Commercial Bank of Dubai: Annual Report 2018

Transcription

1. 2018 ANNUAL REPORT
3. His Highness Sheikh Khalifa bin Zayed Al Nahyan President of the UAE Ruler of Abu Dhabi His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum Crown Prince of Dubai His Highness Sheikh Mohammed bin Rashid Al Maktoum Vice President and Prime Minister of the UAE Ruler of Dubai His Highness Sheikh Hamdan bin Rashid Al Maktoum Deputy Ruler of Dubai Minister of Finance of the UAE His Highness Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum Deputy Ruler of Dubai
4. Our Vision To be recognized as the best bank in the UAE by building on the strength of our relationships Our Mission To deliver a best in class value proposition that defines us as the bank of choice for our corporate clients servicing their related business and personal banking requirements Our Values Collaboration : One Bank together now Ownership: What we say, we do Delivery: Drive flawless execution through effective planning Excellence: Win together through service excellence 4 Commercial Bank of Dubai
5. Table of Contents Chairman ’s Message Board of Directors 6 8 Corporate Governance Framework 12 Directors’ Report 20 Executive Committee Major Indicators Report of the Auditors to the Shareholders Consolidated statement of financial position Consolidated statement of profit or loss Consolidated statement of profit or loss and other comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 19 29 32 40 41 42 43 44 45 Annual Report 2018 5
6. Chairman ’s Message Humaid Mohammad Al Qutami Chairman of the Board “ Dear Shareholders, CBD signed an innovation program agreement with PWC that will foster and promote innovation and help the bank provide an exceptional customer experience On behalf of the Board of Directors, it is my pleasure to present Commercial Bank of Dubai’s Annual Report for 2018, a year of remarkable achievements and results for the bank. Despite the economic challenges encountered, the bank was able to outperform as a result of the substantial efforts exerted in all our activities and the strategic decisions adopted by the bank’s management. Firstly, I present to you an overview of the economic conditions during 2018 and their impacts on the financial sector. With rising oil production and government spending as well as continued reforms to promote the private sector, the UAE economy is projected to strengthen and register 3.5% GDP growth in 2019. The UAE is forecast to achieve an average real GDP growth rate of 3.8 percent between 2019 and 2023, supported by an increase in investment flows and private consumption. Inflation is projected at 3.5 per cent in 2018 owing to the introduction of the value-added tax and should ease afterwards. “ The UAE, both at a federal and emirate level, has announced a host of reforms and initiatives to improve economic growth and more competitively position the country. This includes a reduction in license fees, an AED 50-billion stimulus package, 10-year visas for investors and professionals among others. Under the vision of the country’s prudent leadership, the UAE has quickly grown to become the second biggest economy in the Arab world and a prominent regional as well as international trade and investment hub, and we expect the reforms and initiatives to further improve growth in the country. In a highly competitive banking industry and despite a challenging economic environment for financial institutions, CBD posted a strong set of results for 2018 and net profit increased to AED 1.16 billion, representing 16% growth year on year, as total revenues reached over AED 2.7 billion. In addition, the bank achieved a 5% increase in net interest income to AED 1.91 billion and a 7.2% increase in Operating Profit. Operating expenses were AED 858 million, down 4.7% attributable to ongoing expense management and improved efficiency supported by digital transformation. The operating performance was also supported by higher non-interest income, lower expenses and an improved cost of risk. 6 Commercial Bank of Dubai
7. Additionally , as part of the bank’s corporate social responsibility (CSR) objectives, CBD has committed to continue to promote living healthier and happier lives for society, citizens, customers, shareholders, and the communities in which the organization does business. Our CSR policy is intended to promote a culture of social responsibility within the organization and contribute to the sustainable creation of value for all stakeholders. During the year, we continued our efforts to deliver on our strategy which is designed to promote and encourage the delivery of long-term benefits which enhance growth and revenue returns. In order to improve profitability in the challenging environment, CBD has continued to make gains in cost control across all divisions of the bank and has increasingly focused on productivity and innovation. This year, we signed an innovation program agreement with PWC that will foster and promote innovation and help the bank provide an exceptional customer experience. We plan to drive innovation and leverage cutting-edge technologies to deliver a world class customer experience across all segments including personal, corporate and commercial businesses. In 2018, CBD was recognized by various professional institutions for its strong financial performance and innovative banking products and services. We are proud of the fact that the bank was honored with the ‘Most Innovative Digital Bank in the UAE’ Award by International Finance, in addition to being recognized, for the third consecutive year, as the ‘Best Cash Management Bank in the UAE’ by Banker Middle East and ‘Best Online Cash Management Bank’ by Global Finance Magazine. We expect 2019 to be another challenging year for financial service providers. However, we are confident that our prudent business model shall continue to deliver a solid performance and deal with the opportunities and challenges that will present themselves. “ CBD was recognized by various professional institutions for its strong financial performance and innovative banking products and services “ Throughout the year, we continued our efforts to strengthen the foundations of our corporate governance as we firmly believe that strong governance is the key to our long term business performance and reinforces our reputation in the market as a transparent organization. We will continue to strengthen and grow our balance sheet with further improvements in capital, liquidity and credit quality to drive revenue and profit growth ahead of the market and deliver solid returns for our shareholders. We will continue our efforts in fostering a high-performance culture across the bank and to leverage technologies in order to deliver extraordinary service to our clients to improve efficiency and reduce costs. Our achievements in 2018 reflect our tireless efforts and dedication in our work to achieve the highest levels of excellence and leadership in all our transactions and activities. We look forward to the continued involvement of our board committees in helping the bank achieve its business goals. In conclusion, on behalf of the Board, I extend our sincere appreciation and gratitude to our shareholders and our valued customers for their trust and to the bank management team and employees for their continued dedication and commitment. Best Regards, Humaid Mohammad Al Qutami Chairman of the Board Annual Report 2018 7
8. Board of Directors H .E. Humaid Mohammad Obaid Al Qutami Chairman of the Board H.E. Humaid Al Qutami joined the CBD’s Board of Directors in March 2015. He is the Director General of Dubai Health Authority, Chairman of the Federal Authority for Government Human Resources, Chairman of the Board of Trustees of Hamdan Bin Rashid Al Maktoum Award for Distinguished Academic Performance, Chairman of the Board of Trustees of the Sharjah Voluntary Work award and Chairman of the Board of Directors of Emirates Transport and Services Corporation. Prior to which he has held the position of UAE’s Minister of Education, the UAE Minister of Health amongst many high other profile positions. H.E. Al Qutami holds a Master’s Degree in Administration from the Western Michigan University, USA. CBD Committee Membership: None Mr. Ahmad Abdulkarim Julfar Vice Chairman of the Board and Chairman of the Nomination and Remuneration Committee Mr. Ahmad Abdulkarim Julfar joined the CBD’s Board of Directors in March 2018. He has been also the Director of Emirates Integrated Telecommunications Company PJSC since March 2018. Mr. Julfar served as Group Chief Executive Officer of Etisalat from July 2011 to March 2016. He serves as a Director of The National Bank of Ras Al-Khaimah (P.S.C.). He has held a range of senior positions including Chairman of the Board of Directors of Thuraya Group and Etisalat Services Holding, as well as Deputy Chair of the GSM Association. He was named Telecom Leader of the Year in 2014 by the Mobile World Congress and CEO of the Year (Telecom) 2013 by CEO Middle East. In 2004, he was one of the first graduates of the Sheikh Mohammed Bin Rashid Al Maktoum Establishment for Young Business Leaders. He has also received degrees in Civil Engineering and Computer Science from the Gonzaga University in Washington, USA. CBD Committee Membership: • Chairman of the Nomination and Remuneration Committee • Member of the IT and Digital Banking Committee Mr. Abdulla Salim Alturifi Non-Executive Director and Chairman of the Financial Settlements and Recovery Committee Mr. Abdulla Salim Alturifi joined CBD’s Board of Directors in March 2018. Mr. Alturifi is the Chairman of the Sharjah Social Security Fund and Chairman of the Board of Trustees of the Sharjah Award for Doctoral Dissertations in Management Science. He is also a member of the Board of Directors of the Business Company of the American University of Sharjah. He was the Chief Executive Officer of the Securities and Commodities Authority (“SCA”) from 2003 to 2015. He was also the Chairman of Trustee of the SCA training center. He was appointed in 2007 until 2010 as the Secretary General of the Union of Arab Securities Commissions. He was also a Board member of the Emirates Industrial Bank in 2010-2011. He is the founder and first director of the Hamriyyah Industrial Free Zone. Mr. Alturifi holds a Bachelor of Business Administration and Political Science from the UAE University and the Honorary Fellowship of the Institute of Securities and Investment (CISI) in London. CBD Committee Membership: • Chairman of the Financial Settlements and Recovery Committee • Member of the Audit and Compliance Committee 8 Commercial Bank of Dubai
9. Mr . Abdulla Saif Al Hathboor Non-Executive Director Mr. Abdulla Al Hathboor joined the CBD’s Board of Directors in 2008. He is the Chairman and Managing Director of Al Hathboor Group LLC, a Board member of Best food Company and Al Jadeed/ Dubai Automatic Bakeries, Emirates Institute of Banking & Finance and Dubai Municipality Rent Committee. Mr. Al Hathboor holds a Bachelor’s degree in Accounting & Business Administration from the Al Ain University, UAE. CBD Committee Membership: • Member of the Nomination and Remuneration Committee • Member of the Credit and Investment Committee Mr. Abdul Wahed Al Fahim Non-Executive Director Mr. Abdul Wahed Al Fahim joined the CBD’s Board of Directors in March 2018. He is a board member of EGA since 2014. He also acts as the Chairman of NASDAQ Dubai Limited and serves as a board member of DUBAL Holding LLC, Union National Bank, Emirates Development Bank and Meydan City Corporation. Mr. Al Fahim has over 25 years of banking and finance experience with the Emirates NBD Group having served as a board member of both Emirates NBD Capital and Emirates NBD Asset Management. Mr. Al Fahim served as General Manager of both the Corporate and Wholesale Banking divisions of Emirates NBD Bank before his appointment as Group Deputy Chief Executive Officer of the bank in 2009. Mr. Al Fahim holds a Bachelor’s degree in Business Administration Management from St. Edward’s University. CBD Committee Membership: • Member of the Risk Committee • Member of the Credit and Investment Committee Mr. Ali Fardan Al Fardan Non-Executive Director Mr. Ali Al Fardan joined the CBD’s Board of Directors in 2011. He is currently the member of the Board of Directors of Al Mal Capital, Dubai Investment PJSC and Union Properties PJSC. He is the Vice Chairman of Naif Marine Services Co. PJSC, Vice Chairman of Al Fardan Holdings LLC, Vice Chairman of The First Investor LLC, the owner of Al Fardan Brands, Managing Director of Al Fardan Real Estate, and the Chairman of Carlton Hospitality and Management. Mr. Al Fardan holds a Bachelor of Science (Major in Information System) from the Metropolitan State College, USA. CBD Committee Membership: • Member of the Credit and Investment Committee Annual Report 2018 9
10. Board of Directors Mr . Buti Saeed Al Ghandi Non-Executive Director and Chairman of the Credit and Investment Committee Mr. Buti Saeed Al Ghandi joined the CBD’s Board of Directors in 2015. Mr. Al Ghandi serves as the Managing Director of Al Ghandi Investment Co. and as Chairman of the Board of Emirates Investment and Development Company PSC. He is also the Managing Director of Meethaq Employment Agency, Chancellor of the Canadian University of Dubai and Vice Chairman of Dubai World Trade Centre. He holds directorships on the Board of the Dubai Chamber of Commerce. He was a member of the Board of Zakat Fund and served as a Director of Union National Bank PJSC, Oman Insurance Company, Dubai Islamic Bank and Union National Bank in Egypt. Mr. Al Ghandi holds a Bachelor’s Degree in Business Administration & Finance from George Washington University, USA. CBD Committee Membership: • Chairman of the Credit and Investment Committee • Member of the Nomination and Remuneration Committee • Member of the Financial Settlements and Recovery Committee Mr. Hamed Ahmed Kazim Non-Executive Director and Chairman of the Information Technology and Digital Banking Committee Mr. Hamed Kazim joined the CBD’s Board of Directors in March 2012. He is the owner of Hamed Kazim Consultancy, his own advisory practice, advising major groups and international firms. Mr. Kazim is also a member of the Board of Larsen & Toubro (India), Franklin Templeton Middle East and a Senior Advisor to PricewaterHouseCoopers. Prior to this Mr. Kazim was the Managing partner of Andersen Dubai and served on the Board of ESCA. Mr. Kazim holds a B.A. in Economics and minor in Electronic Engineering from the University of California, San Diego, USA. CBD Committee Membership: • Chairman of the IT and Digital Banking Committee • Member of the Audit and Compliance Committee • Member of the Risk Committee Mr. Khalid Abdul Wahed Al Rostamani Non-Executive Director Mr. Khalid Abdul Wahed Al Rostamani joined the CBD’s Board of Directors in March 2008. He was appointed as Deputy Chairman to the Board of Commercial Bank of Dubai in 2012. Mr. Al Rostamani is the Vice Chairman of the A.W. Rostamani Group of Companies and a founder and Chairman of BCD Travel, Transport and Freight Forwarding. He is also a Board Director of Dubai Insurance Company (P.S.C.) and Etisalat. Mr. Al Rostamani holds a Bachelor’s degree in Finance from the George Washington University, USA. CBD Committee Membership: • Member of the Risk Committee • Member of the Credit and Investment Committee 10 Commercial Bank of Dubai
11. Dr . Omar Mohamed Alqaizi Non-Executive Director and Chairman of the Audit and Compliance Committee Dr. Omar Mohamed Alqaizi joined the CBD’s Board of Directors in March 2018. Dr. Alqaizi has an accomplished track record in the banking regulatory sector. Prior to this, he was the Executive Director in Central Bank of the UAE for 15 years and was an active member of the Executive Committee that was chaired by the Governor of UAE Central Bank. Dr. Alqaizi participated in national and international training programs such as UAE Government Leadership Program, Federal Reserve Bank training program, Bank for International Settlements program and many others including programs at DUKE, INSEAD, Ashridge and Harvard University. Dr. Alqaizi holds a Master and Ph.D. in Business Management from Ain Shams University in Egypt. CBD Committee Membership: • Chairman of the Audit and Compliance Committee • Member of the Financial Settlements and Recovery Committee H.H. Sheikh Maktoum Hasher Al Maktoum Non-Executive Director and Chairman of the Risk Committee H.H. Sheikh Maktoum Hasher Al Maktoum joined the CBD’s Board of Directors in March 2015. He founded A1 Grand Prix Limited in 2001 and served as its Chairman and President. He is currently the Chief Executive Officer of Al Fajer Properties LLC. He served as an Executive Chairman of SHUAA Capital PSC from April 2012 to February 2015. He served as an Executive Chairman of Gulf Finance Corporation PJSC. He serves as the Chairman of Dubai International Holding Company. He serves as a Director of Hult International Business School. He served also as Director of SHUAA Capital PSC from February 2011 to February 2015. He is also a Founding Investor of Virgin Megastores in the UAE. He has been recognized for his leadership qualities on a number of occasions, including being named “Chief Executive Officer of the Year” by Chief Executive Officer Middle East in 2009 and “Young Global Leader of 2007” by the World Economic Forum. He graduated with a Bachelor of Science degree in Business Administration and Finance from Boston University, USA CBD Committee Membership: • Chairman of the Risk Committee • Member of the Audit and Compliance Committee Annual Report 2018 11
12. Corporate Governance Framework Introduction This report describes the governance structures , practices and policies that the Commercial Bank of Dubai PSC (“CBD”) applies in order to ensure the independence and integrity of decision-making and associated governance controls. CBD’s Corporate Governance Report is based on UAE laws, the company’s Articles of Association and the written charters of the Board of Directors and its Committees and adheres to the highest standards of corporate governance. The Corporate Governance framework is created on the principle of fair treatment for all stakeholders with the aim of providing a basis for an inclusive relationship between the bank, its board of directors, its shareholders, customers, regulators and employees. The Corporate Governance Framework was audited in 2017 by the Financial Audit Authority (“FAA”) of the Government of Dubai. The results of the audit received in the first quarter of 2018 clearly classify the governance framework within CBD as “Structured”. The FAA has made various suggestions that were either taken into account immediately or implemented in this annual report. Our aim is to be classified as “Advanced” in the future. There is a clear division of roles and responsibilities between the board and management, and between the Chairman and the Chief Executive Officer. There are also clearly defined and documented mandates and delegations of authority for senior managers to ensure high standards of corporate governance contributing to our long-term success, encourage trust and engagement with our stakeholders, and to reinforce our culture. The Corporate Governance Framework is regularly reviewed and adjusted to reflect changes in the bank’s businesses, regulation, best practices and the external environment. The Board of Directors Board Composition, Appointment and Tenure Commercial Bank of Dubai is a Public Shareholding Company (PSC) established under the laws of the United Arab Emirates in accordance with Law No.2 of 2015 related to Commercial Companies. As per Article 19 of its Articles of Association, the bank is overseen by a Board of Directors consisting of eleven directors: a Chairman, a Vice-Chairman and nine other directors. Each director shall hold their position for a term of three years and at the end of such term, the director’s position is elected by the shareholders. During the General Assembly held on 20th of March 2018, an election of the board members was held: 9 directors were elected with 2 directors appointed by the Investment Corporation of Dubai. Overall, 7 directors were re-elected and 4 new members joined the board. Board Membership Executive/ Non-Executive Election/ Nomination During this Term Board Member Since Non-Executive Elected as Board Member on 20 March 2018 and elected as Chairman of the Board on 8 April 2018 March 2015 Ahmad Abdulkarim Julfar Non-Executive Appointed by Investment Corporation of Dubai as Board Member on 20 March 2018 and March 2018 elected as Vice-Chairman of the Board on 8 April 2018 Abdulla Salim Alturifi Non-Executive Elected as Board Member on 20 March 2018 March 2018 Abdulla Saif Al Hathboor Non-Executive Elected as Board Member on 20 March 2008 March 2018 Name of the Director Humaid Mohammad Obaid Al Qutami 12 Commercial Bank of Dubai
13. Corporate Governance Framework Name of the Director Executive / Non-Executive Election/ Nomination During this Term Board Member Since Abdul Wahed Al Fahim Non-Executive Appointed by Investment Corporation of Dubai as Board Member on 20 March 2018 March 2018 Ali Fardan Al Fardan Non-Executive Elected as Board Member on 20 March 2011 March 2018 Buti Saeed Al Ghandi Non-Executive Elected as Board Member on 20 March 2015 March 2018 Hamed Ahmed Kazim Non-Executive Elected as Board Member on 20 March 2012 March 2018 Khalid Abdul Wahed Al Rostamani Non-Executive Elected as Board Member on 20 March 2008 March 2018 Omar Mohamed Alqaizi Non-Executive Elected as Board Member on 20 March 2018 March 2018 Sheikh Maktoum Hasher Al Maktoum Non-Executive Elected as Board Member on 20 March 2015 March 2018 Board Induction The board has a clear and comprehensive induction policy. This introduction to the organizations and board operations allows new members to be properly informed, supported and welcomed to the board from the time of their appointment. The Chairman is responsible for the delivery of the induction process and the board may also wish to nominate a mentor among the board members to assist the newly appointed director. Newly appointed directors will have to complete the induction process and will be supplied with the necessary information, training and support to contribute appropriately to the CBD’s board. All of the four new directors participated in the board induction program in March 2018. Management of Conflict of Interest When performing their duties, there may be individual situations where board members face conflicts of interest. The board’s Charter specifies that the members are required to declare the nature and extent of any perceived conflict of interest in issues to be considered by the board. Should the board resolve that the conflict is a material issue, the interested member should not be present to discuss or vote over the resolution. It is the responsibility of all board members to declare any current or potential conflict of interest to the board at the beginning of any meeting. The same applies for committee meetings, in particular for the Credit and Investment Committee Meeting where the director is obliged to immediately notify the Chairman of the Committee or the secretary of the board of the existence of any conflict in approving any facility or investment and recuse himself from any discussion or voting on the matter. The same is duly recorded in the minutes of the committee meeting. Responsibilities of the Board of Directors The Board of Directors play an integral role for the company and its responsibilities include approving the company’s strategy; setting its risk appetite and risk management strategy; monitoring financial performance; establishing the corporate governance framework; and approving the company’s corporate values. Article 24 of the Articles of Association of the bank specifies the powers of the board. The main duties of the board are to: • Agree objectives, policies and strategies and monitor the performance of executive management; • Agree and set the overall strategic direction of the business for implementation by the management through the Executive Committee; • Keep under review the general progress and long-term development of the organization; • Control and monitor the financial state and performance of the organization; • Approve major expenditures and transactions including acquisitions, disposals and investments; • Ensure that the organization pursues sound and proper policies in relation to risk management and corporate governance; • Ensure an adequate system of controls (financial and otherwise) are in place; and • Ensure adequate succession, nomination and remuneration arrangements are in place. Annual Report 2018 13
14. Corporate Governance Framework Meetings The board and committees ’ meetings schedule and timings are established at the beginning of each year. The calendar of board and committee meetings is circulated in advance to facilitate board and committee members to plan their schedule and ensure meaningful participation in the meetings. Meetings may be re-scheduled if warranted and with the Chairman’s approval. The agenda for board meetings is prepared by the company secretary in liaison with the Chairman and the Chief Executive Officer. Board papers are circulated a week in advance of a meeting. The board of directors are required to consider topics that are fundamental to the direction of the bank, such as business performance, long-term planning, strategy, risk appetite and management, succession planning, and human resources. Board members receive a regular flow of information and reports relevant to the fulfillment of their role. Board papers encompass reports from the Chief Executive, Chief Financial Officer and others on a regular and planned basis. Formal minutes of the different committee meetings are included in the board pack and the Chairman of each committee gives an update to the board members at the beginning of each board meeting on important items discussed in the committee meeting. In 2018, the board held six meetings. The key business discussed at main board meetings throughout the year is detailed below: Board Meeting No. Date 1 7 February 2018 2 25 April 2018 3 11 June 2018 4 11 July 2018 5 17 October 2018 6 19 December 2018 Board Remuneration Main Topics • • • • • • • • • • • • • • • • • • • • • • • • • • Update on the committees’ meetings Approval of 2017 financial results Presentation of new senior management team Approval of the annual general meeting agenda Approval of the corporate social responsibility policy Approval of the stakeholders engagement policy Update on the committees’ meetings Approval of the Q1 2018 financial results Strategy update Update on personal banking group Corporate governance – Delegation of authorities to the Chairman of the board Update on the committees’ meetings Financial highlights and strategy update Update on the committees’ meetings Approval of the H1 2018 financial results Strategy update CBD 50th anniversary Update on the committees’ meetings Approval of the Q3 2018 financial results Strategy update Financial Audit Authority reports Approval of the wholesale credit policy Update on the committees’ meetings Financial highlights and strategy update Financial Strategic and Financial plan update for 2019 Corporate governance matters According to applicable laws and Article 60 of the bank’s Articles of Association, Directors’ remuneration shall not exceed 10% of the annual profit. As at 31 December 2018, the bank’s directors were not eligible for any bonus, longterm or other incentive schemes. Directors do not receive any pension benefits from the bank. 14 Commercial Bank of Dubai
15. Corporate Governance Framework Article 21 of the Resolution No .7 (R.M) of 2016 of the Chairman of the Securities and Commodities Authority’s Board of Directors concerning the Standards of Institutional Discipline and Governance of Public Shareholding Companies specifies that “attendance allowance may not be paid to the Chairman or a board member for attending the board meetings”. As a result, CBD no longer pays any sitting fees for board meetings. However, CBD does pay an amount of AED 20,000 as a sitting fee per meeting per director for attendance at the different committees. Directors’ remuneration is set annually by the bank’s shareholders based on a recommendation from the board. In 2017, board members received the amount of AED 11 million as remuneration. For 2018, the board recommends that directors’ remuneration be maintained at the same level. The proposal will be presented for approval during the Annual General Assembly to be held on the 20th of February 2019. Evaluation of the Board Performance The board evaluation process enables an open and candid evaluation effort of the board and its committees and helps in understanding and adopting areas of improvement. In 2016, the board engaged an external independent consultant to conduct a performance evaluation. Thereafter, the board undergoes a rigorous in-house performance evaluation in April of each year. In April 2019, the secretary to the board will coordinate the process of the evaluation of the board’s performance in 2018. External Audit KPMG, the external auditors, were appointed at the 2018 Annual General Meeting held on 20th of March 2018. Local laws restrict the external auditors’ tenure to no more than three consecutive renewals. KPMG is paid on a fixed annual fee basis, as approved by the shareholders at the AGM. In 2018, the audit fees for the bank and its subsidiaries amounted to AED 700,000. For 2019, the board of directors is recommending the reappointment of KPMG as the bank’s external auditors. CBD Directors’ Shareholdings Number of Shares in CBD as at 31/12/2017 Number of Shares in CBD  as at 31/12/2018 Change in Shareholding Humaid Mohammad Obaid Al Qutami Nil Nil Nil Ahmad Abdulkarim Julfar Nil Nil Nil Abdulla Salim Alturifi Nil Nil Nil 1,337,004 1,337,004 Nil Abdul Wahed Al Fahim Nil Nil Nil Ali Fardan Al Fardan Nil Nil Nil Buti Saeed Al Ghandi Nil Nil Nil Hamed Ahmed Kazim Nil Nil Nil 4,447,038 2,481,591  (1,965,447) Nil Nil Nil 136,722 136,722 Nil Director Abdulla Saif Al Hathboor Khalid Abdul Wahed Al Rostamani Omar Mohamed Alqaizi Sheikh Maktoum Hasher Al Maktoum Annual Report 2018 15
16. Corporate Governance Framework Board Committees Presentation Starting from March 2018 , the board of directors of CBD decided to create two additional committees: • Financial Settlements and Recovery Committee “FSRC”, and • Information Technology and Digital Banking Committee “ITDBC” Recovery and financial settlements are important to the performance of the bank. The UAE Central Bank puts the ultimate responsibility of recoveries on the directors. This committee was established with the aim of maximizing recoveries and increasing oversight from the directors. Moreover, as the banking industry improves mobile delivery and responds to new regulatory requirements, the need for technology expertise has never been greater. Hence, in a changing world where digitization is a key element, the establishment of a committee dedicated to Information Technology and Digital Banking shows the commitment from the board of directors to the digitization effort. The above committees are in addition to the existing four committees: • Credit and Investment Committee “CRIC” • Risk Committee “RC” • Audit and Compliance Committee “ACC” • Nomination and Remuneration Committee “REMCO” Each committee has its own terms of reference that are periodically reviewed to ensure that the committees’ role and duties are updated. Committees’ Composition Committee Member Position Credit and Investment Committee Mr. Buti Al Ghandi Mr. Abdulla Al Hathboor Mr. Ali Al Fardan Mr. Abdulwahed Al Fahim Mr. Khalid Al Rostamani Chairman Member Member Member Member Audit and Compliance Committee Mr. Omar Alqaizi Sheikh Maktoum Hasher Al Maktoum Mr. Hamed Kazim Mr. Abdulla Alturifi Chairman Member Member Member Risk Committee Sheikh Maktoum Hasher Al Maktoum Mr. Hamed Kazim Mr. Abdulwahed Al Fahim Mr. Khalid Al Rostamani Mr. Ahmad Julfar Chairman Member Member Member Member Nomination & Remuneration Committee Mr. Ahmad Julfar Mr. Abdulla Al Hathboor Mr. Buti Al Ghandi Chairman Member Member Mr. Abdulla Alturifi Mr. Omar Alqaizi Mr. Buti Al Ghandi Chairman Member Member Mr. Hamed Kazim Mr. Ahmad Julfar Chairman Member Financial Settlements and Recovery Committee Information Technology and Digital Banking Committee 16 Commercial Bank of Dubai
17. Corporate Governance Framework Committees ’ Responsibilities and Meetings Credit and Investment Committee The role of the Credit and Investment Committee is primarily to review the bank’s credit and investment portfolio and oversee the effectiveness and administration of credit related policies including the approval of applications and investments that are above management limits. The committee also approves investment policies and procedures and monitors compliance with the bank’s credit guidelines. The committee held 16 meetings in 2018. Risk Committee The Risk Committee in conjunction with the board is responsible for setting the overall risk appetite parameters and limits within which the bank may conduct its business. The committee monitors the risks inherent in the businesses of the bank and the control processes in regards to such risks, including market risk, credit, liquidity, fiduciary, regulatory, reputational, strategic and operational risks. The committee held 6 meetings in 2018. Audit and Compliance Committee The Audit and Compliance Committee’s key role is to ensure that the bank has a robust system of risk management, internal controls and compliance with legal and regulatory obligations. The committee regularly reviews the audit and compliance policies, procedures and the selection, appointment and independence of the external auditor to ensure there is appropriate transparency and disclosure to the board on operational risk to include reporting of any transaction that may be fraudulent. The committee held 6 meetings in 2018. Nomination and Remuneration Committee The Nomination and Remuneration Committee’s key focus is to ensure that the bank’s policies and procedures on remuneration, recruitment, retention, Emiratization, succession planning and performance are in line with the bank’s strategic goals and objectives and is competitive in order to attract and retain the best talent. The committee held 6 meetings in 2018. Financial Settlements and Recovery Committee The role of the Financial Settlements and Recovery Committee is primarily to provide oversight of the restructuring and recovery process. It approves large restructuring proposals related to borrowers managed by the Financial Recovery and Restructuring (FRR) department of the bank over and above management limits. The committee also oversees the bank’s approach to restructuring and recovery of exposures to stressed and defaulted clients. It assists and guides at the request of management in the restructuring and recovery process for large clients where access, information or visibility may be challenging. The committee held 8 meetings in 2018. Information Technology and Digital Banking Committee The committee assists the board in fulfilling its oversight responsibilities for the bank’s digitization program and related potential security risk issues. Furthermore, the committee explores with management the different digitization opportunities available to the bank. The committee held 2 meetings in 2018. Annual Report 2018 17
18. 18 Commercial Bank of Dubai
19. Executive Committee Dr . Bernd van Linder Chief Executive Officer Mr. Darren Clarke Chief Financial Officer Mr. Fahad Al Muhairi General Manager CBD Al Islami Mr. C. Krishna Kumar Chief Operating Officer Mr. Othman Bin Hendi General Manager Corporate Banking Mr. Abdul Rahim Al Nimer General Manager Commercial Banking Mr. Alan Grieve Chief Risk Officer Mr. Gareth Powell Chief Human Resources Officer Mr. Amit Malhotra General Manager Personal Banking Group Mr. Hassan Al Redha General Manager Institutional & Transaction Banking Mr. Mark Zanelli General Manager Treasury, Asset & Liability Management Annual Report 2018 19
20. Directors ’ Report Dear Shareholders, On behalf of Commercial Bank of Dubai (CBD), we have the pleasure of presenting our report together with the audited consolidated financial statements for the year ended 31 December 2018. The audited financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and include Basel II Pillar III annual disclosures. FINANCIAL HIGHLIGHTS CBD posted a strong set of results for 2018, lifting returns whilst delivering on our strategic agenda. The bank is investing in digital transformation, recruiting and retaining top talent to further enhance business capabilities and position itself as a key player in this evolving environment. Net Profit of AED 1,162 million for the year was 16% higher on the back of a 3.1% increase in operating income, a 4.7% decline in operating expenses and a 4.8% reduction in impairment allowances. Operating Income for 2018 amounted to AED 2,725 million, an increase of 3.1% due to a 5% increase in net interest income (NII) driven by loan growth, whilst other operating income (OOI) decreased slightly by 1%. Within OOI, foreign exchange income registered a 19.8% increase, other income increased by 51.3% and fees and commission income increased by 2.4% from 2017. Offsetting this was a decrease in investment income by 75.6% due to a one-off investment dividend received in 2017, not repeated in 2018. Operating Expenses of AED 858 million decreased by 4.7% driven by ongoing expense management and improved efficiency supported by digital transformation. The cost to income ratio improved to 31.5% (2017: 34.1%). Operating Profit grew by 7.2% as a result of higher revenues and expense optimization. Impairment Allowances were lower with an additional net impairment provision of AED 704 million set aside during the year in line with the bank’s prudent provisioning policy compared to AED 740 million for the prior year. (AED Million) Income Statement (AED Million) Net interest income and Islamic financing income Net fees, commission and FX Other operating income Total revenue Operating expenses Operating profit Net impairment allowances Net profit FY18 FY17 YoY Var 1,911 1,821 5.0% 721 684 5.4% 92 138 (33.0%) 2,725 2,642 3.1% 858 901 (4.7%) 1,866 1,742 7.2% 704 740 (4.8%) 1,162 1,002 16.0% Underlying Asset Quality improved with the focus on enhancing risk management practices. The non-performing loans (NPL) ratio decreased significantly to 6.2% from 8.7% at the end of 2017, with both ratios now calculated under IFRS 9. 20 Commercial Bank of Dubai
21. Directors ’ Report NPL ratio (%) Non performing loans (AED Million) 4,333 4,302 8.7 3,307 8.7 4,026 3,526 8.0 3,307 6.7 6.2 2017 2018 6.2 Q1 18 Q2 18 Q3 18 Q4 18 Balance Sheet: Total Assets were AED 74.1 billion as at 31 December 2018, an increase of 5.2% compared to AED 70.4 billion as at 31 December 2017. Net Loans and Advances were AED 50.9 billion, registering an increase of 7.8% when compared to AED 47.3 billion as at the end of 2017. Customers’ Deposits were AED 53.2 billion as at 31 December 2018 representing an increase of 9.8% compared to AED 48.4 billion in 2017. Low cost current and savings accounts (CASA) constitute 38.9% of the total deposit base, while the financing-to-deposits ratio stood at 95.8%. Balance Sheet (AED Million) Dec-18 Dec-17 YoY Var Gross loans and advances 54,058 50,185 7.7% Allowances for impairment 3,113 2,910 7.0% Net loans and advances 50,945 47,276 7.8% Total assets 74,102 70,414 5.2% Customers’ deposits 53,165 48,411 9.8% Shareholders’ equity 9,219 9,081 1.5% The bank’s liquidity position was strong and comfortably within risk appetite with an advance to stable resources ratio of 89.4% as at 31 December 2018 (2017: 88.6%) compared to the UAE Central Bank limit of 100%. CBD’s Capital Adequacy and Tier 1 capital ratios were at 14.6% and 13.4% respectively, and were significantly above the regulatory thresholds mandated by the UAE Central Bank. Key ratios,% FY18 FY17 YoY Var bps Return on equity 13.5% 11.7% 179 Return on assets 1.6% 1.4% 15 31.5% 34.1% (258) 6.2% 8.7% (249) Provision coverage 77.8% 78.3% (46) Loan to deposit 95.8% 97.7% (183) Cost to income ratio Non-performing loan (NPL) Annual Report 2018 21
22. Directors ’ Report Key ratios,% FY18 FY17 YoY Var bps Advance to stable resources (ASRR) 89.4% 88.6% 86 Capital adequacy 14.6% 15.2% (60) Tier 1 and CET1 ratio 13.4% 14.0% (62) The Board of Directors have proposed a 20.7% cash dividend for the year 2018 (equivalent to 49.9% of net profit). STRATEGY Following a detailed review of its business, CBD developed a three year strategic plan for the period 2018 to 2020. The strategic plan sets out CBD’s growth and profitability aspirations through to 2020 along with the initiatives required to achieve them. As part of the strategy, CBD aims to diversify income sources by selectively expanding the range of products and services offered to the core business areas of Corporate and Commercial Banking, while seeking selective and measured growth in the Personal Banking and Islamic Banking segments. CBD will seek to acquire new customers and strengthen existing customer relationships with the aim of becoming its customers’ primary banking partner. The bank is also targeting to increase fee and commission income from existing Corporate and Commercial Banking customers, and increasing services provided to existing and future customers. CBD intends to achieve this objective by focusing on the following initiatives: · Selectively expanding the range of corporate and commercial products and services offered to corporate and commercial customers; · Deepening customer relationships; and · Targeting the expatriate owned business market. CBD aims to be recognized as an employer of choice in the UAE by fostering a motivational environment which rewards superior performance. CBD’s performance management framework has recently been restructured with a reward and development programme that supports CBD’s ambition to build a high performance culture across the bank. 22 Commercial Bank of Dubai CORPORATE, COMMERCIAL AND BUSINESS BANKING Consistent with the bank’s growth oriented strategy, the Corporate, Commercial, and Business Banking (CCBB) business recorded a strong result with the loan book growing a solid 7%, while deposits increased by 10%. Overall fee and commission income increased by 5% year-on-year; mainly due to higher treasury products by 24%, and from trade by 7%. The division continues to support areas of key economic activity, specifically trade, education, hospitality, healthcare, services, manufacturing and contracting sectors. It has seen strong growth from both existing and new customers in these important sectors. Furthermore, the division focused on diversifying its services by offering enhanced online banking and cash management products and services. The CCBB division focused on improving market share in government, semi-government and UAE national customers. During 2018, the CCBB team developed and executed new strategic initiatives with the aim of enhancing our client coverage model. The main objectives included lifting our services to existing and new customers. Execution of the strategic initiatives has been designed to provide improved turn-around-times for all operational services, as well as superior customer engagement through setting minimum required customer visits by top management and business teams. The CCBB team successfully organized and held the first Customer Engagement Forums in 2018 which hosted the top senior management of the top tier customers. CCBB also established new industry specific coverage verticals for selected industries that require unique industry-specific financing and service proposition. A contracting division was established under the Corporate Banking Group, and manufacturing and gold divisions were established under the Commercial Banking Group.
23. Directors ’ Report As a result of several large and strategic cash management mandates won in 2018, overall revenues resulted in a record increase of 30% (as compared to 2017). During the year, the continued investment in bespoke payments and cash management solutions has generated over 92% of corporate and 78% of commercial customers leveraging the iBusiness, the bank’s award winning corporate online banking platform. The enhancements have resulted in over 80% of transactions being performed online (25% increase as compared to 2017). With the payments and cash management business focused on “Default Digital”, the business has launched a number of new capabilities which will be available for our customers in 2019. CBD continued with its leadership in payments and cash management with the award winning capabilities and recognized as “Best Cash Management Bank” in the UAE, by Banker Middle East in 2018 for the second year in a row. CBD was also awarded the “Best Online Cash Management Bank” in the UAE by Global Finance World’s Best Digital Bank Awards in 2018. FINANCIAL INSTITUTIONS The Financial Institutions (FI) team delivered a strong growth in 2018 with total revenues up by 47% principally through growth in trade finance transactions (Letters of Credit confirmation, discounting and issuance of Letters of Guarantees) and continued support for commodity finance transactions enabling us to handle larger volumes of trade and support our local customers and global beneficiaries. CBD also undertook an inaugural cross border deal by acting as a Lead Arranger for a syndicated loan in close collaboration with the Debt Capital Markets team. Our geographical scope in the MENAT and Indian sub-continent regions, FI-related portfolio witnessed a growth of 70% in the export LC volumes. 2018 was another successful year for Commodity Finance (CF). Corporate CF revenues increased by 20% as a result of the onboarding of new-to-bank customers while growing business with existing customers and expanding product range to cover bilateral facilities and inventory financing, in addition to our participation in the syndication of commodity traders. During 2018, CBD was recognized by the International Finance Corporation (IFC) as the best regional confirming bank winning the award of “2017 Best Regional Confirming Bank in the Middle East and North Africa”. During the year, the Debt Capital Market and Syndication (DCM) team successfully completed more than AED 3.6 billion worth of transactions. The team has been extremely active as a bookrunner on several high profile syndication deals within the region.  Trade Finance (TF) sales and advisory is one of the core areas of expertise of CBD with a wide range of trade products available to our Corporate and Commercial customers supporting them to finance their imports, exports and guarantee requirements. A dedicated team of trade sales specialists, with sound knowledge of the local and international business environment Annual Report 2018 23
24. Directors ’ Report contributed to higher customer satisfaction during 2018 resulting in 12% YOY increase in TF related income. Collaboration with strong correspondent banking relations resulted in beneficial trade financing deals including large value avalization business. The Supply Chain Finance proposition was successfully launched targeting the SME sector through buyer led supply chain financing. PERSONAL BANKING GROUP In 2018, the Personal Banking Group (PBG) team has delivered an improved result for the bank, contributing a net profit of AED 57.0 million for 2018. This milestone was achieved with sound traction on revenue growth, a focus on exposure optimization with improving credit cost and overall better asset quality. Overall asset growth remained flat, while liabilities grew by 15% resulting in a healthy asset to liability ratio of 49% by the end of 2018. Revenue increased by 15% on increased net interest and fee income. Costs decreased by 6.4% mainly due to optimization initiatives and a 16% reduction in credit cost due to a shift in the portfolio mix in favour of segments with improved risk profile. The credit cards business witnessed year-on-year revenue growth of 26%, mainly driven by increased customer engagement via spend-linked offers, new platforms and revisions to card propositions. The bank launched ‘Super Saver’, a new cashback card offering 10% cashback on key everyday spend categories such as groceries, education, bill payments and fuel. 24 Commercial Bank of Dubai Also introduced was ‘CBD Epicure’, the bank’s first engagement platform, offering merchant-funded dining discounts to debit and credit cardholders across 100+ outlets. The bank also marked the relaunch and rebranding of Affluent Banking, with CBD Elite and CBD Private, along with the launch of World and World Elite MasterCard Debit Cards, offering significant banking, lifestyle, travel and wellness benefits for our customers. The mortgage portfolio exhibited steady growth of 9.3% through strategic alliances with key partners and new product offerings. The personal loan portfolio was stable with a focus on return for risk. Momentum on current and savings account growth continued, with the launch of various balance enhancement campaigns, including the Gold Bonanza, Etihad Miles Promotion, Win 2xSalary, as well as the Smartkidz program, and the Twin-Win product (i.e. a combination of deposits and investments) contributing significantly during the year. The bank continued the drive to becoming “Default Digital”, with more customers embracing the bank’s new mobile channels and digitally enabled services. The bank successfully implemented the integration of multiple apps into one with a fresh user interface, providing mobile app access to Islamic banking credit card customers. At the end of 2018, 82% of PBG customers registered for digital channels with 91% of bill payments
25. Directors ’ Report and money transfers conducted digitally. In addition to this, 13 new credit card services were launched on the mobile app and online banking making card usage more convenient. PBG won three awards for Digital Banking: • ‘Best Mobile App’ (Ethos Integrated Solutions) • ‘Most Innovative Digital Bank’ (International Finance) • ‘Best Digital Bank’ (Banker Middle East) Additionally, PBG successfully launched their first bankwide Sales Tracking and Rewards (STAR), an incentive scheme to drive a high performance culture and reward individuals based on the economic value generated for the bank. PBG continued to align its branch network by exiting from three locations, opening a new branch in Sharjah City Centre and relocating one branch into the Al Ain Mall. ISLAMIC BANKING The CBD Islamic banking business, managed under Attijari Al Islami (AAI) sustained strong growth in 2018, with financing assets increasing to AED 8 billion, customer deposits increasing to AED 12 billion, leading to a 55% growth in net profit. A range of innovative Islamic products were launched  this year such as Step Up, Premium Saver, Secured Lending, Bonus Booster, Covered Card and Long Term Wakala, focusing on digital solutions through the mobile app and online banking. Innovative payments and cash management (PCM) solutions through iBusiness, iCollect, iPrint and iConnect were introduced to ensure our customers have a unique banking experience using state of the art technologies. In line with the bank’s Corporate and Social Responsibility (CSR) commitment, AAI continued to play a crucial role in supporting the society through building partnerships and supporting charitable organizations. TREASURY Markets Overview: After a sustained period of record gains, 2018 saw the global equity market rally experience a significant late reversal. European stocks fell 17%, Japanese equities 12% whilst the US markets, the bell weather of global equities markets, shed over 6%. The catalyst for this turnaround was driven by concern over global growth, as the US administration adopted an increasingly protectionist approach to its trade policies. The rate hikes in the US that started in earnest in December 2016 have continued and not surprisingly the dollar was the beneficiary of this interest rate divergence, particularly given the benign rate environment in other G10 economies. Brexit negotiations were also a focus, especially for GBP, which waned against the dollar in 2018.  Whilst a ‘Withdrawal Agreement’ was finally reached between the UK and the EU (despite multiple resignations from UK cabinet members), parliamentary approval has not yet been given, creating further uncertainty in the markets. Annual Report 2018 25
26. Directors ’ Report The fourth quarter drop in the oil price was a key regional development.  During this time, Brent fell from $86.29 to $50.47, before closing the year at $59.44. This bearish sentiment did have some knock-on effect to the market, but the resilience across the UAE economy ensured that a positive outlook remained with GDP growth in 2018 being forecast at 2.6% and 2019 at 3.4%, with government spending on the 2020 Expo expected to impact strongly. Treasury Solutions and Investment Products: Restructuring and greater customer alignment programmes, undertaken in 2018, saw a 19.8% increase in revenues across the two teams. New products, together with closer co-ordination between Treasury and the business groups of the bank enabled the delivery of a high quality service proposition and successfully captured customer business, some of which had previously been lost to competitor banks. The increased product range allowed for hedging solutions to be provided across all asset classes, helping customers to mitigate risk in not just FX and interest rates but also in the highly volatile commodity space. On the investment products side, a programme of innovative cross asset investment solutions provided customers with access to attractive yields whilst carefully managing risk and encouraging a portfolio based approach to wealth management. Given 2019 is likely to bring further financial market challenges to customers, the Treasury Solutions and Investments teams are ideally positioned to provide solutions that our customers need and further accelerate growth for the area. 26 Commercial Bank of Dubai Asset and Liability Management (ALM): In 2018, there was a continued drive to maintain our balanced liability mix, which involved a focus on a high component of current and savings accounts as a percentage of overall funding was maintained. Funding duration was another key focus area and the year saw a successful round of funding agreed to replace our maturing deals, at favourable margins. Asset and Liability Committee (ALCO) oversight remained robust and ensured that an optimal balance of funding ratios was maintained for our balance sheet. Maximizing returns on the Investment Portfolio was critical and the year saw our dedicated fixed income team navigate the challenging rising rate environment while significantly growing both repurchase and reverse repurchase deals to maximize income opportunities. Competition for deposits remained a feature of the market, however the team successfully further diversified the counterparty base and continue work on deposit mobilization programmes through the establishment of liability teams. This was even more important in 2018 when the Federal Reserve delivered 100bp of monetary tightening, leading to a much flatter yield curve, which helped reduce the relative price of duration over the year. The period did however also see an increase in EIBOR, which looks set to further increase in 2019. INFORMATION TECHNOLOGY The Information Technology (IT) team continued the transformation journey through a series of key initiatives,
27. Directors ’ Report whereby the technology team has become the main vehicle carrying the bank towards the ‘Default Digital’ state. Alongside the traditional, transaction-focused systems supporting the vertical banking capabilities, the bank’s technology assets have been enhanced with intelligent process management, customer relationship management (CRM), digital banking platforms and data analytics. With an emphasis on using these capabilities to drive more value for the business and our customers, the year saw the completion of a significant number of projects (80), enhancements (210) and small scale changes (650) with a 90% utilization of resources and 94% accuracy in planning. In total, more than 20,000 person-days of effort were invested in improving cost-efficiency, revenue generation and customer experience. Key initiatives included the automation of wholesale loan origination, new liquidity management and electronic marketplace features for corporate customers, the automation of more than 70 credit card service requests with an STP ratio that exceeds 75%, a new retail customer segmentation model, digital customer onboarding and mobile banking features built upon the bank’s awardwinning digital platform. Other initiatives included the implementation of real time international and domestic remittances, a new sales incentives system driven by the CRM platform and a white labeled digital wallet for public sector payments. In the digital era, business change is the new normal and innovation is essential to success. Acknowledging the challenges, CBD established an innovation framework working with partners to effectively navigate the expanding landscape of approaches while maintaining a clear and valued purpose. In 2018, the bank selected emerging technologies provided by fintech organizations in areas ranging from Artificial Intelligence to Open Banking and Blockchain. The embedding of these new technologies and models to the bank’s ecosystem is currently being pursued and will further accelerate the digital enablement. Rising up to the challenge of increasing regulatory complexity, security threats and market competition, IT achieved the highest systems availability and conducted the most comprehensive Disaster Recovery simulation to date. Through a series of initiatives, core systems of the bank were updated to achieve a high level of maintenance and sustainability. Security threats were efficiently addressed through a continuous cycle of proactive system management. The renewals of the ISO 9001 and 10002 certifications for quality management and customer service further safeguard the interest of the bank and its customers. From the human capital aspect the teams continued to be assessed using an online skill assessment partner as a result of which specialized training plans were executed. Recognized talents were given the opportunity to grow and develop within the organization in alignment with the bank’s Human Resource strategy. Annual Report 2018 27
28. Directors ’ Report Amongst the various industry recognitions attained were the technology achievements of our team including the International data Corporation (IDC) finalist awards in the categories of “Chief Information Officer (CIO) of the Year” and “Best Customer Experience Transformation”. HUMAN RESOURCES CBD’s focus on creating a high performance culture has continued in 2018. The strengthening of the performance management framework introduced in 2017 has begun to pay dividends in identifying and differentiating performance. This has enhanced our ability to align rewards specifically and appropriately to commercial and functional achievements. The bank’s new values of Collaboration, Ownership, Delivery and Excellence were launched, under the banner of the CBD “CODE”, through a series of workshops attended by all staff. Other employee participation programmes including recognition and communications, were also enhanced. The learning and development curriculum were upgraded and flagship courses were delivered in relationship management, customer service, compliance, credit and risk as well as a modular development programme for junior Emirati staff. In addition, all line managers across the bank attended a two day “Enabling High Performance” workshop which focused on the best way to engage and motivate employees through the extensive managerial toolkit. The Central Bank guidelines on Emiratization were achieved and a new long term employee loyalty scheme was introduced under the branding of “Idikhar”. Our new graduate programme, Tumoo7, was expanded for UAE national management trainees and CBD was represented at career fairs in Dubai and Sharjah, as well as running two “open days” for hiring Emiratis. As part of the bank’s engagement plans, a new quarterly “pulse survey” was introduced to ensure a real time sense of engagement levels. By year end, positive indications of improvement were already achieved. CORPORATE SOCIAL RESPONSIBILITY CBD’s Corporate Social Responsibility (CSR) practices are in line with society values, principles and need. In 2018, the bank continued to be a responsible corporate citizen through a CSR framework that is aligned with its corporate culture and belief. As part of CBD’s participation in the Year of Zayed, the bank has supported various 28 Commercial Bank of Dubai charitable organizations across the UAE in the areas of health, education, arts and culture and community wellbeing through donations and sponsorships. CBD’s contributions have changed people’s lives through different associations and charities that support the community. These organizations included clubs for people of determination, society and welfare associations dedicated to boosting community development, charitable and humanitarian work, helping low-income patients, and providing financially incapable patients with treatment facilities. During the holy month of Ramadan, CBD provided 3,500 Iftar meals to workers at construction sites as part of Zayed Humanitarian Day initiatives. CBD continued to support youth, education, health and sustainability, demonstrated by CBD complying with the Dubai Declaration. CBD continued to sponsor one of the prestigious international cycling competitions for the third year to support the Dubai Plan 2021 promoting a healthy lifestyle amongst UAE citizens. The event attracts participation from the world’s leading cyclists and has significant media coverage both nationwide and globally. CBD participated in the UAE leading health initiative 30X30 during the month of November, where employees volunteered for several activities, including supporting balanced diet choices and healthy workplace habits to have a healthier, happier and more productive workforce. CBD believe that ethical banking is what our customers expect from us and this inspires the structure of our products, the delivery of our services and the principles that run our business. Everything we do in CBD should be for our customers’ interest and create economic value.
29. Major Indicators Profits (AED million) Operating Profit Net Profit +8% 1,493 1,592 2015 2016 1,866 1,742 +2% 1,066 1,003 +7% 2017 1,162 1,002 +16% 2018 2015 2016 2017 2018 Loans and Deposits (AED million) Net Loans +9% 39,021 41,963 2015 2016 Customers’ Deposits 50,945 47,276 +8% 2017 2018 +10% 40,475 43,774 2015 2016 53,165 48,411 +9% 2017 2018 Annual Report 2018 29
30. 30 Commercial Bank of Dubai
31. Report of the Auditors to the Shareholders 32 - 39 Consolidated statement of financial position 40 Consolidated statement of profit or loss 41 Consolidated statement of profit or loss and other comprehensive income 42 Consolidated statement of changes in equity 43 Consolidated statement of cash flows 44 Notes to the consolidated financial statements 45 - 125 Annual Report 2018 31
32. Report of the Auditors to the Shareholders 32 Commercial Bank of Dubai
33. Report of the Auditors to the Shareholders (continued) Annual Report 2018 33
34. Report of the Auditors to the Shareholders 34 Commercial Bank of Dubai
35. Report of the Auditors to the Shareholders (continued) Annual Report 2018 35
36. Report of the Auditors to the Shareholders 36 Commercial Bank of Dubai
37. Report of the Auditors to the Shareholders (continued) Annual Report 2018 37
38. Report of the Auditors to the Shareholders 38 Commercial Bank of Dubai
39. Report of the Auditors to the Shareholders (continued) Annual Report 2018 39
40. Consolidated statement of financial position as at 31 December 2018 Note 2018 2017 AED ’000 AED’000 ASSETS Cash and balances with Central Bank 8 8,682,322 6,808,539 Due from banks, net 9 971,280 2,834,710 Loans and advances and Islamic financing, net 10 50,944,947 47,275,725 Investment securities, net 11 6,751,150 7,077,080 Investment in an associate 12 84,842 81,053 Investment properties, net 13 214,420 194,980 Property and equipment 14 343,093 383,704 5,266,428 5,121,186 843,064 637,080 74,101,546 70,414,057 Bankers acceptances Other assets, net 15 TOTAL ASSETS LIABILITIES AND EQUITY LIABILITIES Due to banks 16 2,762,944 779,823 Customer deposits and Islamic customer deposits 17 53,165,030 48,411,192 Notes and medium term borrowings 18 2,609,944 6,089,663 5,266,428 5,121,186 1,078,474 931,438 64,882,820 61,333,302 Due for trade acceptances Other liabilities 19 TOTAL LIABILITIES EQUITY Share capital 20.1 2,802,734 2,802,734 Legal and statutory reserve 20.2 1,401,367 1,401,367 General reserve 20.3 1,328,025 1,328,025 Capital reserve 20.4 38,638 38,638 Fair value reserve 20.5 (137,060) (10,956) Retained earnings 3,785,022 3,520,947 TOTAL EQUITY 9,218,726 9,080,755 74,101,546 70,414,057 TOTAL LIABILITIES AND EQUITY These consolidated financial statements were approved and authorized for issue by the Board of Directors on 23 January 2019. The attached notes on pages 45 to 125 form part of these consolidated financial statements. Mr. Humaid Al Qutami Chairman The report of the Auditors is set out on pages 32 to 39. 40 Commercial Bank of Dubai Dr. Bernd van Linder Chief Executive Officer
41. Consolidated statement of profit or loss for the year ended 31 December 2018 Note 2018 2017 AED ’000 AED’000 Interest income and income from Islamic financing 21 2,847,213 2,514,762 Interest expense and distributions to Islamic depositors 22 (935,990) (694,038) 1,911,223 1,820,724 578,205 564,590 142,969 119,368 650 5,248 - 9,172 6,914 9,310 9,621 6,750 5,126 61,013 69,995 46,251 2,724,703 2,642,426 (2,951) - (727,410) (799,179) 47,770 112,159 Net interest income and net income from Islamic financing Net fees and commission income 23 Net gains from foreign exchange and derivatives Net gains from investments at fair value through profit or loss 24 Net gains from sale of equity investments at fair value through other comprehensive income (2017: available-for-sale) Net gains from sale of debt investments at fair value through other comprehensive income (2017: available-for-sale) Share of profit of an associate 12 Dividend income Other income Total operating income Impairment allowance on due from banks Impairment allowance on loans and advances and Islamic financing 10 Recoveries Reversal of / (impairment) allowance on investment securities 11 1,056 (2,255) Impairment allowance on investment property 13 - (27,835) (22,730) (22,730) 2,020,438 1,902,586 25 (795,354) (844,619) 13 & 14 (62,973) (56,049) Total operating expenses (858,327) (900,668) Net profit for the year 1,162,111 1,001,918 AED 0.41 AED 0.36 Impairment allowance on other assets Total net income Staff and other expenses Depreciation and amortization Basic and diluted earnings per share 27 The attached notes on pages 45 to 125 form part of these consolidated financial statements. The report of the Auditors is set out on pages 32 to 39. Annual Report 2018 41
42. Consolidated statement of profit or loss and other comprehensive income For the year ended 31 December 2018 2018 2017 AED ’000 AED’000 1,162,111 1,001,918 1,384 - (12,391) - (1,061) 6,243 4,881 (12,722) - (9,172) (147) - (6,914) (9,310) (110,472) 13,855 - (17,864) Net change in investments held at fair value through other comprehensive income / available-for-sale (117,386) (13,319) Other comprehensive loss for the year (124,720) (28,970) Total comprehensive income for the year 1,037,391 972,948 Net profit for the year Items that will not be reclassified to profit or loss: Realized gain on sale of equity investments held at fair value through other comprehensive income Revaluation loss of equity investments held at fair value through other comprehensive income Actuarial (loss) / gain on retirement benefits obligations Items that may be subsequently reclassified to profit or loss: Changes in fair value of effective portion of cash flow hedge Realized gain on sale of equity investments Changes in fair value reserve of an associate Changes in investments held at fair value through other comprehensive income / available-for-sale: Realized gain on sale of debt investments Revaluation (loss) / gain on debt investments Revaluation loss on equity investments The attached notes on pages 45 to 125 form part of these consolidated financial statements. The report of the Auditors is set out on pages 32 to 39. 42 Commercial Bank of Dubai
43. Consolidated statement of changes in equity For the year ended 31 December 2018 At 1 January 2017 Share capital Legal and statutory reserve General reserve Capital reserve Fair value reserve Retained earnings Total AED ’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 2,802,734 1,401,367 1,328,025 38,638 18,014 3,090,845 8,679,623 Transactions with shareholders, recorded directly in equity Cash dividend for 2016 (20%) - - - - - (560,547) (560,547) Directors’ remuneration for 2016 - - - - - (11,000) (11,000) Share of Directors’ remuneration of an associate (note 12) - - - - - (269) (269) Net profit for the year - - - - - 1,001,918 1,001,918 Other comprehensive loss for the year - - - - (28,970) - (28,970) - - - - (28,970) 1,001,918 972,948 At 31 December 2017 2,802,734 1,401,367 1,328,025 38,638 (10,956) 3,520,947 9,080,755 At 31 December 2017 2,802,734 1,401,367 1,328,025 38,638 (10,956) 3,520,947 9,080,755 Other comprehensive income Total other comprehensive income IFRS 9 adjustment (refer to note 6) At 1 January 2018 - - - - 2,802,734 1,401,367 1,328,025 38,638 - (397,495) (397,495) (10,956) 3,123,452 8,683,260 Transactions with shareholders, recorded directly in equity Cash dividend for 2017 (17.5%) - - - - - (490,478) (490,478) Directors’ remuneration for 2017 - - - - - (11,000) (11,000) Share of Directors’ remuneration of an associate (note 12) - - - - - (447) (447) Net profit for the year - - - - - 1,162,111 1,162,111 Gain on sale of equity investments at fair value through other comprehensive income - - - - (1,384) 1,384 - Other comprehensive loss for the year - - - - (124,720) - (124,720) - - - - (126,104) 1,163,495 1,037,391 2,802,734 1,401,367 1,328,025 38,638 (137,060) 3,785,022 9,218,726 Other comprehensive income Total other comprehensive income At 31 December 2018 The attached notes on pages 45 to 125 form part of these consolidated financial statements. The report of the Auditors is set out on pages 32 to 39. Annual Report 2018 43
44. Consolidated statement of cash flows For the year ended 31 December 2018 OPERATING ACTIVITIES Note Net profit for the year Adjustments for : Depreciation and amortization 13 & 14 Amortization of premium / discounts on investments Amortization of transaction cost on notes and medium term borrowings Loss / (gain) on forex translation on investments Realized gain on sale of investments Net unrealized (gain) / losses on derivatives (Reversal of) / impairment allowance on investment securities 11 Share of profit of an associate 12 Dividend income Net unrealized loss on investments at fair value through profit or loss Impairment allowance on loans and advances and Islamic financing 10 Impairment allowance on due from banks Impairment allowance on other assets Impairment allowance on investment properties 13 Loss / (gain) on disposal of property and equipment AED’000 2017 AED’000 1,162,111 1,001,918 62,973 49,331 9,631 7,706 (7,175) (30,556) (1,056) (9,621) (5,126) 727,410 2,951 22,730 81 56,049 54,086 9,126 (13,611) (23,998) 7,239 2,255 (6,750) (61,013) 268 799,179 22,730 27,835 (3,817) 1,991,390 (177,398) 1,871,496 (143,997) 700,000 (2,300,000) Increase in statutory reserve with the Central Bank Decrease / (increase) in negotiable Central Bank certificate of deposits with original maturity of more than three months (Increase) / decrease in due from banks with original maturity of more than three months Increase in loans and advances and Islamic financing Increase in other assets Increase / (decrease) in due to banks with original maturity of more than three months Increase in customer deposits and Islamic customer deposits Increase / (decrease) in other liabilities Directors’ remuneration paid (157,528) 373,512 (4,785,380) (193,833) (6,112,366) (126,962) 1,447,912 (3,080) 4,753,838 143,672 (11,000) 3,711,673 4,637,368 (15,796) (11,000) (1,830,825) Purchase of investments Proceeds from sale of investments Purchase of property and equipment Proceeds from sale of property and equipment Dividend received Dividend from an associate (2,950,319) 3,094,592 (43,822) 1,939 5,126 3,992 (5,919,555) 6,230,624 (75,744) 5,127 61,013 3,196 (3,489,350) (490,478) (560,547) Net cash flow from / (used in) operating activities INVESTING ACTIVITIES Net cash flow from investing activities FINANCING ACTIVITIES 14 12 Notes and medium term borrowings Dividend paid Net cash flow used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Supplemental disclosure: Interest income and income from Islamic financing received Interest expense and distributions to Islamic depositors paid The report of the Auditors is set out on pages 32 to 39. 44 2018 Commercial Bank of Dubai 111,508 (3,979,828) 28 304,661 (560,547) (156,647) (2,086,711) 3,315,334 3,471,981 2,781,643 812,883 2,469,190 600,741 3,471,981 5,558,692
45. Notes to the consolidated financial statements For the year ended 31 December 2018 1 . LEGAL STATUS AND ACTIVITIES Commercial Bank of Dubai PSC (“the Bank”) was incorporated in Dubai, United Arab Emirates (U.A.E.) in 1969 and is registered as a Public Shareholding Company (PSC) in accordance with Federal Law No. 2 of 2015. The bank is listed on the Dubai Financial Market. The bank’s principal activity is commercial banking. The registered address of the bank is Al Ittihad Street, P.O. Box 2668, Dubai, United Arab Emirates. The consolidated financial statements of the Group for the year ended 31 December 2018 comprise the results of the bank, its wholly owned subsidiaries (together referred to as “the Group”) and the Group’s interest in an associate. Details about subsidiaries and an associate: a) CBD Financial Services LLC, is registered as a limited liability company in accordance with Federal Law No. 2 of 2015 in Dubai, United Arab Emirates. The bank holds a 100% interest. Its principal activity is providing brokerage facilities for local shares and bonds. b) CBD Employment Services One Person Company LLC, is registered as a limited liability company in accordance with Federal Law No. 2 of 2015 in Dubai, United Arab Emirates. The bank holds 100% interest. Its principal activity is supply of manpower services. c) Attijari Properties LLC, is registered as a limited liability company in accordance with Federal Law No. 2 of 2015 in Dubai, United Arab Emirates. The bank holds a 100% interest. Its principal activity is self-owned property management services as well as buying and selling of real estate. d) CBD (Cayman) Limited is a special purpose entity (SPE) registered in the British Virgin Islands. The SPE has been established for issuance of debt securities. e) CBD (Cayman II) Limited, which is a special purpose entity (SPE) registered in the British Virgin Islands. The SPE has been established to transact and negotiate derivative agreements. f) National General Insurance Co. (PSC) is an associate of the bank and is listed on the Dubai Financial Market. It underwrites all classes of life and general insurance business as well as certain reinsurance business. The bank holds 17.8% interest in the associate. The management believes that it has significant influence on the associate by virtue of having representation on the Board of Directors of the associate. 2. BASIS OF PREPARATION 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and comply with relevant laws of the U.A.E. These consolidated financial statements include Basel II Pillar 3 disclosures in accordance with the guidelines issued by the Central Bank of the UAE. As required by the UAE Securities and Commodities Authority (SCA) notification number 85/2009 dated January 6, 2009, the Group’s exposure in cash and advances with Central Bank of the UAE, Due from Banks and Investment Securities outside the UAE have been presented under the respective notes. From 1 January 2018, under Federal Decree-Law No. (8) of 2017, Value Added Tax (VAT) has been levied in United Arab Emirates. The Group complies with the executive regulations and is required to file quarterly returns. 2.2 Functional and presentation currency The consolidated financial statements are presented in United Arab Emirates Dirhams (“AED”), which is the bank’s functional and presentation currency, rounded to the nearest thousand unless otherwise stated. 2.3 Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity are disclosed in note 4. Annual Report 2018 45
46. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 2. BASIS OF PREPARATION (continued) 2.4 Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: • derivative financial instruments are measured at fair value; • financial instruments classified as trading and fair value through profit or loss (FVPL); • financial assets at fair value through other comprehensive income (applicable from 1 January 2018); • financial assets at available-for-sale are measured at fair value (applicable before 1 January 2018); and • recognized financial assets and financial liabilities that are hedged items in a fair value hedge transaction are measured at fair value in respect of the risk that is hedged. Amortized cost is adjusted for hedging gain or loss. 2.5 Basis of consolidation The consolidated financial statements comprise the financial statements of the bank and its subsidiaries. Subsidiaries are entities controlled by the Group. (i) Business Combination The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. (ii) Subsidiary The Group controls an investee if and only if the Group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); • Exposure, or rights, to variable returns from its involvement with the investee; and • The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • The contractual arrangement with the other vote holders of the investee; • Rights arising from other contractual arrangements; and • The Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interest (NCI). When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: • Derecognizes the assets (including goodwill) and liabilities of the subsidiary; • Derecognizes the cumulative translation differences recorded in equity; • Derecognizes the carrying amount of any non-controlling interest; • Recognizes the fair value of the consideration received; • Recognizes the fair value of any investment retained; • Recognizes any surplus or deficit in the consolidated statement of profit or loss; and • Reclassifies the parent’s share of components previously recognized in consolidated OCI to consolidated statement of profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. 46 Commercial Bank of Dubai
47. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 2. BASIS OF PREPARATION (continued) 2.5 Basis of consolidation (continued) When the Group loses control of a subsidiary, a gain or loss is recognized in the consolidated statement of profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest, and (ii) the previous carrying amount of the assets (including goodwill) and liabilities of the subsidiary, and any non-controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. (iii) Associate An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is a non-controlling or joint interest investor over those policies. The Group’s investment in its associate is accounted for using the equity method. Under the equity method, the investment in an associate is initially recognized at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment. The consolidated statement of profit or loss reflects the Group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes, when applicable, in the consolidated statement of changes in equity. The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the consolidated statement of profit or loss. The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, then recognizes the loss as ‘Share of profit or loss of an associate’. Upon loss of significant influence over the associate, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognized in the consolidated statement of profit or loss. Management reviews its share of investments in associates to assess impairment on a regular basis. In determining the assessment, management compares the recoverable amount with the carrying value of the investment. Estimating recoverable amount using value in use requires the Group to make an estimate of the expected future cash flows from the associates and choosing a suitable discount rate in order to calculate the present value of those cash flows. Annual Report 2018 47
48. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 2. BASIS OF PREPARATION (continued) 2.5 Basis of consolidation (continued) (iv) Transactions eliminated on consolidation Intra-group balances and income and expenses (except for foreign currency translation gains or losses) arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all the years presented in these consolidated financial statements, except changes in accounting policies resulting from the adoption of IFRS 9 and IFRS 15 as described below. Transition The Group initially applied IFRS 15 and IFRS 9 on 1 January 2018 retrospectively in accordance with IAS 8 without any practical expedients. The adoption of IFRS 15 did not materially impact the timing or amount of fee and commission income from contracts with customers and the related assets and liabilities recognized by the Group. Accordingly, the impact on the comparative information due to adoption of IFRS 15 is limited only to new disclosure requirements (refer to note 3.17 (iii)). However, changes in accounting policies resulting from the adoption of IFRS 9 have been applied as follows: • Comparative periods have not been restated and differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in the retained earnings as of 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 and is therefore not comparable to the information presented for the period under IFRS 9. • The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application: o The determination of the business model within which a financial asset is held; o The designation and revocation or previous designations of certain financial assets and financial liabilities measured at FVPL; and o The designation of certain investments in equity instruments not held for trading as FVOCI. As permitted by IFRS 9, the Group has elected to continue to apply the hedge accounting requirements of IAS 39. IFRS 7 Financial Instruments - Disclosures IFRS 7 Financial Instruments: Disclosures, which was updated to reflect the differences between IFRS 9 and IAS 39, was also adopted by the Group together with IFRS 9, for the year beginning 1 January 2018. Refer to note 6 for the transition disclosures. 3.1 Financial Instruments a) Recognition and initial measurement A financial instrument is any contract that gives rise to both a financial asset for the Group and a financial liability or equity instrument for another party or vice versa. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Recognized financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at FVPL) are added to or deducted from the fair value of the financial assets or financial liabilities respectively, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVPL are recognized immediately in consolidated statement of profit or loss. 48 Commercial Bank of Dubai
49. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) a) Recognition and initial measurement (continued) If the transaction price differs from fair value at initial recognition, the Group will account for such difference as follows: • if fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets, then the difference is recognized in consolidated statement of profit or loss on initial recognition (i.e. day 1 profit or loss); and • in all other cases, the fair value will be adjusted to bring it in line with the transaction price (i.e. day 1 profit or loss will be deferred by including it in the initial carrying amount of the asset or liability). After initial recognition, the deferred gain or loss will be released to consolidated statement of profit or loss on a rational basis, only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. b) Fair Value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability, or • In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset, or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. Fair value hierarchy All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, which reflects the significance of inputs used in making the measurements: Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry, group, pricing service or regulatory agency, and those prices represent actual and regularly recurring market transactions on an arm’s length basis. Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs based on unobservable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The hierarchy used by the Group is set out in note 7.2. Annual Report 2018 49
50. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) b) Fair Value measurement (continued) The Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. At each reporting date, the Group analyzes the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per the Group’s accounting policies. For this analysis, the Group verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 3.1.1 Financial assets Applicable from 1 January 2018: a) Classification The Group classifies financial assets on initial recognition in the following categories: (i) Amortized cost; (ii) Fair value through other comprehensive income (FVOCI); and (iii) Fair value through profit or loss (FVPL). • Business model assessment The Group makes an assessment of the objective of a business model in which a financial asset is held at portfolio level, because this reflects the way the business is managed and information is provided to the management. The assessment is not determined by a single factor or activity. Instead, the entity considers all relevant information available at the date of the assessment. The information considered includes: • The stated policies and objectives for the business and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realizing cash flows through the sale of the assets; • How the performance of the portfolio and the financial asset held within the portfolio is evaluated and reported to the management; • The risks that affect the performance of the portfolio and, in particular, the way in which those risks are managed; • How the managers of the business are compensated; and • The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group’s stated objective for managing the financial assets is achieved and how cash flows are realized. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. • Assessment whether contractual cash flows is solely payments of principal and interest In assessing whether the contractual cash flows are solely payments of principal and interest (SPPI), the Group considers the contractual terms of the instrument. 50 Commercial Bank of Dubai
51. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) a) Classification (continued) For the purpose of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers: • • • • • contingent events that would change the amount and timing of cashflows; leverage features; prepayment and extension terms; terms that limit the Group’s claim to cash from specified assets; and features that modify consideration of the time value of money (e.g. periodical reset of interest rates). The Group holds a portfolio of long-term fixed-rate loans for which the Group has the option to propose to revise the interest rate at periodic reset dates. These reset rights are limited to the market rate at the time of revision. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Group has determined that the contractual cash flows of these loans are SPPI because the option varies the interest rate in a way that is consideration for the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding. Non-recourse loans In some cases, loans made by the Group that are secured by collateral of the borrower limit the Group’s claim to cash flows of the underlying collateral (non-recourse loans). The Group applies judgment in assessing whether the non-recourse loans meet the SPPI criterion. The Group typically considers the following information when making this judgement: • whether the contractual arrangement specifically defines the amounts and dates of the cash payments of the loan; • the fair value of the collateral relative to the amount of the secured financial asset; • the ability and willingness of the borrower to make contractual payments, notwithstanding a decline in the value of collateral; • whether the borrower is an individual or a substantive operating entity or is a special-purpose entity; • the Group’s risk of loss on the asset relative to a full-recourse loan; • the extent to which the collateral represents all or a substantial portion of the borrower’s assets; and • whether the Group will benefit from any upside from the underlying assets. (i) Financial assets at amortized cost A debt instrument, including loans and advances and Islamic financing asset is classified as being measured at amortized cost if it meets both of the following conditions and is not designated as at FVPL: • the asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. (ii) Financial assets at fair value through other comprehensive income (FVOCI) • A debt instrument is classified as being measured at FVOCI if it meets the following two conditions and the debt instrument is not designated at FVPL: • the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and Annual Report 2018 51
52. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) a) Classification (continued) (ii) Financial assets at fair value through other comprehensive income (FVOCI) (continued) • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Group measures all equity investments at fair value through profit or loss, except where the Group’s management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Group’s policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. This election is made on an investment-by-investment basis. (iii) Financial assets at fair value through profit or loss (FVPL) Financial assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Classification • Financial assets at fair value through profit or loss (FVPL): This category has the following two sub-categories: Financial assets held for trading Financial assets held for trading are those that are acquired principally for the purpose of sale in the near term. They are recorded at fair value. Fair value changes are recognized in consolidated statement of profit or loss. Designated to be fair valued through profit or loss at inception The Group designates financial assets at fair value through profit or loss in the following circumstances: - The assets are managed, evaluated and reported internally on a fair value basis. - The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise. - The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. • Loans and receivables: Loans and receivables are non-derivative financial assets with fixed and determinable payments that are not quoted in an active market. These arise when the Group provides money directly to the borrower with no intention of trading the receivable. • Held-to-maturity (HTM): Investments classified as held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the intention of and the ability to hold to maturity. HTM assets are carried at amortized cost less impairment loss if any. Sale of HTM assets is allowed only under the following circumstances: - The investment is close enough to maturity as to have no impact on fair value; - The principal is substantially received; - Isolated events beyond the Group’s control; - Significant credit deterioration; - Major business combination or disposal; or - Increase in regulatory capital requirements. 52 Commercial Bank of Dubai
53. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) a) Classification (continued) • Available-for-sale (AFS): Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or not classified as (i) financial assets at fair value through profit or loss, (ii) loans and receivables or (iii) held-to-maturity investments. AFS assets are carried at fair value, with fair value changes recognized in other comprehensive income (OCI). These assets may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Interest income is recognized in profit or loss using the effective interest method. Dividend income is recognized in profit or loss when the Group becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognized in the consolidated statement of profit or loss. Impairment losses are recognized in the consolidated statement of profit or loss. Other fair value changes, other than impairment losses, are recognized in OCI and presented in the fair value reserve within equity. When the investment is sold, the gain or loss accumulated in equity is reclassified to the consolidated statement of profit or loss. b) Subsequent measurement Applicable from 1 January 2018 The Group measures financial instruments, such as derivatives and investments in equity and certain fixed income instruments, at fair value at each reporting date. Financial asset classified as at FVOCI or FVPL are subsequently measured at fair value. Financial assets not carried at fair value are subsequently measured at amortized cost using the effective interest method, less expected credit allowances. Applicable before 1 January 2018 Financial asset classified as at available-for-sale or fair value through profit or loss are subsequently measured at fair value. Financial assets not carried at fair value are subsequently measured at amortized cost using the effective interest method, less expected credit allowances. c) Reclassifications Applicable from 1 January 2018 Financial assets are not reclassified subsequent to their initial recognition except in the period after the Group changes its business model for managing financial assets. If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that results in reclassifying the Group’s financial assets. During the current and previous financial year there was no change in the business model under which the Group holds financial assets and therefore no reclassifications were made. Changes in contractual cash flows are considered under the accounting policy on ‘Modification of financial assets’ and ‘Derecognition of financial assets’ described in note 3.1.1 (g) and 3.1.1 (h) respectively. Applicable before 1 January 2018 In cases where available-for-sale investments with a fixed maturity are reclassified as held-to-maturity investments, the fair value gains or losses until the date of the reclassification are held in OCI and amortized over the remaining life of the held-to-maturity investments using the effective interest rate method. d) Foreign exchange gains and losses The carrying amount of financial assets that are denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of each reporting period. Specifically: • for financial assets measured at amortized cost that are not part of a designated hedging relationship, exchange differences are recognized in consolidated statement of profit or loss in the ‘net gains from foreign exchange and derivatives’ line item; Annual Report 2018 53
54. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) d) Foreign exchange gains and losses (continued) • • • for debt instruments measured at FVOCI that are not part of a designated hedging relationship, exchange differences on the amortized cost of the debt instrument are recognized in the consolidated statement of profit or loss in the ‘net gains from foreign exchange and derivatives’ line item. Other exchange differences are recognized in OCI in the investments revaluation reserve; for financial assets measured at FVPL that are not part of a designated hedge accounting relationship, exchange differences are recognized in consolidated statement of profit or loss in ‘net gains from investments at FVPL’; and for equity instruments measured at FVOCI, exchange differences are recognized in OCI in the investments revaluation reserve. e) Impairment Applicable from 1 January 2018 The Group recognizes loss allowances for expected credit losses (ECLs) on the following financial instruments that are not measured at FVPL: • balances with central banks; • due from banks; • debt investment securities; • loans and advances, Islamic financing and other financial assets; • loan commitments; and • financial guarantee contracts. No impairment loss is recognized on equity investments. The Group considers a debt investment security to have low credit risk when its credit risk rating is equivalent to the globally understood definition of ‘investment grade’. The Group does not apply the low credit risk exemption to any other financial instruments. IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarized below: Stage 1: When loans are first recognized, the Group recognizes an allowance based on 12 months ECLs. 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Stage 2: When a loan has shown a significant increase in credit risk since origination, the Group records an allowance for the life time expected credit losses (LTECL). LTECL are the ECL that result from all possible default events over the expected life of the financial instrument. Stage 3: Loans considered credit-impaired. The group records an allowance for the LTECLs. ECLs are an unbiased probability-weighted estimate of the present value of credit losses that is determined by evaluating a range of possible outcomes. For funded exposures, ECL is measured as follows: • • 54 for financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive; and for financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; Commercial Bank of Dubai
55. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) However, for unfunded exposures, ECL is measured as follows: • for undrawn loan commitments, as the present value of the difference between the contractual cash flows that are due to the Group if the holder of the commitment draws down the loan and the cash flows that the Group expects to receive if the loan is drawn down; and • for financial guarantee contracts, the expected payments to reimburse the holder of the guaranteed debt instrument less any amounts that the Group expects to receive from the holder, the debtor or any other party. The Group measures ECL on an individual basis, or on a collective basis for portfolios of loans that share similar economic and credit risk characteristics. The measurement of the loss allowance is based on the present value of the asset’s expected cash flows using the asset’s original Effective Interest Rate (EIR), regardless of whether it is measured on an individual basis or a collective basis. The key inputs into the measurement of ECL are the term structures of the following variables: • probability of default (PD); • exposure at default (EAD); and • loss given default (LGD). These parameters are generally derived from internally developed statistical models, other historical data and are adjusted to reflect forward-looking information. Details of these statistical parameters / inputs are as follows: • PD – PD is the estimate of likelihood of default over a given time horizon, which is calculated based on statistical rating models currently used by the Group, and assessed using rating tools tailored to the various categories of counterparties and exposures. • EAD – EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract and arising from amortization. The EAD of a financial asset is its gross carrying amount at the time of default. For lending commitments, the EADs are potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. For financial guarantees, the EAD represents the amount of the guaranteed exposure when the financial guarantee becomes payable. For some financial assets, EAD is determined by modelling the range of possible exposure outcomes at various points in time using scenario and statistical techniques. • LGD – LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from any collateral. The LGD models for secured assets consider forecasts of future collateral valuation taking into account sale discounts, time to realization of collateral, cross-collateralization and seniority of claim, cost of realization of collateral and cure rates (i.e. exit from non-performing status). LGD models for unsecured assets consider time of recovery, history of recovery rates and seniority of claims. The calculation is on a discounted cash flow basis, where the cash flows are discounted by the original EIR of the loan. Annual Report 2018 55
56. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) Where modelling of a parameter is carried out on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics that include: • instrument type; • credit risk grading; • collateral type; • Loan to value ratio for retail exposure; • date of initial recognition; • remaining term of maturity; • industry; and • geography location of the borrower. The groupings are subject to regular review to ensure that exposure within a particular group remain appropriately homogenous. Restructured financial assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognized and ECL are measured as follows: • • If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortized cost and debt securities carried at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence that a financial asset is credit-impaired includes the following observable data: • • • • • significant financial difficulty of the borrower or issuer; a breach of contract such as a default or past due event; the lender of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession that the lender would not otherwise consider; the disappearance of an active market for a security because of financial difficulties; or the purchase of a financial asset at a deep discount that reflects the incurred credit losses. It may not be possible to identify a single discrete event - instead, the combined effect of several events may have caused financial assets to become credit-impaired. The Group assesses whether debt instruments that are financial assets measured at amortized cost or FVOCI are credit-impaired at each reporting date. To assess if sovereign and corporate debt instruments are credit impaired, the Group considers the following factors: • • 56 The market’s assessment of creditworthiness as reflected in the bond yields; The rating agencies’ assessments of creditworthiness; Commercial Bank of Dubai
57. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) • • The country’s ability to access the capital markets for new debt issuance; and The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. A loan is considered credit-impaired when a concession is granted to the borrower due to a deterioration in the borrower’s financial condition, unless there is evidence that as a result of granting the concession the risk of not receiving the contractual cash flows has reduced significantly and there are no other indicators of impairment. For financial assets where concessions are contemplated but not granted, the asset is deemed credit impaired when there is observable evidence of credit-impairment including meeting the definition of default. The definition of default includes unlikeliness to pay indicators and a backstop if amounts are overdue for 90 days or more. Purchased or originated credit-impaired (POCI) financial assets For POCI financial assets, the Group recognizes all changes in LTECL since initial recognition as a loss allowance with any changes recognized in consolidated statement of profit or loss. A favourable change for such assets creates an impairment gain. Default definition Critical to the determination of ECL is the definition of default. The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk. The Group considers a financial asset to be in default when: • the borrower is unlikely to pay its credit obligations to the Group in full without recourse by the Group to actions such as realizing security (if any is held); or • the borrower is past due more than 90 days on any material credit obligation to the Group. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding. • it is becoming probable that the borrower will restructure the asset as a result of bankruptcy due to the borrower’s inability to pay its credit obligations. In assessing whether a borrower is in default, the Group considers indicators that are: • qualitative - e.g. breaches of covenant; • quantitative - e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and based on data developed internally and obtained from external sources. The Group has performed a historical default rate analysis to identify homogeneous segments and further estimated ECL parameters (i.e. PD, LGD and EAD) at similar granularities. To perform a historical default rate analysis, the Group has adopted two separate definitions of default for the non-retail and the retail portfolio. • Non-retail portfolio The non-retail portfolio comprises of loans which are managed individually by the Relationship Managers (RMs) with oversight from the Credit Risk team of the Group. These loans are appraised at least annually based on the financial information, other qualitative information and account conduct of the customer. A non-retail customer is identified as at default if the customer is materially delinquent for more than 90 days on any of its credit obligation. Annual Report 2018 57
58. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) • Retail portfolio The retail portfolio comprises of loans that are managed at a product level, and based on approved product programs. A retail account is identified as default if the customer is delinquent for more than 90 days. The default rate analysis for the retail portfolio is performed at the account level. Assessment of significant increase in credit risk The Group’s accounting policy is not to use the practical expedient that financial assets with ‘low’ credit risk at the reporting date are deemed not to have had a significant increase in credit risk. As a result, the Group monitors all financial assets, issued loan commitments and financial guarantee contracts that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk, the Group will measure the loss allowance based on lifetime rather than 12-month ECL. The assessment is performed on at least quarterly basis for each individual exposure. Quantitative thresholds are established for the significant increase in the credit based on the movement in credit rating. In addition to quantitative criteria the Group has a proactive Early Warning Indicator (EWI) framework, based on which the Credit Risk team performs a portfolio quality review on a monthly basis. The objective of the same is to identify potentially higher risk customers within the performing customers. Multiple macro economic scenarios form the basis of determining the probability of default at initial recognition and at subsequent reporting dates. Different macro economic scenarios will lead to a different probability of default. It is the weighting of these different scenarios that forms the basis of a weighted average probability of default that is used to determine whether credit risk has significantly increased. In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the probability of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument with the probability of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial instrument was first recognized. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort, based on the Group’s historical experience and expert credit assessment. The following indicators are incorporated: • internal risk grade; • external credit rating (as far as available); • actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to the borrower’s ability to meet its obligations; • actual or expected significant changes in the operating results of the borrower; • significant increases in credit risk on other financial instruments of the same borrower; • significant changes in the value of the collateral supporting the obligation; • significant changes in the actual or expected performance and behaviour of the borrower, including changes in the payment status of borrowers in the group and changes in the operating results of the borrower; and • macroeconomic information (such as oil prices or GDP) is incorporated as part of the internal rating model. The quantitative factors that indicate significant increase in credit risk are reflected in PD models on a timely basis. However the Group still considers separately some qualitative factors to assess if credit risk has increased significantly. For corporate lending there is particular focus on assets that are included on a ‘watch list’. An exposure is on a watch list once there is a concern that the creditworthiness of the specific counterparty has deteriorated. 58 Commercial Bank of Dubai
59. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) As a back stop, a significant increase in credit risk is presumed if a customer is more than 30 days past due in making a contractual payment. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower. For retail lending the Group considers credit scores and events such as unemployment, bankruptcy or death. As a back-stop when an asset becomes 30 days past due, the Group considers that a significant increase in credit risk has occurred and the asset is in Stage 2 of the impairment model, i.e. the loss allowance is measured as the lifetime ECL. Improvement in credit risk profile If there is evidence that there is no longer a significant increase in credit risk relative to initial recognition, then the loss allowance on an instrument returns to being measured as 12-month ECL. The Group has defined below criteria in accordance with regulatory guidelines to assess any improvement in the credit risk profile which will result into upgrading of customers moving from Stage 3 to Stage 2 and from Stage 2 to Stage 1. • • Significant decrease in credit risk will be upgraded stage-wise (one stage at a time) from Stage 3 to Stage 2 after and from Stage 2 to Stage 1 after meeting the curing period of at least 12 months. Restructured cases will be upgraded if repayments of 3 installments (for quarterly installments) have been made or 12 months (for installments longer than quarterly) curing period is met. Incorporation of forward-looking information The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The Group relies on a broad range of forward looking information as economic inputs such as: • GDP growth rates; • UAE Central Bank base rate; • Unemployment rates; etc. The Group has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. The Group formulates three economic scenarios: a base case, which is the median scenario assigned a 80% probability of occurring, and two less likely scenarios, one upside and one downside, each assigned a 10% probability of occurring. Presentation of allowance for ECL in the statement of financial position Loss allowances for ECL are presented in the statement of financial position as follows: • for financial assets measured at amortized cost: as a deduction from the gross carrying amount of the assets; • for debt instruments measured at FVOCI: no loss allowance is recognized in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognized in the fair value reserve; • for loan commitments and financial guarantee contracts: generally, as a provision; and • where a financial instrument includes both a drawn and an undrawn component, and the Group cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Group presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision. Annual Report 2018 59
60. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) Applicable before 1 January 2018 Identification and measurement of impairment At each reporting date the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets, and that the loss event has an impact on the future cash flows of the assets that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Group considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific asset and collective level. Individually assessed loans At each reporting date, the Group assesses on a case-by-case basis whether there is any objective evidence that a loan is impaired. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. This procedure is applied to all accounts that are considered individually significant. In determining impairment losses on these loans, the following factors are considered: • the Group’s aggregate exposure to the customer; • the viability of the customer’s business model and capability to trade successfully out of financial difficulties and generate sufficient cash flow to service its debt obligations; • the amount and timing of expected receipts and recoveries; • the likely dividend available on liquidation or bankruptcy; • the extent of other creditors’ commitments ranking ahead of, or pari passu with, the Group and the likelihood of other creditors continuing to support the company; • the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident; • the realizable value of security (or other credit mitigants) and likelihood of successful repossession; • the likely deduction of any costs involved in recovery of amounts outstanding; and • the ability of the borrower to obtain, and make payments in, the currency of the loan if not local currency. when available, the secondary market price of debt. Impairment losses are recognized in consolidated statement of profit or loss and reflected in an allowance account against loans and advances. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Collectively assessed loans Impairment is determined on a collective basis in two different scenarios: • for loans subject to individual assessment to cover losses which have been incurred but have not yet been identified; and • for homogeneous groups of loans that are not considered individually significant. 60 Commercial Bank of Dubai
61. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) Incurred but not yet identified impairment Individually assessed loans for which no evidence of loss has been identified (performing loans) are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective loss. This arises from individual loan impairment at the reporting date which will only be specifically identified in the future. The collective impairment loss is determined after taking into account: • historical loss experience in portfolios of similar risk characteristics (for example, by industry sector, loan grade or product); • the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate specific allowance against the individual loan; and • management’s judgment as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. The period between a loss occurring and its identification is estimated by the management for each portfolio grouping. Homogeneous groups of loans For homogeneous groups of loans that are not considered individually significant, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment on investments classified as available-for-sale The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. Impairment losses on available-for-sale investment securities are recognized by transferring the cumulative loss that has been recognized in OCI to consolidated statement of profit or loss as a recycle adjustment. The cumulative loss that is recycled from OCI to consolidated statement of profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in consolidated statement of profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in consolidated statement of profit or loss, the impairment loss is reversed through consolidated statement of profit or loss to the extent of amount earlier recognized as impairment loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is not reversed through the consolidated statement of profit or loss and is recognized directly in other comprehensive income. f) Write-off Loans and advances and Islamic financing and debt securities are written-off when the Group has no reasonable expectations of recovering the financial asset (either partially or in full). This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. A write-off constitutes a derecognition event. The Group may apply enforcement activities to financial assets written-off. Recoveries of amounts previously written-off are included in ‘recoveries’ in the consolidated statement of profit or loss and consolidated statement of other comprehensive income. Annual Report 2018 61
62. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) g) Modification of financial assets Applicable from 1 January 2018 A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and / or timing of the contractual cash flows either immediately or at a future date. When a financial asset is modified the Group assesses whether this modification results in derecognition. In accordance with the Group’s policy a modification results in derecognition when it gives rise to substantially different terms. To determine if the modified terms are substantially different from the original contractual terms the Group considers the following: • Qualitative factors, such as contractual cash flows after modification are no longer SPPI, change in currency or change of counterparty, the extent of change in interest rates, maturity, covenants. If these do not clearly indicate a substantial modification, then; • A quantitative assessment is performed to compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, both amounts discounted at the original effective interest. If the difference in present value is material, the Group deems the arrangement is substantially different leading to derecognition. When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Group determines if the financial asset’s credit risk has increased significantly since initial recognition by comparing: • the remaining lifetime PD estimated based on data at initial recognition and the original contractual terms; with • the remaining lifetime PD at the reporting date based on the modified terms. If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximize recovery of the original contractual terms rather than to originate a new asset with substantially different terms. The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. Both retail and corporate loans are subject to the forbearance policy. The Group Credit Committee regularly reviews reports on forbearance activities. If the Group plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired. For financial assets modified as part of the Group’s forbearance policy, where modification did not result in derecognition, the estimate of PD reflects the Group’s ability to collect the modified cash flows taking into account the Group’s previous experience of similar forbearance action, as well as various behavioural indicators, including the borrower’s payment performance against the modified contractual terms. If the credit risk remains significantly higher than what was expected at initial recognition, the loss allowance will continue to be measured at an amount equal to lifetime ECL. The loss allowance on forborne loans will generally only be measured based on 12-month ECL when there is evidence of the borrower’s improved repayment behaviour following modification leading to a reversal of the previous significant increase in credit risk. If the modification of a financial asset measured at amortized cost or FVOCI does not result in derecognition of the financial asset, then the Group first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognizes the resulting adjustment as a modification gain or loss in the consolidated statement of profit or loss. Then the Group measures ECL for the modified asset, where the expected cash flows arising from the modified 62 Commercial Bank of Dubai
63. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) g) Modification of financial assets (continued) financial asset are included in calculating the expected cash shortfalls from the original asset. For floating-rate financial assets, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortized over the remaining term of the modified financial asset. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method. Applicable before 1 January 2018 If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method. h) Derecognition of financial assets The Group derecognizes a financial asset only when the contractual rights to the asset’s cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received. In the case where the financial asset is derecognized, the loss allowance for ECL is remeasured at the date of derecognition to determine the net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based on 12-month ECL except in the rare occasions where the new loan is considered to be originated credit impaired. This applies only in the case where the fair value of the new loan is recognized at a significant discount to its revised par amount because there remains a high risk of default which has not been reduced by the modification. The Group monitors credit risk of modified financial assets by evaluating qualitative and quantitative information, such as if the borrower is in past due status under the new terms. On derecognition of a financial asset in its entirety, the difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain / loss allocated to it that had been recognized in OCI is recognized in consolidated statement of profit or loss. Applicable from 1 January 2018: Any cumulative gain / loss recognized in OCI in respect of equity investment securities designated as at FVOCI is not recognized in the consolidated statement of profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognized as a separate asset or liability. Annual Report 2018 63
64. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.2 Financial liabilities a) Classification The Group classifies its financial liabilities in the following categories: (i) Fair value through profit or loss; and (ii) Amortized cost. (i) Financial liabilities at FVPL Financial liabilities are classified as at FVPL when the financial liability is (i) held for trading, or (ii) it is designated as at FVPL. A financial liability is classified as held for trading if: • it has been incurred principally for the purpose of repurchasing it in the near term; or • on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and is effective as a hedging instrument. A financial liability other than a financial liability held for trading or contingent consideration that may be paid by an acquirer as part of a business combination may be designated as at FVPL upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and IFRS 9 permits the entire hybrid (combined) contract to be designated as at FVPL. Subsequent measurement Financial liabilities at FVPL are stated at fair value, with any gains / losses arising on remeasurement recognized in profit or loss to the extent that they are not part of a designated hedging relationship. The net gain / loss recognized in consolidated statement of profit or loss incorporates any interest paid on the financial liability. Applicable from 1 January 2018: However, for non-derivative financial liabilities that are designated as at FVPL, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in OCI, unless the recognition of the effects of changes in the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. The remaining amount of change in the fair value of liability is recognized in profit or loss. Changes in fair value attributable to a financial liability’s credit risk that are recognized in OCI are not subsequently reclassified to consolidated statement of profit or loss; instead, they are transferred to retained earnings upon derecognition of the financial liability. In making the determination of whether recognizing changes in the liability’s credit risk in OCI will create or enlarge an accounting mismatch in profit or loss, the Group assesses whether it expects that the effects of changes in the liability’s credit risk will be offset in profit or loss by a change in the fair value of another financial instrument measured at FVPL. This determination is made at initial recognition. Fair value is determined in the manner described in note 3.1 (b). (ii) Financial liabilities at amortized cost Other financial liabilities, including deposits and borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The EIR is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. 64 Commercial Bank of Dubai
65. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.2 Financial liabilities (continued) b) Modification of financial liabilities The Group accounts for substantial modification of terms of an existing liability or part of it as an extinguishment of the original financial liability and the recognition of a new liability. It is assumed that the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective rate is materially different from the discounted present value of the remaining cash flows of the original financial liability. In this case, a new financial liability based on the modified terms is recognized at fair value. The difference between the carrying amount of the financial liability derecognized and consideration paid is recognized in the consolidated statement of profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability. Applicable from 1 January 2018: If the modification of a financial liability is not accounted for as derecognition, then the amortized cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss is recognized in the consolidated statement of profit or loss. For floating-rate financial liabilities, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs and fees incurred are recognized as an adjustment to the carrying amount of the liability and amortized over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument. c) Derecognition of financial liabilities The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in the consolidated statement of profit or loss. When the Group exchanges with the existing lender one debt instrument into another one with substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. 3.1.3 Financial guarantee contracts A financial guarantee contract is a contract that requires the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Financial guarantee contracts issued by a group entity are initially measured at their fair values and, if not designated as at FVPL and not arising from a transfer of a financial asset, are subsequently measured at the higher of: • Applicable from 1 January 2018: The amount of the loss allowance determined in accordance with IFRS 9 and the amount initially recognized less, where appropriate, the cumulative amount of income recognized in accordance with the Group’s revenue recognition policies. • Applicable before 1 January 2018: The amount representing the initial fair value amortized over the life of the guarantee or the commitment and the present value of any expected payment to settle the liability when a payment under the contract has become probable. Financial guarantee contracts not designated at FVPL are presented as provisions on the consolidated statement of financial position and the remeasurement is presented in other revenue. The Group has not designated any financial guarantee contracts as at FVPL. Annual Report 2018 65
66. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.4 Loan commitments Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. Commitments to provide a loan at a below-market interest rate are initially measured at their fair values and, if not designated as at FVPL, are subsequently measured as follows: • Applicable from 1 January 2018: At the higher of the amount of the loss allowance determined in accordance with IFRS 9 and the amount initially recognized less, where appropriate, the cumulative amount of income recognized in accordance with the Group’s revenue recognition policies. • Applicable before 1 January 2018: The Group recognized a provision in accordance with IAS 37 if the contract was considered to be onerous. The Group has not designated any commitments to provide a loan below market rate designated at FVPL. 3.2 Derivative financial instruments a) Classification The Group enters into derivative financial instruments including forwards, futures, swaps and options in the foreign exchange and capital markets. Derivative financial instruments, that do not qualify for hedge accounting are classified as “FVPL – financial assets held for trading” financial instruments. b) Initial and subsequent measurement In the normal course of business, the fair value of a derivative on initial recognition is the transaction price. Subsequent to initial recognition, derivative financial instruments are stated at fair values. Fair values are generally obtained by reference to quoted market prices in active markets, or by using valuation techniques when an active market does not exist. The positive mark to market values (unrealized gains) of derivative financial instruments is included in other assets. The negative mark to market values (unrealized losses) of derivative financial instruments is included in other liabilities. c) Gains and losses on subsequent measurement The gains or losses from derivative financial instruments classified as FVPL are taken to the consolidated statement of profit or loss. 3.3 Hedging instruments As part of its asset and liability management, the Group uses derivatives for hedging purpose. When derivatives are designated as hedges, the Group classifies them as either: • fair value hedges which hedge the change in the fair value of recognized assets or liabilities; or • cash flow hedges which hedge the exposure to variability in highly probable future cash flows attributable to a recognized asset or liability or a forecast transaction. Hedge accounting is applied to derivatives designated as hedging instruments in fair value or cash flow hedge provided certain criteria are met. Hedge accounting a) Hedge documentation At the inception of the hedge, formal documentation of the hedge relationship must be established. The hedge documentation prepared at the inception of the hedge must include a description of the following: • The Group’s risk management objective and strategy for undertaking the hedge; • The nature of risk being hedged; • Clear identification of the hedged item and the hedging instrument; and • How the Group will assess the effectiveness of the hedging relationship on an ongoing basis. 66 Commercial Bank of Dubai
67. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.3 Hedging instruments (continued) b) Hedge effectiveness testing The hedge is regarded as highly effective if both of the following conditions are met: • At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in offsetting the changes in fair value or cash flows of the hedging instruments with corresponding changes in the hedged risk and should be reliably measurable; and • The actual results of the hedge effectiveness testing are within a range of 80 to 125 percent. In case of a cash flow hedge, prospective hedge effectiveness is assessed by matching the critical terms of hedging instruments and hedged items. c) Fair value hedge The changes in the fair value of derivatives that are designated and qualify as fair value hedge instruments is recognized in the consolidated statement of profit or loss. d) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in OCI. Any gain or loss in fair value relating to an ineffective portion is recognized immediately in the consolidated statement of profit or loss. e) Discontinuance of hedge accounting The hedge accounting is discontinued when a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting. At that point of time, any cumulative gain or loss on the hedging instrument that has been recognized in OCI remains in other comprehensive income until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the consolidated statement of profit or loss. f) Hedges that do not qualify for hedge accounting For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of the hedging instrument are taken directly to the consolidated statement of profit or loss for the period. 3.4 Due from banks Amounts due from banks are initially recognized at fair value and subsequently measured at amortized cost less allowance for expected credit loss, if any. 3.5 Loans and advances and Islamic financing Loans and advances and Islamic financing are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortized cost using the effective interest method, except when the Group chooses to carry the loans and advances at fair value through profit or loss. In addition to conventional banking products, the Group offers its customers certain Islamic financing products, which are approved by Sharia’a Supervisory Board. Islamic financing consists of the following: Murabaha An agreement whereby the Group sells to a customer, commodity or asset (subject asset) on a deferred payment basis, which the Group has purchased and acquired, based on a promise received from the customer to buy the item purchased according to specific terms and conditions. The selling price comprises the cost of the subject asset and an agreed profit margin. Income is recognized on an accrual basis adjusted by actual income when received. Annual Report 2018 67
68. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.5 Loans and advances and Islamic financing (continued) Ijara Ijara refers to lease of the asset, which the Group (Lessor) constructs or purchases as per customer (Lessee) request based on the promise to lease the asset for a fixed term against certain rent installment. Ijara can end by transferring the ownership of the asset to the lessee in case of Ijara Muntahia Bittamleek. The Ijarah agreement specifies the leased asset, duration of the lease term, as well as, the basis for rental calculation and the timing of rental payment. The Lessee undertakes under this agreement to renew the lease periods and pay the relevant rental payment amounts as per the agreed schedule and applicable formula throughout the lease term. The Lessor retains the ownership of the asset throughout the lease term. At the end of the lease term, upon fulfillment of all the obligations by the Lessee under the Ijarah agreement, the Lessor will sell the leased asset to the Lessee at nominal value based on a sale undertaking given by the Lessor. Ijarah rentals accrue upon the commencement of the lease and continues throughout the lease term based on the outstanding fixed rental (which predominantly represent the cost of the leased asset). Musharaka An agreement whereby the Group and a customer contribute to a certain enterprise according to a diminishing arrangement ending up with the acquisition by the customer of the full ownership. The profit is shared as per the agreement set between both parties while the loss is shared in proportion to their shares of capital in the enterprise. In principle, Musharaka profit is distributed on declaration / distribution by the managing partner. Islamic financing products are initially recognized at fair value and subsequently measured at amortized cost, using the effective profit method, less any amounts written off, allowance for doubtful accounts and unearned income. The effective profit rate is the rate that exactly discounts estimated future cash flow through the expected life of the financial asset or liability. 3.6 Investment securities The ‘investment securities’ caption in the statement of financial position includes: • debt investment securities measured at amortized cost: these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortized cost using the effective interest method; • debt and equity investment securities measured at FVPL or designated as at FVPL: these are at fair value with changes recognized immediately in profit or loss; • debt securities measured at FVOCI; and • equity investment securities designated as FVOCI. For debt securities measured at FVOCI, gains and losses are recognized in OCI, except for the following, which are recognized in profit or loss in the same manner as for financial assets measured at amortized cost. • Interest revenue using the effective interest method; • ECL and reversals; and • Foreign exchange gains and losses. When debt security measured at FVOCI is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss. The Group elects to present in OCI changes in the fair value of certain investments in equity instruments that are not held for trading. The election is made on an instrument-by-instrument basis on initial recognition and is irrevocable. Gains and losses on such equity instruments are never reclassified to profit or loss and no impairment is recognized in profit or loss. Dividends are recognized in profit or loss unless they clearly represent a recovery of part of the cost of the 68 Commercial Bank of Dubai
69. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.6 Investment securities (continued) investment, in which case they are recognized in OCI. Cumulative gains and losses on equity instruments recognized in OCI are transferred to retained earnings on disposal of an investment. Applicable before 1 January 2018: Investment securities were initially measured at fair value plus, in the case of investment securities not at FVTPL, incremental direct transaction costs, and subsequently accounted for depending on their classification as either held-to-maturity, FVTPL or available-for-sale. (refer to note 3.1.1 (a)) 3.7 Investment properties The Group holds certain investment properties to earn rental income, for capital appreciation or both. The leased out or intended to lease out components have been classified as investment properties. Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred, if the recognition criteria are met and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less any accumulated depreciation and accumulated impairment losses. Depreciation is charged using straight line method over the useful life of the asset. Estimated useful life of buildings is 20 to 30 years. Investment properties are derecognized when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property is determined by comparing the proceeds from disposal with the carrying amount and is recognized in the consolidated statement of profit or loss under ‘other income’ in the year of retirement or disposal. Transfers are made to and from investment properties when, and only when there is change in use evidenced by ending or commencing of owner-occupation, ending or commencement of an operating lease of another party or ending of construction or development. Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition, management has committed to the sale, and the sale is expected to be completed within one year from the date of classification. 3.8 Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses except for granted land, which is stated at the market value at the date of grant. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of replacing an item of property and equipment is recognized in the carrying value of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The day-to-day servicing expenses of property and equipment are recognized in the consolidated statement of profit or loss as incurred. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment. These are included in the consolidated statement of profit or loss. Property and equipment is impaired if the carrying amount of the asset or its cash generating unit (CGU) exceed its recoverable amount. The impairment loss is recognized in the consolidated statement of profit or loss. Annual Report 2018 69
70. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.8 Property and equipment (continued) The cost of all property and equipment other than freehold land and capital work in progress is depreciated using the straight-line method over the following estimated useful lives: Buildings Leasehold improvements Furniture, equipment and vehicles 20 to 30 years 5 years 3 to 5 years Depreciation methods, useful lives and residual values are reassessed at each reporting date and prospectively adjusted if appropriate. Capital work in progress is initially recorded at cost, and upon completion is transferred to the appropriate category of property and equipment and thereafter depreciated in accordance with the Group’s policies. 3.9 Due to banks, notes and medium term borrowing Amounts due to banks, notes and medium term borrowing are initially measured at fair value plus transaction costs, and are subsequently measured at amortized cost using the effective interest method. 3.10 Repurchase agreement When the Group sells a financial asset and simultaneously enters into an agreement to repurchase the asset at a fixed price on a future date, the agreement is accounted for as a term borrowing depending on period of the agreement, and the underlying asset continues to be recognized in the Group’s financial statement. 3.11 Customer deposits and Islamic customer deposits Customer deposits are initially recognized at fair value, being the fair value of the consideration received. After initial recognition, all deposits are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any transaction costs that are directly attributable to the acquisition or receipt of customer deposit. The Islamic customer deposits are received by entering into following kinds of agreements: Mudaraba An agreement between the Group and a third party whereby one party would provide a certain amount of funds (Rab ul Mal) which the other party (Mudarib) would then invest in a specific enterprise or activity against a specific share in the profit. The Mudarib would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudaraba. In principle Mudaraba profit is distributed on declaration/distribution by the Mudarib. Wakala An agreement between Group and third party whereby one party (Muwakil) provides certain amount of funds which the other party (Wakil) would invest according to the terms and conditions of Wakala in return for a certain fee. The Wakil is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. The Wakeel may be granted any excess over and above a certain pre-agreed rate of return as a performance incentive. In principle, wakala profit is distributed on declaration/distribution by the Wakil. Islamic customer deposits are initially measured at fair value plus transaction costs, and subsequently measured at their amortized cost using the effective profit method. 70 Commercial Bank of Dubai
71. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.12 Employees’ terminal benefits (i) Pension obligations The Group operates a pension scheme in respect of eligible UAE national employees in compliance with the UAE Federal Law on Pensions and Social Security. Arrangements for benefits for overseas employees is made in accordance with local regulations and customs. Full provision is made for all accrued benefits. (ii) Termination gratuity benefit scheme In compliance with UAE labour law, the Group has a termination gratuity benefit scheme covering all of its expatriate salaried employees who have been employed with the Group for more than one year. The provision for gratuity is recorded through the consolidated statement of profit or loss. The present value of the gratuity obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for gratuities include the discount and mortality rate. Any changes in these assumptions will impact the carrying amount of gratuity obligations. The value of the gratuity obligations is based on the report submitted by an independent actuarial firm. 3.13 Share capital The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. 3.14 Dividend on ordinary shares Dividends payable on ordinary shares are recognized as a liability in the period in which they are approved by the Group’s shareholders in the Annual General Meeting. 3.15 Offsetting Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when, and only when, the Group has a legally enforceable right to set off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or of gains and losses arising from a group of similar transactions such as in the Group’s trading activity. 3.16 Cash and cash equivalents For the purposes of the consolidated cash flow statement, cash and cash equivalents consist of cash on hand and balances with the Central Bank (excluding statutory reserve), and amounts due from and due to banks with original maturity of less than three months. Cash and cash equivalents are carried at amortized cost in the statement of financial position. 3.17 Revenue recognition (i) Interest income and expense Applicable from 1 January 2018: Interest income and expense for all interest bearing financial instruments except at FVPL, are presented in ‘interest income’ and ‘interest expense’ in the consolidated statement of profit or loss on an accrual basis using the effective interest rates of the financial assets or financial liabilities to which they relate. Interest income and expense for financial instruments at FVPL is recognized as ‘Net gains from investments at fair value through profit or loss’. Applicable before 1 January 2018: Interest income and expense for financial instruments classified as held for trading or designated at FVPL is recognized as ‘trading income’. Interest income and expense are recognized in profit or loss using the effective interest method. The ‘effective interest rate’ is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to: Annual Report 2018 71
72. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.17 Revenue recognition (continued) • • the gross carrying amount of the financial asset; or the amortized cost of the financial liability. When calculating the effective interest rate for financial instruments other than purchased or originated credit-impaired assets, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not ECL. For purchased or originated credit impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including ECL. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability. Amortized cost and gross carrying amount The ‘amortized cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance (or ‘impairment allowance’ before 1 January 2018). The ‘gross carrying amount of a financial asset’ is the amortized cost of a financial asset before adjusting for any expected credit loss allowance. Calculation of interest income and expense Applicable from 1 January 2018: The effective interest rate of a financial asset or financial liability is calculated on initial recognition of a financial asset or a financial liability. In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit impaired) or to the amortized cost of the liability. The effective interest rate is revised as a result of periodic re-estimation of cash flows of floating rate instruments to reflect movements in market rates of interest. The effective interest rate is also revised for fair value hedge adjustments at the date amortization of the hedge adjustment begins. For financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortized cost of the financial asset. If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis. For financial assets that were credit-impaired on initial recognition, interest income is calculated by applying the creditadjusted effective interest rate to the amortized cost of the asset. The calculation of interest income does not revert to a gross basis, even if the credit risk of the asset improves. Applicable before 1 January 2018: The effective interest rate is the rate that discounts estimated future cash receipts and payments earned or paid on a financial asset or a liability through its expected life or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. When calculating effective interest rates, the Group estimates cash flows considering all contractual terms of the financial instruments, but not future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. 72 Commercial Bank of Dubai
73. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.17 Revenue recognition (continued) (ii) Income from Islamic financing and distributions to depositors Income from Islamic financing is recognized in the consolidated statement of profit or loss using the effective profit method. The calculation of the effective profit rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective profit rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset. Distribution to depositors (Islamic products) is calculated according to the Group’s standard procedures and is approved by the Group’s Sharia’a Supervisory Board. (iii) Fees and commission Fee income, which is not an integral part of the effective interest rate of a financial instrument, is earned from a diverse range of services provided by the Group to its customers, and are accounted for in accordance with IFRS 15 ‘Revenue from Contracts with Customers’. Under the IFRS 15, fee income is measured by the Group based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognizes revenue when it transfers control over a product or service to a customer. A contract with a customer that results in a recognized financial instrument in the Group’s financial statements may be partially in the scope of IFRS 9 and partially in the scope of IFRS 15. If this is the case, then the Group first applies IFRS 9 to separate and measure the part of the contract that is in the scope of IFRS 9 and then applies IFRS 15 to the residual. Fee income is accounted for as follows: • income earned on the execution of a significant act is recognized as revenue when the act is completed (for example, fees arising from negotiating, or participating in the negotiation of a transaction for a third-party, such as an arrangement for the acquisition of shares or other securities); • income earned from the provision of services is recognized as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees); and • other fees and commission income and expense are recognized as the related services are performed or received. Other fee and commission expenses relate mainly to credit card loyalty programme, commission and brokerage fees which are expensed as the services are received. Fee income which forms an integral part of the effective interest rate of a financial instrument is recognized as an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in ‘Interest income’. • Asset management services The Group provides asset management services. Fees for asset management services are calculated based on a fixed percentage of the value of assets managed and deducted from the customer’s account balance on a monthly basis. • Customer loyalty programme The Group operates a rewards programme which allows customers to accumulate points when they purchase products on the Group’s credit cards. The points can then be redeemed for shopping rewards, cash back or air miles, subject to a minimum number of points being obtained. While some aspects of the programme are administered in-house, third party providers are used for certain other aspects of the programme. In the case of the in-house administered aspects, the sale proceeds received are allocated between the products / services sold and the points issued. The proceeds allocated to the points are equal to their fair value. Fair value is determined by applying statistical techniques. The fair value of the points issued is deferred and recognized as revenue when the points are redeemed. Annual Report 2018 73
74. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.17 Revenue recognition (continued) (iii) Fees and commission (continued) For aspects where third party providers are used, the consideration allocated to the awards credits collected on behalf of the third party are charged to the consolidated statement or profit or loss at the time of supplying the rewards. (iv) Property related income Property related income includes rental income, which is recognized on a straight line basis over the term of the lease and is recorded under ‘other income’ in the consolidated statement of profit or loss. (v) Dividend income Dividend income is recognized when the right to receive payment is established. The presentation of dividend income in the consolidated statement of profit or loss depends on the classification and measurement of the equity investment, i.e.: • for equity instruments designated at FVOCI, dividend income is presented as Dividend Income; and • for equity instruments at FVPL, dividend income is presented as ‘Net gains from investments at FVPL’. (vi) Share of profit of an associate Share of profit of an associate reflects the Group’s share of the results of operations of the associate. 3.18 Provisions A provision is recognized if as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 3.19 Foreign currencies Foreign currency transactions are recorded at rates of exchange ruling at the value dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date, are translated at the foreign exchange rate ruling at spot date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at the foreign exchange rates ruling at the dates that the fair values were determined. Forward foreign exchange contracts are translated into AED at market rates of exchange ruling at the reporting date. Foreign exchange differences arising on translation are recognized in the consolidated statement of profit or loss. Foreign currency differences arising on translation are generally recognized in the consolidated statement of profit or loss. However, foreign currency differences arising from the translation of qualifying cash flow hedges to the extent that the hedge is effective, are recognized in OCI. 3.20 Leasing The Group has entered into leasing arrangements which based on the evaluation of the terms and condition of the leasing arrangement has been classified as operating lease. Leases are classified as operating leases if risk and reward incidental to ownership of the leased asset lie with lessor. Group as lessor Asset subjected to operating lease are presented in the consolidated statement of financial position according to the nature of the asset. Income from operating leases are recognized in the consolidated statement of profit or loss on straight line basis over the lease term. Group as lessee Lease payments under operating leases are recognized as expense on a straight line basis over the lease term. 74 Commercial Bank of Dubai
75. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.21 Fiduciary activities The Group provides wealth management solutions to manage client assets. These assets are held in the Group’s custody and are invested on behalf of the client in third party funds, and other securities like bonds and sukuk. These assets and income arising from these assets are not included in the Group’s consolidated financial statements as the risk and rewards incidental to ownership of these assets lie with the client. 3.22 Acceptances Acceptances arise when the bank is under an obligation to make payments against documents drawn under letters of credit. Acceptances specify the amount of money, the date and the person to which the payment is due. After acceptance, the instrument becomes an unconditional liability (time draft) of the bank and is therefore recognized as a financial liability in the consolidated statement of financial position with a corresponding contractual right of reimbursement from the customer recognized as a financial asset. Acceptances have been considered within the scope of IFRS 9 - Financial Instruments (before 1 January 2018: IAS 39 Financial Instruments - Recognition and Measurement) and continued to be recognized as a financial liability in the consolidated statement of financial position with a contractual right of reimbursement from the customer as a financial asset. 3.23 Derivative product types A derivative is a financial instrument whose value changes in response to an underlying variable, that requires little or no initial investment and that is settled at a future date. The Group enters into a variety of derivative financial instruments to manage the exposure to profit and foreign exchange rate risks, including unilateral promise to buy/sell currencies and interest rate swap. Forwards Forwards are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future. Forwards are customized contracts transacted in the over-the-counter market. Swaps Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency. For currency swaps, the underlying amounts are exchanged in different currencies. Options Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. (i) Derivative related credit risk Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that are favorable to the Group and potential future fluctuations. The majority of the fair value of favorable contracts (and therefore credit risk) is exposure to financial institutions. (ii) Derivatives held or issued for trading purposes Most of the Group’s derivative trading activities relate to sales and position coverage. Sales activities involve offering products to customers at competitive prices in order to enable them to transfer, modify or reduce current and expected risks. Interest rate derivatives trading are conducted under Board approved limits. Annual Report 2018 75
76. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.23 Derivative product types (continued) (ii) Derivatives held or issued for trading purposes (continued) Derivatives are initially recognized in the consolidated financial statements at cost being its fair value, for the premium received / paid. All derivatives are carried at their fair values as assets where the fair values are positive and as liabilities where the fair values are negative. Subsequent to initial recognition derivatives (held for trading) are measured at fair value with fair value changes recognized in the consolidated statement of profit or loss. 3.24 Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. 3.25 Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Business Committee of the Group to make decisions about resources allocated to the segment and assess its performance, and for which distinct financial information is available. Segment results that are reported to the Business Committee of the Group include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. 3.26 Related parties An entity is considered related party of the Group if: a) A person or a close member of that person’s family is related to the Group, if that person: i. has control or joint control of the Group; ii. has significant influence over the Group; or iii. is a member of the key management personnel of the Group. b) An entity is related to a Group if any of the following conditions applies: i. The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). ii. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). iii. Both entities are joint ventures of the same third party. iv. One entity is a joint venture of a third entity and the other entity is an associate of the third entity. v. The entity is controlled or jointly controlled by a person identified in (a). vi. A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). c) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. Other than the transactions disclosed in note 33, the Group enters into transactions with other Government entities. In accordance with the exemption available in the revised IAS 24, these transactions with such related Government entities are not collectively or individually significant and have not been disclosed. 76 Commercial Bank of Dubai
77. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.27 Impairment of non-financial assets At the end of each reporting period, the Group reviews the carrying amounts of their non-financial assets to determine whether there is any indication of an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in consolidated statement of profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in consolidated statement of profit or loss. 4. USE OF ESTIMATES AND JUDGEMENTS The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty and actual results may therefore differ, resulting in future changes in these estimates. Critical judgements in applying the Group’s accounting policies In particular, considerable management judgment is required in respect of the following issues: 4.1 Going concern The Group’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. 4.2 Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by other available fair value indicators. Applicable from 1 January 2018: 4.3 Financial asset classification Assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and interest on the principal amount outstanding. Annual Report 2018 77
78. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 4. USE OF ESTIMATES AND JUDGEMENTS (continued) 4.4 Significant increase in credit risk As explained in note 3.1.1 (e), ECL are measured as an allowance equal to 12-month ECL for Stage 1 assets, or lifetime ECL assets for Stage 2 or Stage 3 assets. An asset moves to Stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward looking information. 4.5 Establishing groups of assets with similar credit risk characteristics When ECLs are measured on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics. Refer to note 3.1.1 (e) for details of the characterics considered in this judgement. The Group monitors the appropriateness of the credit risk characteristics on an ongoing basis to assess whether they continue to be similar. This is required in order to ensure that should credit risk characteristics change there is an appropriate re-segmentation of the assets. This may result in new portfolios being created or assets moving to an existing portfolio that better reflects the similar credit risk characteristics of that group of assets. Re-segmentation of portfolios and movement between portfolios is more common when there is a significant increase in credit risk (or when that significant increase reverses) and so assets move from 12-month to lifetime ECLs, or vice versa, but it can also occur within portfolios that continue to be measured on the same basis of 12-month or lifetime ECLs but the amount of ECL changes because the credit risk of the portfolios differ. 4.6 Models and assumptions used The Group uses various models and assumptions in measuring fair value of financial assets as well as in estimating ECL. Judgement is applied in identifying the most appropriate model for each type of asset, as well as for determining the assumptions used in these models, including assumptions that relate to key drivers of credit risk. See note 3.1.1 (e) for more details on ECL. Applicable before 1 January 2018: 4.7 Impairment losses on loans and advances and Islamic financing The Group reviews its loan portfolios to assess impairment at each reporting date. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows (excluding future expected credit losses that have not yet been incurred). The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 4.8 Held-to-maturity investments The Group follows the guidance of IAS 39 in classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value and not amortized cost. 4.9 Impairment of available-for-sale investments The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology or operational and financing cash flows. 78 Commercial Bank of Dubai
79. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 4. USE OF ESTIMATES AND JUDGEMENTS (continued) 4.10 Key sources of estimation uncertainty The following are key estimations that have been used in the process of applying the Group’s accounting policies: Applicable from 1 January 2018: • Establishing the number and relative weightings of forward-looking scenarios for each type of product / market and determining the forward looking information relevant to each scenario: When measuring ECL, the Group uses reasonable and supportable forward looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other. • Probability of default: PD constitutes a key input in measuring ECL. PD is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions. • Loss Given Default: LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements. Applicable before 1 January 2018: • Fair value measurement and valuation process: In estimating the fair value of a financial asset or a liability, the Group uses market-observable data to the extent it is available. Where such Level 1 inputs are not available the Group uses valuation models to determine the fair value of its financial instruments. Refer to note 3.1 (b) for more details on fair value measurement. 5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS “IFRS” 5.1 Relevant new and revised IFRS applied with no material effect on the consolidated financial statements The following new and revised IFRS have been adopted in these consolidated financial statements. The application of these new and revised IFRS has not had any material impact on the amounts reported for the current and prior periods. Effective for annual periods beginning on or after • Annual Improvements to IFRS Standards 2014 – 2016 Cycle amending IFRS 1 and IAS 28 to remove short-term exemptions and clarifying certain fair value measurements 1 January 2018 • IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’ 1 January 2018 • Amendments to IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ deleting short-term exemptions for first-time adopters 1 January 2018 • Amendments to IFRS 2 ‘Share Based Payment’ clarifying the classification and measurement of share based payment transactions 1 January 2018 • Amendments to IFRS 7 ‘Financial Instruments’ related to disclosures about the initial application of IFRS 9 1 January 2018 • IFRS 15 ‘Revenue from Contracts with Customers’ 1 January 2018 • Amendments to IAS 28 Investments in Associates and Joint Ventures providing clarification on measuring investees at fair value through profit or loss is an investment-by-investment choice 1 January 2018 • Amendments to IAS 40 ‘Investment Property’ clarifying transfers of property to, or from, investment property 1 January 2018 Other than the above, there are no other significant IFRSs and amendments that were effective for the first time for the financial year beginning on or after 1 January 2018. Annual Report 2018 79
80. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS “IFRS” (continued) 5.2 Relevant new and revised IFRS issued but not yet effective The Group has not applied the following new and revised IFRS, amendments and interpretations that have been issued but not yet effective: Effective for annual periods beginning on or after • IFRS 16 Leases 1 January 2019 • Amendment to IAS 19 Employee Benefits 1 January 2019 • IFRIC 23 Uncertainty over Income Tax Treatments 1 January 2019 • Amendments to IAS 28 Investment in Associates and Joint Ventures 1 January 2019 • Annual Improvements to IFRS Standards 2015 – 2017 Cycle amending IFRS 3, IFRS 11, IAS 12 and IAS 23 1 January 2019 • Amendments to IFRS 10 Consolidated Financial Statements Effective date deferred indefinitely. Adoption is still permitted. Management anticipates that these IFRS and amendments will be adopted in the consolidated financial statements in the initial period when they become mandatorily effective. The impact of these standards and amendments are currently being assessed by the management. 80 Commercial Bank of Dubai
81. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 6. SUMMARY OF IMPACT ANALYSIS AS PER IFRS 9 The following table reconciles the original measurement categories and carrying amounts in accordance with IAS 39 and the new measurement categories with those under IFRS 9 for the Group’s financial assets and financial liabilities with the impairment effect on opening retained earnings as at 1 January 2018. Original New classification as classification as per IAS 39 per IFRS 9 Financial assets Original carrying amount ECL under IFRS 9 New carrying amount AED’000 AED’000 AED’000 Cash and balances with Central Bank Amortized cost Amortized cost 6,808,539 - 6,808,539 Due from banks, net Amortized cost Amortized cost 2,834,710 184 2,834,526 Loans and receivables Amortized cost 47,275,725 388,748 46,886,977 Investment securities - Debt FVPL FVPL 42,104 - 42,104 Investment securities - Debt AFS FVOCI 6,810,574 7,177 6,803,397 Investment securities - Debt HTM Amortized cost 133,242 140 133,102 Equity securities AFS FVOCI 91,160 - 91,160 Other assets FVPL FVPL 69,675 - 69,675 Other assets Amortized cost Amortized cost 326,825 - 326,825 64,392,554 396,249 63,996,305 81,053 1,246 79,807 64,473,607 397,495 64,076,112 Loans and advances and Islamic financing, net Total financial assets Non-financial asset Investment in an associate - - Total financial and non-financial assets Financial liabilities Due to banks Amortized cost Amortized cost 779,823 - 779,823 Customer deposits and Islamic customer deposits Amortized cost Amortized cost 48,411,192 - 48,411,192 Notes and medium term borrowings Amortized cost Amortized cost 6,089,663 - 6,089,663 Other liabilities FVPL FVPL 73,984 - 73,984 Other liabilities Amortized cost Amortized cost 740,665 - 740,665 56,095,327 - 56,095,327 Total financial liabilities Annual Report 2018 81
82. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 7. FINANCIAL ASSETS AND LIABILITIES 7.1 Financial assets and liabilities classification The table below sets out the Group’s financial assets and liabilities classification in accordance with the categories of financial instruments in IFRS 9 (2017: IAS 39): 31 December 2018 Cash and balances with Central Bank Due from banks, net Loans and advances and Islamic financing, net Investment securities, net Customer deposits and Islamic customer deposits Notes and medium term borrowing Due for trade acceptances Total financial liabilities Investment securities, net Other assets, net Total financial assets Due to banks Customer deposits and Islamic customer deposits Notes and medium term borrowing Due for trade acceptances Other liabilities Total financial liabilities 82 Commercial Bank of Dubai 8,682,322 8,682,322 - - 971,280 971,280 50,944,947 50,944,947 - 6,751,150 - 6,751,150 - 5,266,428 5,266,428 104,556 6,751,150 66,461,774 73,317,480 - - 53,165,030 53,165,030 - - 2,609,944 2,609,944 - - 5,266,428 5,266,428 - 64,714,310 64,796,850 - - - Held-toFair value Available-formaturity through Profit sale at fair or loss value AED’000 AED’000 AED’000 - - - - - - - 2,834,710 2,834,710 133,242 42,104 6,901,734 - - - 69,675 111,779 - Other Total carrying amortized amount cost 6,808,539 - 133,242 992,504 6,808,539 - - 909,964 2,762,944 - - 47,275,725 2,762,944 701,353 AED’000 - - 596,797 AED’000 47,275,725 - AED’000 - AED’000 - AED’000 - 82,540 Loans and receivables Bankers acceptances - 82,540 Other liabilities Loans and advances and Islamic financing, net AED’000 - Due to banks Due from banks, net - Amortized Total carrying cost amount AED’000 104,556 Other assets, net Total financial assets Cash and balances with Central Bank Fair value through OCI - Bankers acceptances 31 December 2017 Fair value through profit or loss - - 47,275,725 7,077,080 - 5,121,186 5,121,186 6,901,734 15,091,260 69,513,740 - - 326,825 779,823 396,500 779,823 - - - - 48,411,192 48,411,192 - - - - 6,089,663 6,089,663 - - - - 5,121,186 5,121,186 - 61,142,529 61,216,513 - - - - 73,984 73,984 - 740,665 814,649
83. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 7. FINANCIAL ASSETS AND LIABILITIES (continued) 7.2 Fair value measurement – Fair value hierarchy: The table below shows categorization of fair value of financial assets and liabilities into different levels of the fair value hierarchy: Level 1 31 December 2018 Investments Equities Fund of funds Fixed and floating rate securities Positive market value of forward foreign exchange contracts and other derivatives Held for trading Held for fair value hedge Negative market value of forward foreign exchange contracts and other derivatives Held for trading Held for fair value hedge Held for cash flow hedge Liabilities at amortized cost Notes and medium term borrowings Level 2 Level 3 Total fair value Carrying value AED’000 AED’000 AED’000 AED’000 AED’000 72,324 - - 72,324 72,324 - - 6,675,313 6,675,313 - 9,774 - 104,243 - 104,243 104,243 - (74,303) - (74,303) (74,303) - (7,145) - (7,145) (7,145) 6,675,313 - - 313 - - 9,774 313 313 (1,092) - (1,470,596) (1,143,241) (1,111,451) - - (2,613,837) (2,609,944) 91,160 - - 91,160 91,160 - - 6,970,723 6,970,765 5,277,041 (1,092) 9,774 4,165,590 (1,092) 4,169,483 31 December 2017 Investments Equities Fund of funds - 15,155 - 69,477 - 69,477 69,477 Held for trading - (59,936) - (59,936) (59,936) Held for cash flow hedge - (12,026) - (12,026) (12,026) (3,352,090) (2,789,067) - (6,141,157) (6,089,663) 3,709,793 (2,778,221) - 931,572 983,108 Fixed and floating rate securities Positive market value of forward foreign exchange contracts and other derivatives Held for trading Held for fair value hedge Negative market value of forward foreign exchange contracts and other derivatives Held for fair value hedge Liabilities at amortized cost Notes and medium term borrowings 6,970,723 - - 198 (2,022) - - - 15,155 198 (2,022) 15,155 198 (2,022) The carrying values of the financial assets and liabilities (that are not stated at fair value) are not significantly different from their fair values. During the year there were no transfers between Level 1 and Level 2 of the fair value hierarchy above and no financial instruments were classified within level 3 of the fair value hierarchy at any time during the current or prior year. Further, there has been no change in the valuation techniques in relation to valuation of financial instruments during the current or prior year. Annual Report 2018 83
84. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 8. CASH AND BALANCES WITH CENTRAL BANK Cash on hand Balances with Central Bank U.A.E - Clearing account balances - Statutory reserves - Negotiable certificates of deposit 2018 AED’000 449,843 2017 AED’000 509,915 732,048 3,200,431 4,300,000 475,591 3,023,033 2,800,000 8,682,322 6,808,539 Statutory reserves are not available for use in the Group’s day to day operations and cannot be withdrawn without the approval of the Central Bank. The level of reserves required changes periodically in accordance with the directives of the Central Bank. Cash and balances with Central Bank is classified under stage 1 as per IFRS 9. There are no expected credit losses and hence no provision has been recognized. 9. DUE FROM BANKS, NET Current and demand deposits Overnight, call and short notice Loans to banks 2018 AED’000 550,754 114,071 309,590 2017 AED’000 1,084,783 1,597,865 152,062 Net due from banks 971,280 2,834,710 Gross due from banks Allowances for impairment losses Within the U.A.E. Outside the U.A.E. 974,415 (3,135) 36,746 934,534 971,280 2,834,710 - 991,877 1,842,833 2,834,710 Due from banks is classified under stage 1 as per IFRS 9. The expected credit loss as at 31 December 2018 is AED 3,135 thousand (1 January 2018: AED 184 thousand) 10. LOANS AND ADVANCES AND ISLAMIC FINANCING, NET The composition of the loans and advances and Islamic financing portfolio is as follows: Loans and advances Overdrafts Loans Advances against letters of credit and trust receipts Bills discounted Gross loans and advances Islamic financing Murabaha and Tawaruq Ijara Others Gross Islamic financing Gross loans and advances and Islamic financing Allowances for impairment losses Net loans and advances and Islamic financing 84 Commercial Bank of Dubai 2018 AED’000 6,155,390 35,547,904 3,180,672 1,456,452 2017 AED’000 4,659,635 35,277,114 1,473,914 1,711,513 2,792,472 4,810,392 114,658 2,630,365 4,314,252 118,654 54,057,940 (3,112,993) 50,185,447 (2,909,722) 46,340,418 7,717,522 50,944,947 43,122,176 7,063,271 47,275,725
85. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 10. LOANS AND ADVANCES AND ISLAMIC FINANCING, NET (continued) An analysis of changes in the gross carrying amount and the corresponding ECL allowances is as follows: Stage 1 Gross exposure at 1 January 2018 Net transfers between stages Net additions / (repayments) Amounts written off At 31 December 2018 AED’000 Net transfers between stages Net (reversals) / impairment charge Interest not recognized Recoveries Amounts written off At 31 December 2018 Opening balance at 1 January 2017 Interest not recognized / new provisions raised Less: Written-off Recoveries / reversal to income Closing balance at 31 December 2017 Stage 3 AED’000 Total AED’000 41,515,604 3,819,155 4,850,688 50,185,447 6,033,109 (977,269) (29,973) 5,025,867 (1,855,020) - 45,693,693 Stage 1 ECL allowance at 1 January 2018 Stage 2 AED’000 AED’000 1,676,020 - 4,517,906 Stage 2 AED’000 179,000 (1,153,374) 3,846,341 Stage 3 AED’000 - (1,153,374) 54,057,940 Total AED’000 282,946 2,080,891 3,298,470 (217,707) 47,448 897,669 727,410 - - 934,633 (31,271) - 4,917 - 26,354 269,822 (29,335) - 269,822 (29,335) 685,655 - 335,311 (1,153,374) (1,153,374) Interest suspended Specific provisions Collective provisions Total 530,661 1,849,309 771,330 3,151,300 (210,291) (966,073) - (1,176,364) 548,505 1,532,386 828,831 2,909,722 - AED’000 234,356 (6,221) AED’000 741,678 (92,528) 2,092,027 AED’000 57,501 - 3,112,993 AED’000 1,033,535 (98,749) The economic sector composition of the loans and advances and Islamic financing is set out in note 35 (b). The Group has hedged the fair value of certain fixed rate loans and advances and Islamic financing. The carrying value of these loans and advances and Islamic financing is AED 166 million (2017: AED 271 million). Net positive fair value of the hedged component is AED 128 thousand (2017: net positive fair value of AED 1,824 thousand). Annual Report 2018 85
86. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 11. INVESTMENT SECURITIES, NET 2018 Held at fair value through other comprehensive income Equities Fund of funds (note 11.2) Fixed rate securities - Government - Others Floating rate non-government securities Allowances for impairment losses UAE AED’000 GCC AED’000 International AED’000 AED’000 72,324 - - 72,324 5,175 4,400 199 2,269,581 1,005,845 366,950 3,642,376 183,038 - 213,007 396,045 1,459,601 3,989,719 403,792 1,414,037 773,499 1,353,655 Net investment securities 9,774 2,636,892 6,757,411 (6,261) 6,751,150 2017 Held for trading Total Fixed rate government securities 23,942 5,491 12,671 42,104 Equities 91,160 - - 91,160 Available-for-sale Fund of funds (note 11.2) Fixed rate securities - Government - Others Floating rate non-government securities Held to maturity Fixed rate non-government securities Net investment securities 3,346 11,611 198 15,155 2,638,562 961,796 279,058 3,879,416 138,383 8,809 18,363 165,555 1,658,896 114,807 4,669,096 690,368 - 1,678,075 401,184 18,435 729,909 2,750,448 133,242 7,077,080 An analysis of changes in the investment securities (excluding equity securities held at FVOCI) gross carrying amount and the corresponding ECL allowances is as follows: Stage 1 Gross exposure at 1 January 2018 Net transfers between stages Net disposals At 31 December 2018 ECL allowance at 1 January 2018 Net transfers between stages Net reversals At 31 December 2018 Stage 2 Stage 3 AED’000 AED’000 AED’000 (168,573) 168,573 - 6,519,021 166,066 AED’000 6,985,920 (298,326) - (2,507) - Total AED’000 6,985,920 - (300,833) - 6,685,087 AED’000 AED’000 AED’000 (2,021) 2,021 - 4,256 2,005 Stage 1 7,317 (1,040) Stage 2 - (16) Stage 3 - - Total 7,317 - (1,056) 6,261 Included in fixed and floating rate securities held at fair value through other comprehensive income securities is an amount of AED 1,383 million (31 December 2017: AED 1,393 million), pledged under repurchase agreements with banks (note 18). As at 31 December 2018, the fair value of investments held at amortized cost is AED nil million (31 December 2017: AED 133.2 million ). The fair value represents level 1 of the fair value hierarchy. 86 Commercial Bank of Dubai
87. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 11. INVESTMENT SECURITIES, NET (continued) 11.1 Held at fair value through other comprehensive income fixed and floating rate securities The below table shows the rating of fixed and floating rate securities: 2018 2017 AED’000 AED’000 Rated Aaa to Aa3 1,791,588 1,458,459 Rated A1 to A3 2,304,980 2,348,494 Rated Baa1 to Baa3 1,405,448 1,740,851 Rated below Baa3 or Unrated - Government 1,076,323 1,121,153 96,974 301,808 6,675,313 6,970,765 Rated below Baa3 - others The above represents approved ratings from External Credit Assessment Institutions (ECAIs) as per BASEL III guidelines. 11.2 Fund of funds investments This represents investments in global and regional asset management funds as a part of the Group’s strategy of diversifying its holdings. These investments are carried at net assets value provided by the respective fund managers which represents the fair value of the underlying funds. 12. INVESTMENT IN AN ASSOCIATE Equity accounting was applied using management information available at the date of reporting. The following is the aggregated financial information of the associate: 2018 2017 AED’000 AED’000 81,053 77,768 9,621 6,750 (3,992) (3,196) (447) (269) Other equity adjustments (1,393) - At 31 December 84,842 81,053 2018 2017 AED’000 AED’000 1,320,185 1,262,344 Liabilities 842,201 805,613 Net assets 477,984 456,731 57,851 39,962 At 1 January Share of profit of associate Dividends received Share of Directors’ remuneration of associate Assets Revenue Annual Report 2018 87
88. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 13. INVESTMENT PROPERTIES, NET The movement in investment properties during the year is as follows: 2018 2017 Cost AED’000 AED’000 At 1 January 338,683 345,252 42,097 - - (6,569) 380,780 338,683 143,703 112,329 9,919 9,547 12,738 - Disposals - (6,008) Impairment - 27,835 At 31 December 166,360 143,703 Net book value at 31 December 214,420 194,980 Transfers from property and equipment Disposals At 31 December Depreciation / Impairment At 1 January Charge for the year Transfers from property and equipment Investment properties comprises buildings. Rental income amounting to AED 36.7 million (2017: AED 36.8 million) from investment properties leased under operating lease is recorded in other income. During the year ended 31 December 2018, the Group has carried out external valuations of material investment properties. The valuations are carried out by professional valuers who hold recognized and relevant professional qualification and have recent experience in the location and category of the investment properties being valued. The valuations were based on income (investment) method of valuation. To value the investment properties, the passing rental income and estimated market rental income are used. Any significant movement in the assumptions used for the fair valuation of investment properties such as yield, rental growth, vacancy rate etc. is expected to result in significantly lower / higher fair value of these assets. As a result of the above impairment exercise, the Group has recognized an impairment of AED nil (2017: AED 27.8 million), which has been charged to the consolidated statement of profit or loss and is classified as ‘impairment allowance on investment property’. 88 Commercial Bank of Dubai
89. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 14. PROPERTY AND EQUIPMENT Freehold land Leasehold and buildings improvements Furniture, equipment & vehicles Capital work in progress (CWIP) Total Cost AED’000 AED’000 AED’000 AED’000 AED’000 At 1 January 2018 409,150 62,802 364,837 55,211 892,000 - 1,908 1,844 40,070 43,822 (42,097) (288) 48,239 (47,951) (42,097) - (75) (12,252) (2,196) (14,523) 367,053 64,347 402,668 45,134 879,202 At 1 January 2018 168,057 38,700 301,539 - 508,296 Transfers (12,738) - - - (12,738) 9,371 7,151 36,532 - 53,054 - - (12,503) - (12,503) At 31 December 2018 164,690 45,851 325,568 - 536,109 Net book values at 31 December 2018 202,363 18,496 77,100 45,134 343,093 Additions during the year Transfers Disposals / write off At 31 December 2018 Depreciation Charge for the year On disposals Freehold land and buildings Leasehold improvements Cost AED’000 AED’000 AED’000 AED’000 AED’000 At 1 January 2017 395,056 55,668 344,165 53,795 848,684 14,094 - 8,018 53,632 75,744 Transfer from CWIP - 12,172 40,044 (52,216) - Disposals - (5,038) (27,390) - (32,428) 409,150 62,802 364,837 55,211 892,000 158,404 37,634 297,435 - 493,473 9,653 5,915 30,934 - 46,502 - (4,849) (26,830) - (31,679) At 31 December 2017 168,057 38,700 301,539 - 508,296 Net book values at 31 December 2017 241,093 24,102 63,298 55,211 383,704 Additions during the year At 31 December 2017 Furniture, Capital work in equipment & progress (CWIP) vehicles Total Depreciation At 1 January 2017 Charge for the year On disposals The Group assessed whether there is an indication that an asset may be impaired and concluded that there was no indication of impairment. Annual Report 2018 89
90. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 15. OTHER ASSETS, NET 2018 2017 AED’000 AED’000 Interest receivable 373,932 308,362 Accounts receivable and prepayments 253,780 53,569 Positive mark to market value of derivatives (note 31) 104,556 69,675 Properties acquired in settlement of debt 110,796 205,474 843,064 637,080 During the year, the bank has acquired certain properties against partial settlement of a debt and sold some properties acquired in similar settlement of debt during prior years. These properties are classified as “properties acquired in settlement of debt”. 16. DUE TO BANKS 2018 2017 AED’000 AED’000 187,304 223,804 2,575,640 556,019 2,762,944 779,823 2018 2017 AED’000 AED’000 15,158,944 15,255,996 2,422,298 1,739,286 23,393,862 23,630,424 40,975,104 40,625,706 2,508,574 1,574,694 591,166 615,517 9,090,186 5,595,275 12,189,926 7,785,486 53,165,030 48,411,192 2018 2017 AED’000 AED’000 Government 13,743,546 11,852,186 Corporate 25,555,410 24,910,062 Personal 13,866,074 11,648,944 53,165,030 48,411,192 Current and demand deposits Term borrowings 17. CUSTOMER DEPOSITS AND ISLAMIC CUSTOMER DEPOSITS Customer deposits Current and demand accounts Savings accounts Time deposits Islamic customer deposits Current and demand accounts Mudaraba savings accounts Investment and Wakala deposits Total customer deposits and Islamic customer deposits By sector: 90 Commercial Bank of Dubai
91. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 18. NOTES AND MEDIUM TERM BORROWINGS 31 December 2017 Syndicated loan 18.1 Repurchase agreements - II 18.2 Repurchase agreements - I Euro medium term notes - I Euro medium term notes - II Total 18.2 18.3 18.3 AED’000 1,645,826 551,442 591,799 Cash flow Non cash flow 31 December AED’000 AED’000 AED’000 - - 551,442 1,124 - Changes (1,652,850) - 1,835,376 (1,836,500) 6,089,663 (3,489,350) 1,465,220 31 December 2016 AED’000 - Non cash flow 31 December AED’000 AED’000 AED’000 Changes Repurchase agreements - II 18.2 591,799 - Euro medium term notes - II 18.3 1,463,917 - Euro medium term notes - I Total 18.3 1,832,276 6,080,537 591,799 Cash flow 1,641,103 551,442 - - 1,466,703 18.1 18.2 7,024 2018 1,483 Syndicated loan Repurchase agreements - I Changes - - 9,631 Changes 2,609,944 2017 4,723 1,645,826 - 591,799 - 551,442 - 3,100 1,835,376 - 9,126 6,089,663 1,303 1,465,220 18.1 Syndicated loan In June 2016, the Group entered into a club deal of USD 450 million (AED 1,653 million) for a term of 3 years with an option to roll over on a quarterly or semi-annual basis, carrying an interest at the rate of 3 month LIBOR plus 125 basis points payable on a quarterly basis. This replaced the syndicated loan arrangement of USD 450 million maturing in December 2016, which was prepaid in June 2016 and carried interest at the rate of 3 month LIBOR plus 125 basis points payable on a quarterly basis. The current arrangement has been prepaid during the year and replaced with a bilateral loan of USD 350 million with 3 years maturity arranged from various banks. 18.2 Repurchase agreements In July 2012, the Group entered into Repo transactions to obtain financing against the sale of certain debt securities, amounting to USD 150.1 million (AED 551.4 million) with arrangements to repurchase them at a fixed future date in July 2017. In June 2016 the arrangement of repurchase has been extended for additional five years up until July 2022. In June 2016, the Group entered into additional Repo transactions to obtain financing against the sale of certain debt securities, amounting to USD 161.1 million (AED 591.8 million) with arrangements to repurchase them at a fixed future date in June 2021. As at 31 December 2018, the fair value of the debt securities, which have been pledged under these repurchase agreements with banks, amounts to AED 1,383 million (USD 376.5 million) (2017: AED 1,393 million (USD 379.3 million)) (note 11). 18.3 Euro medium term notes In 2013, CBD activated its Euro Medium Term Note (EMTN) program. These notes can be issued by way of private or public placements and in each case on a syndicated or non-syndicated basis. These notes can be priced at fixed rate, floating rate or can be index linked. The maximum issuance under the program was USD 2 billion (AED 7.3 billion). At the Annual General Meeting (AGM) held on 28 February 2016 shareholders approved the increase of the program limit up to a total of USD 3 billion (AED 11 billion). In May 2013, CBD issued USD 500 million (AED 1,836.5 million) of conventional bonds. These notes were priced at 3.375 per cent fixed rate. These had matured on 21 May 2018. In November 2015, CBD issued USD 400 million (AED 1,469.2 million) of conventional bonds. These notes were priced at 4 per cent fixed rate and mature on 17 November 2020. Annual Report 2018 91
92. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 19. OTHER LIABILITIES 2018 2017 AED’000 AED’000 378,938 255,831 60,648 61,305 Accounts payable 220,151 269,565 Accrued expenses 133,632 100,783 Manager cheques 116,595 108,465 Unearned fee income and deferred credits 85,970 61,505 Negative mark to market value of derivatives (note 31) 82,540 73,984 1,078,474 931,438 Interest payable Employees’ terminal benefits 20.EQUITY 20.1 Share capital The fully paid up and authorized ordinary share capital as at 31 December 2018 comprised 2,802,733,968 ordinary shares of AED 1 each (31 December 2017: 2,802,733,968 shares of AED 1 each). There was no movement in authorized ordinary share capital during the period. 20.2 Legal and statutory reserve The Group’s Article of Association in compliance with the Decretal Federal Law No. (14) of 2018 require a minimum of 10% of annual net profit to be transferred to non-distributable legal and statutory reserve, until such time as this reserve equals 50% of share capital. During the year no transfer to legal and statutory reserve was required (2017: nil) to meet the minimum regulatory requirement. The legal and statutory reserve is not available for distribution except under the circumstances stipulated by the relevant laws. 20.3 General reserve The Group’s new Articles of Association adopted by the General Assembly of Shareholders in its meeting held on 26 June 2016 deleted the requirement for the general reserve. Therefore, there is no requirement to transfer 10% of the annual net profit to the general reserve. The previous Group’s Articles of Association, required a minimum of 10% of the annual net profit to be transferred to general reserve until such time as this reserve equals 50% of share capital. The disposition of the general reserve shall be in accordance with a resolution made by the Board of Directors. 20.4 Capital reserve This reserve represents the value of the granted land at the date of grant, and is not available for distribution to the shareholders. 20.5 Fair value reserve This represents the net change in the fair values of OCI investments (2017: AFS investments), derivative instruments designated as cash flow hedge instruments held by the Group at reporting date and actuarial changes on retirement benefits obligations. This reserve is not available for distribution to the shareholders until realized. 20.6 Proposed distribution As of the date of approving the consolidated financial statements, the Board of Directors proposed a cash dividend of 20.7% (2017: 17.5%). 92 Commercial Bank of Dubai
93. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 21. INTEREST INCOME AND INCOME FROM ISLAMIC FINANCING Interest income Loans and advances Negotiable certificates of deposit with the Central Bank Due from banks Investment securities - Debt securities at amortized cost bonds (2017: Held-to-maturity) - Debt securities at FVOCI (2017: Available for sale) Income from Islamic financing Murabaha and Tawaruq Ijara Total interest income and income from Islamic financing 2018 AED’000 2017 AED’000 2,140,234 1,942,448 52,249 18,285 31,494 21,015 713 5,220 216,657 210,332 2,441,347 2,197,300 165,879 141,265 405,866 317,462 239,987 176,197 2,847,213 2,514,762 Interest income is recognized using the effective interest rate. 22. INTEREST EXPENSE AND DISTRIBUTION TO ISLAMIC DEPOSITORS 2018 2017 Interest expense AED’000 AED’000 Customer deposits 532,723 361,860 Due to banks Notes and medium term borrowings Distribution to Islamic depositors Islamic customer deposits Total interest expense and distribution to Islamic depositors 22,872 12,092 197,668 201,220 753,263 575,172 182,727 118,866 935,990 694,038 182,727 118,866 Distribution to Islamic depositors represents the share of income allocated to Islamic depositors of the Group. The allocation and distribution is approved by the Group’s Sharia’a Supervisory Board. 23. NET FEES AND COMMISSION INCOME 2018 Lending activities Trade finance activities Account operating activities Cards income and brokerage fees Cards, commissions and brokerage expenses 2017 AED’000 AED’000 152,230 144,353 106,479 104,170 (69,283) (50,287) 181,435 182,324 207,344 184,030 647,488 614,877 578,205 564,590 Annual Report 2018 93
94. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 24. NET GAINS FROM INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Net realized gains on sale of investments at fair value through profit or loss Net unrealized losses on investments at fair value through profit or loss 2018 2017 AED’000 AED’000 650 5,516 - (268) 650 5,248 25. STAFF AND OTHER EXPENSES Staff and other expenses include staff related expenses of AED 593 million (2017: AED 608.8 million) and sitting fees paid to directors for attending committee meetings during the year ended 31 December 2018 of AED 3.1 million (2017: AED 2.7 million) and corporate social responsibility (CSR) related expenses of AED 0.9 million (2017: AED 2.1 million). 26. OPERATING LEASES Group as lessee General and administrative expenses include rental expense under operating leases of AED 15.9 million (2017: AED 17.1 million). Future minimum lease payments under non-cancellable operating leases as at 31 December are, as follows: 2018 2017 AED’000 AED’000 Less than 1 year 11,256 10,977 From 1 year to 5 years 16,996 9,582 28,252 20,559 27. BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share have been computed using the net profit AED 1,162,111 thousand (2017: 1,001,918 thousand) divided by the weighted average number of ordinary shares outstanding 2,802,733,968 (31 December 2017: 2,802,733,968). Diluted earnings per share as of 31 December 2018 and 31 December 2017 are equivalent to basic earnings per share as no new shares have been issued that would impact earnings per share when executed. 94 Commercial Bank of Dubai
95. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 28. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following consolidated statement of financial position amounts: 2018 2017 AED’000 AED’000 Cash on hand 449,843 509,915 Balances with the Central Bank U.A.E. 732,048 475,591 2,600,000 400,000 664,825 2,682,648 4,446,716 4,068,154 (1,131,382) (596,173) 3,315,334 3,471,981 Negotiable certificates of deposit with the Central Bank U.A.E. with original maturity of less than three months Due from banks with original maturity of less than three months Due to banks with original maturity of less than three months 29. CONTINGENT LIABILITIES AND COMMITMENTS Contingent liabilities represent credit-related commitments to extend letters of credit and guarantees which are designed to meet the requirements of the Group’s customers toward third parties. Undrawn commitments represent the Group’s commitments towards approved un-drawn credit facilities. The amount of contingent liabilities reflected below represent the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. 2018 2017 AED’000 AED’000 1,221,648 1,021,104 10,804,478 9,197,212 12,026,126 10,218,316 - irrevocable 3,737,846 1,998,263 - revocable 9,682,925 12,558,189 13,420,771 14,556,452 46,615 44,210 25,493,512 24,818,978 Contingent liabilities: Letters of credit Letters of guarantee Undrawn commitments to extend credit: Capital commitments: Capital expenditure commitments Total contingent liabilities and commitments 30. FIDUCIARY ASSETS Assets held under fiduciary capacity on behalf of clients amounted to AED 838.1 million (2017: AED 1,277.2 million). Annual Report 2018 95
96. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 31.DERIVATIVES The following table shows the positive and negative fair values of derivative financial instruments at the reporting date, together with the notional amounts, analyzed by terms to maturity. The notional amount is the value of the derivative’s underlying asset and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and therefore, are neither indicative of the Group’s exposure to credit risk nor market risk. Credit risk on derivatives is limited to its positive fair value if any. Positive market value AED’000 31 December 2018 - Cash flow hedge instruments Fair value hedge instruments Fair value hedge instruments 94,626 200,331 - - 759,197 3,312,755 1,972,255 - 74,303 9,620,796 3,140,194 1,528,493 3,008,451 1,943,658 82,540 19,160,502 6,340,736 2,287,690 6,531,782 4,000,294 12,026 69,477 - 3,643,533 1,663,249 709,595 858,580 412,109 - 59,936 2,153,125 674,082 778,932 411,931 288,180 69,675 73,984 6,141,776 2,337,331 1,488,527 1,457,808 858,110 262,475 - - 82,643 84,381 - 2,022 - 115,950 - 3,200,542 - - 94,626 9,244,749 82,643 - Over five years AED’000 - 198 Forward foreign exchange contracts and other derivatives assets Forward foreign exchange contracts and other derivatives liabilities AED’000 Less than From three From three months to one year to months one year five years AED’000 AED’000 AED’000 1,092 104,556 31 December 2017 Cash flow hedge instruments 7,145 Notional amount 313 104,243 Forward foreign exchange contracts and other derivatives assets Forward foreign exchange contracts and other derivatives liabilities Negative market value AED’000 104,654 - 157,821 Cash-flow hedge instruments include interest rate and cross currency swaps. Fair value hedge instruments include interest rate swaps. 32. SEGMENTAL REPORTING The primary format, business segments, is based on the Group’s management and internal reporting structure that are regularly reviewed by the Executive Committee in order to allocate resources to the segment and to assess its performance. Business segments pay to and receive interest from the Treasury to reflect the allocation of funding costs. Business segments Corporate banking Includes loan and other credit facilities, deposits, trade finance products and e-commerce solutions to large corporate clients (including Government related entities). Commercial banking Includes loans, working capital financing, trade finance and deposits products to commercial (mid-sized) clients. Personal banking Includes current accounts, easy access saving accounts, fixed rate deposit accounts, personal loans, overdraft facilities, vehicle finance, mortgage products, loans and other credit facilities to small business and retail clients. Treasury and investments Undertakes balance sheet management deals and manages the Group’s proprietary investment portfolio. It also has derivatives for trading and risk management purposes. Interest is charged or credited to business segments and branches to match funding transfer pricing rates which approximate the cost of funds. 96 Commercial Bank of Dubai
97. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 32. SEGMENTAL REPORTING (continued) Geographical The Group operates in one geographic area, the United Arab Emirates. Corporate banking Commercial banking Personal banking Treasury & Investments Total AED’000 AED’000 AED’000 AED’000 AED’000 Assets 37,726,659 12,661,640 7,298,537 16,414,710 74,101,546 Liabilities 34,702,788 10,623,806 14,103,333 5,452,893 64,882,820 Assets 34,085,609 12,252,677 7,058,784 17,016,987 70,414,057 Liabilities 32,723,429 8,694,488 12,946,641 6,968,744 61,333,302 Net interest income and net income from Islamic financing 719,205 538,851 451,554 201,613 1,911,223 Non-interest & other income 225,485 247,814 183,257 156,924 813,480 Total operating income 944,690 786,665 634,811 358,537 2,724,703 Expenses (note a) 164,851 255,242 398,782 39,452 858,327 Net provisions (note b) 422,233 95,842 179,010 7,180 704,265 587,084 351,084 577,792 46,632 1,562,592 357,606 435,581 57,019 311,905 1,162,111 Net interest income and net income from Islamic financing 678,500 569,557 388,981 183,686 1,820,724 Non-interest & other income 223,483 224,661 161,667 211,891 821,702 Total operating income 901,983 794,218 550,648 395,577 2,642,426 Expenses (note a) 162,694 281,267 419,837 36,870 900,668 Net provisions (note b) (84,563) 559,743 211,841 52,819 739,840 78,131 841,010 631,678 89,689 1,640,508 823,852 (46,792) (81,030) 305,888 1,001,918 2018 2017 2018 Net profit for the year 2017 Net profit / (loss) for the year (a) This includes staff and other expenses and depreciation and amortization. (b) This includes impairment allowances on due from banks, loans and advances and Islamic financing, investment securities, and other assets, net of recoveries. Annual Report 2018 97
98. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 32. SEGMENTAL REPORTING (continued) The following is an analysis of the total operating income of each segment between income from external parties and intersegment: External parties Inter-segment 2018 2017 2018 2017 AED’000 AED’000 AED’000 AED’000 1,089,880 991,718 (145,190) (89,735) Commercial banking 886,555 894,909 (99,890) (100,691) Personal banking 525,111 499,863 109,700 50,785 Treasury & investments 223,157 255,936 135,380 139,641 2,724,703 2,642,426 - - Corporate banking Total operating income 33. RELATED PARTY TRANSACTIONS AND BALANCES As at 31 December 2018 and 31 December 2017, Investment Corporation of Dubai (“ICD”) owns 20% share capital of the bank. ICD is wholly owned by the Government of Dubai (the “Government”). The Group in the ordinary course of business enters into transactions with major shareholders, directors, key management personnel and their related entities. The terms of these transactions are approved by the Group’s Board of Directors. Directors and key management personnel 2018 Due from banks, net Loans and advances and Islamic financing, net Investment securities, net Acceptances Letters of credit Letters of guarantee Undrawn commitments to extend credit Due to banks Government related parties 2017 2018 2017 Other related parties 2018 2017 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 416,198 474,640 1,262,582 1,804,980 1,398,356 1,207,730 - - 1,315,852 1,466,632 - - - 223 - - - - - 28,424 - - - - 26,167 - - - 323,525 529,246 180,170 771,404 - 323,531 1,238,827 11,926 - 12,715 6,233 226,869 463,374 - - 149,886 12,606 624,380 589,391 - Customer deposits and Islamic customer deposits 98,412 52,559 3,266,268 4,495,314 165,791 1,235,327 Interest income and commission income Interest expense 20,927 8,303 80,916 67,320 71,927 62,149 719 132 90,965 93,986 1,807 26,047 Dividend from an associate - - - - 3,992 3,196 Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. Other related parties represents major shareholders and parties related to directors, key management personnel. 98 Commercial Bank of Dubai
99. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 33. RELATED PARTY TRANSACTIONS AND BALANCES (continued) The terms of transactions with related parties are comparable to third party transactions and do not involve more than normal amount of risk. None of the balances with related parties are classified under stage 3 as per IFRS 9. Hence, no specific provision has been recorded against these balances. Sitting fees paid to directors for attending committee meetings during the year ended 31 December 2018 amounted to AED 3.1 million (2017: AED 2.7 million). Key management compensation Salaries Post-employment benefits Other benefits 2018 2017 AED’000 AED’000 22,923 18,525 998 809 17,793 14,589 34. RISK MANAGEMENT OBJECTIVES AND POLICIES 34.1 Risk Governance The Board of Directors (the “Board”) has the overall responsibility for the operations and the financial stability of the Group, and ensures that the interests of shareholders, depositors, creditors, employees and other stakeholders, including the banking regulators and supervisors, are addressed. The Board is responsible for strategic direction, management oversight and adequate control with the ultimate objective of promoting the success and long-term value of the bank. The Board is also responsible for the overall framework of the risk governance, management, determining risk strategy, setting the Group’s risk limits and ensuring that risk exposure is monitored, controlled effectively and kept within set limits. Additionally, it is responsible for establishing a clearly defined risk management structure and for approval of the risk policies and procedures as well as management of all risks related to the Group. In order to effectively discharge this responsibility the Board is assisted by various Board Committees, namely Credit and Investment committee (CRIC), Risk Committee (RC), Audit and Compliance Committee (ACC), Nomination and Remuneration Committee (REMCO), Financial Settlements and Recovery Committee (FSRC), and Information Technology and Digital Banking Committee (ITDBC). Management actively manages risk, primarily through the Risk Department with oversight by the Executive Committee (EXCO), Assets & Liabilities Committee (ALCO), Credit Committee (CC), Project Investment Committee (PIC), Information Security Risk Committee (ISRC), Compliance Committee (CCO), Human Resources Committee (HRC) and Operational Risk Management Committee (ORMC). 34.2 Control Environment a) Group Risk Group Risk Department comprises credit, market and operational units. Its responsibilities include the following: • Developing a strategy, policy and framework for risk management such that these are aligned with business requirements; • Providing support to the Group in implementation of the framework; • Bringing together analysis of risk concentrations and sensitivities across the Group; • Acting as a point of reference for risk and control matters, providing advice to management, sharing best practices and carrying out special reviews as directed by ALCO; and • Providing independent assessment of, and challenge to the business areas’ risk management and profiles to ensure that they are maintained in a robust manner. Annual Report 2018 99
100. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 34. RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 34.2 Control Environment (continued) b) Internal Audit The role of the Internal Audit Department within the Group is to provide independent and objective assurance that the process for identifying, evaluating and managing significant risks faced by the Group is appropriate and effectively applied. In addition, it also provides an independent check on the compliance with laws and regulations and measuring compliance with the Group’s policies and procedures. Additionally, Internal Audit provides consulting services which are advisory in nature, and are generally performed at the specific request of the ACC or Management. It is led by the Head of Internal Audit who reports to the ACC of the Board of Directors, with administrative reporting to the Chief Executive Officer of the Group. To perform its role effectively, Internal Audit has organizational independence from management, to enable unrestricted evaluation of management activities and personnel. The Internal Audit Charter empowers it to have full, free and effective access at all reasonable times to all records, documents and employees of the Group. Internal Audit has direct access to the Chairman of the ACC and Chief Executive Officer of the Group. To determine whether the Internal Audit Role is functioning effectively, the ACC shall: • Assess the appropriateness of the Internal Audit Charter once each year; • Assess the adequacy of resources available, both in terms of skills and funding once each year; and • Sponsor external assessments, at least once every three (3) years, by a qualified, independent reviewer from outside the Group. c) Internal Control Board of Directors and Management are responsible for developing and maintaining the existence of a sound Internal Control System and procedures that meet international standards and fulfill the requirements of the Group’s management and external regulatory bodies. The internal control system should be capable of ensuring the achievement of the following: • • • • Accuracy and integrity of financial and operational statements issued by the Group; Effectiveness and efficiency of the Group’s operational activities; Effectiveness of measures and procedures set to safeguard the Group’s assets and properties; and Compatibility with laws, legislations and regulations in force as well as policies pertinent to internal operational procedures. Executive management constantly monitors and assesses the efficiency and effectiveness of internal control procedures and their ability to achieve stated objectives and their furtherance and enhancement. The functions and responsibilities of the Internal Control Department include but not limited to: • Ensuring that the Group’s operational policies, processes and controls are adhered to; • Ensuring that proper internal controls are in place and that they are functioning as designed in a timely and effective manner; • Periodic review of the Group’s internal control system in order to identify areas where internal controls may be weak, not present and areas where there appear to be excessive controls resulting in operational inefficiency so as to suggest ways to rectify the same; • Enabling the management to conduct an annual review of the efficiency of the internal control system and report its findings; and • Monitoring of operational activities and overseeing operational controls being exercised to ensure that these are timely and effective. 100 Commercial Bank of Dubai
101. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 34. RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 34.2 Control Environment (continued) d) Compliance and Fraud prevention The process of monitoring compliance is an independent task which aims at ensuring that the Group is in compliance with all applicable laws, regulations, instructions, directives, codes of conduct and sound banking standards and practices as issued by relevant authorities. The Board of Directors take necessary measures to further strengthen the values of integrity and sound professional conduct within the Group by promoting a culture of compliance in letter and spirit of applicable laws, regulations, instructions and standards. The mission and role of compliance, AML and Fraud prevention department is to: • Ensuring compliance risks are adequately identified, assessed, monitored and controlled in conjunction with Business and other control functions; • Ensuring senior management is fully informed of significant compliance issues and plans for resolution; • Contributing to a “no surprise” compliance culture by educating and communicating compliance awareness throughout the Group; • Aligning annual compliance plans with business strategies and goals; and • Meet regulatory expectations, Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) requirements. Fraud prevention The Group has a dedicated Fraud Prevention and Investigation Unit that assists in identification, detection, and verification of potential or actual fraud incidents including quantification and recoupment of any losses sustained as a result of such incident. The purpose is to manage susceptibility of Group’s assets and processes to fraud risk with a view to reducing it and to raise the level of fraud awareness amongst employees and other stakeholders. e) Whistle Blowing A set of arrangements has been designed to enable employees to confidentially report concerns about any potential violations, enabling the investigation and follow up of such concerns independently and discreetly through the whistle blowing policy. Such arrangements are supervised by the ACC and in coordination with the executive management. 34.3 Disclosure policy The Group has laid down the disclosure policy to ensure compliance with all regulations and guidelines issued by the lead regulator Central Bank of the UAE (CBUAE), International Financial Reporting Standards (IFRS), Securities and Commodities Authority (SCA) and Dubai Financial Market (DFM). The following are the key features of the Group’s disclosure policy concerning disclosure of financial information: a) Materiality thresholds Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of consolidated financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement, and / or any material information that might affect the share price. The Group, in order to ensure adequate disclosure lays down qualitative materiality threshold, so that no material information is omitted or misstated; at the same time it does not jeopardize its competitive position. b) Control framework In order to ensure true and fair disclosure, the Group has established controls including detailed procedures for finalization and review of financial disclosures. In addition, the consolidated financial statements are subject to a quarterly review and year end audit procedures by the Group’s external auditors. Annual Report 2018 101
102. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 34. RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 34.3 Disclosure policy (continued) c) Frequency and medium of disclosure Interim financial results are disclosed on a quarterly basis while complete consolidated financial statements complying with the requirements of IFRS, Basel III Pillar 3, relevant laws of the U.A.E, SCA requirement and other guidelines from CBUAE is made on annual basis. Disclosures of material non-public financial information are made as follows: • • • • • • Uploading quarterly reviewed and annual audited consolidated financial statements along with Directors’ report to DFM and SCA websites; Posting quarterly and annual consolidated financial statements on the Group’s website; Publishing of annual audited consolidated financial statements on the bank’s website; Management discussion and analysis in Arabic and English newspapers in a manner that ensures wide dissemination; Publication of the annual report which includes audited consolidated financial statements, list of names of members of the Board of Directors, senior executives, their deputees and assistants and names of wholly or partially owned subsidiaries; and Investor’s pack is presented on bank’s website on a quarterly and annual basis. 35. FINANCIAL RISK MANAGEMENT a) Introduction and overview The Group has exposure to the following primary risks from financial instruments: • Credit risk; • Liquidity risk; • Market risk; and • Operational risk Risk is inherent to the Group’s business and activities. The Group’s ability to identify, assess, monitor and manage each type of risk to which the Group is exposed is an important factor in its financial stability, performance and reputation. The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, through its training, management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The Risk Committee (RC) is responsible for monitoring compliance with the Group’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. The Group’s RC is assisted in these functions by Internal Audit, which undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Group RC as well as ACC. This note presents information relating to the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations arising principally from the Group’s balances with Central Bank, due from banks, loans and advances and Islamic financing, other financial assets, loan commitments and financial guarantee contracts. For reporting purpose, credit risk on loan commitments and financial guarantee contracts is reported as a component of credit risk on loans and advances and Islamic financing. For risk management purposes, credit risk arising on investment securities held at FVPL is managed independently. 102 Commercial Bank of Dubai
103. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (i) Management of credit risk Credit Committee (CC) manages the credit risk of the Group by continuous review and update of the following: • Formulating credit policies; • Establishing the authorization structure for the approval and renewal of credit facilities; • Reviewing and assessing credit risk; • Limiting concentrations of exposure to counterparties, geographies and industries; • Developing and maintaining the Group’s risk gradings; • Developing and maintaining the Group’s processes for measuring ECL; • Reviewing compliance of business units with agreed exposure limits; and • Providing advice, guidance and specialist skills to business units to promote best practice. (ii) Internal credit risk ratings In order to minimize credit risk, the Group has tasked its credit committee to develop and maintain the Group’s credit risk grading to categorize exposures according to their degree of risk of default. The Group’s credit risk grading framework comprises various categories. The credit rating information is based on a range of data that is determined to be predictive of the risk of default and applying experienced credit judgement. The nature of the exposure and type of borrower are taken into account in the analysis. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. The credit risk grades are designed and calibrated to reflect the risk of default as credit risk increases. As the credit risk increases the difference in risk of default between grades changes. Each exposure is allocated to a credit risk grade at initial recognition, based on the available information about the counterparty. All exposures are monitored and the credit risk grade is updated to reflect current information. The monitoring procedures followed are both general and tailored to the type of exposure. The following data are typically used to monitor the customer risk profile: • • • • • • • Payment record and ageing analysis; Extent of utilization of granted limit; Forbearances (both requested and granted); Changes in business, financial and economic conditions; Credit rating information supplied by external rating agencies; For retail exposures: internally generated data of customer behaviour, affordability metrics etc.; and For corporate exposures: information obtained by periodic review of customer files including audited financial statements review and where available changes in the financial sector the customer operates etc. The Group uses credit risk grades as a primary input into the determination of the term structure of the PD for exposures. The Group collects performance and default information about its credit risk exposures analyzed by jurisdiction or region and by type of product and borrower as well as by credit risk grading. The Group credit risk rating methodology has 22 grades frame work, whereby: Classification Grades Risk significance Performing 1 - 19 Good performing assets and debt securities with External Credit Assessment (ECA) of “AAA” and better than “B-”. Non-performing 20 - 22 Impaired financial assets i.e. substandard, doubtful and loss. The Group analyzes all data collected using statistical models and estimates the remaining lifetime PD of exposures and how these are expected to change over time. The factors taken into account in this process include macro-economic data such as GDP growth, unemployment, benchmark interest rates and house prices. The Group generates a ‘base case’ scenario of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. The Group then uses these forecasts, which are probability-weighted, to adjust its estimates of PDs. Annual Report 2018 103
104. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (ii) Internal credit risk ratings (continued) The Group uses different criteria to determine whether credit risk has increased significantly for each obligor. The criteria used are both quantitative changes in PDs as well as qualitative. Irrespective of the outcome of the above assessment, the Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due unless the Group has reasonable and supportable information that demonstrates otherwise. The Group has monitoring procedures in place to make sure that the criteria used to identify significant increase in credit is effective, meaning that significant increase in credit risk is identified before the exposure is defaulted. The Group performs periodic back-testing of its ratings to consider whether the drivers of credit risk that led to default were accurately reflected in the rating in a timely manner. (iii) Measurement of ECL As explained in note 3.1.1 (e), the Group measures ECL considering the risk of default over the maximum contractual period (including extension options) over which the entity is exposed to credit risk. However, for financial instruments such as credit cards and overdraft facilities that include both a loan and an undrawn commitment component, the Group’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the Group’s exposure to credit losses to the contractual notice period. For such financial instruments the Group measures ECL over the period that it is exposed to credit risk and ECL would not be mitigated by credit risk management actions. These financial instruments do not have a fixed term or repayment structure and have a short contractual cancellation period. However, the Group does not enforce in the normal day-to-day management the contractual right to cancel these financial instruments. This is because these financial instruments are managed on a collective basis and are canceled only when the Group becomes aware of an increase in credit risk at the facility level. This longer period is estimated taking into account the credit risk management actions that the Group expects to take to mitigate ECL, e.g. reduction in limits or cancellation of the loan commitment. The maximum contractual period extends to the date at which the Group has the right to require repayment of an advance to terminate a loan commitment or guarantee. (iv) Restructured and renegotiated loans Loans with renegotiated terms are defined as loans that have been restructured due to a deterioration in the borrower’s financial position, for which the Group has made concessions by agreeing to terms and conditions that are more favourable for the borrower than the Group had provided initially and that it would not otherwise consider. A loan continues to be presented as part of loans with renegotiated terms until maturity, early repayment or write-off. Management continuously monitors the progress on renegotiated loans to ensure compliance with the terms at all times. 104 Commercial Bank of Dubai
105. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (v) Exposure to credit risk The Group measures its exposure to credit risk by reference to gross carrying amount of financial assets less interest suspended and expected credit allowances, if any. 2018 Stage 1 Stage 2 Stage 3 Total Due from banks AED’000 AED’000 AED’000 AED’000 Performing 974,415 - - 974,415 (3,135) - - (3,135) 971,280 - - 971,280 Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 45,693,693 4,517,906 - 50,211,599 - - 3,846,341 3,846,341 (685,655) (335,311) (2,092,027) (3,112,993) 45,008,038 4,182,595 1,754,314 50,944,947 Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 6,519,021 166,066 - 6,685,087 (4,256) (2,005) - (6,261) 6,514,765 164,061 - 6,678,826 Allowance for impairment losses Net carrying amount Loans and advances Performing Non-performing Allowance for impairment losses Net carrying amount Debt securities Performing Allowance for impairment losses Net carrying amount Annual Report 2018 105
106. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (v) Exposure to credit risk (continued) i. Loans and receivables AED’000 Due from banks AED’000 Debt securities AED’000 11,518,841 33,460,948 952,920 2,834,710 - 5,503,755 1,467,010 - 484,154 134,689 69,322 285,297 - - 933,216 406,595 1,289,919 - - 122,566 118,010 408,970 - - Total carrying amount 50,185,447 2,834,710 6,970,765 Specific provision for impairment Portfolio provision for impairment related to (iv) above Specific provision for individually restructured loans and under restructuring / OLEM Interest in suspense Collective provision for impairment related to (i) and (ii) above (1,077,280) (285,669) (169,437) - - (548,505) (828,831) - - Carrying amount net of impairment 47,275,725 2,834,710 6,970,765 2017 Neither past due nor impaired Grade 1: good, top performing assets Grade 2 - 9: good, performing assets Grade 10: watch list loans / performing Carrying amount ii. Past due but not impaired In Grade 1 to 10 Less than 30 days 30 - 60 days 60 - 90 days Over 90 days Carrying amount iii. Individually impaired Grade 11 & 12: Substandard Grade 13: Doubtful Grade 14: Loss Carrying amount iv. Impaired on portfolio basis – Retail Grade 11 & 12: Substandard Grade 13: Doubtful Grade 14: Loss Carrying amount Total provisions for impairment 106 Commercial Bank of Dubai 45,932,709 973,462 2,629,730 649,546 (2,909,722) 2,834,710 - - - - 6,970,765 - - - -
107. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (vi) Impairment reserve under the Central Bank of UAE (CBUAE) guidance The CBUAE has issued its IFRS 9 guidance addressing various implementation challenges and practical implications for Banks adopting IFRS 9 in the UAE (“the guidance”). Pursuant to clause 6.4 of the guidance, the reconciliation between general and specific provision under Circular 28/2010 of CBUAE and IFRS 9 is as follows: 2018 Allowances for impairment losses: General AED’000 General provisions under Circular 28/2010 of CBUAE 874,263 Less: Stage 1 and Stage 2 provisions under IFRS 9 General provision transferred to the impairment reserve* 1,020,966 - Allowances for impairment losses: Specific Specific provisions under Circular 28/2010 of CBUAE 2,084,734 Less: Stage 3 provisions under IFRS 9 2,092,027 Specific provision transferred to the impairment reserve* - Total provision transferred to the impairment reserve - *In the case where provisions under IFRS 9 exceed provisions under CBUAE, no amount shall be transferred to the impairment reserve. (vii) Allowances for impairment As discussed above in the significant increase in credit risk section, under the Group’s monitoring procedures, a significant increase in credit risk is identified before the exposure has defaulted, and at the latest when the exposure becomes 30 days past due. This is the case mainly for loans and advances to customers and more specifically for retail lending exposures because for corporate lending and other exposures there is more borrower specific information available which is used to identify significant increase in credit risk. The table below provides an analysis of the gross carrying amount of loans and advances to customers by past due status. Assets carried at fair value through profit or loss is not subject to ECL, as the measure of fair value reflects the credit quality of each asset. Annual Report 2018 107
108. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (vii) Allowances for impairment (continued) The Group monitors concentrations of its impaired loans by sector and by geographic location. An analysis of concentrations of impaired (excluding restructured / under restructuring) loans by sector is shown below: 2018 Manufacturing Construction Real estate Trade Transportation and storage Services Hospitality Financial and insurance activities Personal - mortgage Personal - schematic Individual loans for business Others Total carrying amount 2017 Manufacturing Construction Real estate Trade Transportation and storage Services Hospitality Financial and insurance activities Personal - mortgage Personal - schematic Individual loans for business Others Total carrying amount Impaired loans Collateral AED’000 173,215 218,897 589,191 438,063 46,885 71,789 433,478 1,067,582 450,409 197,876 155,582 3,374 AED’000 87,048 43,580 397,568 108,896 3,906 14,138 420,066 341,346 250,614 71,420 99,641 - 3,846,341 1,838,223 Impaired loans Collateral AED’000 67,814 239,425 510,848 1,016,868 50,570 85,239 442,361 44,027 352,589 197,352 269,139 3,044 AED’000 25,068 67,510 344,668 102,970 13,766 22,222 409,191 13,950 193,550 515 127,085 - 3,279,276 1,320,495 Specific provision and interest in suspense AED’000 117,628 219,611 265,242 257,161 21,412 41,330 40,758 561,683 100,575 389,088 74,835 2,704 2,092,027 Specific provision and interest in suspense AED’000 56,280 189,048 127,006 790,750 37,649 65,909 68,613 10,028 214,039 148,890 201,850 1,392 1,911,454 All impaired loans are located in one geographic area i.e. the United Arab Emirates. The value of collateral is restricted to lower of loan exposure or realizable value of the collateral. The gross carrying value of unfunded exposures pertaining to impaired loans amounted to AED 43.8 million (2017: AED 90.7 million). (viii) Write - off policy The Group writes off a loan / investment in debt security (and any related expected credit allowances) when the Group Credit and Investment Committee (CRIC) determines that the loan / security is uncollectible. This determination is reached after considering information such as the significant deterioration in the borrower’s / issuer’s financial position such that the borrower / issuer can no longer pay the obligation, or proceeds from collateral will not be sufficient to pay back the entire exposure or all possible efforts of collecting the amounts have been exhausted. For smaller balances of standardized loans, write off decisions are generally based on a product-specific past due status. 108 Commercial Bank of Dubai
109. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (ix) Collateral The Group holds collateral against loans and advances in the form of cash, guarantees, mortgages and liens over properties or other securities over assets. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and are subsequently monitored and updated on a periodic basis. Generally, collateral is not held against debt securities and amounts due from banks, and no such collateral was held at 31 December 2018 or 2017. Analysis of collateral by type is presented in the following table: 2018 2017 AED’000 AED’000 3,035,516 Pledged deposits Properties 2,067,227 23,322,055 21,297,734 905,261 911,179 1,145,029 Mortgages Pledge of shares 1,142,902 220,956 Government and bank guarantees 132,543 72,029 Others 67,887 28,700,846 Total collaterals 25,619,472 The above represents collateral value restricted to the lower of loan balance or collateral value. (x) Concentration Concentrations arise when a number of counterparties are engaged in similar business activities or activities in same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. The following tables set out the concentration of credit risk by sector, geography and currency. Concentration of credit risk by sector for 2018: Loans and Due from Debt Equity advances banks securities securities and Islamic and fund financing of funds Cash, balances with Central bank and other assets AED’000 AED’000 AED’000 AED’000 AED’000 Manufacturing 2,359,918 - 135,108 - Construction - - - Real estate Trade 2,522,729 17,161,362 5,316,585 Total Undrawn Acceptances funded commitments and exposures contingent liabilities AED’000 AED’000 AED’000 - 2,495,026 444,412 854,621 - - 2,522,729 680,359 4,880,963 179,909 5,761 - 4,258,297 1,987,675 - - - 1,548,004 6,988,899 17,347,032 - 5,316,585 Transportation 1,491,763 and storage Services 4,305,056 - 321,992 4,400 - 1,818,155 136,077 200,102 - 616,113 53,780 - 4,974,949 957,111 852,334 Hospitality 2,652,430 - - - - 2,652,430 392,691 13,324 Financial and insurance activities Government entities Personal mortgage Personal schematic Individual loans for business Others 7,311,952 974,415 3,061,251 18,157 84,842 11,450,617 1,434,320 903,656 131,497 - 1,925,823 - 8,232,479 10,289,799 161,219 16 2,835,784 - - - - 2,835,784 42,716 - 4,924,986 - - - - 4,924,986 2,436,157 22,429 2,032,242 - - - - 2,032,242 534,086 3,592 1,011,636 - 435,117 - 1,917,131 3,363,884 395,322 584,943 Total carrying 54,057,940 amount 974,415 6,675,313 82,098 10,234,452 72,024,218 13,420,771 17,292,554 Annual Report 2018 109
110. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (x) Concentration (continued) Concentration of credit risk by sector for 2017: Loans and advances Due from and Islamic banks financing Manufacturing Construction Real estate AED’000 3,063,164 2,076,674 - AED’000 50,094 - AED’000 - AED’000 AED’000 2,076,674 803,080 4,483,183 2,189,074 6,603,190 3,113,258 - 16,579,848 3,655,679 - 521,474 783,525 1,952,551 - 291,186 5,456 - 2,249,193 1,042,749 137,729 Services 3,710,102 - 761,103 60,714 - 4,531,919 1,009,001 812,515 Financial and insurance activities 4,668,691 2,834,710 3,012,066 30,479 81,053 10,626,999 1,373,668 841,380 8,466,949 40,087 50 Transportation and storage Hospitality Government entities Personal mortgage Personal schematic Individual loans for business Others Total carrying amount 2,929,679 - - - - - - - 4,959,352 - 2,929,679 2,033,204 - 2,627,582 - - - - 2,627,582 42,645 4,544,506 - - - - 4,544,506 2,104,916 8,521 2,282,999 - - - - 2,282,999 549,855 7,765 977,035 - 3,286,934 792,202 188,755 50,185,447 2,834,710 6,970,765 - 1,798,978 106,315 8,178,655 68,275,892 Loans and Due from Debt Equity Cash, advances banks securities securities balances and Islamic and fund with Central financing of funds bank and other assets AED’000 AED’000 AED’000 AED’000 AED’000 UAE GCC 15,037 - 510,921 6,298,624 432,022 1,457,852 135,121 Concentration of credit risk by geographic location for 2018: 52,600,179 187,671 36,746 3,912,220 45,796 1,409,637 - 14,556,452 15,339,502 Total Undrawn Acceptances funded commitments and exposures contingent liabilities AED’000 77,499 10,234,452 66,861,096 AED’000 AED’000 12,483,950 14,932,999 4,400 - 1,647,504 117,044 266,438 Middle East 305,022 108,498 - - - 413,520 420,403 105,305 Europe 194,606 370,318 243,552 199 - 808,675 87,581 722,060 USA - 194,776 313,420 - - 508,196 147 38,961 Asia 382,061 143,675 665,464 - - 1,191,200 230,097 1,154,328 Others 388,401 74,606 131,020 - - 594,027 81,549 72,463 Total carrying amount 110 AED’000 - 312,191 4,959,352 9,666 AED’000 Acceptances Total Undrawn and funded exposures commitments contingent liabilities - Trade 16,257,991 AED’000 Cash, Equity balances Debt securities Central securities and fund of with bank and funds other assets Commercial Bank of Dubai 54,057,940 974,415 6,675,313 82,098 10,234,452 72,024,218 13,420,771 17,292,554
111. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (x) Concentration (continued) Concentration of credit risk by geographic location for 2017: Loans and Due from advances banks and Islamic financing Debt securities Equity Cash, Total funded Undrawn Acceptances securities balances exposures commitments and and fund with Central contingent of funds bank and liabilities other assets UAE 49,032,668 991,877 4,574,590 94,506 GCC 256,469 482,438 1,666,464 11,611 - Middle East 111,842 Europe 8,178,655 62,872,296 14,451,692 11,425,070 2,416,982 49,305 45,651 453 - - - 112,295 2,321 39,095 53,133 1,041,049 142,119 198 - 1,236,499 12,289 2,428,823 USA - 158,909 109,258 - - 268,167 - 64,209 Asia 101,172 80,320 431,722 - - 613,214 40,845 1,336,654 Others 630,163 79,664 46,612 - - 756,439 - - 50,185,447 2,834,710 6,970,765 106,315 8,178,655 68,275,892 14,556,452 15,339,502 Total carrying amount Concentration of credit risk by currency for 2018: Loans and Due from advances banks and Islamic financing Debt Equity Cash, securities securities balances and fund with Central of funds bank and other assets AED’000 AED’000 AED’000 AED’000 44,788,595 16 - 9,269,345 974,399 6,675,313 Total carrying 54,057,940 amount 974,415 6,675,313 AED Other currencies* AED’000 Total Undrawn Acceptances funded commitments and exposures contingent liabilities AED’000 AED’000 AED’000 77,499 9,777,069 54,643,179 11,293,339 10,485,900 4,599 457,383 17,381,039 2,127,432 6,806,654 82,098 10,234,452 72,024,218 13,420,771 17,292,554 Concentration of credit risk by currency for 2017: AED 200,016 - 94,505 7,647,226 50,586,486 12,324,987 8,796,483 7,540,708 2,634,694 6,970,765 11,810 531,429 17,689,406 2,231,465 6,543,019 Total carrying 50,185,447 2,834,710 amount 6,970,765 106,315 8,178,655 68,275,892 14,556,452 15,339,502 Other currencies* 42,644,739 *Majority of assets denominated in other currencies are in USD to which AED is pegged. Annual Report 2018 111
112. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) c) Settlement risk The Group’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of counterparty to honour its obligations to deliver cash, securities or other assets as contractually due. Any delays in settlement are rare and are monitored and quantified as part of the Group’s Internal Capital Adequacy Assessment Procedures (ICAAP) framework and Operational Risk Management. For certain types of transactions, the Group mitigates this risk by conducting settlements through a settlement / clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval / limit monitoring process described above. Acceptance of settlement risk on free settlement trades requires transaction specific or counterparty specific approvals from the Group’s Risk Management Department. d) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by delivering cash or other financial assets. It includes the risk of the inability to fund assets at contracted maturities and rates and the inability to liquidate assets at reasonable prices and in the required timeframe and the inability to meet obligations as they become due. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to diminish. (i) Management of liquidity risk Liquidity risk is managed by the Treasury and Asset and Liability management (ALM) department in line with the regulatory, internal policies and guidelines. The Group’s approach to manage liquidity risk is to ensure that it has adequate funding from diversified sources at all times to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage of the Group’s reputation. Funds are raised using a broad range of instruments including customers’ deposits, medium term borrowings, money market instruments, subordinated debts and capital. The treasury and ALM department monitors the liquidity profile of financial assets and liabilities and the projected cash flows arising from existing and future business. Treasury maintains a portfolio of short-term liquid assets and inter-bank placements to ensure that sufficient liquidity is maintained. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and abnormal market conditions. The Group’s liquidity management process, as carried out within the Group and monitored by Group’s treasury, includes: • Day to day funding is managed by monitoring future cash flows to ensure that requirements can be met - these include replenishment of funds as they mature or are borrowed by customers. The Group maintains an active presence in global money market to facilitate funding activities; • Maintenance of a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow; • Managing balance sheet liquidity ratios against internal and regulatory requirements; • Managing the concentration and profile of debt maturities; and • Repurchase arrangements with various banks which allow it to repo its fixed income investments to meet any liquidity needs that may arise. (ii) Exposure to liquidity risk The key measure used by the Group for measuring liquidity risk is the advances to stable resources ratio (regulatory ratio) which is 89.42% as at 31 December 2018 (2017: 88.59%). In addition, the Group also uses the following ratios / information on a continuous basis for measuring liquidity risk: • Liquid assets to total assets ratio; • Net loans to deposits ratio (LDR); • Basel III ratios (including LCR, NSFR, etc.) are also monitored internally and shared with the Board on quarterly basis. 112 Commercial Bank of Dubai
113. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) d) Liquidity risk (continued) The following table summarizes the maturity profile of the Group’s assets and liabilities based on the contractual repayment arrangements. These do not take account of the effective maturities as indicated by the Group’s deposit retention history. The contractual maturities of assets and liabilities have been determined on the basis of the residual period at the reporting date to the contractual maturity date. The maturity profile of the assets and liabilities at 31 December 2018 was as follows: Total Less than 1 month From 1 to 3 months AED’000 AED’000 AED’000 AED’000 8,682,322 3,132,048 600,000 971,280 664,825 18,925 Loans and advances and Islamic financing, net 50,944,947 8,407,073 3,255,143 Investment securities, net 6,751,150 - 23,793 952,836 4,622,677 1,069,746 82,098 Investment in associate 84,842 - - - - - 84,842 Investment properties, net 214,420 - - - - - 214,420 Property and equipment 343,093 - - - - - 343,093 5,266,428 91,907 1,067,602 4,105,320 1,599 - - 843,064 732,268 - - - - 110,796 74,101,546 13,028,121 4,965,463 10,502,519 18,136,227 22,983,693 4,485,523 2,762,944 1,336,322 Customer deposits and 53,165,030 Islamic customer deposits 27,130,021 Notes and medium term borrowings 2,609,944 - - Due for trade acceptances 5,266,428 91,907 Other liabilities 1,078,474 1,017,826 Total liabilities 64,882,820 Assets Cash and balances with Central Bank Due from banks, net Bankers acceptances Other assets, net Total assets From 3 From 1 to 5 months years to 1 year Over 5 years No Fixed Maturity AED’000 AED’000 AED’000 1,300,000 - - 3,650,274 182,245 105,285 - - 3,962,118 13,406,666 21,913,947 - Liabilities and equity Due to banks Gap representing equity 144,031 - 1,282,591 - - 8,861,068 16,559,281 614,124 536 - - 2,609,944 - - 1,067,602 4,105,320 1,599 - - - - - - 60,648 29,576,076 10,072,701 20,664,601 4,508,258 536 60,648 9,218,726 (16,547,955) (5,107,238) (10,162,082) 13,627,969 22,983,157 4,424,875 Annual Report 2018 113
114. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) d) Liquidity risk (continued) The maturity profile of the assets and liabilities at 31 December 2017 was as follows: Total Less than 1 From 1 to 3 From 3 From 1 to 5 Over 5 years month months months to 1 years year Assets No Fixed Maturity AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Cash and balances with Central Bank 6,808,539 1,526,463 300,000 1,450,000 - - 3,532,076 Due from banks, net 2,834,710 2,682,648 - 22,038 130,024 - - Loans and advances and Islamic financing, net 47,275,725 6,961,910 2,197,444 3,460,068 12,669,861 21,986,442 - Investment securities, net 7,077,080 116,805 312,379 528,801 4,561,725 1,408,951 148,419 Investment in associate 81,053 - - - - - 81,053 Investment properties, net 194,980 - - - - - 194,980 Property and equipment 383,704 - - - - - 383,704 5,121,186 1,005,078 64,854 3,823,561 227,693 - - 637,080 431,606 - - - - 205,474 70,414,057 12,724,510 2,874,677 9,284,468 17,589,303 23,395,393 4,545,706 Bankers acceptances Other assets, net Total assets Liabilities and equity Due to banks Customer deposits and Islamic customer deposits 594,823 48,411,192 26,480,743 185,000 - - - - 7,684,519 12,869,486 1,375,961 483 - Notes and medium term borrowings 6,089,663 - - 1,835,376 4,254,287 - - Due for trade acceptances 5,121,186 1,005,078 64,854 3,823,561 227,693 - - 931,438 870,133 - - - - 61,305 7,934,373 18,528,423 5,857,941 483 61,305 9,080,755 (16,226,267) (5,059,696) (9,243,955) 11,731,362 23,394,910 4,484,401 Other liabilities Total liabilities Gap representing equity 114 779,823 Commercial Bank of Dubai 61,333,302 28,950,777
115. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) d) Liquidity risk (continued) The table below shows the maturity of the Group’s contingent liabilities and credit commitments: Total Less than 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years Over 5 years AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Contingent liabilities 12,026,126 2,160,628 4,915,539 4,376,682 572,715 562 Credit commitments 13,420,771 2,635,300 3,024,248 3,785,944 714,896 3,260,383 Total 25,446,897 4,795,928 7,939,787 8,162,626 1,287,611 3,260,945 Contingent liabilities 10,218,316 3,581,015 2,369,650 3,572,604 694,276 771 Credit commitments 14,556,452 3,617,670 1,393,436 4,992,164 949,407 3,603,775 Total 24,774,768 7,198,685 3,763,086 8,564,768 1,643,683 3,604,546 2018 2017 The tables below show undiscounted contractual cash flows on the Group’s financial liabilities: Total Less than 1 month AED’000 AED’000 AED’000 AED’000 AED’000 2,913,440 1,343,023 155,366 36,490 1,378,561 53,852,867 27,208,072 8,984,915 17,009,999 649,881 Notes and medium term borrowings 3,000,053 3,866 3,129 20,986 2,972,072 Due for trade acceptances 5,266,428 91,907 1,067,602 4,105,320 1,599 Other liabilities 500,401 500,401 - - - Total liabilities 65,533,189 29,147,269 10,211,012 21,172,795 5,002,113 779,937 559,852 185,055 2,754 32,276 48,839,135 26,529,184 7,763,603 13,112,397 1,433,951 Notes and medium term borrowings 6,468,286 - 16,972 1,908,278 4,543,036 Due for trade acceptances 5,121,186 1,005,078 64,854 3,823,561 227,693 493,158 493,158 - - - 61,701,702 28,587,272 8,030,484 18,846,990 6,236,956 2018 Due to banks Customer deposits and Islamic customer deposits From 1 to 3 From 3 months months to 1 year From 1 to 5 years 2017 Due to banks Customer deposits and Islamic customer deposits Other liabilities Total liabilities Annual Report 2018 115
116. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) e) Market risk Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads, will affect the Group’s income and / or value of a financial instrument. The Group manages its market risk in order to achieve optimum returns while maintaining market risk exposures within set risk appetite. (i) Management of market risk The Board of Directors set the risk appetite pertaining to market Risk which translates into risk limits which are closely monitored by the Group’s Risk Management, reported daily to senior management and discussed monthly by the ALCO. The Group separates its exposure to market risk between trading and non-trading portfolios with overall responsibility vested with the ALCO. The Group’s Risk Management department is responsible for the development of detailed risk management policies and for the day-to-day implementation, subject to review and approval by the ALCO. (ii) Exposure to interest rate risk – non trading portfolio Interest rate risk arises from interest bearing financial instruments and reflects the possibility that changes in interest rates will adversely affect the value of the financial instruments and the related income. The Group manages the risk principally through monitoring interest rate gaps, matching the re-pricing profile of assets and liabilities and by having pre-approved limits for repricing bands. The Group’s Risk Management Department monitors compliance with these limits on a daily basis and is responsible for reporting breaches if any, to senior management. ALCO review reports on a monthly basis. In addition the Group also assesses the impact of defined movement in interest yield curves on its net interest income and regulatory capital. The following is the impact of interest rate movement on net interest income and regulatory capital: 116 2018 2017 Net interest income Net interest income 50 b.p. 100 b.p. 50 b.p. 100 b.p. AED’000 AED’000 AED’000 AED’000 Upward Parallel Shift 26,602 54,539 17,982 44,097 Downward Parallel Shift (3,664) (7,328) (4,995) (9,989) Commercial Bank of Dubai
117. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) e) Market risk (continued) A summary of the Group’s interest rate sensitivity position based on contractual re-pricing arrangements or maturity dates, whichever dates are earlier is as follows: 31 December 2018 Non-interest bearing Less than 3 months From 3 to 6 months From 6 months to 1 year Over 1 year Total AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 4,382,322 3,000,000 500,000 800,000 - 8,682,322 628,095 36,730 90,231 216,224 - 971,280 3,651,186 39,923,389 2,548,605 1,612,403 6,322,357 54,057,940 (3,112,993) - - - - (3,112,993) Investment securities, net 82,098 394,706 471,054 543,491 5,259,801 6,751,150 Investment in associate 84,842 - - - - 84,842 Investment properties, net 214,420 - - - - 214,420 Property and equipment 343,093 - - - - 343,093 5,266,428 - - - - 5,266,428 843,064 - - - - 843,064 12,382,555 43,354,825 3,609,890 3,172,118 11,582,158 74,101,546 187,304 2,575,640 - - - 2,762,944 16,819,512 19,171,577 9,464,268 7,095,013 614,660 53,165,030 - 1,143,241 - - 1,466,703 2,609,944 Due for trade acceptances 5,266,428 - - - - 5,266,428 Other liabilities 1,078,474 - - - - 1,078,474 Total liabilities 23,351,718 22,890,458 9,464,268 7,095,013 2,081,363 64,882,820 Interest rate sensitivity gap (10,969,163) 20,464,367 (5,854,378) (3,922,895) 9,500,795 9,218,726 Cumulative interest rate sensitivity gap (10,969,163) 9,495,204 3,640,826 (282,069) 9,218,726 Assets Cash and balances with Central Bank Due from banks, net Loans and advances and Islamic financing Expected credit losses Bankers acceptances Other assets, net Total assets Liabilities Due to banks Customer deposits and Islamic customer deposits Notes and medium term borrowings Represented by equity 9,218,726 Annual Report 2018 117
118. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) e) Market risk (continued) 31 December 2017 Non-interest bearing Less than 3 months From 3 to 6 months From 6 months to 1 year Over 1 year Total AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Cash and balances with Central Bank 4,008,539 1,350,000 400,000 1,050,000 - 6,808,539 Due from banks, net 1,118,431 1,694,241 22,038 - - 2,834,710 Loans and advances and Islamic financing 3,279,276 37,292,261 1,757,062 1,475,715 6,381,133 50,185,447 Allowance for impairment losses (2,909,722) - - - - (2,909,722) Investment securities, net 148,419 594,739 100,507 327,281 5,906,134 7,077,080 81,053 - - - - 81,053 Investment properties, net 194,980 - - - - 194,980 Property and equipment 383,704 - - - - 383,704 5,121,186 - - - - 5,121,186 637,080 - - - - 637,080 12,062,946 40,931,241 2,279,607 2,852,996 12,287,267 70,414,057 228,802 551,021 - - - 779,823 16,422,228 17,743,034 6,840,680 6,028,806 1,376,444 48,411,192 - 2,789,067 1,835,376 - 1,465,220 6,089,663 5,121,186 - - - - 5,121,186 931,438 - - - - 931,438 22,703,654 21,083,122 8,676,056 6,028,806 2,841,664 61,333,302 Interest rate sensitivity gap (10,640,708) 19,848,119 (6,396,449) (3,175,810) 9,445,603 9,080,755 Cumulative interest rate sensitivity gap (10,640,708) 9,207,411 2,810,962 (364,848) 9,080,755 Assets Investment in associate Bankers acceptances Other assets, net Total assets Liabilities Due to banks Customer deposits and Islamic customer deposits Notes and medium term borrowings Due for trade acceptances Other liabilities Total liabilities Represented by equity 9,080,755 Overall interest rate risk positions are managed by the Treasury and ALM Department, which uses investment securities, advances to banks, deposits from banks and derivative instruments to manage the overall position arising from the Group’s activities. Interest rate risks are assumed by ALM from the businesses through fund transfer pricing process. 118 Commercial Bank of Dubai
119. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) e) Market risk (continued) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates and arises from financial instruments denominated in a foreign currency. The Board of Directors has set limits on positions by currency. Positions are closely monitored and hedging strategies are used to ensure positions are maintained within established limits. At 31 December, the Group had the following significant net exposures denominated in foreign currencies: Net spot Forward Position Position Currencies US Dollar GCC currencies Great Britain Pound 2018 2017 AED’000 3,120,427 (2,294,622) 825,805 (1,268,181) (2,249,459) 2,301,663 52,204 (76,282) (161,647) 161,878 231 246 8,822 (8,672) 150 30 (91,506) 92,982 1,476 (1,868) (661) (2,202) (2,863) 547 Japanese Yen Euro Net exposure Others A summary of capital requirement for market risk under standardized approach of Basel III is set out below: Foreign currency risk Interest rate risk 2018 2017 AED’000 AED’000 2,269 377 42,449 68,552 44,718 68,929 f) Equity risk The Group has defined in its trading book policy the instruments which the Group is allowed to trade. A limited trading activity takes place in the equity market, monitored by Risk Management and in line with Credit and Investment Committee (CRIC) recommendations. Daily stop loss limits as well as portfolio notional limits are monitored daily and reported to senior management. In addition, the Group has classified an equity portfolio as FVOCI. Analysis of equity portfolio: Publicly traded (quoted): Equity (note 11) 2018 2017 AED’000 AED’000 72,324 91,160 9,774 15,155 82,098 106,315 2018 2017 AED’000 AED’000 1,384 9,172 (12,391) (27,036) Privately held (unquoted): Funds of funds investments (note 11) Total Analysis of gains or (losses) on equity investments: Realized gains on sale Unrealized loss Annual Report 2018 119
120. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) f) Equity risk (continued) Analysis of capital requirement for equity investments under standardized approach of Basel III: 2018 2017 FVOCI FVOCI AED’000 AED’000 Equity 7,594 9,572 Funds of funds investment 1,026 1,591 Total 8,620 11,163 g) Operational risk Operational risk is defined by basel as “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, this includes legal risk but excludes strategic and reputation risks”. The Group’s objective is to manage operational risk, so as to balance the avoidance of financial losses and damage to the Group’s reputation, with overall cost effectiveness and to avoid control procedures that restrict initiative, innovativeness and creativity. The primary responsibility for the overseeing the establishment of sound operational risk management framework and monitoring the operational risk profile of the Group vests with the senior management of the Group. The Group has set up a cross functional committee named Operational Risk Management Committee (ORMC) of senior management personnel to formalize this responsibility and closely monitor key operational risks on a pan bank basis to support timely execution of action plans. Accountability and responsibility is further assigned to the heads of individual units, departments or branches. This responsibility is supported by the development of overall Group standards for the management of operational risk in the following areas: • Requirements for appropriate segregation of duties, including the independent authorization of transactions to eliminate scenarios involving any conflict of interest; • Requirements for the reconciliation and monitoring of transactions; • Compliance with regulatory and other legal requirements; • Documentation of controls and procedures pertaining to all activities of the bank; • Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; • Requirements for the reporting of operational losses and proposed remedial action to avoid its future recurrence; • Development of contingency plans to ensure continuity of business under all circumstances; • Training and professional development of employees at all levels so as to increase their awareness of the subject; • Ethical and business standards (through the Group’s approved and functional Code of Ethics); • Risk mitigation, including insurance wherever this is effective; and • Whistle Blowing and Incident Reporting Policies are channels available to all staff for reporting of any loss events or other wrongdoings. The Group has an approved framework for end-to-end management of its operational risks, which involves the active participation of the employees at all levels. The Operational Risk Management plan places an equal emphasis on the identification, assessment, control and reporting of operational risks and on quantification of potential risks and resultant losses therein, if any. Reports are produced covering operational risk dashboards, heat-maps, loss matrices, operational risk register and loss databases. 120 Commercial Bank of Dubai
121. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) g) Operational risk (continued) The Group has in place an operational risk management system to collate operational risk information in an automated environment; this has enabled the bank to build operational risk databases to support migration to more complex approaches for computation of operational risk capital in the future. Group Risk Management continued its efforts towards increasing bank-wide awareness about the ORM concept, by organizing workshops, seminars and training courses on the subject, for the employees, throughout the year. On an ongoing basis, Risk and Control Self Assessments (RCSA) are being carried out by all branches and units to identify the operational risks and assess the effectiveness of existing controls, so as to plan any remedial actions (if required) and minimize recurrence of loss events. Moreover, the Group conducts an assessment of disaster recovery and business continuity position, as well as detailed system risk assessments of all new / upgraded IT systems and assessment of operational risk elements in any new products to be launched or procedures to be implemented. Compliance with policies and procedures is supported by periodic reviews undertaken by Internal Audit. A review of the insurance coverage available to the Group is undertaken to maintain oversight of adequacy of insurance as necessitated by the Basel guidelines. Regular updates are provided to the senior management and the Risk Committee (RC) to support their mandate to maintain adequate oversight of the Group’s operational risk framework and status of operational risks across all areas of the Group. 36. CAPITAL MANAGEMENT 36.1 Regulatory capital The Group’s regulator, the Central Bank of the UAE, sets and monitors regulatory capital requirements. The Group’s objectives when managing capital are as follows: • Safeguard the Group’s ability to continue as a going concern and optimize returns for shareholders; and • Comply with regulatory capital requirements set by the Central Bank of the UAE. The Group’s policy is to maintain a strong capital base so as to maintain investors, creditors and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Group recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Group also assesses its capital requirements internally taking into consideration growth requirements and business plans, and quantifies its Regulatory and Risk / Economic Capital requirements within its integrated ICAAP Framework. Risks such as Interest Rate Risk in the Banking Book, Concentration Risk, Strategic Risk, Legal and Compliance Risk, Stress Risk, Insurance Risk and Reputational Risk are all part of the ICAAP. The Group also calculates the Risk Adjusted Return on Capital (RAROC) for credit applications that are priced on a riskadjusted basis. RAROC calculations are also built into the Credit Appraisal System. The Central Bank of UAE supervises the Group on a consolidated basis, and therefore receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Effective from 2017, the capital is computed at a Group level using the Basel III framework of the Basel Committee on Banking Supervision (‘Basel Committee’), after applying the amendments advised by the CBUAE, within national discretion. The Basel III framework, like Basel II, is structured around three ‘pillars’: minimum capital requirements, supervisory review process and market discipline. The Group’s regulatory capital is analyzed into two tiers: • CET1 capital is the highest quality form of capital, comprising of share capital, legal, statutory and other reserves, fair value reserve, retained earnings, after deductions for intangibles and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes under ‘CBUAE’ guidelines. Annual Report 2018 121
122. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 36. CAPITAL MANAGEMENT (continued) 36.1 Regulatory capital (continued) • Tier 2 capital comprises of collective provision which shall not exceed 1.25% of total credit risk weighted assets. The CBUAE issued Basel III capital regulations, which came into effect from 1 February 2017 introducing minimum capital requirements at three levels, namely Common Equity Tier 1 (‘CET1’), Additional Tier 1 (‘AT1’) and Total Capital. The minimum capital adequacy requirements as set out by the Central Bank are as follows: - Minimum common equity tier 1 (CET 1) ratio of 7% of risk weighted assets (RWAs). - Minimum tier 1 ratio of 8.5% of RWAs. - Total capital adequacy ratio of 10.5% of RWAs. Additional capital buffers (Capital Conservation Buffer (CCB) and Countercyclical capital Buffer (CCyB) - maximum up to 2.5% for each buffer) introduced over and above the minimum CET1 requirement of 7%. For 2018, CCB is effective in transition arrangement and is required to be kept at 1.88% of the capital base and from 2019 it will be required to be kept at 2.5% of the capital base. CCyB is not in effect and is not required to be kept for 2018. The Group has complied with all the externally imposed capital requirements. 36.2 Capital resources and adequacy The table below summarizes the composition of regulatory capital and the ratios of the Group as per BASEL III guidelines and has complied with all of the externally imposed capital requirements to which it is subject to: 2018 2017 Capital base AED’000 AED’000 Tier 1 capital 8,528,988 8,522,287 Tier 2 capital 728,552 678,434 9,257,540 9,200,721 58,284,194 55,411,527 425,881 656,467 4,893,229 4,660,438 63,603,305 60,728,432 Tier 1 ratio 13.41% 14.03% Tier 2 ratio 1.15% 1.12% 14.56% 15.15% Total capital base Risk weighted assets (RWA) Pillar 1 Credit risk Market risk Operational risk Risk weighted assets Capital adequacy ratio Tier 1 capital for 2017 has been adjusted as per the approved dividend at 17.5%. Capital adequacy ratio calculation is after netting off proposed dividend distribution from capital base. 122 Commercial Bank of Dubai
123. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 36. CAPITAL MANAGEMENT (continued) 36.2 Capital resources and adequacy (continued) Risk weighted capital requirement The Group has adopted the standardized approach for credit risk and market risk and basic indicator approach for operational risk for regulatory reporting purposes. The Group’s risk weighted capital requirement for credit, market and operational risk are given below: (i) Risk weights for credit risk The Group has a diversified funded and unfunded credit portfolio. The exposures are classified as per the Standard Portfolio approach mentioned under the Central Bank of UAE Basel III Capital Adequacy Framework covering the standardized approach for credit risk. The descriptions of the counterparty classes along with the risk weights used to derive the risk weighted assets are as follows: • Funded exposure Claims on sovereigns These pertain to exposures to governments and their central banks. Claims on central banks and sovereigns are risk weighted in accordance with their ratings from acceptable external credit assessment institutions (ECAIs), except that, for all GCC sovereigns a 0% weight has been applied. Claims on non-commercial public sector entities (PSEs) Domestic currency claims on GCC non-commercial PSEs were treated as claims on GCC sovereigns if their Central Bank or monetary authority treats them as such. Foreign currency claims on GCC PSE were treated one grade less favourable than its sovereign i.e. 20% risk weights were applied. Claims on other foreign non-commercial PSEs were treated one grade less favourable than its sovereign. Claims on multilateral development banks (MDBs) All MDBs are risk weighted in accordance with each bank’s credit rating except for those members listed in the World Bank Group which are risk weighted at 0%. Claims on banks Claims on banks are risk weighted based on the ratings assigned to them by external rating agencies, however, short term claims denominated in local currency were assigned more favourable risk weighting. No claim on an unrated bank would receive a risk weight lower than that applied to claims on its sovereign of incorporation. Claims on corporate and government related entities portfolio Claims on corporate and government related entities (entities with greater than 50% government ownership) are risk weighted in accordance with ratings from acceptable ECAIs. Risk weight of 100% is applied on claims on unrated corporate and government related entities. Claims on regulatory retail exposures Retail claims that are included in the regulatory retail portfolio are assigned risk weights of 75% (except for past due loans), if they meet the criteria mentioned in the Central Bank of the UAE Basel III guidelines. Claims secured by residential property A preferential risk weight of 35% was applied on claims that did not exceed AED 10 million to a single borrower and the claim was secured by residential property with LTV of up to 85%. Other claims secured on residential property were risk weighted 100%. Claims secured by commercial property 100% risk weight was applied on claims secured by commercial property. Annual Report 2018 123
124. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 36. CAPITAL MANAGEMENT (continued) 36.2 Capital resources and adequacy (continued) (i) Risk weights for credit risk (continued) Past due exposures The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of specific provisions (including partial write-offs), is risk weighted as follows: - 150% risk weight when specific provisions are less than 20% of the outstanding amount of loan; - 100% risk weight when specific provisions are greater than 20% of the outstanding amount of loan. Equity portfolios 0% risk weight was applied on equity in trading book. Equity in banking book was risk weighted at 100%. The aggregate investments in insurance companies (including investment in associate held as per equity accounting) amounting to AED 84,842 thousand (2017: AED 85,404 thousand) have been risk weighted in accordance with Basel III. Other exposures These are risk weighted at 100%. • Unfunded exposure For credit-related contingent items, the nominal value is converted to an exposure through the application of Credit Conversions Factors (CCF). The CCF is at 20%, 50% or 100% depending on the type of contingent item, and is used to convert off balance sheet notional amounts into an equivalent on balance sheet exposure. Undrawn commitments to extend credit represent commitments that have not been drawn down or utilized at the reporting date. The nominal amount provides the calculation base to which the CCF is applied for calculating the exposure. CCF ranges between 20% and 50% for commitment with original maturity of up to one year and over one year respectively and 0% CCF is applicable for commitments which can be unconditionally cancelled at any time. Asset classes 2018 Claims on sovereigns Claims on non-commercial Public Sector Enterprises (PSEs) Claims on banks Claims on corporates and government related enterprises Claims included in the regulatory retail portfolio Claims secured by residential property Claims secured by commercial real estate Past due loans Other assets TOTAL CLAIMS TOTAL CREDIT RISK 124 Commercial Bank of Dubai On & off balance sheet Credit risk mitigation (CRM) On & off balance sheet Gross outstanding Exposure before CRM CRM AED’000 AED’000 AED’000 10,383,296 10,383,296 7,591,907 220,213 Net exposure after credit conversion factors (CCF) Risk weighted assets AED’000 AED’000 220,213 - 220,213 - - 10,382,776 7,591,907 - 7,264,611 201,422 3,750,924 61,797,891 61,794,816 8,315,663 38,446,271 37,702,934 4,876,277 4,876,273 27,018 3,884,383 2,995,128 2,131,564 2,131,564 3,045 2,110,667 1,024,441 9,236,518 9,236,518 210,081 7,754,982 7,754,982 5,182,795 3,093,849 31,859 2,982,811 3,688,647 102,900,418 100,796,697 8,587,666 1,479,957 1,468,261 - 1,468,261 74,514,974 1,165,717 58,284,194 58,284,194
125. Notes to the consolidated financial statements For the year ended 31 December 2018 (continued) 36. CAPITAL MANAGEMENT (continued) 36.2 Capital resources and adequacy (continued) (i) Risk weights for credit risk (continued) Asset classes 2017 Claims on sovereigns Claims on non-commercial Public Sector Enterprises (PSEs) Claims on banks Claims on corporates and government related enterprises Claims included in the regulatory retail portfolio Claims secured by residential property Claims secured by commercial real estate Past due loans Other assets TOTAL CLAIMS TOTAL CREDIT RISK On & off balance sheet Credit risk mitigation (CRM) Gross outstanding Exposure before CRM 8,435,810 8,435,810 840,203 7,841,780 840,203 7,841,780 On & off balance sheet CRM Net exposure after credit conversion factors (CCF) - 8,394,898 125 289,253 7,310,303 Risk weighted assets 220,311 - 3,531,542 60,217,614 60,048,176 6,993,025 36,973,233 36,247,285 4,408,688 4,408,688 134,236 4,054,154 3,157,354 2,259,013 2,259,013 8,494 2,213,710 1,000,481 8,212,054 8,212,054 131,227 7,112,811 7,112,811 4,204,176 2,292,723 16,967 2,233,926 2,649,592 96,261,037 7,284,074 2,015,289 98,434,627 1,922,590 - 1,922,590 70,504,878 1,492,151 55,411,527 55,411,527 The Group uses the following external credit assessment institutions (ECAIs): Standard & Poor’s, Moody’s and Fitch. The external rating of ECAI is mapped to the prescribed credit quality assessment scale that in turn produces standard risk weightings. The Group also uses various CRM techniques. The total exposure to banks before CRM includes AED 5,576 million (2017: AED 7,619 million) rated exposure. Risk weighted assets as per standardized approach is set out below: 2018 Exposure prior to CRM Less: Eligible financial collateral Net exposure after CRM 2017 Exposure Risk weighted assets Exposure Risk weighted assets AED’000 AED’000 AED’000 AED’000 83,102,640 66,877,912 77,788,952 62,671,495 8,587,666 8,593,718 7,284,074 7,259,968 74,514,974 58,284,194 70,504,878 55,411,527 (ii) Risk weights for market risk Capital requirement for market risk is calculated using standardized approach. The capital requirement for market risk is analyzed into capital requirement for interest rate risk, equity risk, foreign exchange risk and option risk. (iii) Risk weight for operation risk Capital requirement for operation risk is calculated using basic indicator approach. This capital charge was computed using basic indicator approach by multiplying the three years average gross income by a predefined beta factor. 37. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the presentation adopted in these consolidated financial statements, the effect of which are considered immaterial. Annual Report 2018 125
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