BLME: Interim Report for the six months - 30 June 2019

Transcription

1. BLME Holdings plc Interim Report For the six months ended 30 June 2019 Registered number 08503102
2. CONTENTS Group Highlights for BLME Holdings plc 3 Chief Executive Officer ’s statement 4 Statement of directors' responsibilities 5 Independent review report to BLME Holdings plc 6 Condensed consolidated income statement 7 Condensed consolidated statement of comprehensive income 8 Condensed consolidated statement of financial position 9 Condensed consolidated statement of cash flows 10 Condensed consolidated statement of changes in equity 11 Notes to the condensed consolidated financial statements 13 Glossary of Abbreviations 48 Glossary of Islamic finance terminology 50 Company information 51 2
3. GROUP HIGHLIGHTS FOR BLME HOLDINGS PLC FOR THE SIX MONTHS TO 30 JUNE 2019 (unaudited) The Group’s profit after tax for the six months ended 30 June 2019 was £7.2 million (six months to 30 June 2018: £7.1 million) Consolidated Total Operating Income before impairment gains/(losses) - £ million for 6 month periods ended on 30 June 28.6 Other income 27.6 Net investment income 21.8 21.0 16.5 Net fee income Operating lease income Net margin 2015 2016 2017 2018 2019 Consolidated Total Operating Expenses - £ million for 6 month periods ended on 30 June Other operating expenses (excl. FX movements)) Other depreciation and amortisation 24.9 21.4 16.1 17.5 16.6 Operating lease depreciation Personnel Expenses 2015 2016 2017 2018 2019 Profit / (loss) after tax - £ million for 6 months ending 30 June 8 7.1 7.2 2018 2019 1.5 -2 2015 2016 2017 (2.3) -12 (11.7) Consolidated Total Assets - £ million as at 30 June 1,800 1,330 1,500 1,397 1,255 1,200 1,033 1,082 2017 2018 900 600 300 2015 2016 2019 Impairment provision - £ million as at 30 June 47.9 29.0 2015 2016 Exposure by country of incorporation as at 30 June 2019 1% 6% 17.5 12.4 12.1 2017 2018 2019 Exposure by economic sector as at 30 June 2019 United Kingdom & Ireland USA 2% 10% GCC financial institutions UK financial institutions 10% 8% Switzerland 11% 12% 3% 1% Other financial institutions Manufacturing Real estate Jersey 4% Kuwait 2% 3% 3% 3% Transportation and storage Government Wholesale / Retail Qatar 75% 12% Commodities Energy Saudi Arabia 3% 4% United Arab Emirates 27% Construction Others 3
4. CHIEF EXECUTIVE OFFICER ’S STATEMENT Financial performance BLME reports a half year profit of £7.2m after tax, consistent with the £7.1m profit for the same period in 2018. Credit impairment gains for the 6 months to 30 June 2019 were £2.5m compared with £3.6m in the 6 months to 30 June 2018. Total assets grew by 9% to £1.4 billion with increased financing activities supported by diversified, consumer deposit-led funding. Our cost:income ratio has fallen for a consecutive year from 78% to 76% (excluding the effect of operating lease depreciation). These results demonstrates our commitment to growing a sustainable, profitable Bank. Customer led approach Our clients are our priority and we maintain a focus on providing excellent customer service. We are proud to have received the ‘Best Fixed Term Account Provider’ award from MoneyFacts for the second year running. This year, for the first time BLME surveyed our savings customers and found that an impressive 79% of our customers would recommend a BLME savings account. We will continue to invest in products and improvements to ensure that we keep pace with customer expectations and the high level of service they deserve. Our commitment to customer service is reflected by the 35% increase in customer deposits during the first half of 2019 and reduced funding concentration risk by 14% compared to the end of 2018. The future The political and economic climate including Brexit will bring challenges but I am confident that we have built a bank that can respond with agility and find the opportunities that these challenges will also bring. As we enter the second half of the year we will build on our foundations, improved operating model and a healthy new business pipeline to deliver sustainable and profitable results. I am privileged to work with a team that is committed to growing a successful bank that serves the needs of our customers and shareholders. I would like to thank the Board, Sharia’a Supervisory Board and our Shareholders for their continued support. Giles Cunningham 21 August 2019 4
5. STATEMENT OF DIRECTORS ’ RESPONSIBILITIES We confirm to the best of our knowledge that this condensed consolidated interim financial information has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’, as adopted by the European Union (EU). The Directors, who are required to prepare the financial statements on a going concern basis unless it is not appropriate, are satisfied that the Group has the resources to continue in business for the foreseeable future and that the financial statements continue to be prepared on a going concern basis. On behalf of the Board: Giles Cunningham Chief Executive Officer 21 August 2019 5
6. INDEPENDENT REVIEW REPORT TO BLME HOLDINGS PLC Introduction We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises condensed consolidated income statement , condensed consolidated statement of comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of cash flows, condensed consolidated statement of changes in equity and the related explanatory notes 1 to 21. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed. Directors' Responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with International Accounting Standard 34, “Interim Financial Reporting,” as adopted by the European Union. As disclosed in note 2, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting,” as adopted by the European Union. Our Responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the halfyearly financial report based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union. For and on behalf of Ernst & Young LLP London 21 August 2019 6
7. CONDENSED CONSOLIDATED INCOME STATEMENT For the six months ended 30 June 2019 (unaudited) Note Income Income from financing and investing activities Returns to financial institutions and customers Net margin 6 Fee and commission income Fee and commission expense Net fee and commission income Net investment loss Credit impairment gains Operating lease income Other operating income Net operating income Expenses Personnel expenses Operating lease depreciation Other depreciation and amortisation Other operating expenses Total operating expenses 8 7 14 Profit before tax Tax credit / (expense) 9 Profit for the period Attributable to: Equity holders of the parent Non-controlling interests Earnings per share Equity shareholders of the parent for the period: Basic earnings per share Diluted earnings per share 10 10 6 months to 30 June 2019 6 months to 30 June 2018 £000 £000 27,753 (11,906) 15,847 23,654 (7,979) 15,675 1,136 (159) 977 1,002 (200) 802 (94) 2,504 4,656 458 24,348 (480) 3,564 3,938 1,064 24,563 (7,807) (3,724) (360) (5,560) (17,451) (8,168) (3,145) (657) (5,279) (17,249) 6,897 7,314 256 (254) 7,153 7,060 6,756 397 7,153 6,907 153 7,060 Pence Pence 3.69 3.36 3.57 3.54 The notes on pages 13 to 47 are an integral part of these condensed consolidated financial statements. 7
8. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the six months ended 30 June 2019 (unaudited) Profit for the period 6 months to 6 months to 30 June 2019 30 June 2018 £000 £000 7,153 7,060 2 32 890 (168) 1 (4) 893 (140) 8,046 6,920 7,649 6,767 397 153 8,046 6,920 Items that may be reclassified to profit or loss: Foreign currency translation differences for foreign operations Net gains/(losses) on financial assets measured at FVOCI Income tax on other comprehensive income Other comprehensive income / (expense) for the period net of income tax Total comprehensive income for the period Attributable to: Equity holders of the parent Non-controlling interests Total comprehensive income for the period The notes on pages 13 to 47 are an integral part of these condensed consolidated financial statements. 8
9. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2019 (unaudited) Note Assets Cash and balances with banks Due from financial institutions Due from customers Investment securities Financing arrangements Finance lease receivables Operating lease assets Profit rate swaps Property and equipment Intangible assets Other assets Deferred tax asset Total assets Liabilities Due to financial institutions Due to customers Profit rate swaps Other liabilities Current tax liability Total liabilities Equity Share capital Other reserve Capital redemption reserve Fair value reserve Non-controlling interests Share-based payment reserve Foreign currency translation reserve Retained earnings Total equity Total liabilities and equity 11 12 13 14 15 16 30 June 2019 31 December 2018 £000 £000 84,369 34,653 10,888 95,292 752,100 357,082 43,239 4,700 329 9,957 3,998 1,396,607 104,339 8,045 14,612 103,872 737,522 256,198 43,378 73 488 266 6,641 3,514 1,278,948 646,618 483,082 1,628 20,538 285 1,152,151 672,240 357,353 469 12,710 482 1,043,254 48,933 15,226 50 176 6,429 2,340 45 171,257 244,456 48,933 15,226 50 (715) 5,221 2,207 43 164,729 235,694 1,396,607 1,278,948 These condensed consolidated financial statements were approved by the Board of Directors on 21 August 2019 and were signed on its behalf by: Giles Cunningham Christopher Power Chief Executive Officer Chief Financial Officer The notes on pages 13 to 47 are an integral part of these condensed consolidated financial statements 9
10. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended 30 June 2019 (unaudited) 6 months to 30 June 2019 £000 6,897 6 months to 30 June 2018 £000 7,314 158 (97) (2,504) 4,084 125 20 500 868 10,051 (534) 427 (3,564) 3,802 165 21 275 7,906 (27,396) 3,716 (12,122) (99,123) (3,586) (4,509) (143,020) (504) (6) (79,939) (51,760) (6,265) (8,329) (146,803) (28,176) 125,434 4,377 101,635 (5,171) 48,484 (563) 42,750 (417) - Net cash outflow from operating activities (31,751) (96,147) Cashflow from investing activities Purchase of intangible assets Purchase of investments Sale of investments Net cash inflow from investing activities (179) (42,584) 52,229 9,466 (88) (5,095) 23,648 18,465 (188) 1,000 812 (279) 4,000 3,721 (21,473) 104,339 1,503 (73,961) 96,780 (667) 84,369 22,152 Cash flows from operating activities Profit before tax Adjusted for: Exchange differences Fair value (gain) / loss on investment securities Credit impairment gains Depreciation and amortisation Share-based payment awards Amortisation of held-to-maturity securities IFRS 16 - depreciation and finance charges Mark-to-market movement in profit rate swaps Net increase in operating assets: Due from financial institutions Due from customers Financing arrangements Finance lease receivables Operating lease assets Other assets Net increase in operating liabilities: Due to financial institutions Due to customers Other liabilities Corporation tax paid Cash flows from financing activities Dividend paid by a subsidiary to a Non-controlling interest Partial sale of indirectly held investment Net cash inflow from financing activities Net change in cash and cash equivalents Cash and cash equivalents at the beginning of the period Exchange differences in respect of cash and cash equivalents Cash and cash equivalents at the end of the period The notes on pages 13 to 47 are an integral part of these condensed consolidated financial statements. 10
11. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June 2019 (unaudited) Sha re Other Ca pi ta l ca pi ta l res erve redempti on Fa i r va l ue Sha re- Reta i ned ba s ed ea rni ngs Forei gn currency res erve res erve pa yment tra ns l a ti on £000 164,729 res erve £000 43 NonControl l i ng Tota l Tota l Interes ts Equi ty £000 £000 £000 230,473 5,221 235,694 £000 48,933 £000 15,226 £000 50 £000 (715) res erve £000 2,207 - - - - - (238) - (238) (1) 48,933 - 15,226 - 50 - (715) - 2,207 - 164,491 6,756 43 - 230,235 6,756 5,220 397 Net cha nge i n fa i r va l ue of equi ty/debt i ns trument a t FVOCI Ta x on other comprehens i ve i ncome - - - 890 1 - - 2 - 2 890 1 - Total other comprehensive income - - - 891 - - 2 893 - 1 893 Total comprehensive income for the period Contributions by and distributions to owners - - - 891 - 6,756 2 7,649 397 8,046 Di vi dend pa i d by a s ubs i di a ry to a Non-control l i ng i nteres t - - - - - - - - (188) 1,000 (188) 1,000 - - - - 125 8 133 13 (3) 10 - 13 125 5 143 812 13 125 5 955 48,933 15,226 50 176 2,340 171,257 45 238,027 6,429 244,456 Ba l a nce a t 31 December 2018 Cha nges on i nti a l a ppl i ca ti on of IFRS 16 Restated balance at 1 January 2019 Profi t for the peri od Other comprehensive income Forei gn currency tra ns l a ti on Pa rti a l s a l e of i ndi rectl y hel d i nves tment Sa l e of equi ty i ns tument a t FVOCI Equi ty-s ettl ed Sha re-ba s ed pa yment a wa rds Ta x on i tems tra ns ferred di rectl y to equi ty Total transactions with owners Balance at 30 June 2019 (239) 235,455 7,153 2 890 Fair value reserve includes the cumulative net change in fair value of FVOCI investments until the investment either is derecognised or becomes impaired. Share-based payment reserve represents the amortised portion of the fair value of equity instruments issued under the Group’s share incentive schemes and accounted for as equity-settled share-based payments. Foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The Capital redemption reserve arose on 26 June 2014 following the redemption of the 50,000 preference shares of £1 each and the repurchase of the one A ordinary share of £1. Non-Controlling Interests relates to the minority shareholders in MKL Construction Equipment Finance Limited, Aspenway Limited and AQ1 Limited. Sale of investment to non-controlling interest comprises the sale proceeds of the part investment in AQ1 Limited which was sold down during the period. The notes on pages 13 to 47 are an integral part of these condensed consolidated financial statements. 11
12. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Share Other Capital Fair Share- Retained Foreign capital reserve redemption reserve value reserve based payment reserve earnings currency translation reserve Total NonControlling Interest Total Equity £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 48,933 15,226 50 (382) 1,911 156,894 (30) 222,602 280 222,882 - - - - - 25 - 25 - 25 48,933 15,226 50 (382) 1,911 156,919 (30) 222,627 280 222,907 - - - - - 10,793 - 10,793 449 11,242 Forei gn currency tra ns l a ti on - - - - - - 73 73 - 73 Net cha nge i n fa i r va l ue of equi ty/debt i ns trument a t FVOCI - - - 356 - - - 356 - 356 Ta x on i tems tra ns ferred di rectl y to equi ty - - - 135 - - - 135 - 135 Total other comprehensive income - - - 491 - - 73 564 - 564 Total comprehensive income for the year - - - 491 - 10,793 73 11,357 449 11,806 Di vi dend pa i d by a s ubs i di a ry to a Non-control l i ng i nteres t - - - - - - - - (508) (508) Fundi ng from non-control l i ng i nteres t - - - - - - - - 5,000 5,000 Net i ncrea s e i n trea s ury s ha res - - - - - (3,677) - (3,677) - (3,677) Sa l e of equi ty i ns trument a t FVOCI - - - (824) - 824 - - - Equi ty-s ettl ed Sha re-ba s ed pa yment a wa rds - - - - 266 27 - 293 - 293 Ta x on i tems tra ns ferred di rectl y to equi ty - - - - 30 (157) - (127) - (127) Total transactions with owners - - - - 824 296 (2,983) - (3,511) 4,492 981 48,933 15,226 (715) 2,207 164,729 43 230,473 5,221 235,694 Ba l a nce a t 31 December 2017 Cha nges on i ni ti a l a ppl i ca ti on of IFRS 9 Restated balance at 1 January 2018 Profi t for the yea r Other comprehensive income Contributions by and distributions to owners Balance at 31 December 2018 50 FVOCI – Fair value through other comprehensive income Treasury shares - £3,569,622 was paid to repurchase 10,357,374 ordinary shares. Transaction costs capitalised include £89,169 for brokerage commission and £17,850 paid to HMRC for stamp duty. Fair value reserve includes the cumulative net change in fair value of FVOCI instruments until the investment is either derecognised or becomes impaired. Share-based payment reserve represents the amortised portion of the fair value of equity instruments issued under the BLME and the Company’s share incentive schemes and accounted for as equity-settled share-based payments. The transfer to retained earnings of £27k represents the recycling of credits previously recognised within the Share Based Payment Reserve in relation to DABS options which have lapsed and/or forfeited. Foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The Capital redemption reserve arose on 26 June 2014 following the redemption of 50,000 preference shares of £1 each and the repurchase of one A ordinary share of £1. Non-Controlling Interest relates to the minority shareholders in MKL Construction Equipment Finance Limited and Aspenway Limited. The notes on pages 13 to 47 are an integral part of these condensed consolidated financial statements. 12
13. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. REPORTING ENTITY BLME Holdings plc (“the Company”) is a Company domiciled in the United Kingdom. The address of the Company’s registered office is Cannon Place, 78 Cannon Street, London, EC4N 6HL. The Company’s principal activity is to act as a holding Company for Bank of London and The Middle East plc (“the Bank” or “BLME”). The condensed consolidated financial statements of the Group for the six months ended 30 June 2019 comprise BLME Holdings plc and its subsidiaries (together referenced as “the Group”). 2. ACCOUNTING POLICIES AND BASIS OF PREPARATION These interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34 ‘Interim Financial Reporting’ as adopted by the EU. These interim financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as at 31 December 2018. The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU. The Group is adopting the same accounting policies as applied in the preparation of the Group’s published financial statements for the year ended 31 December 2018 except for those explained in section 2.1 below for the updated and new IFRSs that are applicable in the current reporting period. All amounts have been rounded to the nearest thousand except when otherwise indicated. 2.1 Changes in accounting policies and disclosures due to adoption of new and amended accounting standards The following new standards, amendments or interpretations are required to be applied as per the effective date however none are material to the Group with the exception of IFRS 16 Leases:       IFRIC Interpretation 23, ‘Uncertainty over Income Tax Treatment’, effective 1 January 2021 Amendments to IFRS 9, ‘Prepayment Features with Negative Compensation’, effective 1 January 2019 Amendments to IFRS 10 and IAS 28, ‘Sale or Contribution of Assets between an Investor and its Associate or Joint Venture’, deferred indefinitely Amendments to IAS 19, ‘Plan Amendment, Curtailment or Settlement’, effective 1 January 2021 Amendments to IAS 28, ‘Long-term interests in associates and joint ventures’, effective 1 January 2021 Annual Improvements 2015-2017 Cycle (issued in December 2017), effective 1 January 2021 In these interim condensed financial statements, the Group has adopted the requirements of IFRS 16 for the first time effective for periods beginning on and after 1 January 2019. The Group has not restated comparative information for 2018 for leases in the scope of IFRS 16. Therefore, the comparative information for 2018 is reported under IAS 17 and is not comparable to the information presented for 2019. Differences arising from the adoption of IFRS 16 have been recognised directly in retained earnings as of 1 January 2019 and are disclosed in Note 4. 2.1.1 IFRS 16 Leases IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and 13
14. an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the finance charge on the lease liability and the depreciation expense on the right-of-use asset. Depreciation expense is calculated on a straight-line basis over the minimum lease term. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from accounting under IAS 17. Lessors continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 requires lessees and lessors to make more extensive disclosures than under IAS 17. Set out below are the new accounting policies of the Group upon adoption of IFRS 16: Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. In calculating the present value of lease payments, the Group uses the incremental financing rate at the lease commencement date if the profit rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of profit and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value (i.e., below €5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term. 14
15. Set out below , are the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements during the period: Statement of financial position As at 31 December 2018 Balance arising on transition to IFRS 16 Additions Depreciation expense Finance charge Payments As at 30 June 2019 Right-of-use assets Lease liabilities £000 £000 4,847 6,130 (419) 87 (582) 4,428 5,635 Presentation of comparative figures The comparative financial information for the year ended 31 December 2018 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor’s report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006. 3. USE OF ESTIMATES AND JUDGEMENTS The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based on management’s best assessment of the outcome, actual results may ultimately differ from those estimates. Management believes that the underlying assumptions are appropriate and that the Group’s financial statements therefore present the financial position and results fairly. There have been no significant changes in the basis upon which critical estimates and judgements have been determined, compared to those applied at 31 December 2018 except for significant judgement in determining the lease term of contracts with renewal options as discussed below. The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, under some of its leases to lease the assets for additional terms. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). The Group included the renewal period as part of the lease term for leases of plant and machinery due to the significance of these assets to its operations. These leases have a short non-cancellable period (i.e., three to five years) and there will be a significant negative effect on production if a replacement is not readily available. The renewal options for leases of motor vehicles were not included as part of the lease term because the Group has a policy of leasing motor vehicles for not more than five years and hence not exercising any renewal options. 15
16. 4 . IFRS 16 TRANSITION DISCLOSURES The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019. The Group elected to apply the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 as at 1 January 2019. The Group therefore did not apply the standard to contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4. The Group elected to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. The Group has leases of certain office equipment (i.e., personal computers, printing and photocopying machines) that are considered of low value. The cumulative effect of initially applying IFRS 16 is recognised at the date of initial application as an adjustment to the opening balance of retained earnings. Therefore, the comparative information has not been restated and is reported under IAS 17 and IFRIC 4. The effect of adopting IFRS 16 as at 1 January 2019 was, as follows: Impact on the statement of financial position (increase/(decrease)) as at 1 January 2019: £000 Assets Property and equipment (right-of-use-assets) Prepaid rent Liabilities Lease liabilities Other liabilities 4,847 (301) 4,546 6,130 (1,347) 4,783 Impact on opening retained earnings as at 1 January 2019: £000 Retained earnings Closing balance under IFRS 17 (31 December 2018) Impact of adopting IFRS 16 Opening balance under IFRS 16 (1 January 2019) 164,729 (238) 164,491 Per IFRS.16.C12, an entity applying the modified retrospective approach is required to disclose an explanation of the difference between   operating lease commitments disclosed when applying IAS 17 at the end of the annual reporting period immediately preceding the date of initial application, discounted using the incremental financing rate at the date of initial application; and lease liabilities recognised in the statement of financial position at the date of initial application. 16
17. 1 January 2019 £000 Operating lease obligations at 31 December 2018 per Note 29* Operating lease obligations at 31 December 2018 not disclosed due to low value 6,889 32 *Per the 2018 audited financial statements Gross lease liabilities at 1 January 2019 Impact of discounting Additional lease liabilities as a result of the initial application of IFRS 16 as at 1 January 2019 5. 6,921 (791) 6,130 SEGMENTAL INFORMATION The Group has three operating segments as described below, which are based on the Group’s strategic business divisions. The strategic business divisions offer different products and services and are managed separately based on the Group’s management and internal reporting structure. The following summary describes the operations of each of the Group’s reportable segments during the period: Wealth Management Wealth Management includes the Group’s Private Banking, Investment Solutions and Real Estate Finance. The Private Banking offers residential and investment property finance targeted towards GCC and Middle-East and North Africa (MENA) based High Net Worth Individuals. It provides real estate investment opportunities, deposit products and banking services alongside specialist aviation and yacht finance. Investment Solutions offers targeted Sharia ’a compliant investments through in-house capabilities or third parties. Real Estate Finance provides finance to small and medium sized Real Estate developers, investors and High Net Worth Individuals looking to invest in UK property across all sectors. Commercial Finance Commercial Finance specialises in providing competitive financing solutions to a wide range of businesses in the UK and GCC regions. The clients range from multinational corporations to family businesses generally earning a minimum operating profit of £500k across a variety of business sectors. The facilities offered typically range in size from £250k - £20 million and the credit approval process is centralised in the London office. The business is relationship focussed so the same team remain with the transaction from origination to repayment. Commercial Finance division is organised in three departments:    Leasing solutions for the UK corporates ranging from SME to multinationals. Corporate and Asset Finance for the GCC region including vendor programmes to mid corporates. Trade Finance offering receivables finance, structured commodity trade transactions and letters of credit. 17
18. Treasury The Treasury division manages the Bank and Group ’s capital, liquidity and funding, ensuring that the Group operates within its market and liquidity risk appetites. To this end Treasury ensures funding sources are diversified and at cost effective rates. In alignment with the strategy objective to achieve wider and diversified funding, the minimum deposit amount for the Premier Deposit Account was reduced during 2018. BLME has seen the benefits of continued efficiency and improved customer experience in digitalising its growing savings products. Information regarding the results of the Group’s three reportable segments is included below. Performance is measured based on net segment contribution as included in the internally generated management information of the Group utilised by the Executive Committee. Segment contribution is stated after charging (or crediting) funding costs between the segments in respect of the segment assets or liabilities which either require or generate funding. There are no other significant transactions between segments. For the six months ended 30 June 2019 Net margin from financing and investing activities Operating lease income Net fee income Net investment loss Other operating income Credit impairment gains Net operating income Directly attributable segment expenses Operating lease depreciation Net segment contribution Wealth Management £000 Commercial Finance £000 Treasury Division £000 Total 7,342 6,981 1,524 15,847 103 4,110 874 546 - 4,656 977 - - (94) (94) 893 300 1,579 158 32 458 2,504 8,338 13,844 2,166 24,348 (1,605) (1,978) (1,513) (5,096) - (3,724) - (3,724) 6,733 8,142 653 15,528 Common costs not directly attributable to segments (8,631) 6,897 Profit before tax Segment assets Unallocated assets Total reportable segments assets £000 446,547 724,253 248,778 1,419,578 10,814 1,430,392 The Treasury division manages the Group’s liquidity as a whole. The Group’s liabilities are not analysed by operating segment within the internally generated management information. 18
19. For the six months ended 30 June 2018 Wealth Management £000 Commercial Finance £000 Treasury Division £000 Total 5,475 9,504 696 15,675 105 3,414 676 524 21 3,938 802 - - (480) (480) 57 346 463 3,241 544 (23) 1,064 3,564 5,983 17,298 1,282 24,563 (1,215) (2,465) (664) (4,344) - (3,145) - (3,145) 4,768 11,688 618 17,074 Net margin from financing and investing activities Operating lease income Net fee income Net investment loss Other operating income Credit impairment gains/ (losses) Net operating income Directly attributable segment expenses Operating lease depreciation Net segment contribution Common costs not directly attributable to segments (9,760) 7,314 Profit before tax Segment assets Unallocated assets Total reportable segments assets £000 297,711 602,730 172,391 1,072,832 9,319 1,082,151 Entity wide disclosures Geographical analysis of non-current assets Dubai Luxembourg United Kingdom USA Total As at 30 June 2019 £000 36 62,047 140 62,223 As at 30 June 2018 £000 30 37 50,157 442 50,666 Non-current assets include operating lease assets, deferred tax asset, investment properties, property and equipment, intangible assets, and other assets. 19
20. 6 . RETURNS TO FINANCIAL INSTITUTIONS AND CUSTOMERS Customer deposits Murabaha Wakala FX forward money market swap costs* 6 months to 30 June 2019 £000 4,070 4,299 1,546 1,991 11,906 6 months to 30 June 2018 £000 2,906 3,981 1,092 7,979 *This represents the cost of managing non-GBP funding incurred by the Bank. This cost arises due to the profit rate differential between the GBP and non-GBP currencies and also the markets factoring economic/political impact on the future exchange rates. 7. PERSONNEL EXPENSES Wages and salaries Social security costs Defined contribution pension scheme costs Recruitment and relocation costs Other staff costs Number of employees at period end Average for the period - management Average for the period - non-management 6 months to 30 June 2019 £000 6,330 528 499 6 months to 30 June 2018 £0 6,520 726 540 71 379 7,807 49 333 8,168 6 months to 30 June 2019 Number 110 12 102 6 months to 30 June 2018 Number 117 10 106 20
21. 8 . IMPAIRMENT OF FINANCIAL ASSETS The table below shows the ECL charges on financial assets in the income statement and statement of financial position: Income Statement New and increased provisions (net of releases) Inventory write-off Total impairment gain 6 months to 30 June 2019 £000 (2,852) 348 (2,504) 6 months to 30 June 2018 £000 (3,564) (3,564) Statement of Financial Position As at 30 June 2019 Financing arrangements Finance lease receivables Other assets Total Impairment Stage 1 Collective £000 493 1,147 1,640 Stage 2 Collective £000 457 430 887 Stage 3 Specific £000 7,823 974 825 9,622 Stage 1 Collective £000 710 595 1,305 Stage 2 Collective £000 1,697 2,728 4,425 Stage 3 Specific £000 7,927 1,349 9,276 Total £000 8,773 2,551 825 12,149 Statement of Financial Position As at 31 December 2018 Financing arrangements Finance lease receivables Total Impairment Total £000 10,334 4,672 15,006 Within Stage 1 and Stage 2 for financing arrangements there is an ECL balance of £14k relating to off balance sheet letters of credit and guarantees, an ECL balance of £80k relating to undrawn commitments and an ECL balance of £28k relating to investment securities. Forborne exposures that have not been specifically provided for equates to £33m. The Stage 1 and Stage 2 ECLs relating to these forborne exposures is £28k. 21
22. An analysis of changes in the gross carrying amount and the corresponding ECL allowances is , as follows: 2019 As at 30 June 2019 Exposure Carrying amount as at 1 January 2019 Changes due to financial assets recognised in the opening balance that have Transferred to Stage 1 Transferred to Stage 2 Transferred to Stage 3 New and increased provisions (net of releases) Write-offs from specific provisions Foreign currency translation adjustments Balance at 30 June 2019 ECL Carrying amount as at 1 January 2019 Changes due to financial assets recognised in the opening balance that have Transferred to Stage 1 Transferred to Stage 2 Transferred to Stage 3 New and increased provisions (net of releases) Foreign currency translation adjustments Balance at 30 June 2019 Stage 1 Collective £000 1,215,991 Stage 2 Collective £000 196,034 Stage 3 Specific £000 21,472 £000 1,433,497 29,521 (14,745) (161) 136,793 1,367,399 (29,521) 14,745 (4,159) (25,601) 151,498 4,320 (6,589) 5 19,208 104,603 5 1,538,105 1,305 4,425 614 (24) - (614) 24 (754) 754 - (255) (2,194) (403) (2,852) 1,640 887 (5) 9,622 (5) 12,149 9,276 Total 15,006 The total Group exposure is higher than the total assets due to undrawn credit facilities and off balance sheet commitments. 22
23. 2018 As at 31 December 2018 Exposure Carrying amount as at 1 January 2018 Changes due to financial assets recognised in the opening balance that have Transferred to Stage 1 Transferred to Stage 2 Transferred to Stage 3 New and increased provisions (net of releases) Write-offs from specific provisions Foreign currency translation adjustments Balance at 31 December 2018 ECL Carrying amount as at 1 January 2018 Changes due to financial assets recognised in the opening balance that have Transferred to Stage 1 Transferred to Stage 2 Transferred to Stage 3 New and increased provisions (net of releases) Write-offs from specific provisions Foreign currency translation adjustments Balance at 31 December 2018 9. Stage 1 Collective £000 954,908 Stage 2 Collective £000 107,768 Stage 3 Specific £000 45,795 £000 1,108,471 13,336 (124,129) (8,115) (13,336) 124,129 - 8,115 - 379,991 (22,527) (28,756) 328,708 1,215,991 196,034 (4,494) 812 21,472 (4,494) 812 1,433,497 2,395 746 151 (322) (19) (151) 322 - 19 - (900) 3,508 (321) 2,287 1,305 4,425 (3,593) 350 9,276 (3,593) 350 15,006 12,821 Total 15,962 TAXATION UK Corporation tax - on current period profit Deferred tax credit for the period Tax credit / (charge) in income statement 6 months to 30 June 2019 £000 6 months to 30 June 2018 £000 (228) (228) (254) (254) 484 256 (254) The effective tax rate for the period is -4% (six months ended 30 June 2018: 3% and year ended 31 December 2018: 3%), representing the best estimate of the annual effective tax rate expected for the full year, applied to the operating profit before tax for the six month period. This is below the standard rate for the period of 19% and the main reason for this is the utilisation of brought forward unrecognised losses and recognition of the deferred tax asset. The headline rate of UK corporation tax is 19%, and following the enactment of the 2016 Finance Act on 15th September 2016, this will reduce to 17% from 1 April 2020. As these changes were enacted before the balance sheet date, relevant deferred tax balances have been calculated with reference to these rates. 23
24. Tax recognised in other comprehensive income Fair value reserve 10 . 6 months to 30 June 2019 £000 1 1 6 months to 30 June 2018 £000 (4) (4) EARNINGS PER SHARE The calculation of basic earnings per share is based on the profit attributable to ordinary shareholders and the number of basic weighted average ordinary shares. When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the dilutive effects of all dilutive share options and awards. Earnings per share Basic Diluted Profit attributable to ordinary shareholders Profit attributable to shareholders (basic) Profit attributable to shareholders (diluted) 6 months to 30 June 2019 6 months to 30 June 2018 pence 3.69 3.36 pence 3.57 3.54 £000 6,756 6,756 £000 6,907 6,907 At 30 June 2019 Number 195,733,691 At 30 June 2018 Number 195,733,691 Weighted average number of ordinary shares Number of ordinary shares of 25p in issue Shares held by the BLME Holdings Employee Benefit Trust Treasury shares (2,192,029) (2,307,640) (10,357,374) - Weighted average number of shares (basic) Effect of dilutive share options in issue Weighted average number of shares (diluted) 183,184,288 18,113,729 201,298,017 193,426,051 1,447,273 194,873,324 24
25. 11 . INVESTMENT SECURITIES Listed Fair Value through other comprehensive income (FVOCI) Equity Sukuk Amortised cost (AC) Sukuk £000 £000 £000 89,609 341 - 341 89,609 5,342 - 5,342 94,951 341 95,292 Listed Available-for-sale Equity Sukuk Held to Maturity Sukuk At 30 June 2019 Unlisted Total At 31 December 2018 Unlisted Total £000 £000 £000 93,894 341 - 341 93,894 9,637 - 9,637 103,531 341 103,872 25
26. 12 . FINANCING ARRANGEMENTS Murabaha Mudaraba Participation agreement Less than 1 year 1-5 years Over 5 years £000 705,695 3,641 110 709,446 £000 45,567 45,567 £000 5,860 5,860 Provision for impairment IFRS 9 Stage 1 and 2 ECL IFRS 9 Stage 3 ECL Murabaha Mudaraba Participation agreement Sukuk At 30 June 2019 Total £000 757,122 3,641 110 760,873 (8,773) 752,100 (950) (7,823) (8,773) Less than 1 year 1-5 years Over 5 years £000 692,456 3,642 141 931 697,170 £000 50,686 50,686 £000 - Provision for impairment IFRS 9 Stage 1 and 2 ECL IFRS 9 Stage 3 ECL At 31 December 2018 Total £000 743,142 3,642 141 931 747,856 (10,334) 737,522 (2,407) (7,927) (10,334) Refer to Note 8 for the analysis of changes in IFRS 9 Stages 1 and 2 and IFRS 9 Stage 3 ECLs. These tables represent contractual maturities. For definitions of the above Sharia’a financing terminology, refer to glossary. 26
27. 13 . FINANCE LEASE RECEIVABLES Gross investment in finance lease receivables Less than one year One to five years More than five years Gross investment in hire purchase Less than one year One to five years More than five years Unearned future income on finance leases Unearned future income on hire purchase IFRS 9 Stage 1 & 2 ECL IFRS 9 Stage 3 ECL Net investment in finance leases and hire purchase The net investment in finance leases comprises: Less than one year One to five years More than five years The net investment in hire purchase comprises: Less than one year One to five years More than five years At 30 June 2019 £000 At 31 December 2018 £000 63,153 110,835 7,032 181,020 50,616 83,324 4,913 138,853 78,519 124,762 1,394 204,675 61,472 79,597 192 141,261 (12,887) (13,175) (1,577) (974) 357,082 (10,974) (8,270) (3,323) (1,349) 256,198 55,622 104,008 6,703 166,333 41,840 77,652 4,596 124,088 71,406 117,998 1,345 190,749 56,140 75,783 187 132,110 357,082 256,198 These tables represent contractual maturities. The Group’s investment in finance lease receivables covers a wide range of equipment types, including transport, construction, and mining and heavy machinery equipment. Refer to Note 8 for the analysis of changes in IFRS 9 Stages 1 and 2 and IFRS 9 Stage 3 ECLs. 27
28. 14 . OPERATING LEASE ASSETS Gross carrying amount Less depreciation Gross carrying amount Less depreciation At 31 December 2018 £000 56,663 (13,285) 43,378 Additions 2019 £000 6,390 6,390 Translation Disposals Depreciation differences 2019 2019 2019 £000 £000 £000 (9,965) (1) 7,160 (3,724) 1 (2,805) (3,724) - At 30 June 2019 £000 53,087 (9,848) 43,239 At 31 December 2017 £000 47,798 (12,876) 34,922 Additions 2018 £000 27,846 27,846 Translation Disposals Depreciation differences 2018 2018 2018 £000 £000 £000 (19,327) 346 6,339 (6,443) (305) (12,988) (6,443) 41 At 31 December 2018 £000 56,663 (13,285) 43,378 At 30 June 2019 £000 At 31 December 2018 £000 7,228 18,769 2,152 28,149 8,291 19,076 2,671 30,038 Future rental receipts under operating leases Future rentals are as follows: Less than one year Between one and five years More than five years The Group’s investment in operating lease assets covers a wide range of equipment types, including transport, construction, and mining and heavy machinery equipment. 15. OTHER ASSETS VAT recoverable Contract assets Collateral deposits Prepayments Collateral assets Other receivables and assets* At 30 June 2019 £000 1,294 139 201 1,013 2,971 4,339 9,957 At 31 December 2018 £000 2,625 65 404 1,105 2,442 6,641 *Other receivables and assets line above include foreign exchange forward deal balance of £1.5m (31 December 2018: £1.2m). 28
29. 16 . OTHER LIABILITIES At 30 June 2019 £000 932 163 319 8,477 5,617 5,030 20,538 Trade payables Contract liability Social security and income tax Accruals Lease liability Other creditors* At 31 December 2018 £000 18 5 334 10,814 1,539 12,710 *Other creditors line above includes foreign exchange forward deal balance of £2.4m (31 December 2018: £0.2m). 17. SUBSIDIARIES AND OTHER ENTITIES Principal Subsidiaries Country of incorporation and principal operations BLME Issued equity interest in capital equity capital Profit for the half year (unaudited) Principal business activity Ultimate parent undertaking Immediate parent undertaking £000 Directly held: Bank of London and The Middle East plc United Kingdom 100% £48,933,422 6,473 Regulated Bank BLME BLME Holdings plc Holdings plc United Kingdom 100% £100,000 - Dormant BLME BLME Holdings plc Holdings plc Indirectly held: BLME Asset Management Limited United Kingdom 100% £2 - Dormant BLME BLME plc Holdings plc BLME Holdco Limited United Kingdom 100% £102 - Dormant BLME BLME plc Holdings plc BLME Holdings EBT Jersey N/A - BLME Limited United Kingdom 100% £2 - Employee benefit trust Dormant BLME BLME plc Holdings plc BLME BLME plc Holdings plc Global Liquidity Solutions Limited United Kingdom 100% £1 - Dormant BLME BLME plc Holdings plc MKL Construction Equipment Finance Limited Renaissance Property Finance Limited United Kingdom 60% £1,000 470 Leasing BLME BLME plc Holdings plc United Kingdom 100% £2 - Dormant BLME BLME plc Holdings plc Renaissance Trade Finance Limited United Kingdom 100% £2 - Dormant BLME BLME plc Holdings plc AQ1 Limited Jersey 96% £24,870,000 820 BLME BLME plc Holdings plc Aspenway Limited Jersey 56% £11,300,000 448 Investment Holding Company Investment Holding Company Walbrook Asset Finance Limited 100% BLME BLME plc Holdings plc 29
30. As the Group owns the majority of the equity capital of the above entities , it is exposed, and has rights, to variable returns from its involvement with the investees and has the ability to affect those returns through its power over the investees. Consequently, the results of the subsidiaries above have been consolidated in these financial statements. There is one active structured entity (“SE”) (2018: one) that does not qualify as subsidiary under UK law but which is consolidated under IFRS 10 as the substance of the relationship is that the entity is deemed to be controlled by the Group. This entity is deemed to be controlled by the Group because the relationship between the Group and the SE is governed by a participation agreement which allows the Group to exercise power over the SE in addition to being exposed to, and having rights over, the variable returns from its involvement with the SE. Furthermore, the Group has the ability to use its power to affect its returns from its involvement in the SE. The one structured entity is DMJ 2 LLC (USA) – Operating leases. Lease assets owned by the SE are reported as Group operating lease assets amounting to £0.1 million (31 December 2018: £0.1 million). The BLME Holdings Employee Benefit Trust (‘EBT’) holds a stock of own shares acquired at a cumulative cost of £3.5 million (31 December 2018: £3.5 million) which has been deducted from retained earnings in the Condensed Consolidated Statement of Changes in Equity. The EBT did not purchase any Company shares during the period ended 30 June 2019 (31 December 2018: Nil). No stamp duty costs were incurred by the Group on behalf of the BLME Holdings EBT (six months to 30 June 2018: Nil).  Significant restrictions The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory frameworks require banking subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to other parts of the Group and comply with other ratios. The carrying amounts of Bank of London and The Middle East plc’s assets and liabilities are £1,423 million and £1,193 million respectively (31 December 2018: £1,273 million and £1,045 million respectively).  Interests in unconsolidated structured entities The Group does not have any interests in unconsolidated structured entities.  Contractual arrangements and financial support The Group does not have any contractual arrangements that could require the parent or its subsidiaries to provide financial support to a consolidated or unconsolidated structured entity (2018: none). Except for a letter of support provided to MKL Construction Equipment Finance Limited, the Group did not provide financial support to any of its consolidated or unconsolidated structured entities during 2019 (2018: nil) and does not have any current intentions to provide such support (2018: none). 30
31. 18 . NON-CONTROLLING INTERESTS The Group holds a 60%, 56% and 96% shareholding in MKL Construction Equipment Finance Limited, Aspenway Limited and AQ1 Limited respectively, and consolidates them as subsidiaries under IFRS 10. The non-controlling interests represents the minority shareholders of 40% in MKL Construction Equipment Finance Limited, 44% in Aspenway Limited and 4% in AQ1 Limited. 19. RELATED PARTIES During the reporting period the Group entered into transactions on an arm’s length basis with related counterparties as detailed below: Boubyan Bank K.S.C.P Wakala placement Wakala deposit taking Participation deposit The Public Institution for Social Security Reverse Murabaha National Bank of Kuwait SAKP Bahrain Reverse Murabaha Commodity Murabaha Exchange of deposit (receivable) Exchange of deposit (payable) National Bank of Kuwait International Reverse Murabaha Commodity Murabaha 6 months to 30 June 2019 6 months to 30 June 2018 £000 £000 115,039 113,846 400,516 138,453 30,592 - 103,231 246,365 - 23,406 119,452 - 61,497 7,517 152,225 23,400 70,058 74,475 113,398 176,176 National Bank of Kuwait SAKP Singapore Commodity Murabaha - 7,500 The amounts outstanding with The Public Institution for Social Security (of Kuwait) were as follows: Included within: Due to financial institutions Reverse Murabaha At 30 June At 31 December 2019 £000 422,977 2018 £000 525,193 As at 30 June 2019, The Public Institution for Social Security held 8.10% (31 December 2018: 8.10%) of the Bank’s shares and its Chief Investment Officer is a member of the Company’s board. 31
32. The amounts outstanding with Boubyan Bank K .S.C.P were as follows: At 30 June At 31 December 2019 2018 £000 £000 812 1,372 23,530 31,128 15,588 15,597 4,002 - Included within: Cash and balances with banks Nostros Due to financial institutions Wakala deposit taking Financing arrangements Participation deposit Due from financial institutions Wakala placement As at 30 June 2019, Boubyan Bank K.S.C.P held an economic interest of 27.91% of the Company’s shares (31 December 2018: 27.91%). A Non-Executive Director who joined the Board on 6 December 2012 and was appointed Chairman on 31 March 2014 is the Chief Executive Officer and Vice Chairman of Boubyan Bank K.S.C.P. The amounts outstanding with National Bank of Kuwait SAKP Bahrain were as follows: Included within: Due to financial institutions Reverse Murabaha Due to financial institutions Exchange of deposit* 2019 £000 2018 £000 11,850 - 42,031 - *this amount has been shown as a net figure. Transactions entered into have been shown as gross on page 31. The amounts outstanding with National Bank of Kuwait International were as follows: Included within: Due to financial institutions Reverse Murabaha At 30 June At 31 December 2019 £000 18,882 2018 £000 19,150 The key management of the Group are the Executive Directors. The compensation of key management personnel for the period was as follows: Key management emoluments * Bank contributions to pension plans 6 months to 30 June 2019 £000 419 7 426 6 months to 30 June 2018 £000 402 22 424 * Key management emoluments include share-based payments of £0.07 million (six months to 30 June 2018: £0.07 million). 32
33. 20 . FINANCIAL RISK MANAGEMENT The Group has exposure to the following risk categories arising from the use of financial instruments: • credit risk • liquidity risk • market risk (trading book and banking book) • operational risk (including conduct and cyber risk) • capital risk The following presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing these risks, and the management of capital. Following a review of the Bank’s business strategy in late 2016, the following objectives were identified: • • • Continue to reduce exposure to capital intensive and less profitable business lines; Expansion of its presence in the Gulf Cooperation Council (GCC) states and the Middle East; Reduced wholesale funding concentration. This has been achieved by attracting more deposits through BLME’s Premier Deposit Account (PDA) and will continue into 2020. Risk management framework The Group’s risk management framework (“RMF”) provides the foundation for ensuring risk-taking activity is consistent with the Bank’s strategy and risk appetite, and that the Bank delivers good service and good outcomes for customers from its products. The RMF establishes an appropriate balance between risks and reward and ensuring robust controls and management of risk. The Group’s method of managing risk begins with the definition of the Bank’s Risk Appetite, which when combined with the Bank’s strategy articulates its willingness to be exposed to risk events and losses. The RMF is subject to regular evaluation to ensure that it meets the challenges and requirements of the market in which the Bank operates, including regulatory standards and industry best practices. The Bank requires a strong and proactive RMF, in order to mitigate all principal risks and:     Manage the Bank in line with the Board’s approved Risk Appetite; Achieve the Bank’s strategic objectives whilst adhering to its Risk Tolerance levels; Empower and equip the Bank’s staff to make decisions in a risk-aware manner; with roles, responsibilities, and delegated authorities clearly defined; and Embed a culture of treating customers fairly. The RMF lays out systematic processes to identify, evaluate, mitigate, report, and manage risk:    Risk identification – the process of determining risks that could potentially prevent BLME from achieving its goals and objectives; Risk assessment – a careful examination and quantification of the impact and likelihood of potential events; Risk mitigation – a strategy to prepare for and reduce the adverse effects and exposure to risks and their likelihood of occurrence. Risk mitigation is achieved through establishing key control processes and practices, including limit structures, impairment allowance criteria and reporting requirements. Ensure all frameworks and policies are regularly reviewed and kept relevant and up to date; 33
34.    Execution and monitoring – separate control functions independent of business lines are responsible for monitoring the operation of the controls and adherence to risk direction and limits; Assurance – assurance and advice are provided by the Bank’s Third Line of Defence where the Internal Audit function provides the Board with independent, objective assurance or advice whether the risk management, control and governance processes are adequate and operating in line with expectations. Additional assurance is provided by external audit; and Monitoring and reporting – the Second Line of Defence is responsible for monitoring the operation of the controls and adherence to risk direction and limits. The RMF provides the necessary discipline to oversee risks comprehensively through the Bank and in line with the Board Risk Appetite, and the overall strategy. The constituting elements of the RMF are:         Sharia’a principles; BLME governance; Business strategy, vision, values and culture; Risk appetite; Risk management approach; Policies and procedures; Infrastructure; and Training, remuneration and rewards. Board Risk Appetite The Board defines its appetite and tolerance for risk expressed in terms of qualitative and quantitative metrics which are measured on a stressed and unstressed basis. The BLME Risk Appetite Statement is set by the BLME Board and is reviewed at least semi-annually. The Board has set risk appetite within the context of projected financial earnings and balance sheet over the short and medium term. The risk appetite will be set to clearly articulate the Board’s objectives under a stress event, and to align to the Board’s stated strategy. The Board’s appetite for risk is stated as an appetite for potential loss under stressed and normal market scenarios which drives the business to focus on business that has adequate rewards for the risks taken, and to reduce the overall level of risk undertaken. The principal risks faced by the Group, together with details of how these risks are managed (which have not changed in terms of impact significantly during the period), remain as detailed in the Group’s 2018 Annual Report and Accounts and are expected to remain unchanged in the final six months of the financial year to 31 December 2019. 34
35. Impairment of Financial assets  Definition of Default and Cure Credit financing risk is the risk of the Group sustaining a loss from a customer or other counterparty being unable to meet its contractual obligations. This default risk applies to all credit-sensitive transactions. Incorporated within credit default risk are the following sub-types: Primary Financing Risk: the possibility that payments (Principal, Profit share yield and / or other) due from a transaction will not be paid by the obligor when due. Financing and issuer risk may include amounts that may crystallise from contingent transactions such as letters of credit and underwriting. Counterparty Credit Risk (also known as Pre-settlement risk): the potential exposure that could arise if a trading partner for a Profit Rate or Foreign Exchange (FX) product defaults prior to expiration (either maturity or termination) leaving the Group exposed to a loss if the market has moved adversely. BLME uses a bespoke methodology to calculate pre-settlement risk, which represents a conservative view of the possible negative currency fluctuation over time. The resultant calculated or “net” credit risk is then assessed on the same basis as primary financing risk. Settlement Risk: the possibility that a counterparty might not honour the settlement of a transaction in a financial instrument, leaving the Group exposed if it has paid but failed to receive the corresponding settlement. The Group policy, not including its major Financial Institution (“FIs”) Counterparties, is to enter into customer FX or Profit Rate transactions on delivery versus payment (“DVP”) so that no additional exposure arises at maturity. Market transactions with FIs will involve settlement exposure which is covered by the allocation of a specific Settlement Limit. Collectively, the total credit default risk represents the majority of the Group’s total identified risk as outlined in the Group’s ICAAP. This is therefore considered to be the key risk undertaken by the Group. The Group seeks to mitigate its credit default risk via: - A comprehensive credit application process for individual credit exposures. Regular, focused portfolio reviews. Key risk indicator tracking undertaken on a monthly basis via Executive Risk Committee (ERC). The management of customer facilities is transferred to the Bank’s Asset Recovery Unit (ARU) as a result of the incremental risks identified via triggering of the Early Warning Indicators (EWI) and Watchlist resulting in a concern that BLME could be faced with a non-performing finance (“NPF”) situation. The Group policy towards the identification of NPFs mirrors Basel Committee guidance. The facilities of all customers that have suffered sufficient credit deterioration require specialist ‘intensive care’ and restructuring involvement from the ARU team. Unless specifically approved otherwise, day-to-day management of the file transfers to ARU. Customers being managed by ARU will typically exhibit one or more of the following traits: - Multiple Basel II judgemental triggers or one or more Basel II obligatory triggers Covenant breach(es) Overdue profit or principal payments A known requirement for facility restructuring Forbearance or a requirement for forbearance in the short-term One or more other escalation events per the First Line of Defence (1 LOD) escalation criteria The Credit Risk Department reserves the right to recommend that any name is elevated to ARU status, subject to Counterparty Credit Risk Committee (CCRC) approval. It is also possible for customers to exhibit one or more 35
36. of the above traits , but not receive ARU classification (for instance a non-distressed facility restructuring requirement or a minor covenant breach). The ARU checklist contains full details on the requirements of the ARU function on transferal of a file however the below key steps are to be taken in all cases: 1. 2. 3. 4. Day 1: Impairment and transferral to ARU approved by CCRC Day 7: Transferral of file from 1 LOD to be completed Day 14: Customer handover meeting with 1 LOD to be completed Day 30: Finance Loss Reserve form to be submitted to CCRC for approval, containing: - Exit analysis - Background - Future strategy - Headline discounted cash flow (DCF) assumptions (to be discussed/agreed at CCRC) - Recommendations as to third party business and legal documentation reviews It is recognised that 30 days may be too soon to adequately determine the level of impairment provision required. In the event that this is the case, a formal provision recommendation will be provided in line with the quarterly finance loss review (FLR) process. ARU undertakes various actions on receipt of a newly-impaired customer file. These are outlined in full in the ARU checklist, which is completed on an individual basis. In addition to the four steps outlined above, actions arising from ARU classification include, but are not limited to: -  Amendment of the credit rating to a default rating. Change of reporting department to ARU. Account placed on non-accrual. Consideration to be given to a formal, external security review. Consideration to be given to a formal, external Independent Business Review or valuation of the underlying assets. File is discussed at CCRC on an ad-hoc basis in line with any changes or business updates and is then subject to quarterly FLR. Internal rating and Probability of Default (PD) estimation process The Group’s independent Credit Risk Department operates its internal rating models, which rates customers on a scale of 1 to 20. Credit ratings are subject to the following hierarchy: - ECAI (Moody’s, and Fitch only) long-term issuer rating - Moody’s Creditedge rating (to be mapped to BLME Internal rating). - Moody’s RiskCalc / Moody’s CRE Model - Manual Rating The Group’s Internal Credit Ratings follow a numerical scale and are equated to ECAI ratings in accordance with the BLME Internal Credit Ratings Scale. It is the responsibility of the 1 LOD to populate and propose Credit ratings, with these then challenged and analysed by the Credit Risk department. Formal approval of an individual credit rating is the responsibility of the relevant delegated authority holder, in all cases being the most senior signatory to such a proposal. Customers with a BLME Internal Credit Rating greater than 17 are considered to be in default. 36
37. Non-Investment Grade “Junk” Investment Grade Fitch a. AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC+ CC CCC+ C CD Moody's Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca1 Ca2 Ca3 C1 C2 C3 D BLME (Internal Ratings) aaa aa+ aa aaa+ a abbb+ bbb bbbbb+ bb bbb+ b bccc+ ccc cccd d d d d d d 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 17 17 18 18 18 19 19 19 20 Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty is not able to pay capital and/or profit, or otherwise meet its contractual obligations under credit facilities or in respect of other agreements. This risk is managed in accordance with the Group’s Credit Risk Management Policy. The Group has a credit review process in place covering all its customers and counterparties whereby it assigns an in-house rating and maximum permitted tenor. External rating agency ratings are used where available. Ratings are subject to regular review as is the amount of credit that can be made available to the risk counterparty. i. Management of credit risk The Group manages credit risk by the use of Portfolio Limits and Commercial Guidelines (“CGs”) within the Group’s Credit Risk Management Policy. These sector and business based expressions of credit risk appetite provide guidance on the acceptable level of credit exposure by counterparty rating, country and sector, including the adequacy of collateral. Credit risks are monitored on a daily basis and are regularly re-assessed for creditworthiness. The Board Credit Committee is a sub-committee of Board Risk Committee (BRC) established to review and agree decisions made by the CCRC that are outside of stated risk appetite and/or meet other escalation criteria. A separate Credit Risk Department, accountable to the CCRC, is responsible for oversight of the Group’s credit risk, including: 37
38.       Formulating credit policies in consultation with other business units, covering credit assessments, collateral requirements, risk reporting, legal requirements and compliance with regulatory and statutory requirements Establishing authorisation limits and structures for the approval and renewal of credit exposure limits Reviewing and assessing credit risk prior to agreements being entered into with customers Establishing limits for counterparties and reviewing these limits On-going assessment of exposure and implementation of procedures to reduce this exposure Providing advice, guidance and specialist skills to all business areas throughout the Group in the management of credit risk Adherence to country and counterparty limits is monitored on an on-going basis by the Group’s Credit Risk Department, with a detailed review of all limits being undertaken at least annually. Senior management receives regular reports on the utilisation of these limits. The Group also employs a credit grading system, to facilitate monitoring of the quality of the overall portfolio and individual segments. ii. Exposure by Statement of Financial Position line The tables below present the Group’s exposure to credit risk on balance sheet financial instruments as at 30 June 2019, before taking account of any collateral held or other credit enhancements. The amounts at the current reporting date are indicative of the amounts at risk throughout the period. Group Cash and balances with banks Due from financial institutions Wakala Due from Customer Investment securities Financing arrangements Finance lease receivables Other assets (Foreign exchange forward deals) Profit rate swaps Total credit exposure At 30 June 2019 £000 84,369 At 31 December 2018 £000 104,339 34,653 10,888 95,292 752,100 357,082 1,451 1,335,835 8,045 14,612 103,872 737,522 256,198 1,154 73 1,225,815 As at 30 June 2019 there were 12 letters of credit (£8,150k) and 4 guarantees (£2,947k) (31 December 2018: 11 letters of credit (£14,232k) and 3 guarantees (£2,162k)) with a total exposure of £11 million (31 December 2018: £16 million). These letters of credit and guarantees mainly relate to short dated Trade Finance and Corporate and Asset Finance facilities with a maturity of less than twelve months. BLME is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. BLME expects most guarantees it provides to expire unused. In addition, BLME has a credit exposure to £157m in undrawn commitments (31 December 2018: £121m). 38
39. iii . Exposure by country of the financed counterparty The Group’s exposure to credit risk at balance sheet date was dispersed across the following countries: Group At 30 June 2019 £000 At 31 December 2018 £000 GCC countries Bahrain Kuwait Qatar Saudi Arabia United Arab Emirates 1,390 108,545 15,501 77,554 17,208 5,669 94,292 41,890 77,829 15,473 EEA countries Belgium Netherlands United Kingdom Ireland France 998,608 1,529 1,618 633 2,398 864,490 - 2,720 6,158 17,113 36,607 1,771 49,513 1,335,835 3,060 230 16,716 36,691 2,103 64,341 1,225,815 Other countries Cayman Islands Japan Canada Switzerland Jersey New Zealand USA Total credit exposure 39
40. iv . Exposure by economic sector The Group’s exposure to credit risk at balance sheet date was dispersed across the following economic sectors: Group Financial services GCC financial institutions UK financial institutions Other financial institutions Mining and quarrying Manufacturing Real estate Transportation and storage Government Wholesale / Retail Commodities Energy Construction Others Total credit exposure v. At 30 June 2019 £000 At 31 December 2018 £000 133,748 145,761 45,613 6,108 38,646 359,720 56,385 44,296 157,629 38,540 14,644 164,578 130,167 1,335,835 162,854 130,696 49,647 4,806 50,508 309,876 41,059 46,486 127,555 86,047 13,247 117,149 85,885 1,225,815 Credit risk quality The Group’s credit quality and direct investments are managed by CCRC and the Assets & Liabilities Committee (ALCO) respectively, under the oversight of the Executive Committee and, in the case of CCRC, under the oversight of BCC. Credit quality is assessed using techniques that include information from the major External Credit Assessment Institutions (ECAI) as well as internal ratings for customers who are not externally rated. The table below shows the breakdown of credit quality as at 30 June 2019. Of the total portfolio 15% (31 December 2018: 19%) was directly rated by at least one of the ECAI, with 85% (31 December 2018: 81%) using internal ratings. For counterparties not rated by the major ECAI the Group determines underlying counterparty credit quality by use of rating agency systems including Moody’s CreditEdge and Real Estate Models and its internal credit rating procedures. These procedures assess in combination, the financial and managerial strength, business model robustness, collateral value and availability and the sector and geography of the counterparty concerned. Following this assessment an internal rating is allocated. 40
41. At 30 June 2019 Neither Past Due Nor Impaired ECAI Rating BLME Internal Rating Investment Sub- Investment Sub- Ungraded Past due but not Individually Grade Investment Grade Investment impaired Impaired Grade equivalent Grade Total £000 83,631 26,791 - £000 - £000 7,862 10,531 £000 - £000 738 357 £000 - £000 - £000 84,369 34,653 10,888 32,189 - - - - - - 32,189 Other Investment securities 57,420 - - 341 - - - 57,761 Government debt securities Other Investment securities Financing arrangements Finance lease receivables Other assets (Foreign exchange forward deals) Total credit exposure 3,951 - 1,391 - 399,755 153,802 277,898 179,726 43,234 20,751 15,007 1,800 16,206 1,003 3,951 1,391 752,100 357,082 1,428 - 23 - - - - 1,451 205,410 1,391 571,973 457,965 65,080 16,807 17,209 1,335,835 Cash and balances with banks Due from financial institutions Due from customers Investment secutities FVOCI Government debt securities AC At 31 December 2018 Cash and balances with banks Due from financial institutions Due from customers Investment securities FVOCI Government debt securities Other Investment securities AC Government debt securities Other Investment securities Financing arrangements Finance lease receivables Other assets (Foreign exchange forward deals) Profit rate swaps Total credit exposure Neither Past Due Nor Impaired ECAI Rating BLME Internal Rating Investment Sub- Investment Sub- Ungraded Past due but not Individually Grade Investment Grade Investment impaired Impaired Grade equivalent Grade Total £000 104,339 - £000 - £000 8,045 14,612 £000 - £000 - £000 - £000 - £000 104,339 8,045 14,612 31,839 62,055 - - 341 - - - 31,839 62,396 3,953 21,538 - 5,684 - 384,676 103,662 251,615 139,418 50,660 5,327 22,510 552 6,523 7,239 9,637 737,522 256,198 - - 1,149 5 - - - 1,154 73 - - - - - - 73 223,797 5,684 512,144 391,379 55,987 23,062 13,762 1,225,815 The Group’s cash balances, amounts due from financial institutions and customers and investment securities were neither past due nor impaired as at 30 June 2019 and 31 December 2018. 41
42. vi . Analysis of past due amounts and impairments Group Neither past due nor impaired Past due but not impaired Gross exposure associated with impairment provision Less: allowance for impairments Total Financing arrangements At 30 June At 31 December 2019 2018 Finance Leases At 30 June At 31 December 2019 2018 £000 728,710 15,007 £000 706,723 22,510 £000 355,253 1,800 £000 249,756 552 16,206 16,216 1,003 7,239 (7,823) 752,100 (7,927) 737,522 (974) 357,082 (1,349) 256,198 £000 15,007 15,007 £000 7,565 8,430 6,515 22,510 £000 1,739 15 8 38 1,800 £000 535 17 552 Past due but not impaired Past due up to 30 days Past due 30 to 60 days Past due 60 to 90 days Past due over 90 days Total The past due but not impaired balances as at 30 June 2019 include £15 million (31 December 2018: £22.5 million) relating to two real estate transactions (31 December 2018: three) where the facility balances are lower than the collateral values. The Group believes that impairment is not appropriate on the basis of the level of security or collateral available and/or the stage of collection of amounts owed to the Group. An analysis of impairments is provided in Note 8 “Impairment of financial assets”. vii. Fair value of financial assets and liabilities We have not identified any material movements between fair value and carrying value for our assets. viii. Valuation of financial instruments Level 1: Valuation is based upon quoted market price in an active market for an identical instrument. Level 2: Valuation techniques are primarily based upon observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Valuation techniques using significant unobservable inputs. Further detail on the Group’s fair value measurement techniques can be found in Note 3b of the Group’s annual financial statements for the year ended 31 December 2018. 42
43. The table below analyses financial instruments measured at fair value at the end of the reporting period , by the fair value hierarchy. At 30 June 2019 Investment securities Profit rate swaps (asset) Foreign exchange forward deals (assets) Profit rate swaps (liability) Foreign exchange forward deals (liabilities) At 31 December 2018 Investment securities Profit rate swaps (asset) Foreign exchange forward deals (assets) Profit rate swaps (liability) Foreign exchange forward deals (liabilities) Level 1 £000 89,609 - Level 2 £000 - Level 3 £000 341 - Total £000 89,950 - - 1,451 - 1,451 - 1,628 - 1,628 - 2,381 - 2,381 2018 Level 1 £000 93,894 - 2018 Level 2 £000 73 2018 Level 3 £000 341 - 2018 Total £000 94,235 73 - 1,154 - 1,154 - 469 - 469 - 237 - 237 During the six month period ended 30 June 2019, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurements (31 December 2018: none). Transfers between levels would occur at the date of the event or change in circumstances that caused the transfer. The level 3 investment securities’ market value is determined by using prices and other relevant information generated by market transactions involving the individual security and/or identical or comparable securities. The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy. Investment securities 6 months to 30 June 2019 £000 341 Year to 31 December 2018 £000 973 Total gains / (losses) recognised in: - profit or loss* - other comprehensive income** - 20 (195) Sales - (457) 341 341 Balance at 1 January Balance at 31 December * This amount is included in “net investment loss” in the income statement ** This amount is included in “net gain/(losses) on financial assets measured at FVOCI” in the statement of comprehensive income 43
44. ix . Financial assets and financial liabilities Financial assets and financial liabilities comprise cash and cash equivalents, amounts due from / to financial institutions and customers, investment securities, financing arrangements, finance lease receivables and certain Sharia’a compliant derivative financial instruments. b. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due, arising from the differing maturity profile of its assets and liabilities. This risk is managed by ensuring that the Group has sufficient liquidity to meet its liabilities as and when they fall due. Liquidity risk also includes the funding concentration risk which is the risk associated to the dependence on a single or limited number of counterparties to provide funding for the Group’s activities. i. Residual contractual maturities of financial assets At 30 June 2019 Cash and balances with banks Due from financial institutions Due from customers Investment securities Financing arrangements Finance lease receivables Other assets (Foreign exchange forward deals) Profit rate swaps (asset) At 31 December 2018 Cash and balances with banks Due from financial institutions Due from customers Investment securities Financing arrangements Finance lease receivables Other assets (Foreign exchange forward deals) Profit rate swaps (asset) Less than 1-3 3 - 12 1-5 5+ 1 month months months years years £000 £000 £000 £000 £000 £000 84,369 - - - - 84,369 35,014 - 8,219 - - 43,233 10,535 20,461 9,071 783 69,716 - 10,535 100,031 424,533 11,727 214,800 24,685 61,455 102,709 51,928 235,597 7,147 8,426 759,863 383,144 1,450 1 - - - 1,451 588,089 248,557 173,166 357,241 15,573 1,382,626 Total Total Less than 1-3 3 - 12 1-5 5+ 1 month months months years years £000 £000 £000 £000 £000 £000 104,339 - - - - 104,339 - 8,218 - - - 8,218 14,627 456 40,133 29,370 38,789 146 14,627 108,894 408,511 239,617 67,256 34,858 - 750,242 6,847 17,505 83,064 162,921 5,105 275,442 336 819 - - - 1,155 64 59,777 94 15,415 - 75,350 535,180 366,069 179,784 251,983 5,251 1,338,267 The tables above show the contractual, undiscounted cash flows of the Group’s financial assets. 44
45. None of the Group ’s assets have been pledged as collateral apart from cash collateral deposits of £0.04 million (31 December 2018: £0.05 million) pledged as security against rental payments on the Group’s premises. ii. Residual contractual maturities of financial liabilities At 30 June 2019 Due to financial institutions Due to customers Profit rate swaps Other liabilities (Foreign exchange forward deals) At 31 December 2018 Due to financial institutions Due to customers Profit rate swaps Other liabilities (Foreign exchange forward deals) Less than 1-3 3 - 12 1-5 5+ 1 month months months years years £000 £000 £000 £000 £000 £000 213,554 186,589 249,274 - - 649,417 59,886 45,653 243,036 146,534 4,036 499,145 - 317 115 1,196 - 1,628 2,380 1 - - - 2,381 275,820 232,560 492,425 147,730 4,036 1,152,571 Total Less than 1-3 3 - 12 1-5 5+ 1 month months months years years £000 £000 £000 £000 £ £000 182,138 174,608 321,080 - - 677,826 41,451 137,676 105,829 85,748 697 371,401 - 135 249 85 - 469 3 234 - - - 237 223,592 312,653 427,158 85,833 697 1,049,933 Total The tables above show the contractual, undiscounted cash flows of the Group’s financial liabilities. Whilst BLME has sufficient assets in the short dated time buckets to cover its short dated liabilities as they become due, it also holds a significant High Quality Liquid Assets (“HQLA”) of £90 million as at 30 June 2019 (31 December 2018: £76.1 million). These HQLA holdings have been greater than the regulatory liquidity requirement throughout the period. c. Market risks Market risk is the risk that changes in market prices will affect income. It covers profit rate risk, credit spread risk, equity price risk and foreign exchange risk. The credit spread risk only pertains to the part that is not related to the issuer’s / obligor’s credit standing as that part is already covered in credit risk. i. Profit rate risk This risk arises from the effects of changes in profit rates on the re-pricing of assets and liabilities, and covers both fixed and variable profit rates. The Group manages such risks through the use of time based limits that measure the profit rate sensitivity to changes in profit rates. As at 30 June 2019, the Group’s net profit rate sensitivity to profit and loss on its fixed and variable rate assets, and its capital and reserves, as measured by the discounted value of a one basis point change in market rates, was £10,901 45
46. (31 December 2018: £21,511). The impact of an increase / decrease of 100 basis points in profit rates at the statement of financial position date, subject to a minimum rate of 0%, would be as follows: At 30 June 2019 At 31 December 2018 Increase of 100 bp £000 Decrease of 100 bp £000 Increase of 100 bp £000 Decrease of 100 bp £000 Increase of 100 bp £000 Decrease of 100 bp £000 6,766 6,476 - 6,214 5,934 3,186 3,300 - 2,968 3,067 6,182 5,946 - 5,884 5,522 Increase in profit & loss Decrease in profit & loss Increase in equity Decrease in equity ii. At 30 June 2018 Foreign exchange risk Foreign exchange risk is the risk that the value of a non-Sterling asset or liability position will fluctuate due to changes in currency rates. The Bank does not take significant foreign exchange positions and the majority of risk relates to earnings on US Dollar assets and US Dollar liabilities whose maturities are broadly matched. The Board has established position and stop loss limits to ensure that positions and revaluation results are subject to independent daily monitoring and reporting to senior management. Res ul ta nt forei gn excha nge reva l ua ti on (l os s ) / ga i n from a 10% s trengtheni ng or wea keni ng of the net forei gn currency pos i ti ons a ga i ns t Sterl i ng Net forei gn excha nge ga i n for the peri od iii. At 30 June 2019 £000 At 31 December 2018 £000 (79) (85) 6 months to 30 June 2019 £000 Year to 31 December 2018 £000 158 173 Equity price risk Equity prices are monitored by the Group’s Assets & Liabilities Committee (“ALCO”) but due to the limited exposure to equity price risk, the sensitivity risk is not currently significant in relation to the overall results and financial position of the Group. d. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The responsibility for the operating framework for risk governance rests with the Board. This extends to determining risk appetite in line with the Bank’s strategy and ensuring that there is a clearly defined risk management structure with distinct roles and responsibilities that allow risks to be monitored, controlled and reported effectively. Risk governance is underpinned by ensuring that the Board and its committees are provided with transparent and risk sensitive reporting to facilitate their accountabilities and decision making. The Operational Risk Policy is built around 46
47. the three lines of defence model . This Policy has been approved and is periodically reviewed by the Risk Committees of the Board. Senior Management ensures the identification and assessment of operational risk through a Risk and Control SelfAssessment (“RCSA”) process. Technology risk (including Cyber Security and Information Risk) surrounding core banking systems is perceived to be the area of risk that concerns most business areas and is compounded by a high inherent End User Computing risk. Operational Risk events are reported through a centralised risk management system accessible to all staff; the resolution of an event is monitored by a network of operational risk ‘champions’ located within each business unit and support function. Basel III requires capital to be retained for operational risk, which the Group has calculated to be £5.7 million using the Basic Indicator Approach (31 December 2018: £6.2 million) (unaudited). e. Capital risk Capital risk is the risk that low risk adjusted returns or stress events reduce the Bank’s profitability, which result in a reduction in available capital. This could potentially lead to a breach in the Bank’s regulatory capital requirements. Capital adequacy and capital risk was assessed during the 2019 ICAAP process, which showed BLME’s internal assessment of capital requirements was sufficient to cover the capital requirements set by the Prudential Regulation Authority (“PRA”). At 30 June 2019 and throughout the period BLME complied with the capital requirements that were in force as set out by the PRA. In addition, the Brexit risk to the Group is regularly reviewed at the ERC and BRC meetings. Further information regarding BLME’s approach to risk management and its capital adequacy are contained in the unaudited disclosures made under the requirements of Basel III (the Pillar 3 disclosures) which can be found in the Investor Relations section of the BLME website www.blme.com. 21. INTERIM REPORT AND STATUTORY ACCOUNTS The information in this interim report is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. This interim report was approved by the Board of Directors on 21 August 2019. The statutory accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies for England and Wales in accordance with section 446 of the Companies Act 2006. 47
48. GLOSSARY OF ABBREVIATIONS This is complete glossary of the abbreviations used in 31 December 2018 year-end financial statements and for the half year ended 30 June 2019 condensed financial statements . AED AFS AGM ALCO AML ARU ASOP Basel BCC BLME BLMEH BREEAM BRC CCR CCRC CEO CET1 CFO CGs CIC COO CRD IV CRO DABS DCF DFSA DIFC DIPs DVP EBT ECAI ECL EPS ERC EU EWI EXCO EY FCA FI FLR FRC FVOCI FVPL FX GCC GDPR HTM IAS IASB ICAAP ICG Arab Emirate Dirham Available-for-Sale Annual General Meeting Assets & Liabilities Committee Anti-Money Laundering Asset Recovery Unit Approved Share Option Plan Basel Accord or Basel Standards Board Credit Committee Bank of London and The Middle East plc BLME Holdings plc Building Research Establishment Environmental Assessment Method Board Risk Committee Counterparty Credit Risk Counterparty Credit Risk Committee Chief Executive Officer Common Equity Tier 1 Chief Financial Officer Commercial Guidelines Change Implementation Committee Chief Operating Officer Capital Requirements Directive IV Chief Risk Officer Deferred Annual Bonus Scheme Discounted cash flow Dubai Financial Services Authority Dubai International Financial Centre Deferred Incentive Plan Scheme Delivery versus payment Employee Benefit Trust External Credit Assessment Institutions Expected Credit Loss Earnings Per Share Executive Risk Committee European Union Early Warning Indicators Executive Committee Ernst & Young LLP Financial Conduct Authority Financial Institution Finance loss review Financial Reporting Council Fair Value Through Other Comprehensive Income Fair Value Through Profit or Loss Foreign Exchange Gulf Cooperation Council General Data Protection Regulation Held to Maturity International Accounting Standard International Accounting Standard Board Internal Capital Adequacy Assessment Process Individual Capital Guidance 48
49. IFRIC IFRS ILAAP INED ISA KYC LAB LGD LLP LOD MBA MCOBs MENA MIFID MLRO NCI NEDs NPF OCI ORC PC PD PDA PIFSS PRA PRR PRS PVO1 RMF RRP RSCA SE SIC SID SM &CR SSB UAE UK USA USOP WMIC International Financial Reporting Interpretations Committee of the IASB International Financial Reporting Standard Individual Liquidity Adequacy Assessment Process Independent Non-executive Director International Standards on Auditing Know Your Customer Liquid Asset Buffer Loss Given Default Limited Liability Partnership Lines of Defence Master of Business Administration Mortgage and Home Finance Conduct of Business rules Middle East and North Africa Markets in Financial Instruments Directive Money Laundering Reporting Officer Non-Controlling Interest Non-executive Directors Non-performing finance Other Comprehensive Income Operational Risk Committee Product Committee Probability of default Premier Deposit Account Public Institution for Social Security Prudential Regulation Authority Position Risk Requirement Profit Rate Swap Present Value to 1 basis point Risk Management Framework Recovery and Resolution Planning Risk Control Self-Assessment Structured Entities Standard Interpretations Committee of the IASB Senior Independent Director Senior Managers and Certification Regime Sharia’a Supervisory Board United Arab Emirates United Kingdom United States of America Unapproved Share Option Plan Wealth Management Investment Committee Naming convention and abbreviations: In this document, the expression “the Company” refers to BLME Holdings plc which is the ultimate parent Company of the BLME Group and is listed on Nasdaq Dubai. The expression “the Group” or “the BLME Group” refers to BLME Holdings plc and its subsidiaries. The name of the principal subsidiary, Bank of London and The Middle East plc is shortened to “BLME” or “the Bank” in narrative text. 49
50. GLOSSARY OF ISLAMIC FINANCE TERMINOLOGY Murabaha A Murabaha contract is a deferred sale of goods at cost plus an agreed profit mark-up under which one party purchases goods from a supplier and sells the goods to another party at cost price plus an agreed mark-up . The delivery of the goods is immediate whilst payment is deferred. Murabaha has a variety of applications and is often used as a financing arrangement, for instance for working capital and trade finance. Commodity Murabaha A Commodity Murabaha contract (a subset of Murabaha) is often used as a liquidity management tool by financial institutions. The Commodity Murabaha is today the mainstay of the Islamic interbank short term liquidity market. In these transactions the commodity, usually a London Metal Exchange base metal, is sold on a deferred basis with a mark-up. The mark-up is close to conventional money market levels. Wakala Wakala means agency and is often used in an arrangement where one party (the principal) places funds with another (the agent). The agent invests funds on the behalf of the principal for an agreed fee or profit share. Ijara An Ijara is a contract allowing the granting of the right to use an asset by one party to another which equates to the leasing of an asset in return for rental payments. Ijara is typically used for medium to long term financing of real estate, equipment, machinery, vehicles, vessels or aircraft. Mudaraba A Mudaraba is a partnership contract in which a capital owner (Rab al Mal) enters into a contract with a partner (Mudarib) to undertake a specific business or project. The Mudarib provides the labour or expertise to undertake a business or activity. Profits are shared on a pre-agreed ratio but losses are borne by the Rab al Mal unless negligence of the Mudarib is demonstrated. Musharaka An agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others. All providers of capital are entitled to participate in the management but not necessarily required to do so. The profit is distributed among the partners in predetermined ratios, while the loss is borne by each partner in proportion to his/her contribution. Sukuk Sukuk (also referred to as Islamic bonds) are certificates that reflect ownership in an underlying asset. Profits are calculated according to the performance of the underlying asset or project. Sukuk are usually issued by Structured Entities (“SE”) which are set up to acquire and to issue financial claims on the assets. Such financial claims represent a proportionate beneficial ownership for a defined period when the risk and the return associated with cash-flows generated by the underlying asset are passed to the Sukuk holders. Sukuk are commonly used as funding and investment tools. Istisna An Istisna contract is usually used for construction finance. The asset is not in existence at the start of the contract and is built or manufactured according to detailed specifications defined by the client, and delivered at the agreed date and price. Payment is deferred. Istisna contracts are commonly applied in project finance, construction finance and pre-export finance where the bank acts as an intermediary between the producer and the ultimate client. Profit rate swaps A profit rate swap is a contract between two parties where each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty providing a means of exchanging fixed rate profit rate risk for floating rate risk – or vice versa. Participation agreement A participation agreement is an agreement executed between the relevant SE and the Bank. The main objective of this agreement is to facilitate the required funding to enable the SE to acquire leased assets or investment property and to convey the beneficial ownership of the asset to the Bank. Under this agreement the risks and rewards are transferred to the Bank and the SE is indemnified against actual losses that arise as a result of any lease transaction it enters into except in cases where it misappropriates any funds. Zakat Zakat is an a legitimate obligation to donate a proportion on certain kinds of wealth each year to certain deserving classes of recipients prescribed for in accordance with the principles of Sharia’a. The purpose of Zakat is to make society coherent so that the rich feel the suffering of the poor and the needy in society. Zakat is paid by Muslims who have wealth above a certain threshold. Zakat is paid on "shares" and shareholders of BLME are responsible for paying Zakat on their shareholding. Fatwa Islamic law given by a recognised authority 50
51. COMPANY INFORMATION BLME Holdings plc and Bank of London and The Middle East plc Registered Office Cannon Place 78 Cannon Street London EC4N 6HL Tel : +44 (0) 20 7618 0000 Fax: +44 (0) 20 7618 0001 Email: info@blme.com Website: www.blme.com Bank of London and The Middle East plc Commercial Finance Regional office Lowry House 17 Marble Street Manchester M2 3AW Tel: +44 (0) 16 1661 4575 Email: info@blme.com Website: www.blme.com Bank of London and The Middle East plc DIFC Branch Office No 2904, Level 29 Tower 2, Al Fattan Currency House, Dubai International Financial Centre, P.O. Box 506557 Dubai, UAE Tel: + 971 (0) 4 365 0700 Fax: + 971 (0) 4 365 0799 Email: info@blme.com Website: www.blme.com Auditors: Ernst & Young LLP Chartered Accountants 25 Churchill Place London E14 5EY Website: www.ey.com 51