661,821 - - 1,680,651 3,840,732 1,365 - 47,394,834 171,156,410 14,011,734 894,962 124,825 32,512,949 2,188 1,636,474 307,140,977 177,189 288,893 168,191 11,220,284 393 1,895,930 271,962 1,367,870 121,206 915 8,398,304 1,474 124,825 34,058,008 412,680 1,805,580 328,928,931 4,371,081 261,776,977 266,148,058 10,167,478 422,487 4,429,765 4,852,252 406,234 6,615 6,615 2,818 251,218 251,218 - 467,968 6,849,703 7,317,671 2,989,605 3,198 3,198 1,300 5,522,567 273,056,445 278,579,012 13,567,435 5,109,109 178,503 1,409 - 1,486,847 600 6,776,468 87 Total
95. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 28. GEOGRAPHICAL CONCENTRATION (continued) b) The distributions by geographical concentration of non-performing financing and allowance for impairment of financing as of 31 December are as follows: 2018 Kingdom of Saudi Arabia Non-performing Corporate Mutajara Installment sale Murabaha Credit cards Allowance for impairment of financing Corporate Mutajara Installment sale Murabaha Credit cards 2017 991,751 534,309 536,865 11,874 (837,349) (453,000) (504,296) (2,970) (SAR’000) GCC & South East Middle East of Asia 5,959 14,942 108,621 - (2,066) (10,185) (108,500) - 26,610 16,969 17,084 7 1,024,320 591,541 662,570 11,881 (2,958) (4,244) (17,084) - (842,373) (467,429) (629,880) (2,970) (SAR’000) Kingdom of GCC & South East Saudi Arabia Middle East of Asia Non-performing Corporate Mutajara Installment sale Murabaha Credit cards Allowance for impairment of financing Corporate Mutajara Installment sale Murabaha Credit cards 1,217,981 495,193 19,168 (982,385) (620,357) (4,792) Total 14,827 - 4,333 11,267 5,418 1,992 (10,149) - (3,609) (4,491) (1,020) (1,539) Total 1,222,314 521,287 5,418 21,160 (985,994) (634,997) (1,020) (6,331) Refer to Note 7-a for performing financing. 29. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Determination of fair value and fair value hierarchy The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: quoted prices in active markets for the same instrument (i.e. without modification or additions). Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant inputs are based on observable market data. Level 3: valuation techniques for which any significant input is not based on observable market data. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either: - In the accessible principal market for the asset or liability, or 88
96. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 29. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (continued) - In the absence of a principal market, in the most advantageous accessible market for the asset or liability. Carrying amounts and fair value: The following table shows the carrying amount and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 31 December 2018 Financial assets Financial assets measured at fair value Investments held at FVSI FVOCI investment Sukuk Carrying value Level 1 Level 2 Level 3 Total 1,141,584 1,103,463 800,000 1,079,101 - 1,141,584 - 24,362 800,000 1,141,584 1,103,463 800,000 30,808,011 - - 30,701,027 30,701,027 Financial assets not measured at fair value Due from banks and other financial institutions Investments held at amortized cost - Murabaha with Saudi Government and SAMA - Sukuk Gross Financing Total 22,477,145 - - 22,478,958 22,478,958 17,395,957 241,895,260 315,621,420 1,079,101 1,141,584 17,274,997 242,364,635 313,643,979 17,274,997 242,364,635 315,864,664 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions Customers’ deposits Total 7,289,624 293,909,125 301,198,749 - - 7,287,557 293,909,125 301,196,682 7,287,557 293,909,125 301,196,682 (SAR‘000) 31 December 2017 Financial assets Financial assets measured at fair value Investments held at FVSI Available-for-sale investments Financial assets not measured at fair value Due from banks and other financial institutions Investments held at amortized cost - Murabaha with SAMA - Sukuk Gross Financing Total Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions Customers’ deposits Total Carrying value Level 1 Level 2 Level 3 Total 412,680 1,805,579 771,293 389,193 1,034,286 23,487 - 412,680 1,805,579 10,709,795 - - 10,698,223 10,698,223 23,452,869 10,605,139 239,090,783 286,076,845 771,293 1,423,479 23,459,853 10,559,636 248,834,350 293,575,549 23,459,853 10,559,636 248,834,350 295,770,321 5,522,567 273,056,445 278,579,012 - - 5,522,554 273,056,440 278,578,994 5,522,554 273,056,440 278,578,994 89
97. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 29. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (continued) FVSI and FVOCI investments classified as level 2 include mutual funds, the fair value of which is determined based on the latest reported net assets value (NAV) as at the date of statement of consolidated financial position. The level 3 financial assets measured at fair value represent investments recorded at cost. The carrying value of these investments approximate fair value. Gross financing classified as level 3 has been valued using expected cash flows discounted at relevant SIBOR as at 31 December, 2018. Investments held at amortized cost, due to / from banks and other financial institution have been valued using the actual cash flows discounted at relevant SIBOR/ SAMA murabaha rates as at31 December, 2018. The value obtained from the relevant valuation model may differ from the transaction price of a financial instrument. The difference between the transaction price and the model value commonly referred to as ‘day one profit and loss’ is either amortized over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable data, or realized through disposal. Subsequent changes in fair value are recognized immediately in the statement of income without reversal of deferred day one profits and losses. During the current year, no financial assets / liabilities have been transferred between level 1 and/ or level 2 fair value hierarchy. 90
98. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 30. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank transacts business with related parties. The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA. The nature and balances resulting from such transactions as at and for the year ended 31 December are as follows: (SAR‘000) 2017 2018 Related parties Members the Board of Directors Mutajara Contingent liabilities * Current accounts Companies and establishments guaranteed by members of the Board of Directors Mutajara Contingent liabilities * Other major shareholders (above 5% equity share) Mutajara Contingent liabilities * Current accounts Other liabilities Associate Contributions receivable Payable against claims Bank balances 69,967 16,634 77,788 39,163 586 10,242,942 6,913,183 1,585,464 16,334 - 3,308,232 26,067 252,706 144,640 274,705 121,017 150,243 289,236 * = off balance sheet items Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the years ended 31 December are as follows: (SAR‘000) 2017 2018 Income from financing and other Mudaraba Fees Employees’ salaries and benefits (air tickets) Rent and premises related expenses Contribution – policies written Claims incurred and notified during the period Claims paid Board of Directors’ remunerations 139,496 68,272 4,142 2,238 1,059,392 900,207 905,840 5,945 194,190 49,860 4,253 1,131 1,339,545 1,139,983 1,023,048 5,418 The amounts of compensations recorded in favor of or paid to the Board of Directors and the executive management personnel during the years ended 31 December are as follows: (SAR‘000) 2017 2018 Short-term benefits Provision for end of service benefits 85,579 11,536 91 37,866 1,280
99. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Banks directly or indirectly. 31. MUDARABA FUNDS Mudaraba funds as of 31 December comprise the following: (SAR‘000) 2017 2018 Customers’ Mudaraba and investments Current accounts, metals Total 21,070,580 21,070,580 21,199,185 2,031 21,201,216 Mudaraba and investments represents customer’s investment portfolio managed by Al Rajhi Capital Company and are considered as off balance sheet. Consistent with the accounting policies of the Group, such balances are not included in the Consolidated financial statements as these are held by the Group in fiduciary capacity. 32. SPECIAL COMMISSIONS EXCLUDED FROM THE CONSOLIDATED STATEMENT OF INCOME The following represents the movements in charities account, which is included in other liabilities (see note 13): (SAR‘000) 2017 2018 Balance at beginning of the year Additions during the year Payments made during the year Balance at end of the year 16,854 40,520 (1,024) 56,350 23,785 5,201 (12,132) 16,854 33. INVESTMENT MANAGEMENT SERVICES The Group offers investment services to its customers. The Group has established a number of Mudaraba funds in different investment aspects. These funds are managed by the Bank’s Investment Department, and a portion of the funds is also invested in participation with the Group. The Group also offers investment management services to its customers through its subsidiary, which include management of funds with total assets under management of SAR 41,294 million (2017: SAR 26,595 million). The mutual funds are not controlled by the Bank and neither are under significant influence to be considered as associates. Mutual funds’ financial statements are not included in the consolidated statement of financial position of the Group. The Group’s share of investments in these funds is included under investments, and is disclosed under related party transactions. Funds invested by the Group in those investment funds amounted to SAR 1,142 million at 31 December 2018 (2017: SAR 1,423 million). 92
100. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 34. CAPITAL ADEQUACY The Bank's objectives when managing capital are, to comply with the capital requirements set by SAMA to safeguard the Bank's ability to continue as a going concern; and to maintain a strong capital base. Capital adequacy and the use of regulatory capital are monitored daily by the Bank's management, SAMA requires the banks to hold the minimum level of the regulatory capital and also to maintain a ratio of total regulatory capital to the risk-weighted assets at or above 8%. The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its consolidated statement of financial position, commitments and contingencies, to reflect their relative risk as of 31 December 2018 and 2017. (SAR‘000) Credit risk weighted assets Operational risk weighted assets Market risk weighted assets Total Pillar I - risk weighted assets Tier I – capital Tier II capital Total tier I & II capital Capital Adequacy Ratio % Tier I ratio Tier I and II ratio 2018 2017 222,309,112 28,094,351 4,102,847 254,506,310 219,687,988 26,832,383 4,594,750 251,115,121 48,554,018 2,778,864 51,332,882 55,750,918 2,746,100 58,497,018 19.08% 20.17% 22.20% 23.29% 35. STANDARDS ISSUED BUT NOT YET EFFECTIVE IFRS 16 “Leases” IFRS 16 – “Leases”, applicable for the period beginning on or after 1 January 2019. The new standard eliminates the current dual accounting model for lessees under IAS 17, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, IFRS 16 proposes on-balance sheet accounting model. The impact is not material for the Bank. IAS 19 “Employee Benefits” Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) to harmonise accounting practices and to provide more relevant information for decision-making. An entity applies the amendments to plan amendments, curtailments or settlements occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. These amendments are not expected to have material impact on the consolidated financial statements of the Group. 93
101. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017 36. APPROVAL OF THE BOARD OF DIRECTORS The consolidated financial statements were approved by the Board of Directors on 05 Jumada II 1440H (corresponding to February 10, 2019). 37. COMPARATIVE FIGURES Figures have been rearranged or reclassified wherever necessary for the purpose of better presentation, however, no significant rearrangements or reclassifications have been made in these consolidated financial statements. 38. OTHER ADJUSTMENT The Bank has conducted a review of the timing of the recognition of up-front fees and special commission income relating to retail credit products. As a result of the review, the method of the application of the accounting policy on timing of the recognition of up-front fees and special commission income has been amended to appropriately reflect the systematic deferral of the recognition of such income. Based on materiality considerations, an adjustment of SAR799.356 million was only made to the opening retained earnings as at 1 January 2018 with a corresponding adjustment to deferred income as at that date. 39. SUBSEQUENT EVENTS The Board of Directors proposed, on 3rd of January 2019, a distribution of final dividends to the shareholders for the year amounting to SAR 3,656.25 million, of SAR 2.25 per share. In addition, the Board of Directors has recommended to increase the Share Capital to SAR 25,000 million by granting share dividends of 7 shares for every 13 shares owned. The Board’s proposal is subject to the approval of the extraordinary General Assembly in the next meeting. 94