Al Rajhi Banking & Investment Corporation: Consolidated Financial Statements - 31 December 2016

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1. AL RAJHI BANKING AND INVESTMENT CORPORATION (A SAUDI JOINT STOCK COMPANY) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 TOGETHER WITH THE INDEPENDENT AUDITORS’ REPORT
10. AL RAJ1II B A N K I N G AND INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 AND 2015 (SAR'OOO) Notes ASSETS Cash and balances with Saudi Arabian Monetary Authority ("SAMA") and other central banks Due from banks and other financial institutions Investments, net Financing, net Property and equipment, net Investment properties, net Other assets, net TOTAL ASSETS 2016 2015 4 5 6 7 8 9 10 42,149,905 26,578,525 34,032,879 224,994,124 6,485,162 1,330,868 4,140,354 339,711,817 27,053,716 26,911,056 39,876,864 210,217,868 5,578,931 1,350,000 4.631,213 315,619,648 I1 12 13 8,916,970 272,593,136 6,254,839 287,764,945 4,558,224 257,821,641 16,250,000 16,250,000 3,873,362 12,236,010 3,337,500 51,946,872 16,250,000 16,250,000 2,997,754 8,666,300 46,639,054 339,711,817 315,619,648 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Due to banks and other financial institutions Customers' deposits Other liabilities Total liabilities Shareholders' equity Share capital Statutory reserve Other reserves Retained earnings Proposed gross dividends and Zakat Total shareholders' equity 14 15 15 23 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 6.600,729 268,980,594 2,475.000 The accompanying notes from 1 to 37 form an integral part of these consolidated llnancial statements. 1 k
11. AL RA .JHI BANKING AND INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF INCOME EOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 INCOME Gross financing and investment income Return on customers', banks' and financial institutions' time investments Net financing and investment income Fee from banking services, net Exchange income, net Other operating income, net Total operating income 2016 17 11,751,445 10,258,380 17 17 (586,127) 11,165,318 (299,438) 9,958,942 I8 2,949,963 925,286 243,044 15,283,611 2,704,091 979,566 103,176 13,745,775 2,949,886 277,179 415,595 1,306,826 2,142,242 65,923 7,157,651 2,661,043 243,718 374,099 1,378,815 1,958,025 8,125,960 7,130,075 1,625 million 1,625 million 19 EXPENSES Salaries and employees' related benefits Rent and premises related expenses Depreciation Other general and administrative expenses Impairment charge for financing, net Impairment charge for available-for-sale investments Total operating expenses 20 21 NET INCOME FOR THE YEAR Weighted average number of shares outstanding 14 & 22 Basic and diluted earnings per share (in SAR) (SAR'OOO) 2015 Notes 22 6,615,700 5.00 The accompanying notes from I to 37 form an integral part of these consolidated financial^st^teniejits. 2 ' 4.39
12. Al R A . I 1 I I B A N K I N G AND INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 2016 SAR'OOO 2015 SAR-000 8,125,960 7.130,075 15 33,327 (206,914) 15 71,376 (10,784) 155,010 (159,878) 8,219,879 6,918,293 Notes Net income for the year Other comprehensive income Items that are or may be reclassifieil to consolidated statement of income in subsequent periods Availablc-for-salc investments Net change in fair value -Net amounts transferred to consolidated statement of income Exchange difference on translation of foreign operations Total comprehensive income for the year The accompanying notes from 1 to 37 form an integral part of these consolidated llnancial statements. 3
13. AL RAJHI BANKING AND INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS ' EQUITY FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 (SAR'OOO) Notes 2016 .Balance at 1 January 2016 Transfer to other reserves for zakat Dividends for the second half of 2015 Interim dividends for the first half of 2016 Net change in fair value of available-for-sale investments Net amounts transferred to consolidated statement of income Net movement in foreign currency translation reserve Net income recognized directly in equity Net income for the year Total comprehensive income for the year Employees shares plan Zakat paid Proposed gross dividends and Zakat for 2016 .Balance at 31 December 2016 2015 Balance at 1 January 20 15 Transfer to other reserves for zakat Dividends for the second halfof 2014 Interim dividends for the first halfof 2015 Prior period adjustment Net change in fair value of available-for-sale investments Net amounts transferred to consolidated statement of income Net movement in foreign currency translation reserve Net income recognized directly in equity Net income for the year Total comprehensive income for the year Employees shares plan Zakat paid Proposed gross dividends and Zakal for 2015 Balance at 3 1 December 20 1 5 Share capital Statutory reserve Other reserves Retained earnings 16,250,000 16,250,000 2,997,754 850,000 8,666,300 - - (1,218,750) 23 23 15 15 15 15 15 23 71,376 (10,784) 93,919 8,125,960 8,219,879 9,274 (77,585) ; - ; 93,919 - - 16,250,000 16.250.000 (1,625,000) (1,218,750) 71,376 ( 10,784) 23 46,639,054 33,327 - . 1 6,250,000 2,475,000 (850,000) (1,625,000) Total 33,327 - . 1 6,250,000 Proposed »ross dividends and Zakat 93,919 9474 (77,585) . 3.873 ,362 2,598.599 750.000 8,125,960 8,125,960 (3,337,500) 1 2,236,01 0 4,828.845 3.337,500 3,337,500 1.968.750 (750.000) (1,218.750) 51,946,872 41,896,194 (2 06.914) (1,218.750) (812.500) (5.120) (206.914) 55,010 155.010 (1 59.878) (211.782) (159.878) (211.782) 7.130.075 6.918.293 4,313 (143,376) 23 (812,500) (5,120) 15 15 15 15 15 23 - . 16.250.000 . 16.250.000 (211.782) 4,313 (143.376) . 2.997.754 7.130.075 7.130.075 (2.475.000) 8.666.300 The accompanying notes from 1 to ^7 form an integral part of these consolidated financial statements. 2,475.000 2.475.000 46.639.054
14. AL RA .JHI BANKING AND INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 (SAR L 000) Notes CASH FLOWS FROM OPERATING ACTIVI T1KS Net income lor the year Adjustments to reconcile net income to net cash from / (used in) operating activities: ((lain) / loss on investments held at fair value through statement of income (FVSI) Depreciation on property and equipment Depreciation on investment properties Gain on sale of property and equipment, net Foreign currency translation reserve Impairment charge for financing, nel Impairment charge for available-tbr-sale investments Share in earnings of associate Expenses of employees' share plan (Increase) / decrease in operating assets Statutory deposit with SAMA and central hanks Due from banks and other financial institutions Financing Investments held as FVSI Other assets, net Increase / (decrease) in operating liabilities Due to hanks and other financial institutions Customers' deposits Other liabilities Net cash from / (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment Investment in an associate Availuble-for-sale investments Proceeds from maturities of investments recorded at amortized cost Purchase of investments recorded at amortized cost Purchase of investment property Proceeds from sale of property and equipment Net cash from investing activities 19 X 19 15 7-3 19 15 2016 2015 8,125,960 7.130.075 (9,382) 415,595 19,132 100,939 374,099 - (5,861) (159,878) 1.958.025 (10,784) 2,142,242 65,923 (13,762) 9,274 - - (6,858) 4,313 (711,153) 6,249,000 (17,065,604) 1,015,228 637,965 (1,950,858) (11,761,834) (6,235.933) (334,906) (329,887) 4,358,746 14,771,495 (362,960) 19,636,915 2,422.987 (1,152,548) 1.894.794 (8.053,331) (1,321,826) 3,568,855 (1.141.995) (45,000) (514,990) 264.773.784 (261,352,114) (1,350,000) 8.767 378.452 CASH FLOWS FROM F I N A N C I N G ACTIVITIES Dividends paid Zakal paid Net cash used in financing activities (2,826,680) (77,585) (2,904,265) (2,031,250) (143.376) (2J74.626I NET I N C R E A S E / ( D E C R E A S E ) IN CASH AND CASH E Q U I V A L E N T S Cash and cash equivalents at the beginning of the year CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 20,301,505 12,382,480 32,683,985 (9,849,505) 22,231.9X5 12.382.480 11,369,076 10,175,450 (495,713) 10,873,363 (322.063) 9.853.387 147,106 - 104,703 (51.904) Gross financing and investment income received during the year Return on customers . banks and financial institutions time investments paid during the year Non-cush transactions: Other real estate Net change in fair value and gain/(loss) transferred to consolidated statement of income on availablc-lbr-sale investments 8 - (509,772) 121,001,671 (115,601,218) - 24 The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements.
15. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 1 . a) GENERAL 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 Olaya Street P.O. Box 28 Riyadh 11411 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 for its own account and on behalf of others inside and outside the Kingdom of Saudi Arabia through 584 branches (2015: 569) including the branches outside the Kingdom and 13,684 employees (2015: 12,374 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: Name of subsidiaries Shareholding % 2015 2016 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.
16. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 1 . a) GENERAL (continued) Incorporation and operation (continued) Al Rajhi Capital Company – KSA Shareholding % 2015 2016 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 Hashimi 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 non-controlling interest which is insignificant is not disclosed. All the above-mentioned subsidiaries have been consolidated. 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. 2. a) BASIS OF PREPARATION Statement of compliance The consolidated financial statements are prepared in accordance with the Accounting Standards for Banks promulgated by the Saudi Arabian Monetary Authority (“SAMA”) and International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Bank also prepares its consolidated financial statements to comply with the requirements of the Banking Control Law, the provision of Regulations for Companies in the Kingdom of Saudi Arabia and the Bank’s Articles of Association. 7
17. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 2 . b) BASIS OF PREPARATION (continued) 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 available-for-sale 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 26-2. 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 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. 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: i) Impairment on financing The Bank reviews its financing portfolios to assess specific and collective impairment on a quarterly basis. The specific impairment applies to financing evaluated individually for impairment and is based on management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgments about a customer’s financial situation and the net realisable value of any underlying collateral. This evidence may include observable data indicating that there has been an adverse change in the payment status of clients in a group. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Each impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. 8
18. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 2. BASIS OF PREPARATION (continued) d) Critical accounting judgments, estimates and assumptions (continued) i) Impairment on financing (continued) A collective component of the total allowance is established for groups of homogeneous financing that are not considered individually significant and is established using statistical methods such as roll rate methodology and internal loss estimates. The methodology uses statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at on the basis of historical information is appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates are regularly benchmarked against actual loss experience. In assessing the need for collective loss allowance, management considers factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depends on the model assumptions and parameters used in determining the collective allowance. ii) Impairment of available for-sale and sukuk investments The Bank exercises judgement to consider impairment on the available-for-sale equity investments at each reporting date. This includes determination of a significant or prolonged decline in the fair value below its cost. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. The determination of what is 'significant' or 'prolonged' requires judgement. In making this judgement, the Bank evaluates among other factors, the normal volatility in share price, deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The Bank reviews its investments in sukuks at each reporting date to assess whether they are impaired. This requires similar judgement as applied to individual assessment of financing. In addition, the Bank considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. iii) Fair value of financial instruments The Group measures certain 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 by the Group. 9
19. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 2. d) BASIS OF PREPARATION (continued) Critical accounting judgments, estimates and assumptions (continued) iii) Fair value of financial instruments (continued) 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. 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: - - 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 iv) Classification of investments held at amortised cost The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as Investments held at amortised cost. v) Determination of control over investees The control indicators set out in note 3 (b) are 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 its 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. 10
20. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 2. BASIS OF PREPARATION (continued) d) Critical accounting judgments, estimates and assumptions (continued) vi) 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 amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due process being followed as per the Law. vii) Fees from Banking Services The management has established a threshold for the purpose of recording documentation / loan processing charges as an adjustment to effective yield. The amount below this threshold are not capitalise and the impact is considered as immaterial. viii) 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. 3. SUMMARY OF SIGNIFICANT 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 2015 except for the change in accounting policies resulting from new and amended IFRS. The following changes have no material impact on the consolidated financial statements of the Bank: a) Amendments to existing standards - Amendments to IFRS 10 – “Consolidated Financial Statements”, IFRS 12 – “Disclosure of Interests in Other Entities” and IAS 28 – “Investments in Associates”, applicable for the annual periods beginning on or after 1 January 2016, addresses three issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures its subsidiaries at fair value. Furthermore, only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. - Amendments to IFRS 11 – “Joint Arrangements”, applicable for the annual periods beginning on or after 1 January 2016, require an entity acquiring an interest in a joint operation, in which the activity of the joint operation constitutes a business, to apply, to the extent of its share, all of the principles in IFRS 3 – “Business Combinations” and other IFRSs that do not conflict with the requirements of IFRS 11 Joint Arrangements. Furthermore, entities are required to disclose the information required by IFRS 3 and other IFRSs for business combinations. The amendments also apply to an entity on the formation of a joint operation if, and only if, an existing business is contributed by one of the parties to the joint operation on its formation. Furthermore, the amendments clarify that, for the acquisition of an additional interest in a joint operation in which the activity of the joint operation constitutes a business, previously held interests in the joint operation must not be remeasured if the joint operator retains joint control. 11
21. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - Amendments to IAS 1 – “Presentation of Financial Statements”, applicable for the annual periods beginning on or after 1 January 2016, clarify, existing IAS 1 requirements in relation to; o o o o The materiality requirements in IAS 1 That specific line items in the statement(s) of profit or loss and other comprehensive income (“OCI”) and the statement of financial position may be disaggregated That entities have flexibility as to the order in which they present the notes to financial statements That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss. The amendments further clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and OCI. - Amendments to IAS 16 – “Property, Plant and Equipment” and IAS 38 – “Intangible Assets”, applicable for the annual periods beginning on or after 1 January 2016, restricts the use of ratio of revenue generated to total revenue expected to be generated to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. - Amendments to IAS 27 – “Separate Financial Statements”, applicable for the annual periods beginning on or after 1 January 2016, allows an entity to use the equity method as described in IAS 28 to account for its investments in subsidiaries, joint ventures and associates in its separate financial statements. - Annual improvements to IFRS 2010-2014 cycle applicable for annual periods beginning on or after 1 January 2016. A summary of the amendments is contained as under: o IFRS 5 – “Non-current Assets Held for Sale and Discontinued Operations”, amended to clarify that changing from one disposal method to the other would not be considered a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of the requirements in IFRS 5. o IFRS 7 – “Financial Instruments: Disclosures” has been amended to clarify that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. The nature of the fee and the arrangement should be assessed in order to consider whether the disclosures are required under IFRS 7 and the assessment must be done retrospectively. IFRS 7 has been further amended to clarify that the offsetting disclosure requirements do not apply to condensed interim financial statements, unless such disclosures provide a significant update to the information reported in the most recent annual report. o IAS 19 – “Employee Benefits” – amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. 12
22. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 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 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 would be required if the Bank had directly disposed of the related assets or liabilities. The subsidiaries are wholly or substantially owned by the Bank and therefore the the non-controlling interest which is insignificant is not disclosed. 13
23. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) Basis of consolidation(continued) Intra group balances and any income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. As of 31 December 2016 and 2015, interests in subsidiaries not directly owned by the Bank are owned by representative shareholders for the beneficial interest of the Bank and hence are not separately disclosed on the consolidated statement of financial position or consolidated statement of income. Investment in associate Associates are enterprises 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 the lower of the equityaccounted 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) Zakat Zakat is calculated based on the Zakat rules and regulations in the Kingdom of Saudi Arabia and is considered as a liability on the shareholders to be deducted from dividends. Zakat is computed based on equity or net income using the basis defined under the Zakat regulations. In case of any differences between the Bank’s calculation and the General Authority for Zakat and Tax (GAZT) assessment, a reserve is created in other reserves (Note 15) for the potential additional zakat. Also see note 23. d) 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. e) 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 a foreign operation), denominated in foreign currencies, are translated 14
24. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) e) Foreign currencies (continued) into SAR at exchange rates prevailing at the date of the consolidated statement of financial position. 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. Realized and unrealized gains or losses on exchange are credited or charged to the consolidated statement of comprehensive income. The monetary assets and liabilities of foreign subsidiaries are translated into SAR at rates of exchange prevailing at the date of the consolidated statement of financial position. The statements of income of foreign subsidiaries are translated at the weighted average exchange rates for the year. 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. f) 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. g) Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group, and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized.  Income from Mutajara, Murabaha, investments held at amortized cost, installment sale, Istisna’a financing and credit cards services is recognized based on effective yield basis on the outstanding balances. The effective yield is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the 15
25. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) g) Revenue recognition (continued)         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. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, on a time-proportionate basis. 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. 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 include all realised and unrealised fair value changes, investment income, dividends and foreign exchange differences. h) 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. 16
26. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) h) Financing and investment (continued) 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 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 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’. iii. 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. 17
27. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) i) 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. 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. 18
28. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) i) Impairment of financial assets (continued) Held at amortised cost (continued) 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. 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. 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. j) 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 recognised, in the statement of income. Gains or losses on disposal are recognised in the statement of income. k) 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. l) 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. 19
29. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) i) Investment properties (continued) The cost of investment properties is depreciated using the straight-line method over the estimated useful life of the assets m) 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 straightline 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 33 years over the lease period or 3 years, whichever is shorter 3 to 10 years Buildings Leasehold building improvements Equipment and furniture 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. n) 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. o) 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. p) 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. 20
30. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) q) 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. 2. 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. r) 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. s) Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. t) Special commission excluded from the consolidated statement of income In accordance with the Shari’a Authority’s resolutions, special commission income received by the Bank is excluded from the determination of income, to and is recorded as other liabilities in the consolidated statement of financial position and is paid as charities. u) 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. v) Share-based payments The Bank operates an equity-settled, share-based compensation plan “Employee share grant plan ESGP” as approved by SAMA, under which the entity receives services from the eligible employees as consideration for equity instruments (options) of the Bank. Under the terms of the ESGP, eligible 21
31. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) v) Share-based payments (continued) employees of the Bank are offered stock options at a predetermined strike price for a fixed period of time. At maturity of the plans, the underlying allotted shares are delivered if the employees exercise the options as per the terms and conditions of the plan. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense in the consolidated statement of income over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Bank estimates the number of options that are expected to vest based on the non-market vesting conditions. It recognizes the impact of the revision to original estimates, if any, in the consolidate statement of income, with a corresponding adjustment to equity. w) 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. x) 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. y) 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 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 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 to be paid through installments as agreed in the contract. 22
32. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) y) Bank’s products definition (continued) 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. 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) 2015 2016 Cash in hand Statutory deposit Current account with SAMA Mutajara with SAMA Total 712241940 545,9425, ,71,921994 394,124292 99,43,, 489,957 15,181,051 42,149,905 294,91493, In accordance with the Banking Control Law and regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA and central banks at stipulated percentages of its customers’ demand deposits, customers’ time investment and other customers’ account 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. 23
33. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 5. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Due from banks and other financial institutions as of 31 December comprise the following: Current accounts Mutajara (SAR’000) 2015 2016 34,,149,, 74214,0 0448091,22 294,,94,9, Total 26,578,525 2,49334,9, 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 (SAR’000) 2015 2016 24,624,791 26,059,374 222,698 351,203 2,063,567 167,948 Total 26,578,525 2,49334,9, 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. 6. INVESTMENTS, NET a) Investments comprise the following as of 31 December: Investment in an associate* Investments held at amortized cost Murabaha with SAMA Sukuk Total investments held at amortized cost Investments held as FVSI Equity investments Mutual funds Total investments held as FVSI Available-for-sale investments Equity investments Mutual funds Total available-for-sale investments Investments (SAR’000) 2015 2016 994935 89,280 22,94, ,0,8 0,,22 ,7,4 32,552,112 1,49294,13 34229491, 19499249,9 02,928 ,,4 ,080 138,709 214,92 3432343,1 343,,4999 708,820 904,292 1,252,778 ,214,,9 5,4523 9,,422, 34,032,879 19459,45,, The designated FVSI investments included above are designated when the financial instruments are being evaluated on a fair value basis and are in accordance with the documented risk management strategy of the Bank. 24
34. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 6. INVESTMENTS (continued) All investments held at amortized costs are neither past due nor impaired as of 31 December 2016. *Investment in an associate The Bank owns 22.5% (31 December 2015: 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: Quoted Murabaha with SAMA Sukuk Equities Mutual funds Total 350,272 917,012 1,267,284 Quoted Murabaha with SAMA Sukuk Equities Mutual funds Total c) 352,134 698,923 1,051,057 (SAR‘000) 2016 Unquoted 30,451,217 1,750,623 02,928 492,2,7 32,765,595 Total 30,451,217 0,,22 ,7,4 ,92 ,99, 492,2,7 34,032,879 2015 Unquoted 1,49294,13 873,400 214,92 342,3492, 38,825,807 Total 1,49294,13 34229491, 9224199 342,3492, 19459,45,, The analysis of unrecognized gains and losses and fair values of investments are as follows: 2016 (SAR’000) Carrying value Gross Gross unrecognized unrecognized gains losses Fair value Murabaha with SAMA Sukuk Equities Mutual funds 22,94, ,0,8 0,,22 ,7,4 ,92 ,99, 492,2,7 41,880 14,162 - - 30,493,097 2,115,057 ,92 ,99, 492,2,7 Total 34,032,879 56,042 - 34,088,921 Gross Gross Carrying unrecognized unrecognized value gains losses 36,727,031 (127,317) 1,225,534 (3,271) 722,375 1,201,924 39,876,864 (130,588) Fair value 36,599,714 1,222,263 722,375 342,3492, 39,746,276 2015 (SAR’000) Murabaha with SAMA Sukuk Equities Mutual funds Total 25
35. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 6. INVESTMENTS (continued) d) Credit quality of investments (SAR’000) Murabaha with SAMA Investment grade Unrated Total 2016 30,451,217 2,296,601 1,285,061 34,032,879 2015 3, ,929,,13 1,359,654 1,790,179 19459,45,, Investment Grade includes those investments having credit exposure equivalent to Standard and Poor's rating of AAA to BBB. The unrated category mainly comprises of private equities, quoted equities and mutual funds. e) f) The following is an analysis of foreign investments according to investment categories as at 31 December: 2016 1,300,895 34229491, Investments held as FVSI Equity investments Mutual funds Total 21,249 232,604 1,554,748 2342,, 3,54,91 341994,93 The following is an analysis of investments according to counterparties as at 31 December: 2015 2016 2,12721420 37,952,565 ,,,4599 ,,,189, 994935 77,1072 1,201,924 49212,7 34,032,879 19459,45,, (SAR‘000) Government and quasi government Companies Banks and other financial institutions Mutual funds Net investments 7. 2015 (SAR‘000) Investments held at amortized cost Sukuk FINANCING, NET 7 - 1 Financing a. Net financing as of 31 December comprises the following: (SAR‘000) 2016 Allowance for Non-performing impairment Performing Mutajara Installment sale Murabaha Credit cards Total 99,779,,,2 ,27 ,,24 ,,22 ,4 ,0,9 ,787 989,,78 228,759,224 26 , ,9,9 ,,04 , ,227,488 ,4 ,2,2 ,, ,272 2,867,601 )2,4, , ,2, 7( )2,299,729( )20,, ,0 ( )92,748( (6,632,701) Net financing 90,727,702 ,22 ,2,7 ,,22 ,4 ,082,,70 99, ,9,2 224,994,124
36. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) (SAR‘000) 2015 Allowance for Non-performing impairment Performing Mutajara Installment sale Murabaha Credit cards Total 15,,99 ,,,, 3,3 ,9,3 ,13, 32,,33 ,599 29, ,399 212,724,356 3,9,9 ,,59 3,1,, ,919 , ,3,9 9, ,952 3,266,911 Net financing )1,939,592( )2,23, ,29, ( )19,, ,9 ( )3,95, ( (5,773,399) 1, ,5,, ,,,1 3,3 ,,,9 ,999 33,995,939 1,, ,991 210,217,868 b. The net financing by location, inside and outside the Kingdom, as of 31 December is as follows: Description Inside the Kingdom (SAR’000) 2016 Installment sale Murabaha Mutajara 92128,1,0, Outside the Kingdom ,2419,21928 - 21,421222 Gross financing 92128,1,0, ,2,19921892 Allowance for impairment )214,,12,7 ( Net financing Credit cards ,218841297 9,,1877 0021,281,29 ,1970 7197,122, ,4122,17,9 9,21082 02,12021704 )2129917 29( )201,,0 ( )921748( )2122018 2, ( 42,868,823 166,398,906 15,276,982 449,413 224,994,124 Description Mutajara Installment sale Inside the Kingdom 1949,94121 399499,4393 Outside the Kingdom ,394392 914291792 Total 2015 Credit cards Total 8,352,333 1,94,9, 208,200,885 149,94595 14,,94,9 1 34,,3 9499,4152 Murabaha Gross financing ,,41,24,99 3,142,24,9 1 12,017,984 1,54919 215,991,267 Allowance for impairment )1493945 92( )2423,429, ( (39,467) )3495,( (5,773,399) Net financing 1,45,,4,,1 161,047,795 11,978,517 1,,4991 23,423945,5 27
37. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) c. The net financing concentration risks and the related provision, by major economic sectors at 31 December are as follows: 2016 Description Performing Commercial Industrial Building and construction Personal Services Agriculture and fishing Others Total Collective allowance for impairment Balance 08122,18,4 ,,17401288 ,100,1,02 ,2,1,,,122 , ,41,721029 2,219,, 012281727 228,759,224 2015 d. Description Performing Commercial Industrial Building and construction Personal Services Agriculture and fishing Others Total Collective allowance for impairment Balance 21,380,148 10,564,357 9,131,983 153,961,181 14,756,442 637,071 2,293,174 212,724,356 (SAR’000) Allowance Nonfor Performing impairment 22712,4 291242 22212,, ,12481222 ,2,1292 ,91497 2,867,601 Net financing (558,190) (15,049) (620,132) (1,671,423) (69,346) (14,032) (2,948,172) (3,684,529) (6,632,701) 27,412,300 11,871,981 9,269,387 160,797,568 16,075,564 613,499 2,638,354 228,678,653 (3,684,529) 224,994,124 (SAR’000) Allowance Nonfor Performing impairment 618,379 58,151 849,256 1,355,317 369,482 16,326 3,266,911 (492,658) (49,151) (463,910) (1,341,539) (274,953) (15,868) (2,638,079) (3,135,320) (5,773,399) Net financing 21,505,869 10,573,357 9,517,329 153,974,959 14,850,971 637,071 2,293,632 213,353,188 (3,135,320) 210,217,868 The table below depicts the categories of financing as per main business segments at 31 December: 2016 (SAR’000) Retail Corporate Total Mutajara Installment sale Murabaha Credit cards 7,,94 ,2, ,4,2 ,7,, 282,288 9,2 ,082 92,28, ,882 8,79, ,79, ,9 ,,22 ,0,8 - 92,28, ,,0, ,2, ,992,892 ,4 ,22, ,7,9 9,2 ,082 Financing, gross Less: Allowance for impairment Financing, net ,20 ,927,,,, )2,277,2, , ( ,4, ,272,222 2, ,,48 ,729 )2,499,2, 2( 65,613,824 02, ,202,704 )2,220,82, ( 224,994,124 28
38. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) 2015 (SAR’000) Retail Corporate Total Mutajara Installment sale Murabaha Credit cards 39,411,4926 637,035 1,54919 ,,41,24,99 ,,41,24,99 549134129 3,142,24,9 1 33415,49,9 12,017,984 1,54919 - Financing, gross Less: Allowance for impairment Financing, net 155,316,498 (2,194,641) 153,121,857 ,,4,9,49,9 (3,578,758) 57,096,011 215,991,267 (5,773,399) 23,423945,5 e. 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: 2016 Neither past due nor impaired (SAR’000) Past due but not impaired Impaired Allowance for impairment Total Net financing Retail Corporate 160,745,604 64,263,237 365,727 3,384,656 1,357,660 162,468,991 1,509,941 69,157,834 )2,277,2, , ( ,4, ,272,222 )2,499,2, 2( 24,2,2 ,709 Total 225,008,841 3,750,383 2,867,601 231,626,825 (6,632,701) 224,994,124 2015 Neither past due nor impaired Past due but not impaired Impaired Total (SAR’000) Allowance for impairment Net financing Retail Corporate 153,669,352 954,,9495, 2934529 2994993 341994139 155,316,498 (2,194,641) 153,121,857 34933499, ,,4,9,49,9 (3,578,758) 57,096,011 Total 212,136,936 9594,2, 142,,4933 215,991,267 (5,773,399) 23,423945,5 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 the total performing financing. 29
39. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) f. The tables below depicts the quality of financing past due (up to 90 days) but not impaired at 31 December: 2016 (SAR’000) Corporate Total Retail Performing financing - Standard Performing financing - Special mention Total 2015 Performing financing - Standard Performing financing - Special mention Total 318,551 47,176 365,727 3,012,218 372,438 3,384,656 Retail (SAR’000) Corporate 2154232 914,39 2934529 3,330,769 419,614 3,750,383 189,292 106,299 2994993 Total 427,504 159,916 9594,2, Financing under the standard category are performing, have sound fundamental characteristics and include those that exhibit neither actual nor potential weaknesses. The special mention category includes financing that is also performing, current and up to date in terms of principal and profit payments. However, they require close management attention as they may have potential weaknesses both financial and non-financial that may, at some future date, result in the deterioration of the repayment prospects of either the principal or the profit payments. The special mention financing is not exposed the Group to sufficient risk to warrant a worse classification. g. The tables below set out the aging of financing past due but not impaired as of 31 December: 2016 Age up to 30 days 31-60 days 61-90 days Total Fair value of collateral Mutajara 2,331,869 680,349 372,438 3,384,656 8,771,194 Installment sale 221,071 82,357 47,176 350,604 - Mutajara Installment sale 2015 Age Credit cards 3194,99 3194,93 394,,3 954591 954,95 134,1, Total 2994993 35943,9 4,031,637 - 30 Credit cards Total 15,123 2,568,063 762,706 419,614 15,123 3,750,383 - 8,771,194 (SAR’000) up to 30 days 31-60 days 61-90 days Fair value of collateral (SAR’000) Total ,,42,9 2,4,92 234953 3,24,,2 29543,3 23,4353 914,95 9594,2, - 4,031,637
40. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) The Bank in the ordinary course of financing activities holds collateral as security to mitigate credit risk in financing. These collaterals mostly include project receivables customer deposits and other cash deposits, financial guarantees, local and international equity securities, real estate and other property and equipment. The collateral is held mainly against commercial and consumer financing and managed against relevant exposures related to financing. The fair value of collateral is based on valuation performed by the independent experts, quoted prices (wherever available) and the valuation techniques. Experts have used various approaches in determining the fair value of real estate collateral including market comparable approach based on recent actual sales or discounted cash flow approach taking into account risk adjusted discount rates, rental yields and terminal values. h. 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: 2016 Retail Individually impaired financing Fair value of collateral - 2015 1,509,941 1,446,712 (SAR’000) Corporate Retail Individually impaired financing Fair value of collateral i. (SAR’000) Corporate - 34933499, 3459349,3 Total 1,509,941 1,446,712 Total 34933499, 3459349,3 The tables below depict the quality of neither past due nor impaired financing as at 31 December: (SAR’000) Funded Exposure 2016 Corporate Low risk(1-3) Acceptable risk(4-6) Watch list (7) 21,,21272 9,1,8,1,,0 71,721424 2910221028 ,2218941229 225,008,841 Retail (un-rated) Total 31 Non-funded Exposure 261,690 4,781,932 1,132,616 6,176,238 6,176,238 Total Exposure 7,172,370 53,953,924 9,313,181 70,439,475 ,2218941229 231,185,079
41. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) (SAR’000) Funded Exposure 2015 Corporate Low risk(1-3) Acceptable risk(4-6) Watch list (7) 7,516,599 44,491,252 6,459,733 58,467,584 153,669,352 212,136,936 Retail (un-rated) Total Non-funded Exposure 242,390 6,230,217 1,240,907 7,713,514 7,713,514 Total Exposure 7,758,989 50,721,469 7,700,640 66,181,098 153,669,352 219,850,450 The retail financing balances that are neither past due nor impaired are classified as standard category. Those balances are performing and have strong fundamental characteristics of credit history, cash flows and timely repayment, and regular monitoring is being carried out. Those balances amounted to SAR 160.746 million as at 31 December 2016 (31 December 2015: SAR 153.669 million). j. The tables below depict the quality of performing financing as at 31 December: (SAR’000) 2016 Low risk(1-3) Acceptable risk(4-6) Watch list (7) Funded Exposure 21,,2 1272 421,87 1,08 , 184, 1272 Retail (un-rated) Total 28129817,2 ,2, 1,,, 122, 228,759,224 (SAR’000) Funded Exposure 2015 Low risk(1-3) Acceptable risk(4-6) Watch list (7) 5,625,100 45,025,568 8,112,507 58,763,175 153,961,181 212,724,356 Retail (un-rated) Total 32 Non-funded Exposure 261,689 5,621,932 1,132,616 7,016,237 7,016,237 74,664,130 ,2, 1,,, 122, 235,775,461 Non-funded Exposure 149,928 6,244,582 1,359,102 7,753,612 7,753,612 Total Exposure 5,775,028 51,270,150 9,471,609 66,516,787 153,961,181 220,477,968 Total 7,172,369 56,600,059 10,891,702
42. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) k. The tables below depict the quality of watch list & corporate non-performing financing and impaired retail financing as at 31 December: (SAR’000) Corporate Watch List Non-performing: Risk Rating 8 Risk Rating 9 Risk Rating 10 Retail (un-rated) Total 2016 2015 ,184,1272 8,112,507 4081111 9881882 4241248 ,,102, 1027 ,12481222 12,626,687 1,212,823 508,464 190,307 10,024,101 1,355,317 11,379,418 l. 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) 2016 412421044 21,4,1727 ,12021,2, 0291272 2120,12,, 13,584,171 Less than 50% 51-70% 71-90% 91-100% More than 100% Total exposure 2015 3,562,767 2,117,022 270,361 463,702 6,370,276 12,784,128 m. The tables below depict the quality of neither past due nor impaired financing as at 31 December: 2016 Retail except credit cards (un-rated) Corporate Credit cards Total 2015 Retail except credit cards (un-rated) Corporate Credit cards Total Low Acceptable risk(1-3) risk(4-6) 160,278,998 6,910,680 49,171,992 466,606 167,656,284 49,171,992 (SAR’000) Watch list (7) Total - 160,278,998 8,180,565 64,263,237 466,606 8,180,565 225,008,841 Low Risk(13) 153,477,859 5,700,307 191,493 159,369,659 (SAR’000) Watch list (7) Total 153,477,859 7,539,453 58,467,584 191,493 7,539,453 212,136,936 33 Acceptable Risk(4-6) 45,227,824 45,227,824
43. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) 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. 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. 34
44. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-1 Financing (continued) 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 is a possibility, and hence writ-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. 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. 7-2 Allowance for impairment of financing: The movement in the allowance for impairment of financing for the years ended 31 December is as follows: 2016 Balance at beginning of the year Charge for the year, net Bad debts written off against provision Balance at the end of the year 2015 Retail (SAR’000) Corporate Total 2,194,641 2,140,930 (1,246,880) 3,578,758 440,633 (475,381) 5,773,399 2,581,563 (1,722,261) 3,088,691 3,544,010 6,632,701 (SAR’000) Corporate Retail Balance at beginning of the year Charge for the year, net Bad debts written off against provision 245924,33 34,2941,1 )3492943 11( 2439,4,,3 Balance at the end of the year Total 241,34939 9439,412, 34195492, 24,,94559 )3,34,5 3( )3452,453, ( 149954995 949914199 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) 2015 2016 24,,94559 0147, ,422 ),,945, 2( (541,268) 101,947 349954,29 2,142,242 Charge for the year Recovery of written off financing, net Bad debts written off directly Allowance for impairment, net 35
45. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 7. FINANCING, NET (continued) 7-4 Financing include finance lease receivables, which are as follows: 2016 31,796,685 2015 28,593,184 Unearned future finance income on finance lease 91,08 1,28 0018721978 9177010,, 2, 18,2 1274 )912291704( 34,114913 35452249,2 5411,4993 254991435, )14,59439, ( Net receivables from finance lease 27,461,860 2943,54,1, Gross receivables from finance lease Less than 1 year 1 to 5 years Over 5 years 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net comprises the following as of 31 December: (SAR‘000) COST At January 1 Additions Disposals At 31 December ACCUMULATED DEPRECIATION At January 1 Charge for the year Disposals At 31 December NET BOOK VALUE At 31 December 2016 At 31 December 2015 Buildings Leasehold land & buildings improvements 1,954,611 994292 2,009,863 2,783,470 , 194999 3,219,265 930,429 3499, 932,383 3,704,451 5254529 4,533,276 9,372,961 8,236,247 34123452, 343, 34999 )94253( 10,694,787 9,372,961 - 294,918 9942, 9 352,187 871,738 3, 459, 888,632 2,627,374 1, 34, 12 2,968,806 3,794,030 3,422,306 , 394999 19, 4, 99 )24199( 4,209,625 3,794,030 2,009,863 1,954,611 2,867,078 2,488,552 43,751 58,691 1,564,470 1,077,077 6,485,162 Land Equipment and furniture Total 2016 Total 2015 5,578,931 Buildings include work-in-progress amounting to SAR 1,343 million as at 31 December 2016 (31 December 2015: SAR 907 million). Equipment and furniture includes information technology-related assets having net book value of SAR 984 million as at 31 December 2016 (31 December 2015: SAR 409 million). 9. INVESTMENT PROPERTIES, NET Investment properties consist of properties acquired by the Group in the year 2015. The net book value of the investment properties approximates the fair value. 36
46. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 10. OTHER ASSETS, NET Other assets, net comprise the following as of 31 December: (SAR‘000) 2016 1,321,131 558,264 524,579 357,217 315,850 305,922 147,106 610,285 4,140,354 Receivables, net Prepaid expenses Investment in cars, real estate and other non-financial assets Cheques under collection Advance payments Accrued income Other real estate* Others, net Total 2015 1,618,164 441,725 1,014,015 518,296 270,383 310,336 458,294 4,631,213 * 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. 11. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions comprise the following as of 31 December: 2016 Current accounts Banks’ time investments Total (SAR‘000) 2015 615,352 149,24592 4,558,224 ,8, 1027 81,94 1820 8,916,970 12. CUSTOMERS’ DEPOSITS Customers’ deposits by type comprise the following as of 31 December: (SAR‘000) 2015 2016 094,828,7,4 0, ,294,472 5,239,735 272,593,136 Demand deposits Customers’ time investments Other customer accounts Total 2,,4955432, 3,4159493, 6,444,005 257,821,641 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: 2016 Saudi Arabian Riyals Foreign currencies Total (SAR‘000) 04,1804194, ,017281288 272,593,136 37 2015 247,438,409 3,41514212 257,821,641
47. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 13. OTHER LIABILITIES Other liabilities comprise the following as of 31 December: (SAR‘000) 2016 Accounts payable Provision for employees’ end of service benefits Cheques under settlement Accrued expenses Charities (see note 11) Other Total 2015 0,,29 ,478 82, ,28, 624,790 2,9 ,2,, 02,874 2,125,307 2,548,431 ,3942,9 1,089,920 ,5,4,,9 214599 1,638,793 6,254,839 6,600,729 14. SHARE CAPITAL The authorized, issued and fully paid share capital of the Bank consists of 1,625 million shares of SAR 10 each (2015: 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. In accordance with the Bank’s accounting policy, the Bank records the amount of Zakat it calculates in other reserves until such time when the final amount of Zakat payable can be determined, at which time, the amount of Zakat payable is transferred from other reserves to other liabilities. During the year, the Bank transferred SAR 77.585 million (2015: SAR 143.376 million) to other liabilities as Zakat payable which was paid during the year. In addition, other reserves includes available-for-sale investments reserve, foreign currency translation reserve and employee share plan. The movements in available-for-sale investments, foreign currency reserves, and employee share plan are summarized as follows: (SAR‘000) AvailableForeign Employee for-sale currency share 2016 investments translation plan Total )921409( ),281,4 , ( 27,836 (155,839) 33,327 33,327 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 Employee share plan 38 71,376 - )3,495, ( - - - 71,376 9,274 )3,495, ( 9,274
48. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 Balance at the end of the year 58,179 15. STATUTORY AND OTHER RESERVES (continued) (147,935) 37,110 (52,646) (SAR‘000) AvailableForeign Employee for-sale currency share 2015 investments translation plan Total Balance at beginning of the year 5,380 22,727 23,523 51,630 Net changes in fair value (206,914) - (206,914) Net amount transferred to consolidated statement of income 155,010 155,010 Exchange difference on translation of foreign operations - (159,878) (159,878) Employee share plan 4,313 4,313 (46,524) (137,151) 27,836 (155,839) Balance at the end of the year The Bank under an employee share plan grants its shares to certain eligible employees. The exercise price of the stock option is the market value of these shares at the date of granting the program to those employees. The condition for granting these options is the completion of two years of employment at the Bank. Exercising these stock options by the eligible employees is subject to fulfillment of some requirements for profitability and growth in the Bank. The Bank has no legal or expected commitment to repurchase or settle these options in cash. 16. COMMITMENTS AND CONTINGENCIES a) Legal proceedings As at 31 December 2016, 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 2016, the Bank had capital commitments of SAR 455 million (2015: SAR 227 million) relating to contracts for computer software update and development, and SAR 596 million (2015: SAR 532 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 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. 39
49. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 16. COMMITMENTS AND CONTINGENCIES (continued) c) Credit related commitments and contingencies (continued) 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 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 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: 2016 Letters of credit Acceptances Letters of guarantee Irrevocable commitments to extend credit Total (SAR‘000) Less than 3 From 3 to months 12 months From 1 to 5 years Over 5 years Total 22812,9 0421822 21,42 9771,27 9441002 0871228 ,7212,2 0122818,8 21,22 012891429 281072 662,702 21,441722 4,378,064 ,1,821078 4,767,180 9891872 412991,4, 2,852,450 12,660,396 40 ,12901,09 8271,7, 410291209
50. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 16. COMMITMENTS AND CONTINGENCIES (continued) 2015 (SAR‘000) Less than 3 From 3 to 12 months months Letters of credit Acceptances Letters of guarantee Irrevocable commitments to extend credit Total From 1 to 5 years Over 5 years 92,492, 1,54993 ,24192 ,934291 3154,99 ,394399 39,411, ,4,3, 1419243,2 214,92 14359 24,954329 334,95 55549,3 3419349,3 2499,42,5 5,94,95 ,4,19499, 29,4,52 2415,4592 Total 341934999 ,914531 949,945,, 249,54,19 3,41,24,93 2. The analysis of commitments and contingencies by counter-party is as follows as at 31 December: (SAR‘000) 2015 2016 d) Corporates Banks and other financial institutions ,2182218,, ,17,21224 9,157,923 1,144,128 Total 12,660,396 3,41,24,93 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) 2015 2016 Less than 1 year One 1 to 5 years Over 5 years 40,391 185,917 50,141 214,,9 392429, ,,4,29 Total 276,449 2,,425, 41
51. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 17. NET FINANCING AND INVESTMENT INCOME Net financing and investment income for the years ended 31 December comprises the following: (SAR‘000) 2015 2016 Financing Corporate Mutajara Installment sale Murabaha ,12721,48 71078144, 4,,1472 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 3412,4559 9493,4515 ,924,,2 2,94,92 49,1,82 2,549,9 42,1,22 9,4,1, 821229 ,,184,1994 3,4295415, (244,011) (448,324) (55,427) (137,803) (586,127) 11,165,318 (299,438) 9499549,2 18. FEE FROM BANKING SERVICES, NET Fee from banking services, net for the years ended 31 December comprise the following: (SAR’000) 2016 Fee income: 2015 Advance payments on contracts Credit cards Payment service systems Share trading services Remittance business SADAD Mudaraba 1,236,365 641,542 640,425 469,634 450,230 154,798 129,776 2421,,, 4,078,889 388,839 3,724,268 Fee expenses: Payment service systems Share trading services Total fee expenses (984,200) (144,726) (1,128,926) (910,670) )3,949, 9( (1,020,177) 2,949,963 249,,4,93 Other Total fee income Fee from banking services, net 42 871,557 462,435 792,346 469,334 460,710 142,169 136,878
52. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 19. OTHER OPERATING INCOME Other operating income for the years ended 31 December comprises the following: (SAR’000) 2015 2016 51,026 31,678 5,861 74,123 6,858 ,21820 (100,939) ,1270 27,420 16,070 112,950 98,029 3,1439, 243,044 Dividend income 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 Other income, net Total 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: (SAR’000) 2016 Executives Employees engaged in risk taking activities Employees engaged in control functions Other employees Number of employees Total Accrued variable compensations in 2016 Other employees’ costs Gross total 2015 Executives Employees engaged in risk taking activities Employees engaged in control functions Other employees 75 1,526 393 11,690 Fixed Compensation 76,374 374,787 125,857 1,631,025 13,684 13,684 2,208,043 297,845 443,998 2,949,886 Variable compensations paid Cash 14,301 75,581 20,094 176,353 Shares 1,554 1,878 1,223 2,142 286,329 286,329 6,797 6,797 (SAR’000) Variable compensations paid Number of employees 65 1,110 314 10,885 Fixed Compensation 954,,, 139435, 3,,4319 34,99453, Cash 94995 ,24,29 3942,, 31,4919 Shares 245,9 14959 34,23 242,9 32419, 12,374 1,933,731 304,732 422,580 2,661,043 197,986 197,986 10,662 10,662 Total Accrued variable compensations in 2015 Other employees’ costs Gross total 43
53. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 20. SALARIES AND EMPLOYEES RELATED BENEFITS (continued) 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 regulation, 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. 21. OTHER GENERAL AND ADMINISTRATIVE EXPENSES Other general and administrative expenses for the years ended 31 December comprises the following: (SAR’000) 2015 2016 Utilities ,,949,9 2841,09 Software 1,54,5, 24,17,, Electricity & water 2534322 0281222 Consultancy ,14,,, 9,1802 Government 114,,, 241049 Others 2594995 0081028 Total 341954539 1,306,826 22. EARNINGS PER SHARE Earnings per share for the years ended 31 December 2016 and 2015 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 period is the number of ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor. 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 period. 44
54. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 23. PAID AND PROPOSED GROSS DIVIDENDS AND ZAKAT The Bank distributed dividends for the first half of 2016 amounting to SAR 1,218,750 thousand (i.e. SAR 0.75 per share) (2015: SAR 812,500 thousand (i.e. SAR 0.5 per share)). Also the Board proposed gross dividends for the second half of 2016 amounting to SAR 3,337,500 thousand (2015: SAR 2,475,000 thousand) of which SAR 900 thousand (2015: SAR 850,000 thousand) will be deducted for Zakat, resulting in a net dividend of SAR 2.25 per share for 2016 (2015: SAR 1.50 per share). The Bank has filed its Zakat returns with the GAZT and paid Zakat for financial years up to and including the year 2015. The Zakat assessments for the years up to 2001 have been finalized with the GAZT. The Bank has received assessments for the years 2002 to 2009 in which the GAZT raised additional demands aggregating to SAR 723 million. These additional demands mainly came from the “disallowance of long-term investments, statuary deposit and financing lease to the Zakat base by the GAZT”. The basis for the additional Zakat liability is being contested by the Bank before the relevant legal courts. Management is confident of a favorable outcome on the aforementioned appeals. However, as a matter of abundant caution, the Bank has set aside amounts for the potential additional Zakat exposure in other reserves. The assessments for the years 2010 to 2015 are yet to be raised by the GAZT. However, if long-term investments are disallowed and long-term financing is added to the Zakat base, in line with the assessments finalized by GAZT for the years referred to above, it would result in significant additional Zakat exposure to the Bank which remains an industry wide issue and disclosure of which might affect the Bank’s position in this matter. 24. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: (SAR’000) 2015 2016 Cash in hand 545,9425, 8,335,452 Due from banks and other financial institutions maturing within 90 days from the date of purchased 249,34,9, 8,677,525 Balances with SAMA and other central banks (current accounts) 756,140 489,957 Mutajara with SAMA 15,181,051 Total 3241524,5, 32,683,985 45
55. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 25. 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), fees from banking services and remittance business. Corporate segment: Incorporates deposits of VIP, corporate customers deposits, credit facilities, and debit current accounts (overdrafts). Treasury segment: Incorporates treasury services, Murabaha with SAMA and international Mutajara portfolio. Investment services and brokerage segments: Incorporates 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. There are no material items of income or expenses between the above segments. Assets and liabilities for the segments comprise operating assets and liabilities, which represents the majority of the Bank’s assets and liabilities. The Bank carries out its activities principally in the Kingdom of Saudi Arabia, and has five subsidiaries as of 31 December 2016 and 2015, as listed in Note 1-a, of which one operate outside the Kingdom of Saudi Arabia, additional to overseas branches operating in Jordan and Kuwait. The total assets, liabilities, commitments, contingencies and results of operations of these subsidiaries are not material to the Bank’s consolidated financial statements as a whole. 46
56. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 25. 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: 2016 (SAR’000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Total assets 177,178,353 61,796,699 98,504,030 2,232,735 339,711,817 Total liabilities 243,517,074 33,307,549 10,805,589 134,733 287,764,945 8,019,744 2,431,816 1,276,643 23,242 995,190 (652,462) (342,728) - - 9,014,934 1,779,354 933,915 23,242 11,751,445 (121,313) (327,012) (137,802) - 8,893,621 1,452,342 796,113 23,242 11,165,318 1,952,996 118,332 10,964,949 (402,251) 502,517 1,954,859 (3,989) 38,637 925,286 34,820 1,794,856 (3,746) 455,813 89,892 568,947 (5,609) 2,949,963 925,286 243,044 15,283,611 )9,4 14,4 ( (1,300,166) (842,076) - )01, 901090( (3,958,056) (340,305) (65,923) (80,675) (154,855) )241, 02( )9142217, , ( (5,660,473) (1,186,370) (150,344) (160,464) )81, 48124, ( 5,304,476 768,489 1,644,512 408,483 71,04 1, 22 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 Impairment charge for available-for-sale investments Other operating expenses Total operating expenses Net income for the year 47 - 11,751,445 (586,127)
57. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 25. OPERATING SEGMENTS (continued) 2015 (SAR’000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment and other Total Total assets 169,972,076 54,520,040 89,794,204 1,333,328 1394, 394, , 5 Total liabilities 245,832,559 18,092,534 4,938,386 117,115 2,5 495, 499, 7,741,332 1,896,617 583,185 37,246 3, 4295415, 1,061,793 (579,487) (482,306) - - 8,803,125 1,317,130 100,879 37,246 3, 4295415, (79,393) (166,156) (53,889) - )2994, 15( 8,723,732 1,641,823 15,144 1,150,974 499,591 2,186 46,990 47,571 979,566 6,786 37,246 515,106 79,060 9499549, 2 249, , 4, 93 979,566 3,1 439, Total operating income Depreciation Impairment charge for financing, net 10,380,699 (364,563) (981,965) 1,652,751 (2,331) (976,060) 1,080,913 (539) - 631,412 (6,666) - 13,745,775 )19, 4, 99( Other operating expenses Total operating expenses (3,799,745) (5,146,273) (267,206) (1,245,597) (55,549) (56,088) (161,076) (167,742) ), 4, 3949, , ( 5,234,426 407,154 1,024,825 463,670 9431, 4, 99 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 Net income for the year b) )349954, 29( ), 4251499, ( The Group’s credit exposure by business segments as of 31 December is as follows: 2016 (SAR’000) Retail segment Consolidated balance sheet assets , 4, 1, , , 18, 8 Commitments and contingencies excluding irrevocable commitments to extend credit Corporate segment Investment services and brokerage segment Treasury segment Total 2, 1480177, 62,522,406 837,757 284,124,761 5,468,177 - - 7,016,237 1,548,060 48
58. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 25. OPERATING SEGMENTS (continued) 2015 (SAR’000) Retail segment Consolidated balance sheet assets Commitments and contingencies excluding irrevocable commitments to extend credit Corporate segment Investmen t services and brokerage segment Treasury segment Total 153,313,215 52,801,678 68,241,979 724,617 275,081,489 1,059,590 6,694,022 - - 949914, 32 Credit risks comprise the carrying value of the consolidated statement of financial position, except for cash and balances with SAMA, investment property, property and equipment and other assets. The credit equivalent value of commitments and contingencies are included in credit exposure. 26. 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 mitigants 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 cooperation 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. 26-1 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. 49
59. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) a. Credit risk measurement 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 nonperforming 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. This process also enables the Bank to detect any weakness in the portfolio quality and make appropriate adjustments to credit risk allowances, where credit quality has deteriorated and where losses are likely to arise. The Bank evaluates individual corporate customer balances which are past due to make appropriate allowances against financings. For the remaining (performing) corporate portfolio, the Bank applies a loss rate to determine an appropriate collective impairments allowance. The loss rate is determined based on historical experience of credit losses. 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. b. 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. Credit Administration, Monitoring and Control Unit. Remedial Unit. 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. 50
60. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) 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 credit 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: b-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. b-2) Collateralized Credit - related commitments 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. 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. 51
61. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) c. Impairment and provisioning policies Allowance for impairment is recognized for financial reporting purposes only for losses that have been incurred at the statement of financial position date based on objective evidence of impairment, and management judgment. Management determines whether objective evidence of impairment exists under IAS 39, based on the following criteria as defined by the Bank:       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. The Bank's policy requires the review of each individual corporate customer at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of incurred losses at the statement of financial position date on a case-by-case basis, and by using management judgment. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account. 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. 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) 2015 2016 On-balance sheet items Investments Murabaha with SAMA 36,727,031 30,451,217 Sukuk 1,225,534 2,100,895 2,49334,9, Due from banks and other financial institutions 26,578,525 Financing, net  Corporate 994,9,4,33 65,613,824  Retail 3914323459 9 159,380,300 275,081,489 Total on-balance sheet items 284,124,761 Off-balance sheet items: Letters of credit and acceptances 345,94532 ,184,1,, 3 Letters of guarantee 949,945,, 410291209 Irrevocable commitments to extend credit 249,54,19 412991,49 3,41,24,93 Total off-balance sheet items 12,660,396 Maximum exposure to credit risk 296,785,157 52 285,383,540
62. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2016 and 2015, 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. 26-2 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. 53
63. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. 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. 2016 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 Less than 3 months (SAR’000) 3 to 12 months 1 to 5 years Over 5 years Total 24,006,460 - - - 24,006,460 10,125,020 16,453,505 - - 26,578,525 10,717,206 12,729,516 3,819,246 449,413 12,389,090 9,045,322 35,509,527 103,716,438 4,415,048 3,223,443 - 10,717,205 42,868,823 14,443,425 166,398,906 3,819,245 15,276,982 449,413 Other assets, net Total 7,894,344 1,678,348 71,419,553 1,274,565 138,709 68,767,170 117,398,477 89,280 89,280 23,383,203 32,552,112 138,709 1,252,778 1,252,778 1,678,348 53,705,136 311,290,336 Liabilities Due to banks and other financial institutions Customer deposits Other liabilities Total 8,723,822 39,257,062 5,469,383 53,450,267 16,143 32,737,119 158,620,122 32,753,262 158,620,122 177,005 8,916,970 41,978,833 272,593,136 5,469,383 42,155,838 286,979,489 Gap 17,969,286 36,013,908 (41,221,645) 11,549,298 Investments Investment in an associate Investments held at amortized cost Investments held as FVSI Available-for -sale investments 54 24,310,847
64. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) 2015 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 Available-for -sale investments Other assets, net Total Liabilities Due to banks and other financial institutions Customer deposits Other liabilities Total Gap (SAR’000) 3 to 12 months 1 to 5 years Over 5 years Total 9,621,424 - - - 9,621,424 9,936,803 15,854,285 1,119,968 - 26,911,056 9,211,151 12,320,156 2,994,629 346,953 10,648,090 7,774,211 34,367,599 100,381,091 3,461,791 2,527,467 - 9,211,151 13,978,949 2,994,630 - 36,844,603 161,047,795 11,978,517 346,953 25,963,534 2,136,460 72,531,110 10,763,497 393,495 1,144,555 75,095,262 113,340,787 75,518 832,039 704,226 27,796,513 75,518 37,952,565 1,144,555 704,226 2,136,460 288,763,672 623,672 396,587 1,020,259 43,699 43,699 4,558,224 257,821,641 5,961,589 268,341,454 72,685,064 112,320,528 27,752,814 20,422,218 2,956,011 255,949,698 5,961,589 264,867,298 (192,336,188) 934,842 1,475,356 2,410,198 The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at 31 December: 2016 (SAR’000) Due to banks and other financial institutions Customer deposits Other liabilities Total 2015 Due to banks and other financial institutions Customer deposits Other liabilities Total Less than 3 months 3 to 12 months 1 to 5 years Over 5 years No fixed maturity Total 8,738,410 16,263 - 178,687 - 8,933,360 39,322,708 5,469,383 53,530,501 32,981,726 32,997,989 160,452,184 160,452,184 42,377,632 42,556,319 - 275,134,250 5,469,383 289,536,993 Less than 3 months 3 to 12 months 1 to 5 years (SAR’000) Over 5 years No fixed maturity Total 2,914,248 934,842 623,672 43,699 43,837 4,560,298 255,303,340 5,961,589 264,179,177 1,475,648 2,410,490 396,587 1,020,259 43,699 673,319 717,156 257,848,894 5,961,589 268,370,781 The cumulative maturities of commitments & contingencies are given in note 16-c-1 of the financial statements. 55
65. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) 26-3 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 2016 and 2015. The sensitivity of equity is same as sensitivity of income since the Bank does not have fixed rate availablefor-sale financial assets as at 31 December 2016 and 2015. All the banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in SAR million. 56
66. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) 2016 Currency Increase in basis SAR +25 Currency Decrease in basis SAR 2015 Currency -25 Increase in basis SAR + 25 Currency Decrease in basis SAR - 25 SAR in Million Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum 156 186 218 131 Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum -156 -186 -218 -131 SAR in Million Sensitivity of gross financing and investment income As at 31 December 211 Average Maximum for Minimum 187 225 152 Sensitivity of gross financing and investment income As at 31 December - 211 Average Maximum for Minimum - 187 - 225 -152 *Profit rate movements affect reported equity through retained earnings, i.e. increases or decreases in financing and investment income. 57
67. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) Commission sensitivity of assets, liabilities and off balance sheet items 2016 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 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 (SAR’000) Less than 3 months 3 to 6 months 6 to 12 months Over 5 years 1 to 5 years Total 16,081,405 8,998,610 4,188,366 12,265,139 - 7,925,055 1,126,410 24,006,460 26,578,525 30,776,721 - 38,452 - - 1,235,392 - 89,280 501,547 138,709 1,252,778 89,280 32,552,112 138,709 1,252,778 13,718,023 12,729,516 4,888,634 449,413 1,678,348 89,320,670 7,587,782 11,797,682 2,704,026 26,316,308 4,801,308 23,728,484 1,711,022 42,505,953 9,045,322 103,699,798 3,223,443 117,203,955 7,716,388 14,443,426 2,749,857 35,943,450 42,868,823 166,398,906 15,276,982 449,413 1,678,348 311,290,336 4,175,834 267,506,530 5,469,383 277,151,747 148,671 2,100,984 2,249,655 1,911,483 1,911,483 556,202 1,074,139 1,630,341 4,036,263 4,036,263 8,916,970 272,593,136 5,469,383 286,979,489 (187,831,077) 187,831,077 408,353 24,066,653 (24,066,653) - 40,549,470 (40,594,470) - 115,573,614 (115,573,614) - 31,907,187 (31,907,187) - 24,310,847 (24,310,847) 408,353 188,239,430 188,239,430 (24,066,653) 164,172,777 (40,594,470) 123,578,307 (115,573,614) 8,004,693 (31,907,187) (23,902,494) (23,902,494) (47,804,988) 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. 58
68. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) 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 re-price in a given period. The Bank manages this risk by matching the re-pricing of assets and liabilities through risk management strategies. 2015 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 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 (SAR’000) Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total 9,621,424 9,936,803 5,284,762 10,569,523 1,119,968 - 9,621,424 26,911,056 25,963,534 - 10,807,219 - - 349,773 - 75,518 832,039 1,144,555 704,226 75,518 37,952,565 1,144,555 704,226 334, , 14, , 9 9495241, , 149, 94193 1, , 4991 2,136,460 72,698,274 94, , 94, 99 3249154553 249, 94931 40,846,232 324, 194312 2, 43994259 149314152 46,699,326 1499, 499, 994, 2, 4391 342114959 85,524,675 9, 34, 39 1949234325 39, 4, 5, 42,995,165 1, 45, , 4, , 1 3, 34, , 94999 3349954939 1, , 4991 2,136,460 288,763,672 2,956,011 255,949,698 5,961,589 264,867,298 311,614 491,785 803,399 623,228 983,571 1,606,799 623,672 396,587 1,020,259 43,699 43,699 4,558,224 257,821,641 5,961,589 268,341,454 (192,169,024) 192,169,024 2994, , , 192,448,488 192,448,488 40,042,833 (40,042,833) (40,042,833) 152,405,655 45,092,527 (45,092,527) (45,092,527) 107,313,128 84,504,416 (84,504,416) (84,504,416) 22,808,712 42,951,466 (42,951,466) (42,951,466) (20,142,754) 20,422,218 (20,422,218) 2994, , , (20,142,754) (40,285,508) The effective profit rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current market rate for a floating rate instrument or an instrument carried at fair value. 59
69. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) The tables below summarize the Bank’s exposure to foreign currency exchange rate risk at 31 December 2016 and 2015 and the concentration of currency risks, Included in the table are the Bank’s financial instruments at carrying amounts, categorized by currency: 2016 UAE Dirham (SAR’000) Japanese Yen Malaysian Ringgit Euro US Dollar ASSETS Cash and cash equivalents Due from banks and other financial institutions Financing, net Investments Fixed assets Other assets, net Total Assets 9, 1229 - ,8 122, 02217, 8 0821, 2, ,92 122, ,7, 1, 24 91229 91229 841, 99 290 227102, 4104, 1772 , 14291222 221704 ,80 1292 814971, 28 LIABILITIES Due to banks and other financial institutions Customer deposits Other liabilities Total Liabilities Net 80 71,2, 21,8, , 212, 0 , 241, 02 01878 222 21998 , 1, 78 281242 ,0, 1929 2441224 412241249 ,7 1722 2127, 1404 , 1, 471290 912,0 ,8 ,8 1829 071922 , , 41002 ), 8194, ( 60 Pound Sterling ,9 1499 Other Total 24812, 7 , 108910, , 82214, 8 9197212, 4 ,7 1, , , 9, 188, 901, 2, 412821822 9010, 0 8,9 14, 2 21 ,28 1979 9291, 44 9,7 241292 ,4 1892 481229 412,4 124, 012,2 1702 ,0 1742184, 012271070 ,,7 189, 0221200 ,7 148, 1002 8741, , 0 017421020 91807 212921, 40 0120, 1887 ,2 41908 481, 2, 91,72 1982 4122, ,,7 1, , 7 201727 9127912, 4 )41989( 22, 1299 , 197217, 4 ,0 17281288 29219, 2 , 912, 91, 70 21779109,
70. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) 2015 UAE Dirham 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 (SAR’000) Japanese Yen Euro Malaysian Ringgit US Dollar Pound Sterling Other Total 21,550 240,074 21,819 61,937 117,758 224,823 213,775 803,195 885,520 30,689 930,146 6,469 1,203,041 2,072,340 2,688,456 261,624 21,819 357 66 180,118 4,396,890 1,230,346 33,968 195,604 6,295,406 6,539,121 92,725 61,375 41,866 8,423,802 - 2,855,760 37 34,255 196 12,231 37,391 5,035,433 13,791,771 1,323,428 129,635 249,963 20,255,593 72 - 818 239,906 1,294,501 4,809 5,766 10,647 25,285 1,030 26,315 180,737 22,633 204,188 5,067,733 85,567 5,393,206 (4,496) (24,070) 902,200 250,977 1,868 8,434 1,545,599 1,241,850 166,210 2,702,561 21,905 3,840,913 5,847 153,002 29,620 4,002,349 10,383,232 440,055 12,368,886 5,721,241 7,771 1,033,084 7,886,707 - 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 2016 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 equity. 61
71. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. FINANCIAL RISK MANAGEMENT (continued) (SAR in million) ____________________________________________________________________________________ Currency Exposures Change in Currency Effect on Net Income Effect on Equity As at 31 December 2016 Rate in % AED USD EUR INR PKR +/-2 +/-2 +/-5 +/-5 +/-5 3.33 34.55 2.81 2.85 2.83 3.33 34.55 2.81 2.85 2.83 (SAR in million) _____________________________________________________________________________________ Currency Exposures Change in Currency Effect on Net Income Effect on Equity As at 31 December 2015 Rate in % AED USD EUR INR PKR +/- 2 +/- 2 +/- 5 +/- 5 +/- 5 5.03 112.55 1.52 0.94 2.14 5.03 112.55 1.52 0.94 2.14 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: 2016 SAR '000 Long/(short) ,18081944 ,1,78 )421074( )210,2( 2421247 2,022,202 US Dollar Japanese Yen Euro Pound Sterling Others Total 62 2015 SAR '000 Long/(short) 5,627,664 (4,350) (30,346) 7,823 515,146 6,115,937
72. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 26. 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 available-for-sale due to reasonable possible change in prices, with all other variables held constant is as follows: d. Market Indices 31 December 2016 Change in Effect Equity price % in SAR Million Equity + /- 10 + /- 2.34 31 December 2015 Change in Effect Equity price % in SAR Million + /- 10 + /- 2.35 Mutual funds + /- 10 + /- 54.03 + /- 10 + /- 120.19 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. 63
73. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 27. 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: 2016 (SAR‘000) Kingdom of Saudi Arabia Other GCC and Middle East North America South East Asia Other Countries Cash and balances with SAMA and central banks 41,249,774 634,869 - - 265,262 - 42,149,905 Due from banks and other financial institutions 16,271,501 9,478,323 201,903 9,242 368,265 249,291 26,578,525 Financing, net Corporate Mutajara 42,868,823 - - - - - 42,868,823 162,534,805 2,260,477 - - 1,603,624 - 166,398,906 10,775,048 847,160 - - 3,654,774 - 15,276,982 447,931 - - - 1,482 - 449,413 89,280 - - - - - 89,280 31,251,217 68,580 - - 1,232,315 - 32,552,112 2,188 32,307 342 - 103,872 - 138,709 1,135,446 306,626,013 116,697 13,438,413 202,245 9,242 635 7,230,229 249,291 1,252,778 327,755,433 3,556,926 262,806,339 266,363,265 7,890,177 4,608,367 4,571,674 4,151,144 8,722,818 443,832 443,832 8,738 8,738 481,887 481,887 62,125 62,125 33,258 33,258 700,102 5,635,653 6,335,755 3,084,260 721,911 17,405 17,405 726,982 726,982 8,916,970 272,593,136 281,510,106 12,660,396 7,016,237 Europe Total Assets Installment sale Murabaha Credit cards Investments, net Investment in an associate Investments held at amortized cost Investments held as FVSI Available-for -sale investments Total Liabilities Due to banks and other financial institutions Customer deposits Total Commitments and contingencies Credit exposure (stated at credit equivalent value) 64
74. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 27. GEOGRAPHICAL CONCENTRATION (continued) 2015 (SAR‘000) Kingdom of Saudi Arabia Other GCC and Middle East Cash and balances with SAMA and central banks 2949924, 99 5994922 - - 2234319 - 294, 91493, Due from banks and other financial institutions 2143394, 39 2499, 4399 2, 1452, 2, 1439, 91, 4, 99 2214511 2, 49334, 9, Financing, net Corporate Mutajara 36,427,431 417,172 - - - - 36,844,603 157,426,012 1,932,848 - - 1,688,935 - 161,047,795 8,349,158 923,066 - - 2,706,293 - 11,978,517 345,292 - - - 1,661 - 346,953 75,518 - - - - - 75,518 36,727,031 - - - 1,225,534 - 37,952,565 1,014,598 32,063 357 - 97,537 - 1,144,555 704,226 29, 43994115 , 4999422, 2, , 4399 2, 1439, , 4, 99499, 2214511 704,226 1, , 4, 9949, , 14, 2141, , 92249, 9 3543, 3 94913 12949, 2 954999 , 4995422, 248,145,140 251,568,446 , 4, , 549, 5 941134911 3543, 3 94913 94, , 94911 941914299 954999 257,821,641 262,379,865 949954195 , 43, 54, 55 , 994992 , 994992 24919 24919 21, 4, 31 21, 4, 31 1,614,367 875,618 17,006 17,006 3, 41, 24, 93 949914, 32 North America Europe South East Asia Other Countries Total Assets Installment sale Murabaha Credit cards Investments, net Investment in an associate Investments held at amortized cost Investments held as FVSI Available-for -sale investments Total Liabilities Due to banks and other financial institutions Customer deposits Total Commitments and contingencies Credit exposure (stated at credit equivalent value) Credit equivalent amounts reflect the amounts that result from conversion of the Bank’s off-balance sheet liabilities relating to commitments and contingencies into the risk equivalent of financing, using credit conversion factors prescribed by SAMA. Credit conversion factor is meant to capture the potential credit risk related to the exercise of that commitment. 65
75. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 27. 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: 2016 Non-performing Corporate Mutajara Installment sale Murabaha Credit cards Allowance for impairment of financing Corporate Mutajara Installment sale Murabaha Credit cards (SAR’000) Kingdom of Saudi Arabia GCC & Middle East South East of Asia 1,469,909 1,328,215 4,082 18,900 9,006 - 25,016 1,356 10,934 183 1,494,925 1,338,577 15,016 19,083 (1,551,633) (1,347,571) (5,241) (588) (19,512) (63) (1,551,633) (1,353,400) (23,646) (19,493) (4,134) (19,430) - 2015 Non-performing Corporate Mutajara Installment sale Murabaha Credit cards Allowance for impairment of financing Corporate Mutajara Installment sale Murabaha Credit cards Total (SAR’000) Kingdom of Saudi Arabia GCC & Middle East South East of Asia 1,880,631 1,293,742 4,968 54,450 6,012 - 24,858 981 1,137 132 1,905,489 1,300,735 6,105 54,582 (1,592,660) (1,007,250) (16,943) (764) (4,047) - (478) (15,885) (52) (1,592,660) (1,011,775) (32,828) (816) Refer to Note 7-a for performing financing. 66 Total
76. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 28. 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 - 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. (SAR‘000) 31 December 2016 (audited) 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 , 27182, , 10401887 7081820 , , 41080 9041292 021928 - , 27182, , 10401887 26,578,525 - - 26,460,455 26,460,455 22194, 10, 8 01, 2217, 4 02, 12021704 292,148,949 827,732 540,318 30,493,097 2,115,057 240,304,256 299,396,302 30,493,097 2,115,057 240,304,256 300,764,352 71, , 21, 82 08014, 21, 22 281,510,106 - - 8,916,640 272,597,959 281,514,599 8,916,640 272,597,959 281,514,599 67
77. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 28. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (continued) 31 December 2015 (Audited) Financial assets Financial assets measured at fair value Financial assets at FVSI Available-for-sale investements (SAR‘000) Carrying value Level 1 Level 2 Level 3 Total 1,144,555 704,226 , 214, , 9 3432343, 1 5, 4523 214, 92 - 343, , 4999 9, , 422, 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 26,911,056 - - 26,921,850 26,921,850 36,727,031 1,225,534 215,991,267 282,703,669 , 214, , 9 342, 3492, 36,707,710 1,222,263 225,644,031 290,519,306 36,707,710 1,222,263 225,644,031 292,344,635 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions Customers’ deposits Total 4,558,224 257,821,641 262,379,865 - - 4,557,968 257,867,241 262,425,209 4,557,968 257,867,241 262,425,209 FVSI and Available-for-sale 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. Gross financing classified as level 3 has been valued using expected cash flows discounted at relevant SIBOR. 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. 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. 68
78. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 29. 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) 2015 Related parties 2016 Members the Board of Directors Mutajara Contingent liabilities* Current accounts 72819,7 214,9 40,971 93,49,2 2,14,,, ,2 Companies and establishments guaranteed by members of the Board of Directors Mutajara Contingent liabilities* 442122, ,841784 9214995 - 2,859,571 171,668 26,039 021022 24995491, 2,34,93 ,2 2142,, 540,318 342,3492, Other major shareholders (above 5% equity share) Mutajara Contingent liabilities* Current accounts Other liabilities Mutual Funds Investments in Mutual Funds * = 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) 2015 2016 Income from financing and other ,349,9 ,821,94 Mudaraba Fees 3,,4,3, 61,484 Employees’ salaries and benefits (air tickets) 94292 91089 Rent and premises related expenses 1,106 1,106 Board of Directors’ remunerations ,4999 9,401 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) 2015 2016 Short-term benefits 37,102 44,935 Provision for end of service benefits 34192 2,024 The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank directly or indirectly. 69
79. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 30. MUDARABA FUNDS Mudaraba funds as of 31 December comprise the following: Customers’ Mudaraba and investments Current accounts, metals Total (SAR’000) 2015 2016 31429,4,39 16,881,090 24,,, 2,031 3142924,99 16,883,121 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. 31. 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) 2015 2016 Balance at beginning of the year Additions during the year Payments made during the year Balance at end of the year 23,875 20,444 (20,534) 1,4,99 ,34522 )924,22( 23,785 214599 32. 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 38,621 million (2015: SAR 35,501 million). 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 540 million at 31 December 2016 (2015: SAR 1,202 million). 70
80. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 33. 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 2016 and 2015. (SAR’000) 2016 2015 Credit risk weighted assets Operational risk weighted assets Market risk weighted assets 221,810,142 25,067,746 2,096,868 2,, 4329,555 2145,54392 6,150,633 Total Pillar I - risk weighted assets 248,974,756 236,288,380 Tier I – capital Tier II capital 51,946,872 2,772,627 ,,4,194,9, 24979,119 Total tier I & II capital 54,719,499 ,942354391 20.86% 21.98% 39.9, % 2, .51% Capital Adequacy Ratio % Tier I ratio Tier I and II ratio 71
81. AL RAJHI BANKING AND INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED 31 DECEMBER 2016 AND 2015 34. ISSUED IFRS BUT NOT YET EFFECTIVE The Bank has chosen not to early adopt the following new standards which have been issued but not yet effective for the Bank’s accounting year beginning on or after 1 January 2017 and is currently assessing their impact. Following is a brief on the new IFRS and amendments to IFRS effective for annual periods beginning on or after 1 January 2017. Effective for annual periods beginning on or after IFRS 9 Financial instruments 1 January 2018 IFRS 15 Revenue from contracts with customers 1 January 2018 Amendments to IAS 9 Disclosure Initiative 1 January 2017 Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions 1 January 2018 IFRS 16 Leases 1 January 2019 35. APPROVAL OF THE BOARD OF DIRECTORS The consolidated financial statements were approved by the Board of Directors on 18 Jumada I 1438 (corresponding to 15 February 2017). 36. 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. 37. SUBSEQUENT EVENTS The Board of Directors proposed, in its meeting held on 19 January 2017, a distribution of dividends to the shareholders for the second half of the current year in a net amount of SAR 2,437.5 million, after Zakat deduction on shareholders, for SAR 1.5 per share. The Board’s proposal is subject to the approval of the ordinary General Assembly in its next meeting. 72