Commercial Bank of Dubai: Annual Report 2020

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2. His Highness Sheikh Khalifa bin Zayed Al Nahyan President of the UAE Ruler of Abu Dhabi His Highness Sheikh Mohammed bin Rashid Al Maktoum Vice President and Prime Minister of the UAE Ruler of Dubai His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum Crown Prince of Dubai His Highness Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum Deputy Ruler of Dubai
3. Our Purpose Table of Contents To back the businesses driving the UAE economy . Chairman’s Message������������������������������������������������������������6 Our Vision Letter from the Chief Executive Officer���������������������������8 To be the best bank for our customers. Board of Directors�������������������������������������������������������������� 10 Our Objectives Executive Committee�������������������������������������������������������� 15 • Our customers are our advocates • Our culture demands high performance Board of Directors’ Report����������������������������������������������� 16 • Our returns are attractive to our shareholders • Our business leads in the digital frontier Corporate Governance Framework������������������������������� 24 Winning together through our values Collaboration 4 Commercial Bank of Dubai Ownership Delivery Excellence Annual Report 2020 5
4. Chairman ’s Message The well-being of our employees, customers and all other stakeholders has been at the front of mind throughout Dear Shareholders, On behalf of the Board, I am delighted to present you with the annual report and audited financial statements of the Commercial Bank of Dubai for the financial year ended 31 December 2020. CBD delivered a commendable performance in 2020 with a net profit of AED 1,120 million The past year has been a year like no other. The significance of the COVID-19 pandemic have been unprecedented, and the world has been deeply affected by the combined health and economic challenges. I am proud of how CBD responded to the pandemic. The well-being of our employees, customers and all other stakeholders has been at the front of mind throughout, all guided by our strong set of core values of Collaboration, Ownership, Delivery and Excellence (CODE). We demonstrated our ability to adapt with speed in response to the global pandemic. As a bank, we have a critical role to play in the recovery, to provide advice and services to our clients, to support the UAE economy and ensure our communities continue to prosper. Over the course of our 50-year history, CBD’s business model has continuously proven its strength, even in the face of global uncertainty and significant economic headwinds. Despite the global pandemic that caused major disruption to individuals, communities and businesses, CBD delivered a commendable performance in 2020 with a net profit of AED 1,120 million for the full year ended 31 December 2020, which is a good performance when compared with other banks and reflecting unprecedented market conditions, record low interest rates and the pandemic-driven economic slowdown, resulting in lower revenue and higher specific and expected credit losses. Operating income for 2020 amounted to AED 2,978 million, lower by 1.8% primarily due to reduced net interest income as a result of significantly lower interest rates. Operating expenses were AED 807 million, down 8.8% compared to full year 2019 while operating profit grew by 1.1% to AED 2,171 million. The cost to income ratio improved to 27.1%. The Bank’s total assets reached AED 97.4 billion, which represents a growth of 10.6% from 2019. Customers’ deposits increased by 10.1% to AED 69.8 billion and total shareholders’ equity increased by 26.8% to AED 13.0 billion. 6 Commercial Bank of Dubai We demonstrated our ability to adapt with speed in response to the global pandemic Our prudent risk management approach has held us in a good stead throughout this difficult year as we continued to strengthen our provision buffers with additional impairment allowances totaling AED 1,051 million, an increase by 40.5% year-on-year. CBD’s capital ratios remained strong with the Capital Adequacy Ratio (CAR) at 16.7%, Tier 1 ratio at 15.5% and Common Equity Tier 1 (CET1) ratio at 12.7%. All capital ratios were significantly above the minimum regulatory thresholds mandated by the UAE Central Bank. The Central Bank of the UAE predicted 2.5 per cent overall growth for the UAE economy in 2021 and 3.6 per cent for non-oil sectors, after shrinking by around 6 per cent in 2020, as the economy emerges from the pandemic and records an increase in economic activities. The International Monetary Fund (IMF) and World Bank also projected a positive trend for the UAE economy following quick progress on the vaccination drive and a swift implementation programme as announced by the government. These solid results were achieved through the disciplined execution of our strategy, broad-based improvement of our business model, continuous cost discipline, and investment in digital capability to support business growth and improve customer experience. Moving through 2021, despite ongoing uncertainties, we expect a gradual recovery as the COVID-19 vaccine rollout gathers momentum, and government stimulus measures support the economic rebound. We will continue our efforts to expand our market share supported by stable and diversified funding, increase the share of non-funded income, invest in our digital and technology infrastructure to further support our customers, and maintain a high level of asset quality with appropriate provisioning that together underpin long-term growth. The bank and our employees benefited from investments in new capabilities to quickly shift our operations, enabling our staff to work from home. The Bank’s investment in operational excellence and digital transformation has given greater flexibility to our customers and the bank’s innovation and digital focus was widely recognized with multiple industry accolades, including the MEA Finance 2020 Awards for “Best Digital Transformation” and for “Best Commercial Bank” in the UAE, the “Best Mobile Banking App in UAE” and “Best in Lending” Awards by Global Finance, in addition to the “Most Effective Bank” Award by Fintech Partnership, IBS Intelligence and the “Excellence in Payment” at the Finnovex Awards. In our efforts to enhance the market’s liquidity, broaden the investment base, and increase foreign capital inflows, CBD has allowed foreign investors to invest in as much as 40% of the bank’s capital. The bank completed the regulatory procedures following the shareholders’ approval during the ordinary general meeting held in March 2020. The economic consequences of the COVID-19 pandemic have been unprecedented for all countries around the world. Despite fiscal stimulus and monetary policy supports, the IMF estimates that global growth contracted by -3.5 per cent in 2020, making it the worst economic downturn since the Great Depression. Transport, retail and hospitality sectors were among the most affected by the pandemic as borders were closed and the volume of global trade declined by an estimated 10 per cent last year (according to the IMF), the most since the global financial crisis in 2009. CBD remains well positioned for further growth and success in the future. We will continue to create a high-quality banking experience with leading financial performance that increase shareholder value. I am confident that with the collaborative efforts of our board, management team and staff, we will continue to exceed our goals and take CBD to even greater heights in the years ahead. In conclusion, on behalf of the Board, I would like to extend our sincere appreciation and gratitude to the UAE’s leadership for their guidance and decisive action in response to the pandemic, and to the health care workers and all who serve on the front lines to protect us. I would also thank our shareholders, management team, employees and valued customers for their trust, continued support and dedication throughout 2020. Best Regards, Humaid Mohammad Al Qutami Chairman Annual Report 2020 7
5. Letter from the Chief Executive Officer for the government . We issued over new 110,000 cards, including over 65,000 cards sold to end users, within the first four months of launch. Top up volumes have been close to one billion Dirham, with over half a billion of actual payments made through our eDirham cards. The solid financial performance is reflective of a great effort by all of our staff Dear Shareholders, The year 2020 has truly been an unprecedented one. Whereas we started the year full of optimism on the back of a record performance in 2019, by the end of the first quarter the world had changed. The impact of the COVID-19 pandemic started to become visible throughout the world, with subsequent countries entering phases of lockdown. Economic activity and global trade almost came to a halt, and business confidence plummeted. The government of the UAE took decisive action early on in the pandemic. Following a strict lockdown phase, the country opened up again and business activity increased. The drive towards containing COVID-19 combined with an early focus on vaccination has resulted in dampening the adverse impact of the virus. In the second half of the year, the economic recovery was pronounced which has benefited your bank. Over the full year, we managed to deliver a slightly increased operating profit, despite the drop in market interest rates. Our focus on growth and continuing delivery resulted in us growing our loan book by 7.8%, which partially compensated for the significant drop in margins and further grew our market share. Strict cost control resulted in lower costs by close to 9%, which also contributed to our strong operating performance. Consequently, our cost-to-income ratio further improved to 27.11%, down by over 2 percentage points from 2019. Our continuing prudent provisioning led to an increase in impairments by in excess of 40%, both reflective of specific non-performing loans as well as expected future losses as the result of the COVID-19 fall-out. 8 Commercial Bank of Dubai All of our efforts resulted in an operating profit of 2.17 billion, up by 1.1% compared to 2019 and a net profit of 1.12 billion, lower by 20% compared to 2019. This result has enabled us to propose a dividend of 20% on par value, which equates to a 50% payout ratio. The proposed dividend payout was enabled by our strong capital position, which was further enhanced through the successful issuance of Additional Tier 1 (AT1) capital in October of 2020. The 600 million US Dollar issue was priced at 6%, which marked both the largest size ever issued by the Bank and at the time the lowest coupon for BASEL III compliant issue out of Dubai. The AT1 issue improved our Tier 1 capital position by close to 280 basis points. The solid financial performance is reflective of a great effort by all of our staff. When the pandemic hit, we set out to prioritise the safety and well-being of our staff, customers and partners. This required significant planning and operational excellence to adapt our business model to the new operating environment. I am proud to say that, whether working from home, in the UAE or India, or from office, we have continued to focus on customer service and excellence in delivery. We decided early on that our project delivery would continue unabated and that there would be no compromises on the back of COVID-19. As a result, we delivered on a wide range of projects, the most visible one arguably us being the first bank to go live with eDirham, the electronic payment wallet We continued with the second phase of Eureka, our joint project with PwC. Through this project, CBD has provided access to promising FinTech companies, sourced through PwC’s global network. In 2020, we delivered the second phase of our state-of-the-art, AI-based system for transaction monitoring. We also launched our offering with NOW Money through which we provide enhanced services such as real-time remittances for our low-income payroll customers. Our partnership with NOW Money has further benefitted from the work undertaken with Thunes, a Singapore based Payments Fintech company that offers real-time remittance solutions to bank accounts, wallets and physical cash. As the result of the partnership with Thunes, we are the first bank in the UAE to offer real-time cross border remittance to wallets. We went live with Demica’s digital platform for Supply Chain Financing, which was received very positively by our customers. Our partnership with Demica was also acknowledged as the most effective bank-FinTech partnership by IBS Intelligence. At the end of the year, we launched the first release of CBD Investr, our robo-advisory platform developed in partnership with InvestSuite, a Belgian FinTech company. Through Investr, our customers have access to a highly sophisticated roboadvisor which manages a portfolio of investments in line with their defined risk appetite. The impact of the COVID-19 pandemic in terms of workfrom-home and social distancing has further accelerated our journey towards being `Default Digital’. Our digital user base grew by 41% over 2020 whilst the number of active users grew by over 60%. Mobile banking transactions grew by over 65% from January to December. The accelerated migration towards default digital has helped us to provide uninterrupted service to all of our customers. Shareholding structure as 31 December 2020 A prime example of this acceleration is the further development of our flagship program “Direct from Customers”. In June, we launched Digi Accounts and Digital Credit Cards for new-tobank customers. The response to this offering has been very positive, resulting in the onboarding of tens of thousands of new customers. In December 2020, we launched our Digi Loans proposition offering customers instant loans through our award winning Mobile App. We were among the first banks to go live on Norbloc, the Blockchain-based SME onboarding platform developed jointly by Dubai Economy and the local banking industry. This platform will enable more streamlined, easier onboarding for small and mediumsized companies, the backbone of the economy. Moreover, we were the first bank to integrate UAE pass in our mobile banking application. All of these are prime examples of our drive to be `default digital’, which will continue throughout next year. On the back of the wise management by the UAE government in containing the spread of the virus and boosting vaccination to world-leading levels, we are looking forward to a positive 2021. We will continue to deliver on our financial targets in a reliable and sustainable way. We will continue our accelerated journey towards being `Default Digital’. The forecast rebound in economic growth in 2021 will be an ideal launching pad for a strong set of results by our bank. I would like to thank the Board of Directors for their unwavering support in a very challenging year. I would also like to thank all the members of the CBD team for their great performance in 2020. Above all else, I would like to thank our customers for their continuing trust in us. Dr. Bernd van Linder Chief Executive Officer of Commercial Bank of Dubai PSC Investment Corporation of Dubai - 20% Al Futtaim Private Co. - 10.51% Orient Insurance P.J.S.C. - 8.84% Abdulla Hamad Al Futtaim - 6.95% Ghobash Trading and Investment Co LTD - 6.37% Abdul Wahed Al Rostamani AWR Group LLC – 6.61% Al Majid Investments - 5% General Public - 35.72% Annual Report 2020 9
6. Board of Directors Humaid Mohammad Obaid Al Qutami Non-Executive - Independent Abdulla Saif Al Hathboor Non-Executive Director - Non-Independent H .E. Al Qutami joined CBD’s Board of Directors in March, 2015. He is the 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 for Emirates Transport and Services Corporation. He was was until January 2021 the Director of Dubai Health Authority. 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. Mr. Al Hathboor joined the Board of Commercial Bank of Dubai 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: CBD Committee Membership: • Member of the Nomination and Remuneration Committee • Member of the Credit and Investment Committee None Ahmad Abdulkarim Julfar Vice Chairman of the Board - Independent Mr. Ahmad Abdulkarim Julfar joined the Board of Commercial Bank of Dubai (P.S.C.) in March 2018. He has been also 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 served as a Director of The National Bank of Ras Al-Khaimah (P.S.C.) until March 2018. He has held a range of senior positions including Chairman of the Board of Directors for 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 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 Information Technology and Digital Committee • Member of the Risk Committe Abdullah Salim Alturifi Non-Executive - Independent Mr. 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 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 Board member of the Emirates Industrial Bank in 2010-2011. He is the founder and first director of the Hamriyyah Industrial Free Zone, and Vice Chairman of the Board of Director of Depa PLC in 2018. Abdul Wahed Mohamed Al Fahim Non-Executive Director - Independent Mr. Al Fahim joined CBD’s Board of Directors in March 2018. He is board member of EGA since 2014. He also acts as Chairman of NASDAQ Dubai Limited and serves as a board member of DUBAL Holding LLC, Emirates Development Bank. 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 Ali Fardan Ali Alfardan Non-Executive Director - Independent Mr. Al Fardan joined the Board of Commercial Bank of Dubai in 2011. He is currently member of the Board of Directors of Dubai Investment PJSC and Al Mal Capital. He is the Vice Chairman of Al Fardan Holdings LLC, Vice Chairman of The First Investor LLC, Managing Director of Al Fardan Real Estate, Chairman of Carlton Hospitality and Management, and the Vice Chairman of Naif Marine Co. PJSC. Mr. Ali 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 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 10 Commercial Bank of Dubai Annual Report 2020 11
7. Board of Directors Buti Saeed Al Ghandi Non-Executive Director - Independent Omar Mohammad Ali Alqaizi Non-Executive Director - Independent Mr . Al Ghandi joined the Board of Commercial Bank of Dubai 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 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. Dr. Alqaizi joined 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 Credit and Investment Committee • Member of the Nomination and Remuneration Committee • Member of the Financial Settlements and Recovery Committee Hamed Ahmed Kazim Non-Executive Director - Independent Mr. Kazim joined the Board of Commercial Bank of Dubai 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), senior advisor to PwC & other major companies. Prior to this Mr. Kazim was the Managing partner of Ernst & Young and, prior to that, Arthur Andersen Dubai. He has served on several boards including ESCA. Mr. Kazim holds a B.A. in Economics and minor in Electronic Engineering from the University of California, San Diego, USA and has a CPA with high distinction. CBD Committee Membership: • Chairman of the Information Technology and Digital Committee • Member of the Audit and Compliance Committee • Member of the Risk Committee CBD Committee Membership: • Chairman of the Audit and Compliance Committee • Member of the Financial Settlements and Recovery Committee Sheikh Maktoum Hasher Al Maktoum Non-Executive Director - Independent H.H. Sheikh Maktoum Hasher Al Maktoum joined 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 is also a Founding Investor of Virgin Megastores in the UAE. He has been recognised 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 Khalid Abdulwahid Hassan Al Rostamani Non-Executive Director - Non-Independent Mr. Khalid Abdulwahid Hassan Al Rostamani joined the Board of Commercial Bank of Dubai (P.S.C.) in March 2008. He served as Deputy Chairman to the Board of Commercial Bank of Dubai from 2012 until 2018. Mr. Al Rostamani is the Chairman of the AW Rostamani Group of Companies and a Founder and Chairman of BCD Travel, Transport and Freight Forwarding. He also a Board member 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 12 Commercial Bank of Dubai Annual Report 2020 13
8. Executive Committee Dr . Bernd van Linder Chief Executive Officer Mr. Darren Clarke Chief Financial Officer Mr. Fahad Al Muhairi General Manager Islamic Banking & Government Relations Mr. Stefan Kimmel Chief Operating Officer Mr. Othman Bin Hendi General Manager Institutional Banking Mr. Abdul Rahim Al Nimer General Manager Corporate Banking Mr. Alan Grieve Chief Risk Officer Mr. Gareth Powell Chief Human Resources Officer Mr. Amit Malhotra General Manager Personal Banking Group 14 Commercial Bank of Dubai Mr. Hassan Al Redha General Manager International and Transaction Banking Mr. Mark Zanelli General Manager Treasury, Asset & Liability Management Annual Report 2020 15
9. Board of Directors ’ Report Board of Directors’ Report Dear Shareholders, Asset quality The non-performing loan (NPL) ratio increased to 6.77%, up from 5.94% at the end of 2019. 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 2020. Total assets were AED 97.4 billion as at 31 December 2020, an increase of 10.6% compared to AED 88.1 billion as at 31 December 2019. The audited financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The report includes Basel II Pillar III annual disclosures and complies with relevant laws of the U.A.E. Net loans and advances were AED 65.3 billion as at 31 December 2020, registering an increase of 8.5% compared to AED 60.2 billion as at the 31 of December 2019. FINANCIAL HIGHLIGHTS CBD has delivered a commendable full year performance while navigating the challenging market environment. Notwithstanding the lower overall performance for the year compared to 2019, CBD continues to deliver on its long term strategy and is well positioned for continued growth. Following on from the recent landmark Additional Tier 1 issuance (AT1), the bank remains well capitalized to support its customers and the UAE economy now and into the future. The bank’s capital base provides a strong foundation to achieve its growth targets in the coming years. Furthermore, all liquidity ratios are comfortably above the minimum levels prescribed by the UAE Central Bank. Net Profit of AED 1,120 million for the full year was 20% down against the prior year on the back of the COVID-19 pandemic, which caused a contraction in business conditions and confidence, leading to historically low interbank interest rates and increased specific and forecast credit losses. Operating Income for the full year of 2020 amounted to AED 2,978 million, a decrease of 1.8%, attributable to lower Net Interest Income (NII) by 4.0% as a result of significantly lower interest rates and a 2.2% increase in Other Operating Income (OOI). Operating Expenses were AED 807 million, down 8.8% compared to the full year 2019. The bank successfully progressed its transformation agenda as an increased number of customers embraced our digital solutions resulting in further efficiencies. The cost to income ratio improved to 27.1% from 29.2% in 2019. Operating Profit grew by 1.1% to AED 2,171 million. Impairment Allowances were higher, with additional net impairment provisions of AED 1,051 million set aside for 2020, up by 40.5% on 2019. The increase in credit provisions is on the back of several specific credit events and forecast credit losses associated with the impact of the COVID-19 pandemic, in accordance with IFRS9 accounting standards. Income statement (AED Million) 2020 2019 YoY Var Net interest income 1,887 1,966 (4.0%) Other operating income 1,092 1,068 2.2% Total income 2,978 3,033 (1.8%) 807 885 (8.8%) Operating profit 2,171 2,148 1.1% Net impairment allowances 1,051 748 40.5% Net profit 1,120 1,400 (20.0%) Operating expenses 16 Commercial Bank of Dubai Customers’ deposits were AED 69.8 billion as at 31 December 2020, representing an increase of 10.1% compared to AED 63.3 billion as at the 31 December 2019. Low cost current and savings accounts (CASA) constitute 41.5% of the total deposit base, while the financing-to-deposits ratio stood at 93.6%. 2020 2019 YoY Var Gross loans and advances 69,049 64,039 7.8% Allowances for impairment 3,761 3,858 (2.5%) Net loans and advances 65,289 60,181 8.5% Total assets 97,362 88,069 10.6% Customers’ deposits 69,751 63,334 10.1% Total Equity 12,954 10,217 26.8% Balance sheet (AED Million) The bank’s liquidity position remained robust with the advances to stable resources ratio at 86.33% as at 31 December 2020 (December 2019: 87.96%), compared to the UAE Central Bank limit of 100%. CBD’s capital ratios remained strong with the capital adequacy ratio (CAR) and Tier 1 ratio increasing to 16.65% and 15.50% respectively, while Common Equity Tier 1 (CET1) ratio remained strong at 12.71%. All capital ratios were significantly above the minimum regulatory thresholds mandated by the UAE Central Bank. Key ratios, % 2020 2019 YoY Var bps Return on equity 10.69 14.61 (392) Return on assets 1.21 1.75 (55) Cost to income ratio 27.11 29.18 (208) Capital adequacy ratio 16.65 14.17 248 6.77 5.94 83 Provision coverage 69.70 83.14 (1,344) Financing-to-deposit ratio 93.60 95.02 (142) Advances to stable resources 86.33 87.96 (163) Tier 1 ratio 15.50 13.02 248 CET1 ratio 12.71 13.02 (31) Non-performing loans (NPL) The Board of Directors has proposed a 20% cash dividend for the year, which is equivalent to 50% of net profit. Annual Report 2020 17
10. Board of Directors ’ Report STRATEGY CBD’s vision is ‘To be the best bank for our customers’ driven by our purpose to back the businesses driving the UAE economy’. During the year the bank executed a landmark Additional Tier 1 issuance (AT1) positioning the organisation for expansion and extending support to our customers and the UAE into the future. CBD continues to focus on our franchise customers within Institutional and Corporate banking and selected market segments within Retail Banking. In 2020, the bank continued to deliver on a number of transformation programs focused on “Default Digital”, leveraging investments made in Information Technology and our physical customer footprint. During the year a strategic priority has been to deepen relationship with existing key franchise customers, supporting their end to end banking needs. The bank was successful with this goal while ensuring that growth across target customer segments was fully aligned with the bank’s risk appetite. In addition, and as cornerstone of the three year strategy, we continued to drive our high performing culture by investing in differentiated capabilities and building talent which offers great customer experiences and with a clear focus on Emiratization. Moving onto 2021, the bank expects to further expand its market share supported by stable and diversified funding, an increased share of non-funded income, improved digital adoption rates, reduced cost of risk and maintaining asset quality with appropriate provisioning. The bank aspires to deliver returns that meet shareholder expectations. CBD’s strong set of core values of Collaboration, Ownership, Delivery and Excellence (CODE) are embedded in its culture and will guide the bank now and in the years ahead. MARKET OVERVIEW The economic outlook for global and domestic growth remains dependent on the speed and success of the vaccine rollout. The International Monetary Fund has upgraded the 2021 forecast for World GDP to 5.5% from 5.2% previously, citing the vaccine rollout and additional policy support from global government and central banks. The forecast for the Middle East and Central Asia is unchanged at 3.0% in 2021. The IMF however has noted that further waves and new strains of the virus remain a risk to the growth path, particularly as parts of the developed world remain under some type of lockdown. 18 Commercial Bank of Dubai Board of Directors’ Report Central Banks globally are expected to maintain an uninterrupted services to customers despite challenges faced The culture of service excellence and the adoption of innovative accommodative stance, keeping interest rates low. In the US, due to the pandemic. A COVID-19 relief package was offered digital technologies has seen CBD ranked by wholesale the Federal Reserve left interest rates and asset purchases to CBD clients bundled with waivers and reductions in pricing banking customers as one of the best transaction banking unchanged, noting a moderation in growth in recent months. for online payments processing, resulting in higher digital service providers in the UAE. As testament to this feedback, The financial markets continue to reflect low interest out into penetration. CBD won several awards from industry leaders, including: As part of our ‘Default Digital’ plan , CBD successfully · the future. Economic concerns are focussed on trade issues, political tensions and the length of the pandemic that could pose a challenge to the recovery. Locally, the UAE has adopted a proactive path to the vaccine and a Digital Document Center, all of which enabled the bank to rollout, and is a global leader in terms of the percentage of meet customers’ growing business requirements, significantly population inoculated. The authorities expect to vaccinate a reduce turnaround times and expand the digital foot print of significant percent of the population in the early part of 2021, our transaction banking products. The iCollect Campaign which is likely to provide a boost to the tourism and hospitality was another milestone through which the bank successfully sectors. Other sectors such as trade and services will likely enrolled our top 50 WBG customers, thereby eliminating the recover more gradually, as global sentiment and consumer need to visit branches or cash deposit machines to deposit confidence returns. The real estate sector, which has recovered cheques and collect returned cheques. partially, will likely further consolidate as increased demand, record low interest rates and attractive valuations entice potential first time buyers. Other factors such as sustained increases in oil prices, dealings with Israel, rapprochement with Qatar and the successful hosting of the EXPO 2020 will CBD’s innovation program “Eureka” focused on working together with leading FinTechs from around the world to bring customer-centric and solutions to our customer base. One of the main deliverables from this programme was to address provide further tailwinds to the recovery. the challenge of helping business owners meet their financial WHOLESALE BANKING GROUP (WBG) CBD implemented a digital Supply Chain Finance (SCF) platform The Wholesale Banking Group (WBG) comprises the relationship management team for our mid-size and large commercial clients as well as the institutional clients. In order to deliver the planned growth in a sustainable and diversified manner the bank established a dedicated Real Estate team as Fintech implemented various digital initiatives such as Remote Presentation of Trade Documents, Card-less Cash Withdrawals, aspirations by unlocking and improving liquidity. To this end, offering both buyer-led and supplier-led financing solutions.  The SCF proposition is the first of its kind in the Middle East and will help CBD’s corporate customers improve their supply chain management and overall relationship with suppliers. Innovation Award - Most Effective Bank- · Partnership, IBS Intelligence; Excellence in Payment, Finnovex Awards. PERSONAL BANKING (“PBG”) PBG contributed a net profit of AED 350.4 million for 2020, an admirable result given the challenging market conditions. The achievement was delivered via a broad based focus on revenue growth, expense optimization, continuing digitization and overall better asset quality. Revenue decreased by 3.8% due to a drop in interest income while expenses were carefully managed. The disciplined execution of expenses optimization initiatives and digital transformation resulted in an improved cost-to-income ratio. Asset growth was largely stable with an increased focus on a low risk portfolio with improved margins. Liabilities grew by 19.6%, resulting in a healthy asset-to-liability ratio of 40.3% by the end of 2020. The credit card business witnessed a solid growth in the portfolio size. This was due to increased digital solutioning supported by the significant shift to online shopping. well as a Liability Management team within CBD. The COVID-19 pandemic was both a major threat to public health and also had a substantial impact on the global and regional economic growth. In line with the UAE government’s initiatives to support the UAE economy, CBD helped customers with the rescheduling of loans where required, and continued to issue new loans to existing as well as new customers. Across WBG solid growth was achieved in 2020 well supported by our product capabilities. The Debt Capital Markets and Syndication team (DCM) was a key pillar in delivering consistent business performance. The team continued with a selective growth path in cross-border transactions across targeted emerging markets including KSA, Egypt and Pakistan. In addition, the team procured two direct bond mandates acting as a Joint Mandated Lead arranger. In the Transaction Banking space, CBD continued to provide Annual Report 2020 19
11. Board of Directors ’ Report Board of Directors’ Report The mortgage portfolio exhibited steady growth through strategic alliances with key partners and via new product offerings. The SUPPORT FUNCTIONS personal loan portfolio remained stable with a continued focus on return for risk. Current and savings account growth continued across the retail and small business segment. The strategic focus during the year was on digital transformation, CBD enhanced its capabilities to provide customers with contactless banking solutions, migrating the majority of transactions from branches to alternative digital platforms. As part of our ‘Default Digital’ focus, CBD launched several new digital initiatives and products including the CBD Digi Account, virtual debit and credit cards and Digi Loans. These products enabled new-to-bank customers to open a CBD account instantly, receive a new credit or debit card or even obtain a loan for emergency cash in just a few minutes using only their Emirates ID. As part of the ongoing efforts to support the UAE economy and back the businesses operating in the country, CBD also partnered with the Department of Economic Development (DED) in Dubai to provide banking services to investors availing new or renewing their trade licenses. Through this partnership DED license holders can open a CBD account and receive preferential rates on local and international transfers, a free cheque book and also get an opportunity to earn up to 100% of their trade license fees back based on the average daily balance maintained. PBG won several awards in 2020, a testament to the innovative products and services offered by the bank: · Best Mobile Banking App in UAE – Global Finance; · Best in Lending – Global Finance; · Most Innovative Card of the Year for CBD One – Seamless Awards 2020; · Best Product Launch – Middle East for CBD Digi Account, EMEA Finance. CBD AL ISLAMI The Islamic business provided incremental growth with financing assets increasing to AED 12.1 billion and customer deposits to AED 16.3 billion for 2020. The year posed significant challenges due to COVID-19 and the bank was able to seamlessly address the challenges encountered with no disruptions to customer servicing. The bank was able to accelerate digital transformation thereby meeting increased customer expectations and enabling employees to work remotely. The Information Technology team continued on the three-year program to build on foundations for ‘Default Digital’, allowing the bank to deliver more than 75 transformation projects and 235 significant enhancements to existing platforms through the year. Our involvement in the ‘Eureka’ innovation framework enabled the bank to navigate the expanding landscape of technology solutions in alignment with our digital transformation. In addition, the bank moved all customer facing operations onto an integrated Microsoft Dynamics CRM platform to enable the customer servicing journey to ‘Default Digital’. CBD was the first bank to partner with the Ministry of Finance to enable the G3 eDirham scheme and was also the first bank to fully integrate UAE Pass into its mobile banking app. The bank also made significant progress in the journey towards Cloud adoption. CBD went live with the first phase of implementing the payments hub solution on the Cloud and successfully migrated several processes from on premise implementations to a Cloud infrastructure, providing efficiencies in operations and infrastructure. These achievements were widely recognized with multiple industry accolades, including: · The IBSI Award for the Most Innovative Project for Bank-Fintech Partnership with Demica; · “Best Commercial Bank” and “Best Digital Transformation” Awards by MEA Finance; · “Excellence in Payment” Award at the Finnovex Awards 2020. During the year, CBD Al Islami continued its journey to provide a range of Sharia compliant products and services, embraced with smart technology to empower customers to apply digitally for the instant issuance of Islamic credit cards, personal finance, multi currencies, instant account opening and instant remittances to various corridors. The Sharia Compliance landscape has undergone substantial development over the past two years. The Higher Sharia Authority from the Central Bank of the UAE has started issuing comprehensive regulations aimed to standardize Islamic banking industry. In this context, the bank has initiated steps in coordination with various functions within the bank to fully align our Islamic window operations. TREASURY With reference to Asset and Liability Management (ALM), rate cuts from the Global Central Banks, together with slowed global growth, gave rise to increased market liquidity. This has remained the same for most of the year and continued to drive the cost of funds lower. This lower rate environment has left investors looking for higher yielding investments. Lower market rates has had a significant positive impact on the realized gains from the bank’s Investment Portfolio. During 2020, CBD Treasury was successful in providing risk management and investment solutions required to meet customer needs. Treasury also continued to grow its product range and further extend operating hours, to meet with demand from customers. This approach translated to growth in both transaction volumes and revenue over the year. For investment solutions, the importance of diversification across portfolios was key for our customers. This allowed them to maintain a programme of cross asset investment solutions, obtain superior risk adjusted yields, while managing risk, in what was a volatile investment environment. The bank’s digital drive further continued and treasury worked closely with global FinTech companies to improve our remittance service and develop a broader wealth management offering. 20 Commercial Bank of Dubai Annual Report 2020 21
12. Board of Directors ’ Report Board of Directors’ Report PEOPLE CORPORATE SOCIAL RESPONSIBILITY (“CSR”) bank. must operate ethically and with integrity. Our core pillars for CSR are unchanged and we continue to identify areas where the The bank continues to focus on maintaining a high performance culture driven by employees, managers and leaders across the Like in all organizations, 2020 was a challenging year for our employees, this being said CBD emerged as an even stronger CBD remains committed to its role in the community as a responsible corporate citizen underpinned by our belief that businesses bank can contribute to society in the fields of Health, Education and Financial Literacy. organization as a result. The bank was able to activate contingency plans with expediency and a regular programme of As part of the banks support for the UAE government and aligned to the importance placed on health and well-being, we communications ensured that the health and well-being of employees were given the highest priority. Notwithstanding the crisis, participated in the Community Solidarity Fund to combat COVID-19. In addition, a number of employees acted as volunteers to the bank’s employee engagement score increased once again as staff gave positive feedback on the handling of the pandemic as assist in the national effort in dealing with the pandemic. well as commenting favourably on other key measures including the vision of the bank, future prospects as well as the capability of the management and senior leadership team. The “Back to School” initiative under the auspices of the Red Crescent has been operating at the bank for the past four years Several new HR processes and programmes were introduced in 2020 including the automation of employee on-boarding, an new academic year. CBD’s employees and their families donated more than 30 boxes of school materials as part of this year’s enhanced digital proposition for personal development and an HR Chat Bot as CBD accelerated technology enhancements during initiative. the year. to support those less fortunate in providing items for their children’s educational well-being and happiness at the start of the On the occasion of the bank’s Golden Jubilee, a new book was published summarizing the Commercial Bank of Dubai’s illustrious The annual “Innovation Challenge” which aims to promote new ideas and concepts for the benefit of our customers attracted history. The book and its many photographs capture the role CBD has played in the development of the national economy and in more than 170 suggestions, whereby the bank will implement the very best ideas in 2021. service of its many customers over the last 50 years. The Central Bank guidelines on Emiratization were achieved and more new hires were enrolled into “Idikhar”, CBD’s long-term employee loyalty scheme for UAE Nationals. 2020 represented another record year for attracting candidates to our UAE National Graduate Programme, Tumoo7, and a number of development programmes for junior Emirati staff were also launched. Many of the bank’s learning and development programmes were supported through increasing participation in the curriculum offered by the Emirates Institute for Banking & Financial Studies (EIBFS). 22 Commercial Bank of Dubai Annual Report 2020 23
13. Corporate Governance Framework Table of Contents Chairman ’s Letter to Shareholders Group Structure as of 31 December 2020 I- The Board of Directors 1. Board Composition, Appointment and Tenure 2. Selection of Board Members 3. Management Conflict of Interest 4. Directors’ Shareholdings 5. Responsibilities of the Board of Directors 6. Board Meetings 7. Board Meetings’ Attendance 8. Board Remuneration II- Board Committees 1. Presentation 2. Committees’ Composition 3. Statement from the Chairman of Credit and Investment Committee 4. Statement from the Chairman of Risk Committee 5. Statement from the Chairman of Audit and Compliance Committee 6. Statement from the Chairman of Nomination and Remuneration Committee 7. Statement from the Chairman of Financial Settlements and Recovery Committee 8. Statement from the Chairman of Information Technology and Digital Committee III- Statement on Effectiveness of Internal Control System 1. Responsibility 2. Key Components of Internal Control System 3. Conclusion IV- Related Party Transactions V- Incentive and Compensation Policy 1. General Principles 2. Disclosure on Discretionary Annual Performance Bonus 3. Disclosure on Long Term Incentive Plan VI- Islamic Banking Governance 1. Regulatory Framework 2. Members of the Internal Sharia Supervision Committee (ISSC) 3. 2020 Report of Internal Sharia Committee VII- Senior Executives 1. Selection Process 2. Management Committees 3. Key Members of the current Senior Management VIII- Corporate Social Responsibility 1. General Overview 2. 2020 Actions 24 Commercial Bank of Dubai Annual Report 2020 25
14. Corporate Governance Framework (continued) Corporate Governance Framework (continued) Chairman’s Letter to Shareholders Chairman’s Letter to Shareholders (continued) I am pleased to present the Corporate Governance Report for 2020. The report demonstrates our firm commitment to comply with the governance regulations and to maintain a governance framework of the highest international standards. 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 associated governance controls. an unquestionable strategic asset for board members in their duty of due diligence, allowing them to be more efficient individually while also enhancing the performance of the Bank. This also allowed us to continue our meetings uninterrupted whilst in the middle of the pandemic. Governance Regulations As a publicly listed company and a financial institution, CBD believes that the key to long-term sustainability and success largely depends on having a good name and solid reputation in the market place. Thus, the business and operations of the Bank will be conducted in accordance with the principles and best practices of good corporate governance. CBD’s corporate governance practices are anchored on our core values which guide us in our decisions, interactions and relationships with our shareholders and other stakeholders. Corporate governance in CBD is based on the principles enunciated in: • The “Corporate Governance Regulation” and accompanying “Corporate Governance Standards” as issued by the UAE Central Bank through the Notice No. CBUAE/BSD/2019/3671 dated 17 September 2019 as amended from time to time and all additional governance requirements as contained in the separate regulations and standards issued by the Central Bank for risk management, internal control, compliance and internal audit and financial reporting and external audit and any additional specific regulation issued now or in the future by the Central Bank, • The “Standard Re. Shari’ah Governance for Islamic Financial Institutions” as issued by the UAE Central Bank through the Notice No. CBUAE/BSD/2020/2123 dated 3 May 2020 as amended from time to time, • The “Standard Re. Regulatory Requirements for Financial Institutions Housing an Islamic Window” as issued by the UAE Central Bank through the Notice CBUAE/BSD/N/2020/4743 dated 26 October 2020, and • The “Chairman of Authority’s Board of Directors’ Decision No. 3/Chairman of 2020 concerning approval of Joint Stock Companies Governance Guide” as published by the Securities and Commodities Authority and amended from time to time. (the “Governance Regulations”) The Bank welcomed the release of the Governance Regulations to strengthen governance not only across the banking sector but for the wider range of listed companies. The Bank conducted a gap analysis against the Governance Regulations and is progressing towards full compliance with these regulations as per the imposed deadlines. In addition to the Governance Regulations, CBD follows leading global practices in corporate governance. Effectiveness of Internal Control System The Board of Directors, assisted by the Audit and Compliance Committee is responsible for ensuring that an adequate and effective internal control system exists in the Bank and that Senior Management is maintaining and monitoring the performance of that system. More details are contained in this Report. The Board members are of the opinion that the functioning of the internal control system is effective and nothing has come to their attention that causes them to believe that the system of internal control has not been property designed or implemented or that effective and efficient internal controls have not been in place throughout the year 2020. Stakeholder Engagement We continued to interact with our stakeholders in 2020. The Bank is part of a greater socioeconomic ecosystem and we recognize that we depend on robust relationships with all our stakeholders in order to deliver on our purpose of using our financial expertise to do good for individuals, families, businesses and the society at large. Engagement is an integral part of developing an understanding of our stakeholders’ needs, interests and expectations thereby assisting the bank in making the right strategic, long-term sustainable decisions. We believe that collaboration and regular interaction with all stakeholder groups is essential to the Bank’s long-term resilience and to the effectiveness of our integrated sustainability approach. Stakeholder engagement is undertaken with a far broader aim than merely communicating ‘to’ various stakeholder groups. Rather, CBD considers its various stakeholders as key partners in its endeavors. Our Annual General Assembly Meeting is an excellent opportunity to meet our investors face-to-face. Finally, I want to take this opportunity to thank all my colleagues on the Board for their support in this special year. We all firmly believe that strong corporate governance practices within a well-established framework will continue to provide solid foundations for sustainable growth. H.E Humaid Mohammad Al Qutami Corporate Governance Framework 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 e mployees. 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. In 2020, the Board and its committees maintained high standards of corporate governance. Despite the COVID-19 pandemic’s restrictions, the meetings of the board and its committees were a space for close interaction between the board members and the executive management. The Bank embraced digital transformation also in its governance practices as we believe that digitization is 26 Commercial Bank of Dubai Annual Report 2020 27
15. Corporate Governance Framework (continued) Corporate Governance Framework (continued) Group Structure as of 31 December 2020 I. The Board of Directors (continued) 4. Directors’ Shareholdings Commercial Bank of Dubai PSC 100% Attijari Properties LLC CBD Financial Services LLC CBD Employment Services one person company LLC CBD (Cayman) II Limited CBD (Cayman) Limited VS 1897 Cayman Limited I. The Board of Directors 1. Board Composition, Appointment and Tenure Commercial Bank of Dubai is a public joint stock company established under the laws of the United Arab Emirates in accordance with Law No.2 of 2015 related to Commercial Companies as amended from time to time. 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 ViceChairman and nine other directors. Each director shall be elected by the shareholders and shall hold their position for a term of three years. During the General Assembly Meeting 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. The Board is composed of nine independent directors and two non-independent directors based on a test of independence conducted in 2020. Elections will be held during the Annual General Assembly Meeting on 17 March 2021 to elect the 11 directors. 2. 3. 28 Selection of Board Members The Board of Directors is reviewing and revising where necessary its Corporate Governance Manual based on the Governance Regulations. This includes the review and approval of a Directors Selection, Suitability and Diversity Policy, which is an integral part of the Bank’s Corporate Governance Manual. The purpose of the policy is to establish the fundamental principles, criteria and procedures for assessing suitability of the members of the Board of Directors, in particular the procedures covering the selection and diversity of members of the Board of Directors Management of Conflict of Interest When performing their duties, there may be specific situations where board members are facing potential 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, such interested member may not be present to discuss or vote on 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. Commercial Bank of Dubai 5. Director Number of Shares Number of Shares in CBD as at in CBD  as at Change in 31/12/2019 31/12/2020 Shareholding Humaid Mohammad Obaid Yousuf Al Qutami Nil Nil Nil Ahmad Abdulkarim Julfar Nil Nil Nil Abdullah Salim Obaid Al Turifi Al Shamsi Nil Nil Nil Abdulla Saif Obaid Al Hathboor 1,337,004 1,337,004 Nil Abdul Wahed Mohamed Al Fahim Nil Nil Nil Ali Fardan Ali Al Fardan Nil Nil Nil Buti Saeed Mohamed Al Ghandi Nil Nil Nil Hamed Ahmed Mohamed Aqil Kazim Nil Nil Nil Khalid Abdulwahid Hassan Al Rostamani 3,099,036 4,061,536 962,500 Omar Mohammad Ali Al Qaizi Nil Nil Nil Shaikh Maktoum Hasher Maktoum Juma Al Maktoum 136,722 136,722 Nil Responsibilities of the Board of Directors The Board of Directors plays an integral role in the governance of the bank and its responsibilities include approving the bank’s strategy; setting its risk appetite and risk management strategy; monitoring its financial performance; establishing the corporate governance framework; and approving the bank’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 management through the Executive Committee; • Keep under review the general progress and long-term development of the organization; • Control and monitor the financial position 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 that an adequate system of controls (financial and otherwise) is in place; and • Ensure that adequate succession, nomination and remuneration arrangements are in place. Annual Report 2020 29
16. Corporate Governance Framework (continued) Corporate Governance Framework (continued) I. The Board of Directors (continued) I. The Board of Directors (continued) 6. Board Meetings The board and committee 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. 7. Board Meetings’ Attendance Sr. No. 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 is 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 Finance Officer and others on a regular and scheduled basis. Formal minutes of the different committee meetings are included in the board file 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 2020, the board held six meetings. The key business discussed at the main board meetings throughout the year is detailed below: Board Meeting No. 30 Date Main Topics 1 5 February 2020 2 22 April 2020 · · · · · · · · · · · · · · · · · · · · · · · · · · · 3 10 June 2020 4 26 July 2020 5 28 October 2020 6 19 December 2020 Commercial Bank of Dubai Update on the committees’ meetings Approval of 2019 financial results Approval of the Annual General Meeting agenda Update on the committees’ meetings Approval of the Q1 2020 financial results Covid-19 Impact on the Bank and UAE Central Bank Measures Update on exposure to NMC and UAE Exchange Groups Update on the committees’ meetings Financial highlights and strategy update Update on Covid-19 Impact Board Resolution on Tier-1 Capital Issuance Update on the committees’ meetings Approval of the H1 2020 financial results Branch network optimization Islamic Banking Strategy Update on Corporate Governance Regulations Update on the committees’ meetings Approval of the Q3 2020 financial results Update on exposure to NMC and UAE Exchange Groups Update on Corporate Governance Regulations Update on the committees’ meetings Financial highlights and strategy update Financial and budget plan for 2021 CBD Financial Services Strategic Review Directors Continuing Development – Compliance Training Board membership notice Corporate Governance matters 8. Board Members Number of Meetings Attended 1 Humaid Mohammad Obaid Yousuf Al Qutami - Chairman 6/6 2 Ahmad Abdulkarim Julfar - Vice Chairman 6/6 3 Abdullah Salim Obaid Al Turifi Al Shamsi - Member 6/6 4 Abdulla Saif Obaid Al Hathboor - Member 6/6 5 Abdul Wahed Mohamed Al Fahim - Member 6/6 6 Ali Fardan Ali Al Fardan - Member 6/6 7 Buti Saeed Mohamed Al Ghandi - Member 6/6 8 Hamed Ahmed Mohamed Aqil Kazim - Member 6/6 9 Khalid Abdulwahid Hassan Al Rostamani - Member 5/6 10 Omar Mohammad Ali Al Qaizi - Member 6/6 11 Shaikh Maktoum Hasher Maktoum Juma Al Maktoum - Member 6/6 Board Remuneration 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 2020, the bank’s directors were not eligible for any bonus, long-term or other incentive schemes. Directors do not receive any pension benefits from the Bank. CBD does not pay any sitting fees for board meetings. However, CBD does pay an amount of AED 20,000 as sitting fee per meeting per director for attendance of the different committees. Directors’ remuneration is set annually by the bank’s shareholders based on a recommendation from the board. In 2019, board members received the amount of AED 15.4 Million as remuneration (excluding VAT). Below the details of the amounts received by the board members in April 2020 as 2019 remuneration in application of the resolution of the Annual General Meeting. Sr. No. Board Members Payment Received including VAT in AED 1 Humaid Mohammad Obaid Yousuf Al Qutami - Chairman 2,100,000 2 Ahmad Abdulkarim Julfar - Vice Chairman 1,407,000 3 Abdullah Salim Obaid Al Turifi Al Shamsi - Member 1,407,000 4 Abdulla Saif Obaid Al Hathboor - Member 1,407,000 5 Abdul Wahed Mohamed Al Fahim - Member 1,407,000 6 Ali Fardan Ali Al Fardan - Member 1,407,000 7 Buti Saeed Mohamed Al Ghandi - Member 1,407,000 8 Hamed Ahmed Mohamed Aqil Kazim - Member 1,407,000 9 Khalid Abdulwahid Hassan Al Rostamani - Member 1,407,000 10 Omar Mohammad Ali Al Qaizi - Member 1,407,000 11 Shaikh Maktoum Hasher Maktoum Juma Al Maktoum Member 1,407,000 Annual Report 2020 31
17. Corporate Governance Framework (continued) Corporate Governance Framework (continued) I. II. Board Committees (continued) 8. The Board of Directors (continued) 2. Board Remuneration (continued) In 2020, CBD paid to the Directors a total amount of AED 2,982,000 (VAT included) as Committees’ sitting fees during 2019 as per the below details: Board Members Number of Committees Meetings Attended Total Sitting Fees in AED including VAT 1 Humaid Mohammad Obaid Yousuf Al Qutami - Chairman - - 2 Ahmad Abdulkarim Julfar - Vice Chairman 14 294,000 3 Abdullah Salim Obaid Al Turifi Al Shamsi - Member 10 210,000 4 Abdulla Saif Obaid Al Hathboor - Member 18 378,000 5 Abdul Wahed Mohamed Al Fahim - Member 15 315,000 6 Ali Fardan Ali Al Fardan - Member 13 273,000 7 Buti Saeed Mohamed Al Ghandi - Member 23 483,000 8 Hamed Ahmed Mohamed Aqil Kazim - Member 14 294,000 9 Khalid Abdulwahid Hassan Al Rostamani - Member 15 315,000 10 Omar Mohammad Ali Al Qaizi - Member 10 210,000 11 Shaikh Maktoum Hasher Maktoum Juma Al Maktoum Member 10 Sr. No. 210,000 II. Board Committees 1.Presentation At the start of 2020, the board had six standing Committees: 2. • Credit and Investment Committee; • Risk Committee; • Audit and Compliance Committee; • Nomination and Remuneration Committee; • Financial Settlements and Recovery Committee; • Information Technology and Digital Committee. 32 Member Position Audit and Compliance Committee Dr. Omar Al Qaizi Mr. Abdulla Al Turifi Mr. Hamed Kazim H.H. Sheikh Maktoum Hasher Al Maktoum Chairman Member Member Member Nomination & Remuneration Committee Mr. Ahmed Julfar Mr. Abdulla Al Hathboor Mr. Buti Al Ghandi Chairman Member Member Financial Settlements and Recovery Committee Mr. Abdulla Al Turifi Mr. Buti Al Ghandi Dr. Omar Al Qaizi Chairman Member Member Information Technology and Digital Committee Mr. Hamed Kazim Mr. Ahmed Julfar Chairman Member Statement from the Chairman of Credit and Investment Committee Mr. Buti Al Ghandi Dear Shareholders, I am pleased to present our Credit and Investment Committee Report for 2020. The Credit and Investment Committee (CRIC) is responsible for approving larger loans and investments above management limits. The Committee also oversees the Bank’s approach to its most material individual portfolio credit exposures, reviews the quality of the Bank’s investment portfolio and the trends affecting that portfolio and oversees the effectiveness of the Bank’s investment strategy and policies. The Committee met fourteen times in 2020 and besides approving facilities and investments, it covered the following matters: Committee Member Position Credit and Investment Committee Mr. Buti Al Ghandi Mr. Abdulla Al Hathboor Mr. Abdulwahed Al Fahim Mr. Ali Al Fardan Mr. Khalid Al Rostamani Chairman Member Member Member Member H.H. Sheikh Maktoum Hasher Al Maktoum Mr. Abdulwahed Al Fahim Mr. Ahmed Julfar Mr. Hamed Kazim Mr. Khalid Al Rostamani Chairman Member Member Member Member Commercial Bank of Dubai Committee The Committee continued its focus on approving quality assets, thereby ensuring that loans and investments approved are aligned with our business goals and overall risk appetite. COVID-19-19 represented a massive challenge to the business and we have closely monitored the resilience of our customers. Committees’ Composition Risk Committee 3. Committees’ Composition (continued) • Reviewed and approved the Management Credit Committee terms of reference; • Monitored the limits for some specific countries and financial institutions ; • Reviewed the implications of COVID-19-19 and actions being taken for the overall portfolio and also for specific industries; • Rapid Portfolio Review of Expat Owned Portfolio; • Rapid Portfolio Review of Educational Portfolio; • Rapid Portfolio Review of Hospitality Portfolio; • Reviewed the Retail Risk Policy; • Reviewed the Commodity Finance Portfolio; • Conducted a stress test of the Real Estate Portfolio • Reviewed the empanelment of valuation companies and process monitoring for retail mortgages; • Rapid Portfolio Review of Jewelers Portfolio. Annual Report 2020 33
18. Corporate Governance Framework (continued) Corporate Governance Framework (continued) II. Board Committees (continued) II. Board Committees (continued) 4. 5. Statement from the Chairman of Risk Committee H.H. Sheikh Maktoum Hasher Al Maktoum Dear Shareholders, I am pleased to present our Risk Committee Report for 2020. The Board Risk Committee (BRC) is responsible for the setting and evolution of the Bank’s Risk Appetite and monitoring its performance against that. The BRC is also responsible for ensuring the Bank is responding appropriately to changes in the external environment and to emerging risks ensuring the profile of business conducted aligns to the risk appetite. Dear Shareholders, I am pleased to present our Audit and Compliance Committee Report for 2020. The year 2020 has been challenging with the Covid-19 pandemic impacting us all in some way. The performance of a Covid-19 review by the Bank’s Internal Audit function provided assurance that the Bank effectively managed key risks throughout the crisis, and we will ensure this to continue in 2021. During 2020 a considerable focus of the BRC was on mitigating the impact of the COVID-19-19 pandemic on the Bank, its customers and its staff. Initial activity was focused on Business Continuity utilizing remote working technology and flexible work patterns. The BRC then focused activities on mitigating the impact on our customers and the financial position of the Bank. The Audit and Compliance Committee held four meetings in 2020, during which the Committee: During the year the BRC met physically or virtually four times. Key items on the agenda of these meetings covered:  • Enhancement of the Bank’s Risk Governance Framework including the formalization of two executive level committees responsible for Risk Management including the EXCO Risk Management Committee (RMC) and the Operational Risk Committee (ORMC); • • Reviewed the Bank’s liquidity management activities including the utilization of the Central Bank’s funding support mechanisms including TESS and the Zero Cost Funding facility; • Reviewed exposure to certain industry sectors and provided guidance on the management of potential concentration risks within the bank’s portfolio; • Analyzed a number of operational risk incidents including the root causes and mitigating actions undertaken by management; • Provided oversight of the development of the Bank’s management of compliance related activities particularly in regard to enhancing AML capabilities where the committee oversaw a significant investment in new technology solutions and upgrades to policy and procedures in line with new Central Bank regulations. Committee also provided detailed guidance to management on addressing developing risk typologies in the compliance arena. • Reviewed the Bank’s policy development in regard to managing vendor related risks; • Executed a hindsight review of certain high value distressed loan situations that crystallized during 2020 to ensure management had acted appropriately in the booking of those exposures and that appropriate lessons were learnt and disseminated; • • A new Model Governance policy was reviewed and approved to ensure a robust process was in place to ensure the increasing reliance on models for credit risk management was executed effectively. Commercial Bank of Dubai Exercised oversight of the performance, effectiveness and activities of the Bank’s Internal Audit function (and separately, the performance of the Chief Internal Audit Officer) and reviewed updates to its audit plan, staffing and audit charter taking in to consideration the UAE Central Bank’s regulations on Internal Controls, Compliance & Internal Audit; • Evaluated the external auditors’ qualifications, performance, independence and objectivity, and reviewed the scope of work proposed by the external auditors for 2020; • Exercised oversight of the activities, and assessed the performance, of the Bank’s Compliance function to ensure the existence of an adequate compliance framework, in consideration of the UAE Central Bank Corporate Governance Reviewed evolving cross-border risk levels in regard to higher risk jurisdictions in the context of the developing macro-economic and political environment and recommended changes as appropriate; 34 Statement from the Chairman of Audit and Compliance Committee Dr. Omar Al Qaizi regulations; • Received regulatory and compliance updates; • Reviewed the Bank’s quarterly and annual audited financial statements; • Reviewed and ensured appropriate action had been taken in relation to audit and review observations raised by the internal and external auditors, the UAE Central Bank, the Financial Audit Authority and other regulators; • Received and considered Internal Audit’s opinion statements. In addition, the Committee continued to assess the Bank’s implementation of IFRS 9. The Committee regularly met with the Bank’s senior management and external auditors to ensure that the Bank’s key processes, methodologies, critical accounting judgements, and financial disclosures remained in compliance with IFRS standards, and to ensure that any subjective judgments had been made appropriately. The Committee met with the Chief Internal Audit Officer, without the presence of the Bank’s management to discuss issues. In addition, Committee members attended meetings of the Board Risk Committee and Credit and Investment Committee to ensure an adequate flow of information between these Committees. We received confirmation from the Bank’s Internal Audit function, and external auditors, that the Bank’s internal controls were assessed for effectiveness and deemed satisfactory. The Committee is pleased with the ongoing enhancement of the Bank’s three lines of defense. Annual Report 2020 35
19. Corporate Governance Framework (continued) Corporate Governance Framework (continued) II. Board Committees (continued) II. Board Committees (continued) 6. 7. Statement from the Chairman of Nomination and Remuneration Committee Mr. Ahmad Julfar Dear Shareholders, I am pleased to present our Remuneration and Nomination Committee Report for 2020. The Nomination and Remuneration Committee (REMCO) is the custodian of the culture of the Bank and ensures that CBD’s values of Collaboration, Ownership, Delivery and Excellence (CODE) are embedded into our ways of working. The Committee continued its focus on the development of a high performance culture, thereby ensuring that our performance planning and reward mechanisms remain fit for purpose and aligned to our business goals. In addition, REMCO monitored the efficacy of our organizational structures, the engagement of our employees, the development of our UAE National workforce, and for 2020 specifically, the implementation of our contingency plans for people management. The Committee met five times in 2020 and covered the following matters: • Reviewed the activities and action plans for employee engagement in 2020; • Monitored the efficacy of organizational structures; • Reviewed the implications of Covid-19 and the implementation of plans for ensuring the health and well-being of our employees; • Supervised execution of the Bank’s Reward Strategy with a specific focus on merit based adjustments to fixed pay and incentive awards for variable performance bonus; • Reviewed and assessed the Bank’s variable performance bonus scheme for the year through business and departmental • results; Considered the performance evaluation and variable bonus of the Chief Executive Officer and all members of senior management; • Reviewed the Bank’s succession and talent management plans; • Reviewed Learning &Development activities and in particular the smooth transition to a virtual learning platform; • Monitored Emiratization activities and made recommendations on the Bank’s Emiratization strategy; • Reviewed UEAN development plans; • Reviewed headcount and the management of staff costs; • Monitored the progress of key initiatives in HR aimed at driving automation and digitization; • Received regular updates from the Chief Human Resources Officer and his team; • Reviewed key HR Policies. Statement from the Chairman of Financial Settlements and Recovery Committee Mr. Abdulla Al Turifi Dear Shareholders, I am pleased to present our Financial Settlements and Recovery Committee Report for 2020. CBD recognizes that timely restructuring or recovery of a debt is critical not only for the Bank but also for the borrower, the community and the economy. A bank loan is not just a contract between the bank and the borrower. Entwined with this contract is the interest of shareholders and general welfare of the public, out of whose deposits the bank loan has been granted. Timely restructuring or recovery of bank loans is important for a variety of reasons and from various perspectives. From the bank’s perspective, the longer the delay in restructuring or recovery, the higher the probability of an opportunity loss to earn income in alternative investments, of security and collateral losing value, and of the bank being exposed to a loss of principal For these reasons, CBD established a board committee dedicated to financial settlements and recovery. The FSR Committee: • Approves large restructuring proposals related to borrowers managed by the Financial Recovery & Restructuring (FRR) Department over and above management limits; • Oversees the Bank’s approach to restructuring and recovery of its exposures to stressed and defaulted clients; • Assists and guides at the request of the management in the restructuring and recovery process for large clients where access, information or visibility may be challenging; • Reviews and approves appropriate provision and write-offs based on management recommendation for stressed clients over and above management limits. The Committee met four times in 2020 and reviewed multiples cases. The combined efforts led to substantial cash recoveries and asset sales made by the Bank during 2020 in addition to important restructuring in support of some customers facing financial difficulties. During the year, significant time was spent by the Committee on ensuring that the Bank’s ambition to maintain a high performance culture will be realized. This included an in-depth review of balanced scorecards for goal setting and performance achievement, an insight into employee responsiveness to this culture change, a review of improvements to the Bank’s organization design and an evaluation of reward plans within the approved strategy. The Bank’s reward strategy is continually assessed against the following four principles: · Results-driven: rewards are directly linked to results and thereby aligned to our high performance culture; · Differentiated: strong differentiation can clearly be seen among employees exhibiting different levels of performance; · Criticality: specialized skill sets command a premium over generic skills; · Change-orientation: the overall approach to reward is driven by transformation and change-orientation. 36 Commercial Bank of Dubai Annual Report 2020 37
20. Corporate Governance Framework (continued) Corporate Governance Framework (continued) II. Board Committees (continued) III. Statement on Effectiveness of Internal Control System 8. 1.Responsibility The Board of Directors, assisted by the Audit and Compliance Committee is responsible for ensuring that an adequate and effective internal control system exists in the Bank and that Senior Management is maintaining and monitoring the performance of that system. An Internal control system includes the policies, procedures and processes, which are designed under the supervision of the Board to achieve the strategic objectives of the Bank. Statement from the Chairman of Information Technology and Digital Committee Mr. Hamed Kazim Dear Shareholders, I am pleased to present our Information Technology and Digital Committee Report for 2020. In recognition of the increasing importance and criticality of information technology and digital on CBD’s competitiveness and operations, the board decided in 2018 to form a first of a kind board committee to oversee this important function and created IT and Digital Committee comprising 2 members of the board with broad knowledge in IT. The Board acknowledges its overall responsibility in establishing a sound internal control system as well as reviewing its adequacy and effectiveness. The Board is of the view that the internal control systems are designed to manage the Bank’s risks within the acceptable risk appetite, rather than to eliminate the risk of failure to achieve the business goals and objectives. It can therefore only provide reasonable, rather than absolute assurance against material misstatement, fraud or loss. The Committee met 4 times and broadly oversaw the following areas:  1. Regular update from CIO (Chief Information Officer) and head of cyber security on key events and initiatives. 2. Review of the Bank’s IT function including strategy, enterprise architecture, the alignment of IT function with the Management is responsible for the appropriate design and functioning of the internal control system, while Risk Management, Internal Audit, Compliance and other internal control departments are responsible for the continuous monitoring and evaluation of the system. The external auditors are responsible for determining the adequacy of the system of internal controls so as to be able to decide on the level of reliance they can place on the effectiveness of the Bank’s internal controls and to design their audit procedures. However, internal controls systems, no matter how well designed, have inherent limitations, and may not prevent or detect all control deficiencies. Moreover, the projection of current evaluations of the effectiveness to future periods is subject to a limitation that controls may become inadequate due to changes in conditions or compliance with policies and procedures. Bank’s business, system stability, resilience, information security and related operations 3. Investment in the Bank’s IT architecture, infrastructure and support systems to underpin the safe and effective delivery of the products and services including digital projects. 4. Alignment between overall business strategy and the IT and digital strategies. 5. Cyber security measures and key incidents 6. Other matters related to IT.   In terms of cyber security, the committee reviewed assessment of the Bank’s overall system by the Bank’s internal auditors as well as third party consultants, Deloitte and against industry standards such as NESA, SWIFT, and PCI DSS.  Overall, CBD’s security was rated strong with no critical findings and with additional recommendations which were implemented during 2020. In addition, during 2020 and with the impact of Covid 19, the Bank’s IT and digital capabilities and resilience were further tested and we recommended further measures to increase the Bank’s digital capabilities and performance to ensure full service availability throughout the lockdown period and beyond. The Bank’s overall IT system withstood the added pressure though we had challenges in terms of limited disruptions and exceptions.  Though not major, the committee directed management to sharply increase capability and capacity of the network and system to ensure smooth operations and availability all the time.  Furthermore, the bank took several initiatives during 2020 and in its pursuit of Default Digital strategy, CBD launched its Digi-Accounts, Digi-Loans, real-time low-cost remittances, digital wallet enhancements and a range of additional digital account services.   In addition, CBD enhanced cyber security capability and the journey to secured UAE cloud and other digital initiatives such as advancement of Data analytics, Robotic Process Automation (RPA) and Artificial Intelligence (AI).  All employees are ultimately responsible for operating and maintaining an efficient internal control system at their respective levels. Concerted and integrated efforts are made by all functions of the Bank to improve the control environment at grass root level through continuous reviewing and streamlining of procedures to prevent and rectify any control deficiencies. Each function, under the supervision of executive management, is entrusted with the responsibility to oversee rectification of control deficiencies identified by internal and external auditors. 2. Key Components of Internal Control System The Bank’s key components of internal control system are as follows: a. Integrity and Ethical Values • A Code of Conduct which sets out the principles to guide employees’ conduct to the highest standards of personal and corporate integrity. The code covers areas such as conflict of interest, use of company assets, confidentiality of proprietary information and acceptance of gifts. b. Authority and Responsibility • The Board establishes the vision and strategic objectives of the Bank and is entrusted with the responsibility in leading and directing the Bank towards achieving its strategic goals and realizing long-term shareholders’ values. The Board retains full and effective control of the Bank’s strategic plans, overseeing the conduct of the Bank’s  CBD has also successfully entered several FinTech Partnerships, such as Thunes for international remittances, Demica for Supply chain finance, NowMoney for banking services for the low-income segment and InvestSuite as a Robo-Investor. Overall, though the Bank’s overall system is stable and adequate, it needs to constantly invest in its IT & Digital and security capabilities to bring it up to best of breed in financial services sector. businesses, setting policies, implementing, reviewing and maintaining an appropriate system of risk, control and compliance management and ensuring the adequacy and integrity of the Bank’s system of internal control. The Board is also responsible in ensuring financial integrity, setting the Bank’s risk appetite, reviewing and approving material transactions, related party transactions, capital financing and succession planning, and for the implementation of stakeholders’ communications. • The Board delegates to the Chief Executive Officer (“CEO”), the authority and powers of executive management of the Bank and its businesses within levels of authority specified from time to time. The CEO may delegate aspects of his authority and powers but remains accountable to the Board for the Bank’s performance and is required to report regularly to the Board on the progress being made by the Bank’s business units and operations. Delegation of responsibilities and accountability by the CEO further down the structure of the Bank is communicated and formalized via respective operational structure and organizational chart as well as the authority matrix. 38 Commercial Bank of Dubai Annual Report 2020 39
21. Corporate Governance Framework (continued) Corporate Governance Framework (continued) III. Statement on Effectiveness of Internal Control System (continued) III. Statement on Effectiveness of Internal Control System (continued) 2. Key Components of Internal Control System (continued) b. Authority and Responsibility (continued) • 2. Key Components of Internal Control System (continued) g. Risk Management • Board committees which are guided by respective Terms of Reference were set up to fulfil certain responsibilities risk management practice by both the Board and the Management. It recognizes that risks are inherent in businesses delegated by the Board. These Committees assist the Board in promoting governance and accountability as well as and views them within the context of risk as an opportunity, uncertainty or hazard. overseeing internal controls. • c. Organization Structure • • The authority matrix outlines the decision areas and the persons empowered to requisite, authorize and approve defense concept with clear functional responsibilities and accountabilities for the management of risk. • d. Frameworks, Policies and Procedures Systems and procedures have been designed to ensure effective and efficient operations, safeguarding assets against unauthorized use or disposition, maintaining proper account records, providing reliable financial information i. Business Continuity Management • • Systems and procedures are in place to identify, control, and report on the major risks including credit risks, changes e. Planning, Monitoring and Reporting • An annual exercise involving all business units to prepare a comprehensive budget and business plan which includes development of business strategies and the establishment of key performance indicators against which the overall performance of the Bank can be measured and evaluated. • Furthermore, review of key business variables and the monitoring of the achievements of the Bank’s performance on a quarterly basis by the Board. f. Internal Audit • The Internal Audit department, independent from line management, includes the assessment of the design and operating effectiveness of the internal control system across the Bank, as well as to provide reasonable assurance as to whether management has implemented and complied with prescribed policies and procedures. The Internal Audit department follows a risk-based audit plan, which is approved by the Board Audit and Compliance Committee. All significant and material findings from Internal Audit assessments are reported to the Audit and Compliance j.Insurance • Board Risk Committee. A Crisis management and communication policies and procedures were established to guide the handling of external communications in the event of any crisis/disaster. in market prices of financial instruments, liquidity, operational risks, and fraud. Exposure to these risks throughout management Risk and Credit Committees. These exposures are also monitored by the Executive Committee and the Business continuity, operations and safety and hazards action plans of operating companies exist for business resilience and robustness in contingencies, crisis management and disaster recovery management. internal policies in relation to business performance. the Bank is monitored by the Operational Risk Management Committee, the Asset and Liability Committee and the The Compliance department developed compliance matrices reflecting requirements of major statutory and regulatory compliances. used within the business or for publication, compliance with all applicable laws and regulations, and for monitoring • Compliance Risk Self-Assessment (CRSA) exercises with mitigations identified to address breaches or material noncompliances are well established. business sense and accountability. • h. Compliance Management • the expenditure/commitment. Delegated authority carries with it the obligation to exercise sound judgement, good The framework provides guidelines on the risk governance, risk management process, risk reporting and generic tools to be used by the Bank. The design of the risk governance structure therein is premised on the three (3) lines of An operational structure and organizational chart exists which defines the lines of responsibility and delegation of authority together with a hierarchical structure of reporting and accountability. The Bank has in place a risk management framework that is modelled to guide the implementation of a consistent An insurance programme is in place to safeguard major assets against financial loss resulting from fraud, property damage, business interruption and general liability, which is reviewed annually. k.Whistle-Blowing • A Whistleblower Policy has been implemented which provides the channels to report wrongdoings by employees and/or other stakeholders whilst ensuring the integrity of the process and information and also protecting the rights of informants. The implementation of this policy enables the Bank to address such concerns that may adversely affect the reputation and interests of the Group more effectively. 3.Conclusion By considering the factors in the preceding paragraphs, the control environment in place, the yearly reviews of its effectiveness and the confirmation made by Management, the Audit and Compliance Committee and the Board are of the opinion that the functioning of the internal control system is effective and nothing has come to their attention in 2020 that causes them to believe that the system of internal controls has not been properly designed or implemented or that effective and efficient internal controls have not been in place throughout the year 2020. Committee. The Audit and Compliance Committee actively monitors the adequacy and effectiveness of the internal control system to ensure that identified risks are mitigated to safeguard the interests of the Bank. The Operational Risk Management and Compliance functions also monitor the control environment, during their respective reviews, in close coordination with each other. • Internal Audit provides the Audit and Compliance Committee at the end of each year with an annual opinion of the internal control environment. The view is based on audits completed as part of the audit plan. Twenty audit reports were issued in 2020. To help measure, assess and improve risk awareness across the Bank, Internal Audit has introduced a secondary rating (Management Approach to Risk Control) in audit reports. The aim of this exercise is to continue to improve risk awareness and effective self-identification of key risks in the respective divisions; and where findings have been self-identified, robust action plans, timelines for remediation and evidence of formal escalation exist. 40 Commercial Bank of Dubai Annual Report 2020 41
22. Corporate Governance Framework (continued) Corporate Governance Framework (continued) IV. Related Party Transactions. V. Incentive and Compensation Policy (continued) The Board of Directors recognizes that transactions between and among related parties may create financial, commercial and economic benefits to individuals, institutions and to the entire group where the Bank belongs. They can present potential or actual conflict of interest and may raise questions on the alignment of such transactions with best interest of the Bank and its stakeholders. 2. In this regard, as required by existing regulations for related party transactions (“RPT” or “Related Party Transaction”), the Bank, its Board, Senior Management, all officers and staff including those of its subsidiaries and affiliates shall ensure that RPTs are done on an arm’s length basis and that the appropriate oversight and implementation of an effective control system for the management of exposures are in place. Therefore, the Bank’s Board of Directors, Senior Management, officers and staff, including concerned personnel in the subsidiaries and affiliates are mandated to comply with regulations and the Policy on Related Party Transactions and shall not allow RPTs that may lead to abuses or may cause disadvantages to the Bank, its depositors, creditors, clients, and other stakeholders. For details on Related Party Transactions completed in 2020, please refer to the Financial Statements Notes. V. Incentive and Compensation Policy 1. General Principles CBD aims to attract, retain and reward talented executives who may be members of the Executive Committee (EXCO) or in other senior roles at L22 and above, by offering compensation that is competitive within the industry, motivates them to achieve the Bank’s business objectives and encourages high levels of performance at the same time as aligning the interests of the Board of Directors and shareholders. Disclosure on Discretionary Annual Performance Bonus In 2020, the Bank is in compliance with the Governance Regulations on compensation. The annual individual bonus for Senior Management and Material Risk Takers (as defined in the Governance Regulations) for the year 2019 and paid in February 2020 has not exceeded 100% of the fixed pay of his/her total compensation. The Discretionary Annual Performance Bonus for the CEO and other members of the Senior Management is approved by the Remuneration and Nomination Committee. As per the current Committee’s directions, the annual bonus pool for the Bank shall not exceed 5% of the annual net profit. In February 2020, a total amount of AED 66,212,920 was paid to the Bank’s employees including CEO and Senior Management as Discretionary Annual Performance Bonus for 2019. 3. Disclosure on Long Term Incentive Plan In February 2018, the Remuneration and Nomination Committee approved a Long Term Incentive Plan (LTIP) for the CEO and a selective number of senior employees with the following benefits expected as a result: • Alignment of total compensation with three-year strategic cycle (2018-2020) of the Bank; and • Alignment of Senior Management total compensation with long-term interests of shareholders. The performance measures include a combination of cumulative 3 year net profit and 3 year operating income. The performance threshold includes a minimum achievement of at least 90% of the performance target over the 3 year performance period for the plan to be activated. Compensation is based on the position (the worth or value of the job in the market based on job evaluation), performance of the employee and the personal capabilities an individual brings to the organization. Compensation is also based on market levels and performance. Each level is pegged against a similar level in the market. Specialized or critical roles are further benchmarked against similar roles to better assess the market benchmark. Compensation of employees in control functions such as Compliance and Internal Audit is determined independently of the Bank’s performance. Fixed compensation pay of employees in control functions such as Compliance and Internal Audit is higher than the variable pay. Compensation is composed of: • Fixed Pay. Fixed Pay is competitive against the local market when benchmarked against the Bank’s key local and international competitors and appropriately differentiated based on performance. It is influenced by each individual’s contribution over the year and any Fixed Pay reviews depend upon a change in responsibilities as well as the achievement of objectives and overall performance level. Fixed Pay is made up of Basic Salary and Allowances. • Variable Pay. Variable Pay covers Short Term Incentives (annual bonus) and Long Term Incentives (deferred bonus) as appropriate in the context of the market and talent. The variable part of the remuneration is determined with due consideration of factors including the achievement of results as well as other developments relevant to the Bank, including non-financial indicators that are relevant to the long-term objectives of the Bank. Variable Compensation (Discretionary Annual Performance Bonus) shall strongly differentiate between different levels of performance and drive the creation of a high performance organization. Payment of bonuses is strictly at the discretion of the Bank, and actual bonuses awarded in any year will be dependent upon the performance of the the bank as a whole, the business line under consideration, and the individual. 42 Commercial Bank of Dubai Annual Report 2020 43
23. Corporate Governance Framework (continued) Corporate Governance Framework (continued) VI. Islamic Banking Governance VI. Islamic Banking Governance (continued) 1. 3. Regulatory Framework The Bank has an Islamic banking window as CBD Al Islami which offers both retail, wholesale, treasury and investment banking services and products. 2020 Report of Internal Sharia Committee The below report was approved by the Higher Sharia Authority on 14 February 2020. In the name of Allah, the Most Gracious, the Most Merciful In compliance with clause 6.1 of the Sharia governance for Islamic Financial Institutions issued by the Higher Sharia Authority of the Central Bank of UAE (“HSA”) on 21 April 2020, the Board of Directors is responsible for establishing and implementing a Sharia governance framework that is commensurate with the size and complexity of the operations of the Bank and its risk appetite, to ensure the Bank’s compliance with the principles of Sharia. The Sharia governance framework ensures the bank’s resilience, effectiveness, efficiency and promote general financial stability. Annual Report of the Internal Sharia Supervision Committee of Commercial Bank of Dubai Islamic Banking Services Department Praise be to Allah, Lord of the worlds, prayers and peace be upon the most honorable messengers, our master Muhammad, and upon all his family and companions. Issued on: 02/02/2021 The Sharia governance framework incorporates the three lines of defense approach comprising the business line, the support and control functions, and internal Sharia audit function. Moreover, the Sharia governance framework outlines the structure, roles, responsibilities, accountability, scope and duties of different functions such as General Assembly of the Shareholders, Board, Senior Management of the Bank, Members of the Internal Sharia Supervision Committee (“ISSC”). In addition to the Sharia governance framework, the Bank established policies and procedures of Internal Sharia Control Department (“ISCD”), Internal Sharia Audit Department (“ISAD”) which contain responsibilities of Head of ISCD, Head of ISAD and the employees of the ISCD and ISAD, and reporting lines and communication channels between different functions with regard to the Bank’s compliance with the principles of Sharia. ISSC is the highest authority in the Bank from Sharia governance perspective. ISCD has the functional report to the ISSC while its administrative line of reporting is with the Board. On the other hand, ISAD has to submit its report to the ISSC for resolutions on Sharia matters mentioned in the audit reports then to submit to the Board’s audit committee for the implementation. 2. To the Shareholders of the Commercial Bank of Dubai (the “Company”) Peace, mercy and blessings of Allah Almighty be upon you: The Company’s Internal Sharia Supervision Committee (the “Committee”), and in accordance with the requirements stipulated in the relevant laws, regulations and standards (“Supervisory Requirements”), submits its report on the Company’s business and activities in compliance with Islamic Sharia for the financial year ending on 31 December 2020 (“Financial Year”). 1. Members of the Internal Sharia Supervision Committee (ISSC) The respected Shari’ah scholars listed below make up the ISSC of CBD Al Islami: Dr. Mohammed Abdul Rahim Sultan Al Olama - Chairman Dr. Ahmad is a Sharia scholar from the UAE who serves as the head of Dubai’s fatwa department, head of Central Bank Higher Sharia Authority (HSA) and he is also chief Sharia advisor with over 20 years of experience in research and teaching at colleges, mosques, and Islamic forums. Dr. Ahmad Abdul Aziz Al Haddad - Member Dr. Mohammed Abdul Rahim Al Olama is a Sharia scholar from the UAE who is a member of the Sharia committee at the Awqaf authority and is dean of the School of Sharia at UAE University, Al Ain. The responsibility of the Committee The responsibility of the Committee in accordance with the Supervisory Requirements and its regulations covers the Sharia supervision of all business, activities, products, services, contracts, documents and charters of the Company’s business, policies and accounting standards, operations and activities in general, the memorandum of association, the articles of association, the financial statements of the corporation, the distribution of profits and the charging of losses, costs and expenses between shareholders and investment account holders (“The Company’s Business”), issuing Sharia decisions regarding it, and laying down the necessary Sharia controls for the Company’s Business and its commitment to Islamic Sharia within the framework of the rules, principles and standards set by the Higher Sharia Authority (“HSE”), to ensure its compatibility with the provisions of Islamic Sharia. The senior management shall be responsible for the Company’s commitment to Islamic Sharia in accordance with the decisions, fatwas, opinions of the HSE, and the Committee’s decisions within the framework of the rules, principles and standards set by the HSE (“Commitment to Islamic Sharia”) in all its business and to ensure this, and the board of directors has ultimate responsibility in this regard. 2. Sharia Standards The Committee relied on the Sharia standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”) standards for the minimum Sharia requirements and committed to them in everything that it decides, approves, agrees, or recommends in relation to the Company’s business during the ended Financial Year without exception in accordance with the HSE decision No. 18/3/2018. 3. The works carried out by the Committee during the Financial Year The Committee has carried out Sharia supervision over the Company’s business, by reviewing and monitoring the Company’s business through the Internal Sharia Supervision and Internal Sharia Audit Department, in accordance with the Committee’s powers, responsibilities and Supervisory Requirements in this regard. The following are the works carried out by the Committee: a. Holding two (2) meetings during the Financial Year, b. Issuing fatwas, decisions and expressing opinions regarding the Company’s Business that is presented to the Committee. c. Review policies, procedural regulations, accounting standards, product structures, contracts, documents, work charters and other documents submitted by the Company to the Committee for accreditation/ approval. 44 Commercial Bank of Dubai Annual Report 2020 45
24. Corporate Governance Framework (continued) Corporate Governance Framework (continued) VI. Islamic Banking Governance (continued) 3. The works carried out by the Committee during the Financial Year (continued) d. Ensuring the compatibility of the distribution of profits and the charging of costs and expenses between investment account holders, shareholders and investment account holders with the Sharia controls approved by the Committee. e. Supervising through the Internal Sharia Supervision and the internal Sharia audit Department over the Company’s Business, including the transactions executed and the procedures followed, on the basis of selecting samples from the executed operations, and reviewing the reports submitted in this regard. f. Providing directives to the concerned bodies in the Company to remedy the observations made in the reports submitted by the Internal Sharia Supervision and the internal Sharia audit Department, and the issuance of decisions to separate the proceeds of the transactions that have been violated in their application to be spent on charitable works according to the directives of the Committee. g. Adoption of corrective/ preventive measures regarding detected errors to prevent them from happening again. h. Based on the calculation according to AAOIFI Standard No. 35 of Zakat, the Bank is not obligated to pay Zakat for the Financial Year 2020. i. Communicate with the board of directors, its committees, and senior management of the Company, as needed, regarding the Company’s Commitment to Islamic Sharia. The Committee sought to obtain all information and explanations it deemed necessary to ensure the Company’s Commitment to Islamic Sharia. 4. The Independence of the Committee The Committee confirms that it has fulfilled its responsibilities and carried out all its work with complete independence, and has obtained the necessary facilities from the Company and its senior management and its board of directors to review all documents and data, and to discuss amendments and Supervisory Requirements. 5. The Opinion of the Committee regarding the Company’s Commitment to Islamic Sharia Based on the information and clarifications which we have obtained in order to ensure the Company’s Commitment to Islamic Sharia, the Committee reached an acceptable degree of reassurance that the Company’s Business during the Financial Year are in compliance with Islamic Sharia, except for the observed violations that have been reported, and the Committee has directed to take appropriate measures in this regard. The opinion of the aforementioned Committee is based on the information it had access to during the Financial Year exclusively. We ask God, The Most High, and The Almighty, to achieve righteousness for all. Peace, Mercy and Blessings of God. The signatures of the members of Internal Sharia Supervision Committee of the Corporation 46 His Eminence Sheikh Prof. Dr. Muhammad Abdul Rahim Sultan Al-Ulama Executive Member and Head of the Internal Sharia Supervision Committee His Eminence Sheikh Dr. Muhammad Abdul Aziz Al-Haddad Member of the Internal Sharia Supervision Committee Commercial Bank of Dubai Annual Report 2020 47
25. Corporate Governance Framework (continued) 48 Commercial Bank of Dubai Corporate Governance Framework (continued) Annual Report 2020 49
26. Corporate Governance Framework (continued) Corporate Governance Framework (continued) VII. Senior Executives VII. Senior Executives (continued) 1. 2. Selection Process All employees hired to the senior most levels of the Bank must be selected through a fair and rigorous process. The Bank believes that its Executive Committee (EXCO) should be made up of highly qualified individuals from diverse backgrounds with an extensive track record and in full compliance with the Corporate Governance Regulations. All individuals with the responsibility for management and control of the business must prove and assure the Bank that they comply with a fit and proper test. Management Committees are endowed with full executive powers to take into force decisions and actions related to their field, scope, and structured hierarchy. The Bank exercises judgment and discretion in assessing fitness and propriety and takes into account all relevant matters including: a) b) c) Certain day-to-day activities of the Bank have been delegated by the Board to the Senior Management through the Executive Committee (the “EXCO”). Competence and Capability The applicants must show that they are competent to undertake the relevant class of regulated activities including where appropriate, detailed knowledge of the structure, purpose and risks of the products/processes associated with the activity. To demonstrate competence, the person involved in carrying out the financial business must act in a knowledgeable, professional and efficient manner, complying with the prevailing regulations. The nature and extent of the competence required will depend upon the services being offered or to be offered. In determining a person’s competence and capability, the Bank shall have regard to matters including but not limited to: • The person has satisfactory past performance or expertise in the nature of the business being conducted; • The person has an appropriate range of skills and experience to understand, operate and manage the regulated activities/financial affairs; • The person has the technical knowledge and ability to perform prescribed duties for which they are engaged, especially recognized professional qualifications and membership of relevant professional institutions Honesty, Integrity, Fairness, Ethical Behavior In determining the honesty, integrity and reputation of the candidate, the Bank may consider among other things, whether the candidate has been convicted, on indictment, of dishonesty, fraud, money laundering, theft or financial crime. This may be regarded by the Bank as an indication that a person is not fit and proper and will, in principle, bar a person from holding a position. Central Bank of UAE may treat each candidate’s application on a case−by−case basis taking into account the seriousness of, and circumstances surrounding, the offence, the explanation offered by the convicted person, the relevance of the offence to the proposed role, the passage of time since the offence was committed and evidence of the individual’s rehabilitation. Financial Soundness or Solvency In assessing the financial soundness of the candidate, the Bank will assess whether the person can maintain solvency and prudent financial control. It includes meeting liabilities as they become due and ensuring adequate control over financial risks on a continuing basis. It also involves taking proper care of customers. Financial soundness is an important element in determining the fitness and probity of applicants. In determining the financial soundness of the candidate, the Bank will also consider matters such as but not limited to: • Whether there are any indicators that the person will not be able to meet their debts as they fall due; • Whether relevant solvency requirements are met; • Whether the person has been subject to any judgment debt or award that remains outstanding or has not been The EXCO is composed of key members of the Senior Management, whose appointments to the EXCO are approved by the Remuneration and Nomination Committee. The responsibilities of the EXCO include: • d) 50 Whether the person has been able to provide the Bank with a satisfactory credit reference. Regulatory Approvals All applications/enquiries relating to any positions that require Central Bank of UAE approval will be sent to the Banking Supervision Department along with the required appointment documents. Commercial Bank of Dubai Assessing and recommending the annual review plan and strategy and schedule of activities of the Bank • Reviewing the financial performance of the Bank and its businesses and functions • Meeting periodically with the other Committees or task force in separate executive session to discuss any matters • Reviewing management reports on business operations and making recommendations to the EXCO • Reviewing and recommending on acquisitions, divestitures, and joint ventures • Reviewing and recommending on the opening and closing of new branches • Overseeing the Bank’s capital raising program, as approved by the Board of Directors • Discussing and debating any other business matters deemed to be submitted in EXCO • Any communications between the Committee members during the EXCO will be considered privileged communications by the Bank, and the Committee will take all necessary steps to preserve the privileged nature of those communications. Other management committees included: a) Asset and Liability Committee (“ALCO”) The objective of the ALCO is to drive the most appropriate strategy for CBD in terms of the mix of assets and liabilities given its expectations of the future and the potential consequences of interest rate movements, liquidity constraints, and foreign exchange exposure and capital adequacy. The ALCO is also responsible to ensure that all strategies conform to the Group’s risk appetite and levels of exposure as determined by the Board. b) Credit Committee (“CC”) The CC manages the credit risk of CBD by continuous review and update of credit limits, credit policies, process and framework, the approval of specific exposures and work out proposals, constant revaluation of the loans portfolio and the sufficiency of provisions thereof. c) Compliance Committee (“CCO”) The CCO primarily ensures the prevention of money laundering and terrorism financing in adherence and compliance with the relevant regulations set by regulatory authorities applicable to CBD. It oversees the monitoring and implementation of policies and procedures related to compliance and AML. It consists of five executive members. d) Operational Risk Management Committee (“ORMC”) The purpose of the ORMC is to maintain oversight of the operational risks identified across the Group by all relevant units like Operational Risk Management Department, Internal Control Department and Internal Audit. Whether the person has made arrangements with creditors, filed for bankruptcy or been adjudged bankrupt or had assets confiscated; • that the Committee or the other Committees believe should be discussed privately satisfied within a reasonable period; • Management Committees Management Committees are established for the purpose of recommending, deciding, approving and/or monitoring key topics in their respective areas of specialization. Equally importantly, they provide a platform for discussion between the Senior Management team on important business and control areas for the Bank. Annual Report 2020 51
27. Corporate Governance Framework (continued) Corporate Governance Framework (continued) VII. Senior Executives (continued) VIII. CORPORATE SOCIAL RESPONSIBILITY 2. Management Committees (continued) e) Information Security Risk Committee (“ISRC”) The ISRC provides strategic and tactical guidance for managing CBD’s overall information security and IT risks in the long and short term, to ensure adherence with applicable regulations and standards, compliance with internal policies and management of IT risks to protect CBD’s business, supporting strategic business goals. f) g) Project Investment Committee (“PIC”) The PIC reviews and approves investment projects for CBD and provides guidance for CBD’s long term and short term goals in the areas of strategic project investment. The PIC governs all projects of CBD including but not limited to those which have a direct or an indirect dependency on IT. The PIC is also responsible for reviewing key aspects including the investment slate, project performance, project financials, business case approvals and project delivery. Human Resources Committee (“HRC”) The purpose of the HRC is to set strategy and policy regarding the development of CBD’s organization structure, professional ethics, business focused succession planning, Emiratization, optimal headcount/ manpower distribution, training and development, performance management and compensation and reward management. Separate working groups or ad-hoc committees are established by EXCO on an “as required” basis. All management committees report to EXCO. The EXCO has full authority to review and reorganize the composition and terms of reference of the management committees and other working groups. 3. • 52 Key Members of the current Senior Management Dr. Bernd van Linder – Chief Executive Officer Dr. Bernd van Linder is currently the Chief Executive Officer at the Commercial Bank of Dubai. He has more than 25 years of banking experience. In his previous role, Dr. Bernd was the CEO for Alawwal Bank (Saudi Hollandi Bank) and was based in Riyadh. He worked at Alawwal Bank for over 10 years including more than seven years in the position of CEO. Prior to that, he worked for ABN Amro in the Netherlands. Dr. Bernd holds a MBA Financial Management from the University of Bradford, UK, a PhD in Artificial Intelligence from the Utrecht Commercial Bank of Dubai University in the Netherlands and an MSc in Computer Science from Nijmegen University in the Netherlands. Dr. Bernd was appointed as CEO of CBD in January 2017. • • Darren Clarke – Chief Financial Officer Darren Clarke is currently the Chief Financial Officer at the Commercial Bank of Dubai. He has more than 25 years of banking experience. In his previous role, Darren was the CFO for National Australia Bank (NAB) International, and was based in Singapore. He worked at NAB for 13 years, including as the CFO for Global Markets & Treasury. Prior to that, he worked for JPMorgan Chase in the UK, Luxembourg and Hong Kong. Darren holds a Bachelor’s degree in Accounting from the University of Wollongong. He is also qualified as a Chartered Accountant with the Institute of Chartered Accountants in Australia. Darren joined CBD in April 2018. Alan Grieve – Chief Risk Officer Alan Grieve joined CBD in 2017 following a 29-year career with HSBC which included senior leadership roles in Corporate Banking, Operations and Risk Management across Asia, Latin America, Europe and the Middle East. Mr. Grieve returned to the UAE after most recently serving for five years as HSBC’s Chief Risk Officer for China, based in Shanghai. Previous roles at HSBC included COO in Panama, Head of Special Assets at SABB and Head of Wholesale Credit Risk for the Asia Pacific region. Mr. Grieve holds an LLB (Hons) from Aberdeen University where he graduated in 1988. 1. General Overview The Board of Directors has the power to design, assess, and continuously revise the Corporate Policies, which contain the guidelines governing the conduct of the Bank and further develop the principles reflected in the Mission, Vision, and Values of the Commercial Bank of Dubai and the other rules of the Corporate Governance system. The Bank’s perspective on organizational culture and employee engagement includes a Corporate Social Responsibility (“CSR”) policy intended to raise awareness of social responsibility and thereby contribute to the sustainable creation of value for society, citizens, customers, shareholders, and the communities in which CBD does business The Bank contributes to the development of communities with its business activity and its social responsibility strategy with measures designed to promote education and culture and to protect vulnerable groups, and works to establish firm and permanent bonds, taking into consideration the interests of its workforce, shareholders and the financial community, regulatory bodies, customers, suppliers, the media, society in general, and the environment (the “Stakeholders”). The Board approved the Corporate Social Responsibility Policy in its meeting held on 7th February 2018. The Policy is intended to establish the basic principles and the general framework of activities for the management of corporate social responsibility practices assumed by the Bank and to serve as the basis for integrating social responsibility into the Bank’s strategy. The Policy is further developed and supplemented by the Stakeholder Engagement Policy. Being a responsible company is integral to the Bank’s success and the Bank is engaged on the issues that matter most to our customers, employees and communities. Our employees are guided by a common set of values that ensure we deliver on our goals while also helping to address local challenges The Bank carries out its business enterprise and its own business model with the objective of sustainably creating value for society, customers, shareholders, and for the communities in which it does business, providing a high-quality service through innovation and maintaining awareness of the opportunities offered by the knowledge economy. Our core pillars for CSR are as follows: (i) Health (ii) Education (iii)Financial literacy The Board reviews these pillars from time to time and make additions or deletions, based on the priorities for each year. 2. 2020 Actions In 2020, and as part of its support for the UAE government and aligned to the importance we place on health and wellbeing, the Bank participated in the Community Solidarity Fund to combat COVID-19. In addition, a number of employees acted as volunteers to assist in the national effort in dealing with the pandemic. Earlier in 2020, under the patronage and attendance of His Highness Sheikh Saud Al Qasimi, Ruler of Ras Al Khaimah, CBD sponsored the 2020 RAK Half Marathon in which 5,200 runners participated. Further sponsorship continued with our support for the Jebel Ali horse racing season. The “Back to School” initiative under the auspices of the Red Crescent has been operating at the Bank for the past four years to support those less fortunate than us in providing items for their children’s educational wellbeing and happiness at the start of the new academic year. Our employees and their families donated more than 30 boxes of school materials as part of this year’s initiative. On the occasion of the Bank’s Golden Jubilee, a new book was published summarizing the Commercial Bank of Dubai’s illustrious history. The book and its many photographs capture the role CBD has played in the development of the national economy and in service of our many customers over the last 50 years. Annual Report 2020 53
28. Report of the Auditors to the Shareholders ���������������������� 57-63 Consolidated statement of financial position ���������������������������� 64 Consolidated statement of profit or loss ������������������������������������������ 65 Consolidated statement of profit or loss and other comprehensive income ������������������������������������������������������������������������������� 66 Consolidated statement of changes in equity �������������������������� 67 Consolidated statement of cash flows ������������������������������������������������ 68 Notes to the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 - 155
29. Report of the Auditors to the Shareholders 56 Commercial Bank of Dubai Annual Report 2020 57
30. Report of the Auditors to the Shareholders (continued) 58 Commercial Bank of Dubai Report of the Auditors to the Shareholders (continued) Annual Report 2020 59
31. Report of the Auditors to the Shareholders 60 Commercial Bank of Dubai Report of the Auditors to the Shareholders (continued) Annual Report 2020 61
32. Report of the Auditors to the Shareholders 62 Commercial Bank of Dubai Report of the Auditors to the Shareholders (continued) Annual Report 2020 63
33. Consolidated statement of financial position As at 31 December 2020 Consolidated statement of profit or loss For the year ended 31 December 2020 Note 2020 2019 AED ’000 AED’000 13,162,743 12,592,641 65,288,572 60,180,810 Note 2020 2019 AED’000 AED’000 2,865,360 3,177,489 ASSETS Cash and balances with Central Bank 7 Due from banks, net 8 Loans and advances and Islamic financing, net 9 Investment securities 10 Investment in an associate 11 Investment properties, net 12 Property and equipment 13 Bankers acceptances 14 Other assets, net TOTAL ASSETS 4,218,894 2,427,735 5,262,597 5,613,287 191,469 198,896 88,514 85,127 290,025 273,583 5,972,327 5,346,819 2,886,419 1,349,993 97,361,560 88,068,891 LIABILITIES AND EQUITY Interest income and income from Islamic financing 20 Interest expense and distributions to Islamic depositors 21 Net interest income and net income from Islamic financing 22 Net fees and commission income Net gains from foreign exchange and derivatives Net gains from investments at fair value through profit or loss Net gains from sale of debt investments at fair value through other comprehensive income 23 Share of profit of an associate 11 Dividend income LIABILITIES 24 Other income Due to banks 15 Customer deposits and Islamic customer deposits 16 Notes and medium term borrowings 17 Due for trade acceptances 18 Other liabilities TOTAL LIABILITIES 4,782,749 69,750,833 4,166,589 63,334,333 1,764,059 3,231,072 5,972,327 5,346,819 2,137,857 1,773,508 84,407,825 77,852,321 2,802,734 2,802,734 EQUITY Share capital 19.1 Tier 1 capital notes 19.2 Legal and statutory reserve 19.3 General reserve 19.4 Capital reserve 19.5 Fair value reserve 19.6 2,203,800 1,401,367 1,328,025 38,638 1,401,367 1,328,025 Reversal of impairment allowance on due from banks Impairment financing allowance on loans and advances and Islamic Recoveries Reversal of impairment allowance on investment securities Impairment allowance on investment property 12 Impairment allowance on other assets 14 Total net income 38,638 65,547 48,454 5,113,624 4,597,352 TOTAL EQUITY 12,953,735 10,216,570 TOTAL LIABILITIES AND EQUITY 97,361,560 88,068,891 Retained earnings Total operating income To the best of our knowledge, the consolidated financial information present fairly in all material respects the financial condition, results of operation and cash flows of the Group as of, and for, the years presented therein. These consolidated financial statements were approved and authorised for issue by the Board of Directors on 10 February 2021. The attached notes from 1 to 37 form part of these consolidated financial statements. Staff and other expenses 25 (978,807) (1,211,907) 1,886,553 1,965,582 651,283 701,154 221,669 196,817 24,626 1,412 137,637 53,127 5,991 4,318 2,786 3,488 47,651 107,316 2,978,196 3,033,214 1,709 2 (1,064,893) (782,312) 23,846 41,516 5,620 162 - (3,322) (17,074) (3,900) 1,927,404 2,285,360 (779,422) (814,771) (27,884) (70,399) Total operating expenses (807,306) (885,170) Net profit for the year 1,120,098 1,400,190 AED 0.40 AED 0.50 Depreciation and amortisation Basic and diluted earnings per share 12 & 13 27 The attached notes from 1 to 37 form part of these consolidated financial statements. H.E. Humaid Al Qutami Chairman 64 Commercial Bank of Dubai Dr. Bernd van Linder Chief Executive Officer Annual Report 2020 65
34. Consolidated statement of profit or loss and other comprehensive income For the year ended 31 December 2020 Note Net profit for the year Consolidated statement of changes in equity For the year ended 31 December 2020 2020 2019 AED ’000 AED’000 1,120,098 1,400,190 Share capital AED’000 At 1 January 2019 2,802,734 Tier 1 Legal and capital statutory notes reserve AED’000 AED’000 General reserve AED’000 - 1,401,367 1,328,025 Capital Fair value reserve reserve Retained earnings Total AED’000 AED’000 38,638 (137,060) 3,785,022 9,218,726 AED’000 AED’000 Transactions with shareholders, recorded directly in equity Items that will not be reclassified to profit or loss: Cash dividend for 2018 (20.7%) - - - - - - (580,166) (580,166) Realised gain on sale of equity investments held at fair value through other comprehensive income Directors’ remuneration for 2018 - - - - - - (11,000) (11,000) Share of Directors’ remuneration of an associate (note 11) - - - - - - (424) (424) Net profit for the year - - - - - - 1,400,190 1,400,190 Gain on sale of equity investments at fair value through other comprehensive income - - - - - (3,730) 3,730 - Other comprehensive income for the year - - - - - 189,244 - 189,244 Total other comprehensive income - - - - - 185,514 1,403,920 1,589,434 - 1,401,367 1,328,025 38,638 - 3,730 Revaluation gain / (loss) of equity investments held at fair value through other comprehensive income 23,079 (12,561) Actuarial (loss) / gain on retirement benefits obligations (2,916) 2,985 Items that may be subsequently reclassified to profit or loss: (3,723) Changes in fair value of effective portion of cash flow hedge 367 Changes in fair value reserve of an associate 4,453 383 Other comprehensive income At 31 December 2019 Changes in investments held at fair value through other comprehensive income: Realised gain on sale of debt investments 10 Revaluation gain on debt investments Net change in investments held at fair value through other comprehensive income Other comprehensive income for the year Total comprehensive income for the year The attached notes from 1 to 37 form part of these consolidated financial statements. (137,637) (53,127) 137,923 243,381 286 190,254 17,093 1,137,191 189,244 1,589,434 2,802,734 48,454 4,597,352 10,216,570 Transactions with shareholders, recorded directly in equity Tier 1 capital notes issued during the year (note 19.2) - 2,203,800 - - - - - 2,203,800 Tier 1 capital notes transaction cost - - - - - - (7,950) (7,950) Cash dividend for 2019 (20.7%) - - - - - - (580,166) (580,166) Directors’ remuneration for 2019 - - - - - - (15,400) (15,400) Share of Directors’ remuneration of an associate (note 11) - - - - - - (310) (310) Net profit for the year - - - - - - 1,120,098 1,120,098 Gain on sale of equity investments at fair value through other comprehensive income - - - - - - - - Other comprehensive income for the year - - - - - 17,093 - 17,093 - - - - - 17,093 1,120,098 1,137,191 2,802,734 2,203,800 1,401,367 1,328,025 38,638 Other comprehensive income Total other comprehensive income At 31 December 2020 65,547 5,113,624 12,953,735 The attached notes from 1 to 37 form part of these consolidated financial statements. 66 Commercial Bank of Dubai Annual Report 2020 67
35. Consolidated statement of cash flows For the year ended 31 December 2020 OPERATING ACTIVITIES Net profit for the year Adjustments for non-cash and other items : Depreciation and amortisation Property and equipment write off Amortisation of premium / discounts on investments Amortisation of transaction cost on notes and medium term borrowings (Gain) / loss on forex translation on investments Unrealized gains on investments at fair value through profit or loss Realised gain on sale of investments Net unrealised gain on derivatives Reversal of impairment allowance on investment securities Share of profit of an associate Dividend income Impairment allowance on loans and advances and Islamic financing Reversal of impairment allowance on due from banks Impairment allowance on other assets Impairment allowance on investment properties Gain on disposal of property and equipment and investment properties Notes to the consolidated financial statements For the year ended 31 December 2020 Note 12 & 13 11 12 13 11 Notes and medium term borrowings Tier 1 capital notes issued during the year Tier 1 capital notes transaction cost Dividend paid Net cash flow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 27,884 (2,625) 30,275 2,187 (29,467) (22,578) (138,838) (7,233) (5,620) (5,991) (2,786) 1,064,893 (1,709) 17,074 (15,647) 70,399 35,328 1,537 5,998 (53,976) (53,399) (162) (4,318) (3,488) 782,312 (2) 3,900 3,322 (73,636) 1,293,029 Net cash flow from operating activities INVESTING ACTIVITIES Net cash flow from investing activities FINANCING ACTIVITIES 2019 AED’000 1,400,190 2,029,917 Decrease / (increase) in statutory reserve with the UAE Central Bank Decrease / (increase) in negotiable UAE Central Bank certificate of deposits with original maturity of more than three months Decrease / (increase) 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 in due to banks with original maturity of more than three months Increase in customer deposits and Islamic customer deposits (Decrease) / increase in other liabilities Directors’ remuneration paid Purchase of investment Proceeds from sale of investments Purchase of property and equipment and investment properties Proceeds from sale of property and equipment and investment properties Dividend received Dividend from an associate 2020 AED’000 1,120,098 28 Supplemental disclosure: Interest income and income from Islamic financing received Interest expense and distributions to Islamic depositors paid 1. 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 and retail banking. The registered address of the Bank is CBD Head Office, Al Ittihad Street, P.O. Box 2668, Dubai, United Arab Emirates. The consolidated financial statements of the Group for the year ended 31 December 2020 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 Cayman 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 Cayman Islands. The SPE has been established to transact and negotiate derivative agreements. f) VS 1897 (Cayman) Limited which is a special purpose entity (SPE) registered in the Cayman Islands. The SPE has been established to manage investments acquired in settlement of debt. g) 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. Management believes that it has significant influence on the associate by virtue of having representation on the Board of Directors of the associate. 2,114,005 (513,532) 2,050,000 (700,000) 19,743 (50,431) (6,172,655) (1,163,672) (10,018,175) (130,356) 883,180 1,325,867 6,416,500 (26,420) (15,400) 5,314,222 10,169,303 373,331 (11,000) 2,559,012 (5,901,384) 6,443,202 (50,086) 31,459 2,786 2,661 528,638 (4,224,500) 5,558,665 (27,291) 112,240 3,488 3,992 1,426,594 (1,469,200) 2,203,800 (7,950) (580,166) 146,484 5,989,344 7,340,365 13,329,709 619,591 (580,166) 39,425 4,025,031 3,315,334 7,340,365 2,779,502 1,059,255 3,155,272 1,131,154 LEGAL STATUS AND ACTIVITIES 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. 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. 2.2 Functional and presentation currency The consolidated financial statements are presented in United Arab Emirates Dirhams (“AED”), which is the Group’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. The attached notes from 1 to 37 form part of these consolidated financial statements. 68 Commercial Bank of Dubai Annual Report 2020 69
36. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 2. 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 through profit or loss (FVPL); • financial instruments classified as fair value through profit or loss; • financial assets at fair value through other comprehensive income; • recognised 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. Amortised cost is adjusted for hedging gain or loss; • end of service benefits that are measured at the present value of the defined benefit obligation. 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 in 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: • Derecognises the assets (including goodwill) and liabilities of the subsidiary; • Derecognises the cumulative translation differences recorded in equity; • Derecognises the carrying amount of any non-controlling interest; • Recognises the fair value of the consideration received; • Recognises the fair value of any investment retained; • Recognises any surplus or deficit in the consolidated statement of profit or loss; and • Reclassifies the parent’s share of components previously recognised 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. 70 Commercial Bank of Dubai BASIS OF PREPARATION (continued) 2.5 Basis of consolidation (continued) (ii) Subsidiary (continued) When the Group loses control of a subsidiary, a gain or loss is recognised 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 recognised 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 not control or joint control 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 recognised 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 amortised 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 recognised directly in the equity of the associate, the Group recognises 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 recognise 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 recognises the loss as ‘Share of profit or loss of an associate’. Upon loss of significant influence over the associate, the Group measures and recognises 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 recognised 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 2020 71
37. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 2. 3. 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. Unrealised losses are eliminated in the same way as unrealised 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 for the accounting standards mentioned in note 5.1 which are applied for the first time. 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. The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis, which is the date on which the Group becomes a party to the contractual provisions of the instrument. 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. Recognised 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 recognised immediately in consolidated statement of profit or loss. 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 recognised in consolidated statement of profit or loss on initial recognition (i.e. day 1 profit or loss); • 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 in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When one is available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as ‘active’ if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 72 Commercial Bank of Dubai SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) b) Fair Value measurement (continued) If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value on initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique for which any unobservable inputs are judged to be insignificant in relation to the difference, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value on initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for the particular risk exposure. Portfoliolevel adjustments – e.g. bid-ask adjustment or credit risk adjustments that reflect the measurement on the basis of the net exposure – are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio. The fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The fair value of investments in mutual funds, private equity funds or similar investment vehicles are based on the last net asset value published by the fund manager. For other investments, a reasonable estimate of the fair value is determined by reference to the price of recent market transactions involving similar investments, are based on the expected discounted cash flows. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 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. Annual Report 2020 73
38. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) b) Fair Value measurement (continued) Fair value hierarchy (continued) 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 6.2. 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 analyses 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 a) Classification The Group classifies financial assets on initial recognition in the following categories: (i) Amortised cost; (ii) Fair value through other comprehensive income (FVOCI); and (iii) Fair value through profit or loss (FVPL). o 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 realising 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 realised. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. 74 Commercial Bank of Dubai SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) a) Classification (continued) o 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. 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 cash flows; • 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). o Assessment whether contractual cash flows is solely payments of principal and interest (continued) 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 SPPI on the principal amount outstanding. Annual Report 2020 75
39. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 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) 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 • the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI 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 not held for trading. 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 amortised 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. b) Subsequent measurement 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. c) Reclassifications Financial assets are not reclassified subsequent to their initial recognition except in the period after the Group changes its business model for managing financial assets. 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. 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 amortised cost that are not part of a designated hedging relationship, exchange differences are recognised in consolidated statement of profit or loss in the ‘net gains from foreign exchange and derivatives’ line item; • for debt instruments measured at FVOCI that are not part of a designated hedging relationship, exchange differences on the amortised cost of the debt instrument are recognised in the consolidated statement of profit or loss in the ‘net gains from foreign exchange and derivatives’ line item. Other exchange differences are recognised in OCI in the investments revaluation reserve; 76 Commercial Bank of Dubai SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) d) Foreign exchange gains and losses (continued) • • • for financial assets measured at FVPL that are not part of a designated hedge accounting relationship, exchange differences are recognised in consolidated statement of profit or loss in ‘net gains from investments at FVPL’; and for equity instruments measured at FVOCI, exchange differences are recognised in OCI in the investments revaluation reserve. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value through profit or loss are re translated into the functional currency (AED) at the foreign exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. e) Impairment The Group recognises 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 and interbank portfolio. IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarised below: Stage 1: When loans are first recognised, the Group recognises 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: • • 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 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; 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. Annual Report 2020 77
40. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) 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 amortisation. 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 realisation of collateral, cross-collateralisation and seniority of claim, cost of realisation 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. 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. 78 Commercial Bank of Dubai SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) Restructured financial assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows: • If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. • If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt 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 amortised 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: • The market’s assessment of creditworthiness as reflected in the bond yields; • The rating agencies’ assessments of creditworthiness; • 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 or a backstop if amounts are overdue for 90 days or more. Purchased or originated credit-impaired (POCI) financial assets POCI financial assets are assets that are credit-impaired on initial recognition. For POCI assets, lifetime ECL are incorporated into the calculation of the effective interest rate on initial recognition. Consequently, POCI assets do not carry an impairment allowance on initial recognition. The amount recognised as a loss allowance subsequent to initial recognition is equal to the changes in lifetime ECL since initial recognition of the asset. Annual Report 2020 79
41. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) 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 or 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 realising 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. o 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. o 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. 80 Commercial Bank of Dubai SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) Assessment of significant increase in credit risk (continued) 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 recognised. 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’ given an exposure is on a watch list once there is a concern that the creditworthiness of the specific counterparty has deteriorated. 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 in stage (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. Annual Report 2020 81
42. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) e) Impairment (continued) 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 65% (2019: 80%) probability of occurring, and two less likely scenarios, one upside at 0% (2019: 10%) probability of occurring and one downside at 35% (2019: 10%) probability of occurring. The table below summarizes key macroeconomic indicators included in the economic scenarios in UAE at 31 December 2020 for the years ending 2020 to 2022: Base Scenario Downside Scenario Upside Scenario 2020 2021 2022 2020 2021 2022 2020 2021 2022 Economic Composite Index -6.36% 2.98% 2.30% -6.36% -8.20% 0.28% -6.36% 7.75% 3.89% Oil Price - USD 41 49 55 41 26 30 41 54 60 Real Estate Index - Dubai 10,585 10,204 10,210 10,585 8,858 8,248 10,585 10,845 11,263 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 amortised cost: as a deduction from the gross carrying amount of the assets; • for debt instruments measured at FVOCI: no loss allowance is recognised 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 recognised 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 82 Commercial Bank of Dubai 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) 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: • House prices like real estate – Dubai and Abu Dhabi Index; • Economic Composite Index (ECI); • Non-Oil Economic Composite Index (NIECI); • Oil Price per Barrel (OPB); • Consumer Price Index (CPI) and • Hotel Occupancy Dubai component is presented as a provision. SIGNIFICANT ACCOUNTING POLICIES (continued) 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. g) Modification of financial assets 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 maximise 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. Annual Report 2020 83
43. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.1 Financial assets (continued) g ) Modification of financial assets (continued) If the modification of a financial asset measured at amortised 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 recognises 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 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 amortised 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. h) Derecognition of financial assets The Group derecognises 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 recognises 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 recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. In the case where the financial asset is derecognised, 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 recognised 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 recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain / loss allocated to it that had been recognised in OCI is recognised in consolidated statement of profit or loss. Any cumulative gain / loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised 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 recognised as a separate asset or liability. 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) Amortised 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. Subsequent measurement Financial liabilities at FVPL are stated at fair value, with any gains / losses arising on remeasurement recognised in profit or loss to the extent that they are not part of a designated hedging relationship. The net gain / loss recognised in consolidated statement of profit or loss incorporates any interest paid on the financial liability. 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 recognised 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 recognised in profit or loss. Changes in fair value attributable to a financial liability’s credit risk that are recognised 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 recognising 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 amortised 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 amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised 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. 84 Commercial Bank of Dubai Annual Report 2020 85
44. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.1 Financial Instruments (continued) 3.1.2Financial 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 recognised at fair value. The difference between the carrying amount of the financial liability derecognised and consideration paid is recognised 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. If the modification of a financial liability is not accounted for as derecognition, then the amortised 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 recognised 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 recognised as an adjustment to the carrying amount of the liability and amortised 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 derecognises 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 derecognised and the consideration paid and payable is recognised 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 and loan Financial guarantees’ are contracts that require the Group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. ‘Loan commitments’ are firm commitments to provide credit under pre-specified terms and conditions. Financial guarantees issued or commitments to provide a loan at a below-market interest rate are initially measured at fair value. Subsequently, they are measured at the higher of the loss allowance determined in accordance with IFRS 9 and the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15. Other loan commitments issued are measured at the sum of (i) the loss allowance determined in accordance with IFRS 9 and (ii) the amount of any fees received, less, if the commitment is unlikely to result in a specific lending arrangement, the cumulative amount of income recognised. Derecognition policies are applied to loan commitments issued and held. The Group has issued no loan commitments that are measured at FVPL. Liabilities arising from financial guarantees and loan commitments are included within provisions. 86 Commercial Bank of Dubai SIGNIFICANT ACCOUNTING POLICIES (continued) 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 (unrealised gains) of derivative financial instruments is included in other assets. The negative mark to market values (unrealised 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 recognised assets or liabilities; or • cash flow hedges which hedge the exposure to variability in highly probable future cash flows attributable to a recognised 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. 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. Annual Report 2020 87
45. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.3 Hedging instruments (continued) Hedge accounting (continued) 3.5 Loans and advances and Islamic financing (continued) Ijara (continued) c) Fair value hedge The changes in the fair value of derivatives that are designated and qualify as fair value hedge instruments is recognised in the consolidated statement of profit or loss. 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. 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 recognised in OCI. Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the consolidated statement of profit or loss. 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). 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 recognised 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. 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 recognised at fair value and subsequently measured at amortised cost, using the effective profit method, less any amounts written off, allowance for doubtful accounts and unearned income. 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. The effective profit rate is the rate that exactly discounts estimated future cash flow through the expected life of the financial asset or liability. 3.4 Due from banks The ‘investment securities’ caption in the statement of financial position includes: • debt investment securities measured at amortised cost: these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; • debt and equity investment securities measured at FVPL or designated as at FVPL: these are at fair value with changes recognised immediately in profit or loss; • debt securities measured at FVOCI; and • equity investment securities designated as FVOCI. Amounts due from banks are initially recognised at fair value and subsequently measured at amortised 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 amortised 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 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 recognised on an accrual basis adjusted by actual income when received. 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. 88 SIGNIFICANT ACCOUNTING POLICIES (continued) Commercial Bank of Dubai 3.6 Investment securities For debt securities measured at FVOCI, gains and losses are recognised in OCI, except for the following, which are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. • Interest revenue using the effective interest method; • ECL and reversals; and • Foreign exchange gains and losses. When debt security measured at FVOCI is derecognised, the cumulative gain or loss previously recognised 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 recognised in profit or loss. Dividends are recognised in profit or loss unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised in OCI. Cumulative gains and losses on equity instruments recognised in OCI are transferred to retained earnings on disposal of an investment. Annual Report 2020 89
46. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Investment properties 3.8 Property and equipment (continued) 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 methods, useful lives and residual values are reassessed at each reporting date and prospectively adjusted if appropriate. Depreciation is charged using straight line method over the useful life of the asset. Estimated useful life of buildings is 30 to 60 years. Amounts due to banks, notes and medium term borrowing are initially measured at fair value plus transaction costs, and are subsequently measured at amortised cost using the effective interest method. 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 Investment properties are derecognised 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 recognised in the consolidated statement of profit or loss under ‘other income’ in the year of retirement or disposal. 3.10 Repurchase agreement 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. 3.11 Customer deposits and Islamic customer deposits 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 recognised 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 recognised 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 recognised in the consolidated statement of profit or loss. 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: 90 SIGNIFICANT ACCOUNTING POLICIES (continued) Buildings 30 to 60 years Leasehold improvements 5 to 10 years Building renovations 7 years Furniture and fixtures 7 years Computer equipment 3 to 10 years Computer software 7 years Motor vehicles 5 years Commercial Bank of Dubai 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 recognised in the Group’s financial statement. Customer deposits are initially recognised at fair value, being the fair value of the consideration received. After initial recognition, all deposits are subsequently measured at amortised cost using the effective interest method. Amortised 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 amortised cost using the effective profit method. 3.12 Employees’ terminal benefits The Group provides end of service benefits for its employees. The entitlement to these benefits is based upon the employees’ length of service and completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. With respect to its UAE national employees, the Group makes contributions to the relevant government pension scheme calculated as a percentage of the employees’ salaries. The Group’s obligations are limited to these contributions, which are expensed when due. Annual Report 2020 91
47. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.12 Employees’ terminal benefits (continued) Defined contribution plan A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity or to a government organisation and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in consolidated statement of profit or loss in the periods during which services are rendered by employees. Pension and national insurance contributions for eligible employees are made by the Group to Pensions and Benefits Fund in accordance with the applicable laws of country where such contributions are made. Defined benefit plan A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The liability recognised in the statement of financial position in respect of defined benefit gratuity plans is the present value of the defined benefit obligation at the end of the reporting period together with adjustments for unrecognised past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. Net interest expense and other expenses related to defined benefit plans are recognised in staff and other expenses in consolidated statement of profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately to profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. 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 recognised as a liability in the period in which they are approved by the Group’s shareholders in the Annual General Meeting. 3.15 Offsetting 3.17 Revenue recognition (i) Interest income and expense 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 recognised as ‘Net gains from investments at fair value through profit or loss’. Amortised cost and gross carrying amount The ‘amortised 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 amortisation 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. The ‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for any expected credit loss allowance. Calculation of interest income and expense 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 creditimpaired) or to the amortised 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 amortisation of the hedge adjustment begins. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer creditimpaired, 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 amortised 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. (ii) Income from Islamic financing and distributions to depositors Income from Islamic financing is recognised in the consolidated statement of profit or loss using the effective profit method. 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 recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. 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. 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. Distribution to depositors (Islamic products) is calculated according to the Group’s standard procedures and is approved by the Group’s Sharia Supervisory Board. 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 amortised cost in the statement of financial position. 92 Commercial Bank of Dubai Annual Report 2020 93
48. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.17 Revenue recognition (continued) (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 recognises revenue when it transfers control over a product or service to a customer. A contract with a customer that results in a recognised 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 recognised 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 recognised 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 recognised 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 recognised 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 recognised as revenue when the points are redeemed. 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. 3.17 Revenue recognition (continued) (iv) Property related income Property related income includes rental income, which is recognised 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 recognised 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 recognised if as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a 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 recognised 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 recognised in OCI. 3.20 Leasing At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group uses the definition of a lease in IFRS 16. i. Group acting as a lessee At commencement or on modification of a contract that contains a lease component, the Group allocates consideration in the contract to each lease component on the basis of its relative standalone price. However, for leases of branches and office premises the Group has elected not to separate non-lease components and accounts for the lease and non-lease components as a single lease component. 94 Commercial Bank of Dubai Annual Report 2020 95
49. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.20 Leasing (continued) The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove any improvements made to branches or office premises. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The Group determines its incremental borrowing rate by analyzing its borrowings from various external sources and makes certain adjustments to reflect the terms of the lease and type of asset leased. Lease payments included in the measurement of the lease liability comprise the following: • fixed payments, including in-substance fixed payments; • variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; • amounts expected to be payable under a residual value guarantee; and • the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the rightof-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group presents right-of-use assets in ‘property and equipment’ and lease liabilities in ‘other liabilities’ in the statement of financial position. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and shortterm leases, including leases of IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. ii. Group acting as a lessor At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone selling prices. When the Group acts as a lessor, it determines at lease inception whether the lease is a finance lease or an operating lease. 96 Commercial Bank of Dubai 3.20 Leasing (continued) ii. Group acting as a lessor (continued) To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. 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 recognised as a financial liability in the consolidated statement of financial position with a corresponding contractual right of reimbursement from the customer recognised as a financial asset. Acceptances have been considered within the scope of IFRS 9 ‐ Financial Instruments and continued to be recognised 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. Annual Report 2020 97
50. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 3. 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 3.23 Derivative product types (continued) (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 Assets & Liabilities Committee (ALCO) approved limits. Derivatives are initially recognised 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 recognised 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 Executive Committee 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 Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. 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 recognised 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 recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in consolidated statement of profit or loss. 3.28 Zakat 3.26 Related parties The Bank discharges Zakat in accordance with the CBUAE notice no CBUAE/BSD/N/2020/3519, the Ministerial council for services’ resolution no. (176/3) of 2007 and the Cabinet Resolution No. (15/9) of 2020. The calculation of Zakat is based on the guidance and approval of the Bank’s Internal Sharia Supervision Committee (ISSC) as follows: • Zakat on shareholders’ equity (except paid up capital) is discharged from the retained earnings. • Zakat is disbursed to Sharia channels through a committee formed by management. Shareholders themselves are responsible to pay Zakat on their paid up capital. The ISSC reviewed the Zakat calculation and confirmed that no Zakat is payable based on 2020 financial results. 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. 3.29 Interest Rate Benchmark Reform 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). 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. An entity is considered related party of the Group if: c) 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. 98 SIGNIFICANT ACCOUNTING POLICIES (continued) Commercial Bank of Dubai Interbank offered rates (“IBORs”), such as the London Interbank Offered Rate (“LIBOR”), plays a critical role in global financial markets, serving as reference rates for derivatives, loans and securities, and as parameters in the valuation of financial instruments. Uncertainty surrounding the integrity of IBOR rates has in recent years, led regulators, central banks and market participants to work towards a transition to alternative risk-free benchmark reference rates (“RFRs”) and market-led working groups in respective jurisdictions have recommended alternative risk-free reference rates, which are gradually being adopted. Progress in the transition to these new benchmarks has resulted in significant uncertainty in the future of IBOR benchmarks beyond 1 January 2022. The majority of LIBOR and other Interbank Offer Rates (“IBORs”) are expected to be discontinued after 31 December 2021 and replaced with certain Alternative Reference Rates (“ARRs”), with the exception of certain USD LIBOR rates were cessation may be delayed until 30 June 2023. The transition away from the IBORs covers most of the business units and support functions of the Group. Management is running a project on the Group’s transition activities and continues to engage with various stakeholders to support an orderly transition and to mitigate the risks resulting from the transition. The project is significant in terms of scale and complexity and will impact products, internal systems and processes. Annual Report 2020 99
51. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 4. 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 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. 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. 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 characteristics 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 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 USE OF ESTIMATES AND JUDGEMENTS (continued) 4.7 Key sources of estimation uncertainty The following are key estimations that have been used in the process of applying the Group’s accounting policies: • 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. 4.8 Impact of COVID-19 On 11 March 2020, the World Health Organisation (“WHO”) officially declared COVID-19 a global pandemic. In light of the rapid spread of COVID-19 across the globe, various economies and sectors have faced significant disruptions and uncertainty as a result of measures taken by governments to contain or delay the spread of the virus. This note describes the impact of the outbreak on the Group’s operations and the significant estimates and judgements applied by management in assessing the values of assets and liabilities as at 31 December 2020. (i) Credit risk management In addition to the management of credit risk described in Note 35 b. (i), the Group has identified the most vulnerable sectors to this stressed situation in response to the COVID-19 outbreak, and reviews are being conducted on a more frequent basis: •        Tourism and Hospitality •         Logistics •        Aviation and Airlines •        Real Estate •         Retail•        Education The Group continues to apply robust underwriting standards to companies in the above sectors, especially for any new to bank customers. Extra measures, such as requiring additional approvals for disbursals of facilities have been implemented to ensure a high level of scrutiny over the credit management process. The Bank will continue to demonstrate sound prudence and vigor in underwriting across the retail sector whilst supporting customers and businesses across the UAE. On a case by case basis in the Institutional, Corporate and Personal banking segments, the Group has approved payment holidays to certain customers. The bank has extensively reviewed the past account conduct and payment history of the borrowers requesting for deferral, prior to approval. Significant judgment is applied when assessing whether the cash flow and liquidity issues faced by the customer are temporary or long term in nature. As required by Central Bank under the notice no CBUAE/BSD/N/2020/2019, the customers benefitting from payment deferrals under the TESS program and the customers benefitting outside the program (Non-TESS) have been split into the below two main categories: Group 1: Customers that are temporarily and mildly impacted by the Covid-19 crisis. This sub segment includes borrowers for which the credit deterioration is not considered significant enough to trigger a significant increase in credit risk. Such customers are expected to face short term liquidity issues caused by business disruption / salary cuts and are expected to recover rapidly once the economic environment stabilizes. These accounts are not considered to have sufficient deterioration in credit quality to trigger a stage migration and the staging maybe retained at the pre-crisis level. 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. 100 Commercial Bank of Dubai Annual Report 2020 101
52. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 4. 4. USE OF ESTIMATES AND JUDGEMENTS (continued) 4.8 Impact of COVID-19 (continued) (i) Credit risk management (continued) The Grouping of the client is based on a combination of quantitative analysis and judgmental approach based on subject matter expert views within the Group. As of 31 December 2020, there are no clients benefiting from payment deferrals under the TESS program. Non-Targeted Economic Support Scheme (Non-TESS) utilization by industry and segment as at 31 December 2020 are summarised below:   Group 1   Amount Total loans deferred and advances   Group 2 Amount Total loans and deferred advances 225,617 2,188,192   18,978 280,620 2,590 51,800   - - Hospitality 82,736 1,285,054   23,800 248,276 Individual loans for business 15,993 190,859   13 123 3,833 141,654   4,531 46,218 Manufacturing 29,500 51,076   - - Services 17,504 344,694   - - Trade and others 155,875 1,367,267   13,441 33,507   533,648 5,620,596   60,763 608,744 Construction and real estate Financial and Insurance activities Individual Loans for consumption Expected Credit Loss (ECL) 4.8 Impact of COVID-19 (continued) (i) Credit risk management (continued) Group 2: Customers that are expected to face substantial changes in their credit worthiness beyond liquidity issues. This sub segment includes borrowers for which the credit deterioration is more significant and prolonged, ranging beyond liquidity issues, with an extended recovery period. For customers in Group 2, there may be sufficient deterioration in credit risk to trigger a migration to stage 2 or 3. Sector USE OF ESTIMATES AND JUDGEMENTS (continued) 65,957   63,183 Below is an analysis of change in ECL allowance by industry sector since 1 January 2020 on the bank’s customers benefitting from payment deferrals under the Non-TESS program as at 31 December 2020 are summarised below: AED’000 Sector Impairment allowance ECL allowance as at 1 January 2020 73,513 Construction and real estate 25,115 Hospitality 18,976 19 Financial and Insurance activities (641) Services (1,650) Manufacturing 435 Individual loans for business 1,657 Individual Loans for consumption 11,716 Trade and others 129,140 ECL allowance as at 31 December 2020 A case by case analysis has been performed for wholesale customers with material exposures and portfolio approach followed for retail customers and customers with smaller exposures. Based on the above considerations, customers availing Non-TESS as at 31 December 2020 have been categorised as follows: Segment Institutional and Corporate banking Group Group 1 Group 2 Personal banking Group 1   Group 2 Total   Number of Customers Payment deferrals under Non-TESS 12 60,364 57 298 40 407 AED’000 Exposure Impairment allowance 584,885 59,929 531,141 5,499,956 2,507 120,640 399 594,411 23,859 6,229,340 64,146 1,811 3,254 129,140 Migration of staging Customers that are categorised as Group 1 will remain in the same stage as of Q1 2020 since these customers do not have substantial changes to their credit worthiness. Further, customers that are categorised as Group 2 may move to Stage 3 if the other conditions of significant increase in credit risk are met. 102 Commercial Bank of Dubai Annual Report 2020 103
53. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 4. 4. USE OF ESTIMATES AND JUDGEMENTS (continued) 4.8 Impact of COVID-19 (continued) (i) Credit risk management (continued) Migration of staging (continued) The IFRS 9 stage classifications of customers availing Non-TESS as at 31 December 2020 are summarized below: Segment Institutional and Corporate banking Stage Group Stage 1 Group 1   Group 2       Stage 2 Group 1     Group 2         Stage 3 Group 1     Group 2       Total     Stage 1 Group 1     Group 2         Stage 2 Group 1 Personal banking     Group 2         Stage 3 Group 1     Group 2     Total     Grand total   Payment deferrals under Non-TESS - - • • 5,499,956 64,146 60,364 584,885 59,929 - - - - 584,885 - - - 64,146 - 59,929 - - - 591,505 6,084,841 124,075 - - - 2,507 2,507 - 345 345 - 54 54 2,906   • 531,141 60,364 594,411 120,640 120,640 - 23,022 23,022 - 837 837 144,499 6,229,340 1,811 1,811 - 2,461 2,461 - 793 793 5,065 129,140 Stage migration of exposure since 1 January 2020, of customers benefiting from payment deferrals under the Non-TESS program by business segment as at 31 December 2020 are summarised below:   Institutional and Corporate banking As at 1 January 2020 - Transfer from stage 1 to stage 2 - Transfer from stage 2 to stage 1 Change in exposure within same stage As at 31 December 2020 Personal banking As at 1 January 2020 - Transfer from stage 1 to stage 2 - Transfer from stage 1 to stage 3 - Transfer from stage 2 to stage 1 Change in exposure within same stage As at 31 December 2020 104 Commercial Bank of Dubai AED’000 Stage 1 Stage 2 Stage 3 5,114,573 502,919 - 5,617,492 30,258 (30,258) - -   (183,483)   183,483   - 538,608 (71,259) -       5,499,956 128,130 584,885 - 467,349 11,233 - 139,363 - 953 - 5,871 (116) 6,771 (6,771) 120,640 23,022 (619)   6,084,841 12,689 (953) Total - (12,689) (ii) Liquidity risk management The effects of COVID-19 on the liquidity and funding risk profile of the banking system are evolving and continue to be evaluated, as Governments around the world contribute to provide relief and mitigate the adverse effects of the crisis. The key risk factors include: Impairment allowance 5,499,956 - 4.8 Impact of COVID-19 (continued) Exposure 531,141 -   AED’000 USE OF ESTIMATES AND JUDGEMENTS (continued) - - 837   - 5,136 144,499 Sustained periods of lower oil prices combined with significantly lower economic output will lead to constraints on the banking sector’s funding capabilities and liquidity management; Potential rise in the cost of funds due to reduced deposit inflows from the general public and government entities; and Weakened credit outlook may have a negative impact on lending, which will further contribute to a slowdown in economic growth. The UAE Central Bank has announced AED 256 billion stimulus package in an attempt to combat the above effects of COVID-19 and ease the liquidity constraints in the UAE Banking Sector, by providing relief to the local economy.The stimulus package includes the launch of the Targeted Economic Support Scheme (‘TESS’), which allows banks to grant temporary relief to certain customers in the way of deferring payments, and allowing banks to apply for zero-cost funding from the Central Bank until 30 June 2021. The details of the benefits under the TESS package have been disclosed under “Other reliefs” section of recent regulatory updates. The Group’s management of liquidity risk is disclosed in note 35 d). In response to the COVID-19 outbreak, the bank continues to evaluate the liquidity and funding position and has taken into consideration the relief provided by the Central Bank. In Q2-2020, the bank has joined the Central Bank’s TESS Programme described above and utilised the zero cost funds available to the bank which was fully paid off on 5 November 2020. The bank will continue to monitor the liquidity position and the risks associated with the evolving COVID-19 crisis. (iii) Use of estimates and judgements: The spread of COVID-19 increased rapidly during the months following March 2020, and as the number of cases spiked governments around the world deployed a multitude of measures to combat the virus and protect their economies. The Bank exercises significant judgement in assessing and estimating areas such as Expected Credit Losses. The bank has updated its ECL model based on the latest macro-economic data provided by Moody’s in December 2020. Governance around IFRS 9 ECL models and calculations Given the significant impact that the macro-economic scenarios and weightages will have on the Bank’s Expected Credit Losses (ECLs), the Bank has further strengthened its processes, controls and governance frameworks around macroeconomic forecasting and the computation of Expected Credit losses. The Bank’s IFRS 9 Committee, which reports to the Executive Management, has primary responsibility for overseeing the Bank’s ECL models. To ensure the ongoing integrity of ECL calculations during times of extreme uncertainty and volatility, the Bank’s IFRS 9 Committee exercises oversight by conducting regular reviews of the portfolio. The committee has been closely monitoring the macro-economic inputs applied to the IFRS 9 model at the bank and has recommended changes required during the current year in the light of relevant information received. The committee will continually assess the performance of the bank’s portfolio, ensuring that credit risk behaviors align with the significant increase in credit risk policy and that the staging criteria remain relevant. The IFRS 9 Committee has reviewed the inputs and assumptions for IFRS 9 ECL measurement in light of available information. During the year, the bank has updated the macro economic variables that feed into the ECL model and this update reflects the impact of COVID-19 on the macro economic environment and in turn into the bank’s ECL. The impact of this update was an increase in ECL charge by AED 83 million. The bank has also assessed the impact of the crisis and changed the weightages assigned to the scenario probabilities of its ECL models during the year. The probability of the adverse scenario was increased from 10% to 35% and the probability of the favourable scenario was reduced from 10% to 0%. The probability assigned to the base case scenario accordingly decreased from 80% to 65%. The impact of changing these scenario probabilities was an increase to the impairment loss allowance by AED 207 million. During the year, the Bank has recalibrated its models using historic data for off balance sheet exposures. Annual Report 2020 105
54. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 4. 4. USE OF ESTIMATES AND JUDGEMENTS (continued) 4.8 Impact of COVID-19 (continued) (iv) Fair value measurement of financial instruments The Group’s existing policy on fair value measurement of financial instruments is disclosed in note 3.1 (b). Given the significant impact of the COVID-19 pandemic on the global financial markets, the bank is closely monitoring whether the fair values of the financial assets and liabilities represent the price that would be achieved for transactions between market participants in the current scenario. (v) Investment properties The Group’s existing policy on the recognition and measurement of investment properties is disclosed in note 3.7. As the real estate market becomes sluggish, adjustments to the fair values of the properties held were made to reflect the current circumstances. A few landlords in the commercial sector have been working with tenants to provide rent reliefs in the form of delayed payments or extended leases. The impact of COVID 19 is contained within the Bank’s updated ECL model. The Bank has not identified any significant impact to the fair values of investment properties during the year 2020. As the situation continues to unfold, the Bank will consistently monitor the market and ensure that the prices used by the Bank are an accurate representation of fair value in accordance with the requirements of IFRS 13. (vi) Recent regulatory updates: On 15th March 2020, the CBUAE launched the Targeted Economic Support Scheme (TESS) to address and mitigate the adverse systematic economic impacts of COVID-19 on the UAE banking sector. The objectives of the program were to: • Facilitate the provision of temporary relief for the payments of principal and / or interest / profit on outstanding loans for all affected private sector corporates, SMEs and individuals, excluding loans extended to governments, government related entities (“GREs”) and non-residents; and • Facilitate additional lending capacity of banks, through the reliefs on existing capital buffers. The constituents of the TESS program are detailed below: a) Zero cost facility: The Zero cost facility (“ZCF”) consists of collateralized CBUAE liquidity facilities provided to eligible counter parties under the TESS program. Funds borrowed by the Bank under the ZCF are priced at zero interest rate and the Bank is expected to pass on this zero-cost benefit, at a minimum, to its clients who have been identified to be eligible as per TESS guidelines. Out of CBUAE’s total funding program of AED 50 billion, an amount of AED 2.35 billion has been earmarked for the Bank and was fully utilized in the Q2-20. The benefit had been passed onto cutomers in the form of payment reliefs. On 5 November 2020, the Bank fully paid back the facility. The ZCFs from CBUAE constitute a Government Grant, as per International Accounting Standard (IAS) 20, as they reflect a transfer of resources to the Bank by a government entity in return for compliance with certain future conditions related to the entity’s operating activities, i.e. funding granted under the TESS is linked with the Bank’s payment deferral schemes offered to customers. The ZCFs are initially recorded at their fair values in accordance with the requirements of IFRS 13 and are subsequently measured in accordance with the requirements of IFRS 9. USE OF ESTIMATES AND JUDGEMENTS (continued) 4.8 Impact of COVID-19 (continued) b) Other reliefs: (continued) • • • As part of stable funding relief, banks are allowed to fall below Net Stable Funding Ratio (NSFR) up to 90% and Advances to Stable Resources Ratio can be up to 110% to provide banks with additional flexibility to support the UAE economy; Funding obtained through CBUAE Zero Cost Funding facility under the TESS program should be treated as stable funding with a 50% factor for calculating NSFR and ASRR; and In line with the CBUAE circular notice no. CBUAE/BSD/N/2020/4980 dated 20 November 2020, it has decided to implement the remaining of the Standards in a phased in manner as follows: • Q2 2021: (Basel III part 1) Credit Risk, Market Risk and Operational Risk. • Q4 2021: (Basel III part 2) Equity Investment in Funds, Securitisation, Counterparty Credit Risk, Leverage Ratio, and Pillar 3 (except for Credit Value Adjustment). • Q2 2022: (Basel III part 3) Credit Value Adjustment and Pillar 3 (for Credit Value Adjustment). • In order to relieve the pressure on financial institutions, the CBUAE, vide its official paper issued on 5 April 2020, has allowed banks to apply a prudential filter to IFRS 9 expected loss provisions. The prudential filter aims to minimize the effect of IFRS 9 provisions on regulatory capital, in view of the expected volatility due to the COVID-19 crisis. The filter will allow Banks to partially add incremental ECL provisions back to their Tier 2 capital for the purpose of calculating capital adequacy ratios. Banks are however required to reverse this capital benefit in a gradual and phased manner over a period of 5 years (ending on 31 December 2024). The CBUAE has also granted extension of the capital buffer relief to 31 December 2021 for banks enrolled in the TESS program. (vii) Concentration analysis: Please refer to note 35-b), which discloses the sector categorization of assets as at 31 December 2020. 4.9 Changes in useful lives of fixed assets: International accounting standard 16 - Property, Plant and Equipment requires that the useful life of assets should be reviewed at least annually, and if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate. Accordingly, the useful lives of the below fixed asset categories have been reviewed as detailed below. 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 30 to 60 years Computer equipment 3 to 10 years Leasehold improvements 5 to 10 years Computer software 7 years Building renovations 7 years Motor vehicles 5 years Furniture and fixtures 7 years Depreciation methods, useful lives and residual values are reassessed at each reporting date and prospectively adjusted if appropriate. Changes in the expected useful life of assets are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates. The Group has updated the useful lives of capitalized fixed assets and sets the default rate for future assets, which resulted in a reduction of depreciation charge for the year by AED 49.6 million. b) Other reliefs: Key measures taken by the CBUAE include: • Reduction of the reserve requirements by half for CASA deposits for all banks, from 14% to 7%; • Under liquidity requirements relief, banks are allowed to fall below Liquidity Coverage Ratio (LCR) up to 70% and Eligible Liquid Assets Ratio (ELAR) up to 7%, to accommodate for the use of ZCF and to provide banks with additional flexibility to support the UAE economy; 106 Commercial Bank of Dubai Annual Report 2020 107
55. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 5. 6. 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 (a) Definition of a Business – Amendments to IFRS 3 1 January 2020 (b) Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 1 January 2020 (c) Definition of Material – Amendments to IAS 1 and IAS 8 1 January 2020 (d) The Conceptual Framework for Financial Reporting 1 January 2020 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 2020. 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 (a) Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to phase 2 1 January 2021 FINANCIAL ASSETS AND LIABILITIES 6.1 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: Fair value through profit or loss Fair value through OCI Amortised cost Total carrying amount AED’000 AED’000 AED’000 AED’000 Cash and balances with Central Bank - - Due from banks, net - - Loans and advances and Islamic financing, net - 31 December 2020 13,162,743 13,162,743 - 65,288,572 65,288,572 - 5,972,327 5,972,327 1,195,846 4,941,608 89,458,243 95,595,697 Due to banks - - 4,782,749 4,782,749 Customer deposits and Islamic customer deposits - - 69,750,833 69,750,833 Notes and medium term borrowing - - 1,764,059 1,764,059 795,081 - 83,553,127 84,348,208 Fair value through profit or loss Fair value through OCI Amortised cost Total carrying amount AED’000 AED’000 AED’000 AED’000 Cash and balances with Central Bank - - 12,592,641 12,592,641 Due from banks, net - - 2,427,735 2,427,735 Loans and advances and Islamic financing, net - - 60,180,810 60,180,810 253,861 5,359,426 - 5,613,287 Investment securities Bankers acceptances Other assets, net Total financial assets Due for trade acceptances Other liabilities Total financial liabilities of interest rate benchmark reforms (b) Amendments to IAS 16 Property, plant and equipment relating to proceeds 1 January 2022 before intended use (c) Amendment to IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1 January 2022 relating to onerous contracts. (d) Annual improvements to IFRS standards 2018 - 2020 1 January 2022 (e) Amendments to IAS 1 Presentation of Financial Statements relating to 1 January 2023 classification of Liabilities as Current or Non-Current (f) Amendment to IFRS 17 Insurance contracts 1 January 2023 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. 108 Commercial Bank of Dubai 320,989 4,941,608 874,857 - - - 795,081 - 4,218,894 - 815,707 5,972,327 1,283,159 4,218,894 5,262,597 1,690,564 5,972,327 2,078,240 31 December 2019 Investment securities Bankers acceptances - - 5,346,819 5,346,819 Other assets, net 485,029 - 486,708 971,737 Total financial assets 738,890 5,359,426 81,034,713 87,133,029 Due to banks - - 4,166,589 4,166,589 Customer deposits and Islamic customer deposits - - 63,334,333 63,334,333 Notes and medium term borrowing - - 3,231,072 3,231,072 Due for trade acceptances - - 5,346,819 5,346,819 Other liabilities 407,228 - 1,293,923 1,701,151 Total financial liabilities 407,228 - 77,372,736 77,779,964 Annual Report 2020 109
56. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 6 FINANCIAL ASSETS AND LIABILITIES (continued) 7. CASH AND BALANCES WITH CENTRAL BANK 6.2 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 2020 Investments Equity instruments and funds Fixed and floating rate securities Positive market value of forward foreign exchange contracts and other derivatives Fair value through profit or loss Held for fair value hedge Held for cash flow hedge Negative market value of forward foreign exchange contracts and other derivatives Fair value through profit or loss Held for fair value hedge Held for cash flow hedge AED’000 93,849 4,868,401 Level 2 AED’000 - - - 874,389 - - - Level 3 AED’000 300,347 - 739,726 430,163 - Statutory reserves and other deposits 3,073,017 6,962,478 - Negotiable certificates of deposit 9,350,000 5,200,000 13,162,743 12,592,641 Cash on hand Balances with Central Bank U.A.E 4,868,401 - - (780,214) 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 recognised. (780,214) - - (6,414) 79,776 AED’000 874,389 - 4,962,250 394,196 AED’000 - - (8,453) AED’000 2019 Effective 28 October 2020, the CBUAE introduced new regulations regarding reserve requirements for deposit-taking licensed financial institutions. Under the new regulation, deposit-taking licensed institutions are allowed to draw on their reserve balances held in the CBUAE on any day up to 100% for daily settlement purposes or to deal with any swings on overnight money market rates, while ensuring that the daily average requirements over a 14-day reserve maintenance period is met. The level of reserves required changes periodically in accordance with business requirements and the directives of the Central Bank. 468 - Total fair value 2020 - 300,347 468 (8,453) (6,414) 5,342,373 8. DUE FROM BANKS, NET 31 December 2019 2020 2019 AED’000 AED’000 Current and demand deposits 2,871,638 1,459,479 Overnight, call and short notice 1,008,402 611,368 340,278 360,021 4,220,318 2,430,868 (1,424) (3,133) 4,218,894 2,427,735 387,404 178,499 3,831,490 2,249,236 4,218,894 2,427,735 Investments Equity instruments and funds Fixed and floating rate securities 48,786 - 254,030 302,816 5,310,471 - - 5,310,471 Positive market value of forward foreign exchange contracts and other derivatives Fair value through profit or loss - 484,145 - 484,145 Held for fair value hedge - - - - Held for cash flow hedge - 884 - 884 Loans to banks Gross due from banks Allowances for impairment losses Net due from banks Negative market value of forward foreign exchange contracts and other derivatives Fair value through profit or loss - (398,070) - (398,070) Held for fair value hedge - (5,582) - (5,582) Held for cash flow hedge - (3,576) - (3,576) 5,359,257 77,801 254,030 5,691,088 The carrying values of the financial assets and liabilities (that are not stated at fair value) are not significantly different from their fair values. Within the U.A.E. Outside the U.A.E. Due from banks is classified under stage 1 as per IFRS 9. The expected credit loss as at 31 December 2020 is AED 1,424 thousand (31 December 2019: AED 3,133 thousand). During the year there were no transfers between Level 1, Level 2 and level 3 of the fair value hierarchy above. Further, there has been no change in the valuation techniques in relation to valuation of financial instruments during the current or prior year. During the year 2019 the Bank has acquired some unquoted equity investments in settlement of debt which are treated as Level 3. These investments are measured at fair value through profit or loss with reference to the net asset values of the respective funds. During the year 2020 the Bank has acquired unquoted fund investments in settlement of debt which are treated as Level 3. These investments are measured at fair value through other comprehensive income with reference to the net asset values of the respective funds. 110 Commercial Bank of Dubai Annual Report 2020 111
57. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 9. LOANS AND ADVANCES AND ISLAMIC FINANCING, NET 9. LOANS AND ADVANCES AND ISLAMIC FINANCING, NET (continued) The composition of the loans and advances and Islamic financing portfolio is as follows: 2020 2019 AED’000 AED’000 7,812,960 7,018,523 45,096,499 40,327,233 Advances against letters of credit and trust receipts 1,608,063 3,219,631 Bills discounted 2,418,037 2,089,718 56,935,559 52,655,105 Loans and advances Overdrafts Loans Gross loans and advances Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 Gross exposure at 1 January 2019 45,693,693 4,517,906 3,846,341 54,057,940 Net transfers between stages (3,944,160) 3,034,794 909,366 - Net additions / (repayments) 10,599,229 (354,270) 22,658 10,267,617 - - (286,296) (286,296) 52,348,762 7,198,430 4,492,069 64,039,261 Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 685,655 335,311 2,092,027 3,112,993 2,934 (43,023) 40,089 - (170,975) 316,864 971,256 1,117,145 Recoveries - - (85,391) (85,391) Amounts written off - - (286,296) (286,296) 517,614 609,152 2,731,685 3,858,451 Amounts written off At 31 December 2019 Islamic financing Murabaha and Tawaruq 4,814,715 4,503,190 ECL allowance at 1 January 2019 Ijara 7,114,905 6,792,880 Net transfers between stages 184,120 88,086 12,113,740 11,384,156     Gross loans and advances and Islamic financing 69,049,299 64,039,261 At 31 December 2019 Allowances for impairment losses (3,760,727) (3,858,451) Net loans and advances and Islamic financing 65,288,572 60,180,810 The net (reversals)/ impairment charge are inclusive of interest in suspense. 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 60.0 million (2019: AED 148.6 million). Net positive fair value of the hedged component is AED 3.7 million (2019: net positive fair value of AED 2.9 million). Others Gross Islamic financing An analysis of changes in the gross carrying amount and the corresponding ECL allowances is as follows: Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 Gross exposure at 1 January 2020 52,348,762 7,198,430 4,492,069 64,039,261 Net transfers between stages (4,468,901) 2,110,891 2,358,010 - 7,626,147 (931,595) (248,123) 6,446,429 - - (1,436,391) (1,436,391) 55,506,008 8,377,726 5,165,565 69,049,299 Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 ECL allowance at 1 January 2020 517,614 609,152 2,731,685 3,858,451 Net transfers between stages (14,168) (207,610) 221,778 - Net impairment charge 149,530 116,381 1,219,166 1,485,077 Recoveries - - (146,410) (146,410) Amounts written off - - (1,436,391) (1,436,391) 652,976 517,923 2,589,828 3,760,727 Net additions / (repayments) Amounts written off At 31 December 2020 At 31 December 2020 Net (reversals) / impairment charge 10. INVESTMENT SECURITIES UAE GCC International Total AED’000 AED’000 AED’000 AED’000 3,353 - - 3,353 22,243 1,292 - 23,535 Quoted equity instruments - - 22,025 22,025 Unquoted equity instruments - - 272,076 272,076 Quoted equity instruments 71,824 - - 71,824 Unquoted equity instruments and fund 27,978 - 293 28,271 - Government 1,069,106 633,556 76,912 1,779,574 - Others 1,173,884 319,935 1,257,182 2,751,001 147,024 - 163,914 310,938 2,515,412 954,783 1,792,402 5,262,597 2020 Held at fair value through profit & loss Fixed rate securities - Government - Others Held at fair value through other comprehensive income Fixed rate securities Floating rate non-government securities 112 Commercial Bank of Dubai Annual Report 2020 113
58. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 10. INVESTMENT SECURITIES (continued) 11. INVESTMENT IN AN ASSOCIATE 2019 Equity accounting was applied using management information available at the date of reporting. The following is the aggregated financial information of the associate: Held at fair value through profit & loss Unquoted equity instruments - - 253,861 2020 2019 AED’000 AED’000 85,127 84,842 5,991 4,318 (2,661) (3,992) (310) (424) 367 383 88,514 85,127 2020 2019 AED’000 AED’000 1,406,949 1,262,345 Liabilities 908,281 782,757 Net assets 498,668 479,588 65,961 51,514 2020 2019 Cost AED’000 AED’000 At 1 January 359,004 380,780 585 - 15,010 29,700 Disposals (26,700) (51,476) At 31 December 347,899 359,004 160,108 166,360 4,655 7,824 11,234 5,133 (19,567) (22,531) - 3,322 At 31 December 156,430 160,108 Net book value at 31 December 191,469 198,896 253,861 Held at fair value through other comprehensive income At 1 January Quoted equity instruments Unquoted equity instruments and fund 48,786 - - 48,786 - - 169 169 Fixed rate securities Share of profit of associate Dividends received Share of Directors’ remuneration of associate - Government 1,702,870 650,064 243,674 2,596,608 Other equity adjustments - Others 1,157,994 377,553 568,723 2,104,270 At 31 December 330,560 - 279,033 609,593 3,240,210 1,027,617 1,345,460 5,613,287 Floating rate non-government securities Included in fixed and floating rate securities held at fair value through other comprehensive income securities is an amount of AED 2.2 billion (31 December 2019: AED 1.4 billion), pledged under repurchase agreements with banks. Net gains from sale of debt investments at fair value through other comprehensive income amounted to AED 137.6 million (2019: AED 53.1 million). 10.1 Rating of fixed and floating rate securities 2020 2019 AED’000 AED’000 766,533 1,255,523 2,500,447 2,085,579 Rated Baa1 to Baa3 896,731 1,014,157 Rated below Baa3 or Unrated - Government 567,834 855,610 Rated below Baa3 - others 136,856 99,602 4,868,401 5,310,471 Rated A1 to A3 Revenue 12. INVESTMENT PROPERTIES, NET The below table shows the rating of fixed and floating rate securities: Rated Aaa to Aa3 Assets The above represents approved ratings from External Credit Assessment Institutions (ECAIs) as per BASEL III guidelines. The movement in investment properties during the year is as follows: Additions Transfers from property and equipment Depreciation / Impairment At 1 January Charge for the year Transfers from property and equipment Disposals Impairment 114 Commercial Bank of Dubai Annual Report 2020 115
59. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 12. INVESTMENT PROPERTIES, NET (continued) 13. PROPERTY AND EQUIPMENT (continued) “Investment properties comprises buildings. Rental income amounting to AED 15.3 million (2019: AED 19.6 million) from investment properties leased under operating lease is recorded in other income. The fair value of the investment property amounted to AED 274 million. All of the investment properties have been categorised as Level 3 fair value measurements.” During the year ended 31 December 2020 the Group has carried out external valuations of all investment properties. The valuations are carried out by professional valuers who hold recognised 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) and market based 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 recognised an impairment of AED Nil (2019: AED 3,322 thousand), which has been charged to the consolidated statement of profit or loss and is classified as ‘impairment allowance on investment property’. 13. PROPERTY AND EQUIPMENT Capital work in progress (CWIP) Total Freehold land and buildings Leasehold improvements Cost AED’000 AED’000 AED’000 AED’000 AED’000 At 1 January 2020 312,147 49,673 456,834 13,091 831,745 531 525 7,566 40,879 49,501 (14,392) (618) 28,944 (28,944) (15,010) (5,751) (7,604) (539) (2,800) (16,694) 292,535 41,976 492,805 22,226 849,542 Transfers Disposals / write off At 31 December 2020 Leasehold improvements Furniture, equipment & vehicles Capital work in progress (CWIP) Total Cost AED’000 AED’000 AED’000 AED’000 AED’000 At 1 January 2019 367,053 64,347 402,668 45,134 879,202 12 3,402 3,186 20,691 27,291 Transfers (29,700) - 51,606 (51,606) (29,700) Disposals / write off (25,218) (18,076) (626) (1,128) (45,048) At 31 December 2019 312,147 49,673 456,834 13,091 831,745 164,690 45,851 325,568 - 536,109 (5,133) - - - (5,133) 9,849 6,671 46,055 - 62,575 On disposals (22,022) (12,843) (524) - (35,389) At 31 December 2019 147,384 39,679 371,099 - 558,162 Net book value at 31 December 2019 164,763 9,994 85,735 13,091 273,583 Additions during the year Depreciation At 1 January 2019 Transfers Charge for the year Furniture, equipment & vehicles Additions during the year Freehold land and buildings Depreciation The Group assessed whether there is an indication that an asset may be impaired and concluded that there was no indication of impairment. 14. OTHER ASSETS, NET 2019 AED’000 AED’000 At 1 January 2020 147,384 39,679 371,099 - 558,162 Interest receivable 482,007 396,149 Accounts receivable and prepayments 116,991 Transfers (10,771) (463) - - (11,234) 359,128 Positive mark to market value of derivatives (note 31) 874,857 485,029 1,723 1,417 20,089 - 23,229 1,170,427 351,824 - (7,476) (3,164) - (10,640) 2,886,419 1,349,993 At 31 December 2020 138,336 33,157 388,024 - 559,517 Net book value at 31 December 2020 154,199 8,819 104,781 22,226 290,025 Charge for the year On disposals Properties acquired in settlement of debt, net During the year provision of AED 17.1 million was charged on property acquired in settlement of debt. 15. DUE TO BANKS Current and demand deposits Term borrowings 116 2020 Commercial Bank of Dubai 2020 2019 AED’000 AED’000 88,863 181,476 4,693,886 3,985,113 4,782,749 4,166,589 Annual Report 2020 117
60. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 16. CUSTOMER DEPOSITS AND ISLAMIC CUSTOMER DEPOSITS 17. NOTES AND MEDIUM TERM BORROWINGS (continued) 2020 2019 AED’000 AED’000 21,668,539 18,139,152 3,410,165 2,749,921 28,403,618 27,967,596 53,482,322 48,856,669 3,267,590 3,495,503 571,232 583,368 12,429,689 10,398,793 16,268,511 14,477,664 69,750,833 63,334,333 2020 2019 AED’000 AED’000 Government 15,634,367 15,181,747 Corporate 35,555,078 32,787,750 Personal 18,561,388 15,364,836 69,750,833 63,334,333 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: 17. NOTES AND MEDIUM TERM BORROWINGS 2019 AED’000 Syndicated loan 17.1 619,912 Repurchase agreements - I 17.2 551,442 Repurchase agreements - II 17.2 591,799 Euro medium term notes - II 17.3 1,467,919 118 Cash flow Non cash flow 31 December AED’000 AED’000 AED’000 - - 551,442 Changes - - Changes 906 - 2020 620,818 591,799 (1,469,200) 3,231,072 (1,469,200) 1,281 - 2,187 1,764,059 31 December Cash flow Non cash flow 31 December 2018 Changes Changes 2019 AED’000 AED’000 AED’000 AED’000 Syndicated loan 17.1 - 619,591 321 619,912 Repurchase agreements - I 17.2 551,442 - - 551,442 Repurchase agreements - II 17.2 591,799 - - 591,799 Euro medium term notes - II 17.3 Total Commercial Bank of Dubai In August 2019, the Group entered into a club deal of USD 170 million (AED 624.4 million) for a term of 5 years with an option to roll over on a semi-annual basis maturing in August 2024. 17.2 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 2020 the fair value of the debt securities, which have been pledged under these repurchase agreements with banks, amounts to AED 1,455.7 million (USD 396.3 million) (2019: AED 1,428.4 million (USD 388.9 million)) (note 10). 17.3 Euro medium term notes 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 matured on 17 November 2020. 18. OTHER LIABILITIES 2020 2019 AED’000 AED’000 379,243 459,691 49,941 50,826 Accounts payable 507,024 320,323 Accrued expenses 125,874 137,202 Manager cheques 221,077 325,881 59,617 72,357 795,081 407,228 2,137,857 1,773,508 Interest payable 31 December Total 17.1 Syndicated loan 1,466,703 - 1,216 1,467,919 2,609,944 619,591 1,537 3,231,072 Employees’ terminal benefits Unearned fee income and deferred credits Negative mark to market value of derivatives (note 31) Based on the actuarial computation of employees’ terminal benefits, the obligation under the defined benefit scheme is AED 49.9 million (2019: AED 50.8 million). The actuarial loss for the year ended 31 December 2020 amounting to AED 2.9 million loss (2019: AED 3.0 million gain) has been recognized directly in other comprehensive income under Actuarial gain / (loss) on retirement benefits obligations. The key assumptions used are normal retirement age, expected increase in salary and discount rate. Annual Report 2020 119
61. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 19. EQUITY 19. EQUITY (continued) 19.1 Share capital 19.6 Fair value reserve In the Annual General Assembly meeting held on 11 March 2020 the shareholders approved the opening of the Bank’s capital to non-UAE Nationals ownership up to 40%, subject to obtaining the necessary approval of the regulatory authorities. On 14 June 2020, all regulatory formalities were completed and then onwards, foreigners were allowed to trade the Bank’s shares. 19.7 Proposed distribution The fully paid up and authorised ordinary share capital as at 31 December 2020 comprised 2,802,733,968 ordinary shares of AED 1 each (31 December 2019: 2,802,733,968 shares of AED 1 each). There was no movement in authorised ordinary share capital during the period. 19.2 Tier 1 capital notes On 11 March 2020, the Bank’s Shareholders at the Annual General Assembly Meeting approved the issuance of regulatory Tier 1 Capital Notes up to USD 750 million (AED 2,754.8 million). On 21 October 2020, the Bank completed all the formalities related to the transaction and issued USD 600 million (AED 2,203.8 million) of Tier 1 Capital Securities at a price of 6.00% per annum. The notes are non-callable for 6 years and are listed on Euronext Dublin and Nasdaq Dubai. As of the date of approving the consolidated financial statements, the Board of Directors’ proposed a cash dividend of 20.0% (2019: 20.70%). 20. INTEREST INCOME AND INCOME FROM ISLAMIC FINANCING 2020 2019 AED’000 AED’000 2,231,190 2,350,108 38,374 102,131 5,717 33,762 162,238 205,692 2,437,519 2,691,693 Murabaha and Tawaruq 155,626 225,955 Ijara 272,215 259,841 427,841 485,796 2,865,360 3,177,489 2020 2019 AED’000 AED’000 17,684 20,812 Customer deposits 594,218 717,989 The Group’s 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. Notes and medium term borrowings 158,502 195,011 770,404 933,812 208,403 278,095 208,403 278,095 19.5 Capital reserve Total interest expense and distribution to Islamic depositors 978,807 1,211,907 Tier 1 capital notes are perpetual, subordinated, unsecured and carry coupons to be paid semi-annually in arrears. The Bank may elect not to pay a coupon at its own discretion. The note holder does not have a right to claim the coupon and an election by the Bank not to service coupon is not considered an event of default. In addition, there are certain circumstances under which the Bank is prohibited from making a coupon payment on a relevant coupon payment date. If the Bank makes a non-payment election or a non-payment event occurs, then the Bank will not (a) declare or pay any distribution or dividend or (b) redeem, purchase, cancel, reduce or otherwise acquire any of the share capital or any securities of the Bank ranking pari passu with or junior to the notes except securities, the term of which stipulate a mandatory redemption or conversion into equity, in each case unless or until one coupon payment has been made in full. The accounting treatment for the securities is governed by IAS 32 Financial Instruments Presentation. As per IAS 32, the instrument qualifies as an equity instrument and the interest paid on the securities is accounted for as a deduction from retained earnings. The accounting treatment for issuing securities transaction costs are accounted for as a deduction from equity. These are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. 19.3 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 (2019: 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. 19.4 General reserve This reserve represents the value of the granted land at the date of grant, and is not available for distribution to the shareholders. 120 This represents the net change in the fair values of OCI 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 realised. Commercial Bank of Dubai Interest income Loans and advances Negotiable certificates of deposit with the Central Bank Due from banks Investment securities - Debt securities at FVOCI Income from Islamic financing Total interest income and income from Islamic financing Interest income is recognised using the effective interest rate. 21. INTEREST EXPENSE AND DISTRIBUTION TO ISLAMIC DEPOSITORS Interest expense Due to banks Distribution to Islamic depositors Islamic customer deposits 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 Supervisory Board. Annual Report 2020 121
62. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 22. NET FEES AND COMMISSION INCOME 27. BASIC AND DILUTED EARNINGS PER SHARE 2020 2019 AED’000 AED’000 Lending activities 215,694 233,941 Trade finance activities 190,894 191,059 Account operating activities 253,157 263,098 Cards income and brokerage fees 105,834 102,875 765,579 790,973 (114,296) (89,819) 651,283 701,154 Cards, commissions and brokerage expenses Basic earnings per share have been computed using the net profit AED 1,120,098 thousand (2019: 1,400,190 thousand) divided by the weighted average number of ordinary shares outstanding 2,802,733,968 (31 December 2019: 2,802,733,968). Diluted earnings per share as of 31 December 2020 and 31 December 2019 are equivalent to basic earnings per share as no new shares have been issued that would impact earnings per share when executed. 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: 2020 2019 AED’000 AED’000 739,726 430,163 Statutory reserves and other deposits 3,073,017 6,962,478 Negotiable certificates of deposit with the UAE Central Bank 9,350,000 5,200,000 Due from banks 4,220,318 2,430,868 17,383,061 15,023,509 (2,420,934) (3,713,963) Less: Negotiable certificates of deposit with the UAE Central Bank with original maturity more than three months (350,000) (2,400,000) Less: Due from banks with original maturity of more than three months (340,278) (360,021) Less: Due to banks with original maturity of less than three months (942,140) (1,209,160) 13,329,709 7,340,365 23. NET GAINS FROM INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Net realised gains on sale of investments at fair value through profit or loss Unrealised gains of investments at fair value through profit or loss 2020 2019 AED’000 AED’000 2,048 1,412 22,578 - 24,626 1,412 24. OTHER INCOME Other income includes rental income from Investment properties and properties acquired in settlement of debt of AED 32.6 million (2019: AED 32.2 million) and profit on sale of investment properties or assets held for sale acquired in settlement of debt of AED 15.7 million (2019: AED 79.1 million). In 2020, staff expenses were AED 555.9 million (2019: AED 613.3 million) and other expenses of AED 216.9 million (2019: AED 196.0 million). Other expenses were inclusive of general and administrative expenses, corporate social responsibility (CSR) related expenses of AED 5.0 million (2019: AED 1.2 million) and directors’ sitting fees for attending committee meetings during the year ended 31 December 2020 of AED 1.6 million (2019: AED 4.3 million). 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 recognised at the reporting date if counterparties failed completely to perform as contracted. 2020 26. LEASE COMMITMENTS Group as lessee Staff and other expenses include expenses related to the leases of the bank amounting to AED 9.7 million (2019: AED 16.4 million). Future minimum lease payments under non-cancellable leases as at 31 December are, as follows: 2020 2019 AED’000 AED’000 Less than 1 year 7,564 8,313 From 1 year to 5 years 1,532 6,339 9,096 14,652 Commercial Bank of Dubai Less: UAE Central Bank statutory reserves requirement 29. CONTINGENT LIABILITIES AND COMMITMENTS 25. STAFF AND OTHER EXPENSES 122 Cash on hand Contingent liabilities: Letters of credit Letters of guarantee Undrawn commitments to extend credit 2019 AED’000 AED’000 2,883,465 2,226,939 11,104,923 12,255,363 13,988,388 14,482,302 14,518,690 14,092,002 20,241 30,689 28,527,319 28,604,993 Capital commitments: Capital expenditure commitments Total contingent liabilities and commitments In the normal course of business, certain litigations were filed by or against the Bank. However based on management assessment none of litigations have material impact on Bank’s financial results. Annual Report 2020 123
63. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 30. FIDUCIARY ASSETS 32 SEGMENTAL REPORTING Assets held under fiduciary capacity on behalf of clients amounted to AED 5,837.9 million (2019: AED 3,623.4 million). 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. During the first half of the year, there has been a significant change to the organization structure and the portfolio allocation to the new business segments defined. The segment that was earlier called “Corporate banking” is now called “Institutional banking”; the previous “Commercial” segment is now called “Corporate banking”. The prior comparative year figures have been accordingly reclassified to conform to the current period presentation. 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, the positive MTM and also the bank’s own credit risk associated with it’s derivative liability position. Positive market value Negative market value Notional amount AED’000 AED’000 AED’000 Less than From three From three months to one year to months one year five years AED’000 AED’000 AED’000 Over Five years AED’000 Business segments pay to and receive interest from the Treasury to reflect the allocation of funding costs. Business segments Institutional banking Includes loan and other credit facilities, deposits, trade finance products and e-commerce solutions to institutional clients (including Government related entities). Corporate banking Includes loans, working capital financing, trade finance and deposits products to corporate (mid-sized and small) 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. Trading & Other Undertakes balance sheet management deals and manages the Group’s proprietary investment portfolio. It also has derivatives for trading and risk management purposes. 31 December 2020 Cash flow hedge instruments - 6,414 67,728 - - 67,728 - Fair value hedge instruments 468 8,453 279,753 - - 243,023 36,730 Forward foreign exchange contracts and other derivatives assets Forward foreign exchange contracts and other derivatives liabilities 874,389 - 19,244,865 309,754 4,528,931 7,590,219 6,548,979 6,815,961 - 780,214 17,566,665 278,115 4,493,117 6,246,454 874,857 795,081 37,159,011 587,869 9,022,048 14,449,949 13,099,145 Interest is charged or credited to business segments and branches to match funding at transfer pricing rates which approximate the cost of funds. Geographical The Group operates in one geographic area, the United Arab Emirates. 31 December 2019 Cash flow hedge instruments 884 3,576 92,716 - 30,905 61,811 - Fair value hedge instruments - 5,582 182,822 - 37,489 73,460 71,873 484,145 - 14,569,390 4,858,982 1,188,567 5,154,149 3,367,692 - 398,070 14,412,712 4,198,582 1,426,051 5,442,125 3,345,954 485,029 407,228 29,257,640 9,057,564 2,683,012 10,731,545 6,785,519 Forward foreign exchange contracts and other derivatives assets Forward foreign exchange contracts and other derivatives liabilities Cash-flow hedge instruments include interest rate and cross currency swaps. Fair value hedge instruments include interest rate swaps. 124 Commercial Bank of Dubai Institutional banking Corporate banking Personal banking Trading & Other Total AED’000 AED’000 AED’000 AED’000 AED’000 Assets 36,061,773 28,429,039 9,031,783 23,838,965 97,361,560 Liabilities 41,461,694 13,078,971 22,410,949 7,456,211 84,407,825 Assets 33,545,565 25,288,803 7,767,121 21,467,402 88,068,891 Liabilities 40,262,366 10,906,139 18,740,953 7,942,863 77,852,321 2020 2019 Annual Report 2020 125
64. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 32. SEGMENTAL REPORTING (continued) 32. SEGMENTAL REPORTING (continued) Institutional banking Corporate banking Personal banking Trading & Other Total AED’000 AED’000 AED’000 AED’000 AED’000 The following is an analysis of the total operating income of each segment between income from external parties and inter-segment: External parties 2020 2020 2019 2020 2019 AED’000 AED’000 AED’000 AED’000 789,082 830,076 192,986 1,871 1,226,790 1,178,414 (186,438) (386,669) Net interest income and net income from Islamic financing 722,766 827,793 586,307 (250,313) 1,886,553 Institutional banking Non-interest & other income 259,302 212,559 397,351 222,431 1,091,643 Corporate banking Total operating income 982,068 1,040,352 983,658 (27,882) 2,978,196 Personal banking 705,769 715,106 277,889 307,702 Trading & Other 256,555 309,618 (284,437) 77,096 2,978,196 3,033,214 - - Expenses (note a) 141,975 126,643 514,553 24,135 807,306 Net provisions (note b) 683,715 236,684 118,710 11,683 1,050,792 825,690 363,327 633,263 35,818 1,858,098 156,378 677,025 350,395 (63,700) 1,120,098 Net profit for the year 2019 Net interest income and net income from Islamic financing 536,342 590,681 636,082 202,477 1,965,582 Non-interest & other income 295,605 201,064 386,726 184,237 1,067,632 Total operating income 831,947 791,745 1,022,808 386,714 3,033,214 Expenses (note a) 221,832 145,619 517,363 356 885,170 Net provisions (note b) 322,763 298,584 119,449 7,058 747,854 544,595 444,203 636,812 7,414 1,633,024 287,352 347,542 385,996 379,300 1,400,190 Net profit 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. Total operating income 33. RELATED PARTY TRANSACTIONS AND BALANCES As at 31 December 2020 and 31 December 2019 Investment Corporation of Dubai (“ICD”) owned 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 Other related parties 2019 2020 2019 2020 2019 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 - - 138,766 284,690 - - 194,195 171,238 1,577,176 859,201 1,925,264 1,905,663 Investment securities - - 715,360 1,013,706 - - Acceptances - - - - 4,509 2,201 Letters of credit - - - - 3,294 984 Letters of guarantee - - 207,585 212,975 101,619 109,428 15,707 24,188 275,416 412,047 226,605 298,546 - - - - - - 112,264 65,568 4,631,362 3,863,571 443,840 482,932 8,387 9,767 41,408 43,105 69,691 80,527 Interest expense 556 818 66,372 98,142 5,255 7,095 Dividend from an associate - - - - 2,661 3,992 Due from banks, net Loans and advances and Islamic financing, net Undrawn commitments to extend credit Customer deposits and Islamic customer deposits Interest income and commission income Commercial Bank of Dubai Government related parties 2020 Due to banks 126 Inter-segment Annual Report 2020 127
65. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 33. RELATED PARTY TRANSACTIONS AND BALANCES (continued) 34. RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 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. The terms of transactions with related parties are comparable to third party transactions and do not involve more than normal amount of risk. Directors’ sitting fees for attending committee meetings during the year ended 31 December 2020 amounted to AED 1.6 million (2019: AED 4.3 million). Key management compensation Salaries Post-employment benefits Other benefits 2020 2019 AED’000 AED’000 21,599 22,457 839 898 21,317 22,201 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 Board Risk Committee (BRC), Audit & Compliance Committee (ACC), Credit & Investment Committee (CRIC), Financial Settlements and Recovery Committee (FSRC), Nomination & Remuneration Committee (REMCO) 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; 128 Commercial Bank of Dubai 34.2 Control Environment (continued) a) Group Risk (continued) • • Financial restructuring & recovery and business management and governance; 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. 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 Chief Internal Audit Officer 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 Function 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. Annual Report 2020 129
66. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 34. RISK MANAGEMENT OBJECTIVES AND POLICIES (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 takes 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 omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. 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. 130 Commercial Bank of Dubai 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, SCA and Nasdaq Dubai websites; • Posting quarterly and annual consolidated financial statements on the Bank’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 deputies 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 analyse 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 Board Risk Committee (BRC) 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 BRC 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 BRC 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. Annual Report 2020 131
67. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (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 authorisation 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 categories 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 utilisation 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. b) Credit risk (continued) (ii) Internal credit risk ratings (continued) 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. Loss Given Default is the loss expected to arise on default, incorporating the impact of forward- looking economic assumptions where relevant, which represents the difference between the contractual cash flows due and those that the Bank expects to receive. The Bank estimates LGD based on history of recovery rates and considers the valuation of any collateral that is integral to the financial asset, taking into account forward-looking economic assumptions where relevant. (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 cancelled 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. The Group uses credit risk grades as a primary input into the determination of the term structure of the probability of default (PD) for exposures. The Group collects performance and default information about its credit risk exposures analysed by jurisdiction or region and by type of product and borrower as well as by credit risk grading. (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. The Group analyses 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. 2020 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. Due from banks Performing Allowance for impairment losses Net carrying amount Loans and advances Performing Non-performing Allowance for impairment losses Net carrying amount 132 Commercial Bank of Dubai Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 4,220,318 - - 4,220,318 (1,424) - - (1,424) 4,218,894 - - 4,218,894 Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 55,506,008 8,377,726 - 63,883,734 - - 5,165,565 5,165,565 (652,976) (517,923) (2,589,828) (3,760,727) 54,853,032 7,859,803 2,575,737 65,288,572 Annual Report 2020 133
68. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (v) Exposure to credit risk (continued) 2019 Due from banks Performing Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 2,430,868 - - 2,430,868 (3,133) - - (3,133) 2,427,735 - - 2,427,735 Stage 1 Stage 2 Stage 3 Total AED’000 AED’000 AED’000 AED’000 52,348,762 7,198,430 - 59,547,192 - - 4,492,069 4,492,069 (517,614) (609,152) (2,731,685) (3,858,451) 51,831,148 6,589,278 1,760,384 60,180,810 Allowance for impairment losses Net carrying amount Loans and advances Performing Non-performing Allowance for impairment losses Net carrying amount b) Credit risk (continued) (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. 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: Specific provision and Impaired loans Collateral interest in suspense 2020 AED’000 AED’000 AED’000 Manufacturing 188,282 34,813 116,622 Construction 226,666 41,346 110,961 1,187,036 919,186 331,816 352,698 112,938 176,626 24,170 19,397 6,915 Services 849,523 479,613 379,969 Hospitality 132,912 - 128,485 1,401,322 472,107 955,661 Real estate The Group’s Investment securities were classified under stage 1 and 2 at the reporting date (2019: classified under stage 1). (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”). Trade 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: Personal - mortgage 198,565 120,962 107,531 Personal - schematic 207,491 113,623 104,767 Individual loans for business 324,137 85,173 159,040 72,763 70,978 11,435 5,165,565 2,470,136 2,589,828 2019 AED’000 AED’000 AED’000 Manufacturing 185,280 162,317 135,860 Construction 276,700 105,458 289,188 Real estate 739,602 698,719 331,816 Trade 435,454 277,953 371,292 41,317 25,887 29,362 Services 777,361 680,573 301,890 Hospitality 449,553 401,320 161,359 Financial and insurance activities 859,030 197,951 671,013 Personal - mortgage 307,229 139,236 200,231 Personal - schematic 211,104 97,918 125,158 Individual loans for business 209,332 121,082 114,410 107 12 106 4,492,069 2,908,426 2,731,685 2020 2019 AED’000 AED’000 General provisions under Circular 28/2010 of CBUAE 1,092,625 1,006,311 Less: Stage 1 and Stage 2 provisions under IFRS 9 1,170,899 1,126,766 - - Allowances for impairment losses: General General provision transferred to the impairment reserve* Allowances for impairment losses: Specific Specific provisions under Circular 28/2010 of CBUAE 2,328,085 2,515,321 Less: Stage 3 provisions under IFRS 9 2,589,828 2,731,685 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. 134 Commercial Bank of Dubai Transportation and storage Financial and insurance activities Others Total carrying amount Transportation and storage Others Total carrying amount Annual Report 2020 135
69. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (vii) Allowances for impairment (continued) b) Credit risk (continued) 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 realisable value of the collateral. The gross carrying value of unfunded exposures pertaining to impaired loans amounted to AED 191.0 million (2019: AED 75.4 million). (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 2020: (viii) Write - off policy The Group writes off a loan / investment in debt security (and any related expected credit allowances) when the 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. Analysis of collateral by type is presented in the following table: AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Manufacturing 3,329,049 - 243,160 - - 3,572,209 1,090,296 957,782 Construction 5,000,476 - - - - 5,000,476 1,032,297 6,407,140 23,373,188 - 74,385 5,007 - 23,452,580 3,434,515 544,394 Trade 6,579,571 - - - - 6,579,571 2,923,733 8,621,190 Transportation and storage 2,720,470 - 68,635 - - 2,789,105 189,579 56,381 Services 5,319,519 - 184,419 66,816 - 5,570,754 958,510 977,757 Hospitality 2,576,351 - - - - 2,576,351 352,862 7,268 Financial and insurance activities 5,814,070 4,220,318 2,354,808 322,373 88,514 12,800,083 1,574,405 1,575,901 Government entities 1,333,967 - 816,026 - 12,423,017 14,573,010 160 1,218 4,036,946 - - - - 4,036,946 - - Real estate Total funded Undrawn exposures commitments 2020 2019 AED’000 AED’000 3,950,065 3,796,375 Properties 32,588,290 27,884,973 Mortgages 198,798 366,726 Pledge of shares 1,775,986 1,455,716 Bank guarantees 267,992 371,152 Gold 200,073 227,596 Credit Insurance 166,253 822,639 Personal - mortgage 42,592 54,818 39,190,049 34,979,996 Personal - schematic 4,952,897 - - - - 4,952,897 959,669 28,480 Individual loans for business 1,241,197 - - - - 1,241,197 225,157 2,400 Others 2,771,598 - 1,126,968 - 4,024,690 7,923,256 1,777,507 780,804 69,049,299 4,220,318 4,868,401 394,196 Pledged deposits Others Total collaterals The above represents collateral value restricted to the lower of loan balance or collateral value. Total carrying amount 136 Acceptances and contingent liabilities Due from banks For smaller balances of standardized loans, write off decisions are generally based on a product-specific past due status. (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 2020 or 2019. Cash, balances Equity securities with Central bank and Debt and fund of funds other assets securities Loans and advances and Islamic financing Commercial Bank of Dubai 16,536,221 95,068,435 14,518,690 19,960,715 Annual Report 2020 137
70. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (continued) Concentration of credit risk by sector for 2019: Concentration of credit risk by geographic location for 2020: b) Credit risk (continued) (x) Concentration (continued) Cash, balances with Central bank and Total funded other assets exposures Cash, balances Equity securities with Central bank and and fund of funds other assets Acceptances and contingent liabilities Undrawn commitments Acceptances and contingent liabilities Loans and advances and Islamic financing Due from banks Debt securities AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 - 2,784,395 584,084 908,324 UAE 66,280,198 388,829 2,415,610 99,802 - - 4,383,388 1,124,968 6,603,348 GCC 158,614 388,547 954,783 - - 1,501,944 4,044 205,471 73,807 5,607 - 22,774,192 3,111,253 887,390 Middle East 639,866 54,281 - 272,075 - 966,222 15,702 105,523 - - - - 5,740,869 2,405,796 7,662,383 Europe 454,487 834,808 62,209 294 - 1,351,798 82,451 2,018,056 951,085 - 131,409 - - 1,082,494 93,220 55,246 USA 1,901 2,296,645 404,790 22,025 - 2,725,361 313,348 502,446 Services 5,714,626 - 366,082 43,179 - 6,123,887 1,153,252 1,249,216 Asia 655,591 112,359 990,521 - - 1,758,471 868 1,091,720 Others 858,642 144,849 40,488 - - 1,043,979 226,261 29,798 Hospitality 2,574,068 - - 169 - 2,574,237 267,412 7,788 Financial and insurance activities 69,049,299 4,220,318 4,868,401 394,196 16,536,221 95,068,435 14,518,690 19,960,715 8,184,858 2,430,868 2,446,443 253,861 85,127 13,401,157 1,441,310 1,365,654 Government entities 14,566,462 77,621,150 13,662,093 16,375,608 273,616 - 1,483,469 - 12,162,478 13,919,563 79,477 Personal - mortgage 3,307,884 - - - - 3,307,884 Personal - schematic 4,690,832 - - - - Individual loans for business 1,759,653 - - - Others 1,331,325 - 457,145 64,039,261 2,430,868 5,310,471 Equity securities Debt and fund of funds securities Loans and advances and Islamic financing Due from banks AED’000 AED’000 AED’000 AED’000 AED’000 Manufacturing 2,432,279 - 352,116 - Construction 4,383,388 - - 22,694,778 - 5,740,869 Real estate Trade Transportation and storage Total carrying amount 138 b) Credit risk (continued) (x) Concentration (continued) Commercial Bank of Dubai Total carrying amount AED’000 Total funded Undrawn exposures commitments AED’000 16,536,221 85,720,660 AED’000 AED’000 13,876,016 16,007,701 Concentration of credit risk by geographic location for 2019: UAE 59,632,846 181,632 3,191,424 48,786 - GCC 195,072 377,521 1,027,617 - - 1,600,210 11,006 165,890 26,556 - Middle East 946,742 53,523 - 253,861 - 1,254,126 137,328 59,938 4,690,832 2,830,978 30,134 Europe 298,026 840,870 114,134 - - 1,253,030 179,792 954,372 USA 1,243 680,034 363,851 169 - 1,045,297 1,109 421,544 - 1,759,653 488,981 2,517 Asia 1,288,488 183,724 546,494 - - 2,018,706 54,533 1,837,375 - 2,318,857 4,107,327 484,715 1,057,121 Others 1,676,844 113,564 66,951 - - 1,857,359 46,141 14,394 302,816 14,566,462 86,649,878 14,092,002 19,829,121 64,039,261 2,430,868 5,310,471 302,816 14,566,462 86,649,878 14,092,002 19,829,121 Total carrying amount Annual Report 2020 139
71. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (x) Concentration (continued) d) Liquidity risk (continued) Concentration of credit risk by currency for 2020: Cash, balances Equity securities with Central bank and and fund of funds other assets Loans and advances and Islamic financing Due from banks Debt securities AED’000 AED’000 AED’000 AED’000 AED 55,774,443 - - Other currencies* 13,274,856 4,220,318 69,049,299 4,220,318 Total carrying amount AED’000 Acceptances and Total funded Undrawn contingent liabilities exposures commitments AED’000 AED’000 AED’000 71,823 15,564,570 71,410,836 11,518,279 10,539,873 4,868,401 322,373 971,651 23,657,599 3,000,411 9,420,842 4,868,401 394,196 16,536,221 95,068,435 14,518,690 19,960,715 Concentration of credit risk by currency for 2019: AED 52,824,785 - - 48,786 14,067,232 66,940,803 11,997,764 11,747,633 Other currencies* 11,214,476 2,430,868 5,310,471 254,030 499,230 19,709,075 2,094,238 8,081,488 Total carrying amount 64,039,261 2,430,868 5,310,471 302,816 14,566,462 86,649,878 14,092,002 19,829,121 *Majority of assets denominated in other currencies are in USD to which AED is pegged. 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. (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 86.33% as at 31 December 2020 (2019: 87.96%). 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); and • Basel III ratios (including LCR, NSFR, etc.) are also monitored internally and shared with the Board on quarterly basis. 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 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. 140 Commercial Bank of Dubai Annual Report 2020 141
72. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (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 2019 was as follows: From 3 Less than 1 From 1 to 3 months to 1 From 1 to 5 year years Total month months d) Liquidity risk (continued) d) Liquidity risk (continued) The maturity profile of the assets and liabilities at 31 December 2020 was as follows: From 3 Less than 1 From 1 to 3 months to 1 From 1 to 5 year years Total month months Assets Assets Over 5 years No Fixed Maturity AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 13,162,743 10,741,809 - - - - 2,420,934 4,218,894 3,879,708 - 162,611 176,575 - - 65,288,572 9,521,406 4,311,593 7,997,610 24,442,437 19,015,526 - 5,262,597 73,633 297,410 936,717 3,954,837 - - 88,514 - - - - - 88,514 Investment properties, net 191,469 - - - - - 191,469 Property and equipment 290,025 - - - - - 290,025 Bankers acceptances 5,972,327 1,889,928 239,469 2,992,317 13,721 836,892 - Other assets, net 2,886,419 1,715,992 - - - - 1,170,427 97,361,560 27,822,476 4,848,472 12,089,255 28,587,570 19,852,418 4,161,369 Cash and balances with Central Bank Due from banks, net Loans and advances and Islamic financing,net Investment securities Investment in associate Total assets Liabilities and equity Due to banks Customer deposits and Islamic customer deposits 142 4,782,749 69,750,833 934,752 72,737 2,094,375 1,680,885 - - 33,715,926 13,281,091 22,255,391 472,122 26,303 - Notes and medium term borrowings 1,764,059 - - 591,799 1,172,260 - - Due for trade acceptances 5,972,327 1,889,928 239,469 2,992,317 13,721 836,892 - Other liabilities 2,137,857 2,094,424 - - - - 43,433 Total liabilities 84,407,825 38,635,030 13,593,297 27,933,882 3,338,988 863,195 43,433 Gap representing equity 12,953,735 (10,812,554) (8,744,825) (15,844,627) 25,248,582 18,989,223 4,117,936 Commercial Bank of Dubai Over 5 years No Fixed Maturity AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 12,592,641 6,978,678 1,500,000 400,000 - - 3,713,963 2,427,735 1,887,197 183,650 158,693 198,195 - - 60,180,810 8,586,759 5,132,808 7,504,705 21,561,851 17,394,687 - 5,613,287 - 427,257 928,757 3,480,042 777,231 - 85,127 - - - - - 85,127 Investment properties, net 198,896 - - - - - 198,896 Property and equipment 273,583 - - - - - 273,583 Bankers acceptances 5,346,819 3,965,387 652,685 728,747 - - - Other assets, net 1,349,993 998,169 - - - - 351,824 88,068,891 22,416,190 7,896,400 9,720,902 25,240,088 18,171,918 4,623,393 4,166,589 1,197,484 76,196 383,650 2,509,259 - - 32,777,673 11,049,955 19,240,109 208,697 57,899 - Cash and balances with Central Bank Due from banks, net Loans and advances and Islamic financing, net Investment securities Investment in associate Total assets Liabilities and equity Due to banks Customer deposits and Islamic customer deposits 63,334,333 Notes and medium term borrowings 3,231,072 - - 1,468,426 1,762,646 - - Due for trade acceptances 5,346,819 3,965,387 652,685 728,747 - - - Other liabilities 1,773,508 1,728,395 - - - - 45,113 Total liabilities 77,852,321 39,668,939 11,778,836 21,820,932 4,480,602 57,899 45,113 Gap representing equity 10,216,570 (17,252,749) (3,882,436) (12,100,030) 20,759,486 18,114,019 4,578,280 Annual Report 2020 143
73. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (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 13,988,388 3,861,327 1,527,476 3,385,870 831,106 4,382,609 Credit commitments 14,518,690 2,912,619 817,594 1,906,955 3,046,174 5,835,348 Total 28,507,078 6,773,946 2,345,070 5,292,825 3,877,280 10,217,957 2020 2019 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 sets the risk appetite pertaining to market risk which translates into risk limits which are closely monitored by Group 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 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 Contingent liabilities 14,482,302 4,204,585 6,046,658 4,024,726 176,026 30,307 Credit commitments 14,092,002 5,128,355 3,214,339 3,564,393 265,058 1,919,857 Total 28,574,304 9,332,940 9,260,997 7,589,119 441,084 1,950,164 The tables below show undiscounted contractual cash flows on the Group’s financial liabilities: 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 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: Total Less than 1 month From 1 to 3 months From 3 months to 1 year AED’000 AED’000 AED’000 AED’000 AED’000 4,952,467 934,819 72,774 2,142,305 1,802,569 69,312,835 32,980,462 13,296,186 22,394,660 641,527 50 bps 100 bps 50 bps 100 bps Notes and medium term borrowings 1,879,957 - - 598,510 1,281,447 AED’000 AED’000 AED’000 AED’000 Due for trade acceptances 5,972,327 1,889,928 239,469 2,992,317 850,613 87,137 192,382 40,874 85,779 Other liabilities 742,456 742,456 - - - (79,813) (159,421) (24,859) (49,719) Total liabilities 82,860,042 36,547,665 13,608,429 28,127,792 4,576,156 4,448,598 1,180,036 103,265 487,177 2,678,120 63,062,350 32,082,994 11,116,675 19,547,087 315,594 Notes and medium term borrowings 3,447,555 8,445 25,335 1,564,243 1,849,532 Due for trade acceptances 5,346,819 3,965,387 652,685 728,747 - 580,708 580,708 - - - 76,886,030 37,817,570 11,897,960 22,327,254 4,843,246 2020 Due to banks Customer deposits and Islamic customer deposits From 1 to 5 years 2020 2019 Net interest income Upward Parallel Shift Downward Parallel Shift Net interest income 2019 Due to banks Customer deposits and Islamic customer deposits Other liabilities Total liabilities 144 Commercial Bank of Dubai Annual Report 2020 145
74. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (continued) e) Market risk (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: Non-interest bearing Less than 3 months From 3 to 6 months From 6 months to 1 year AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Cash and balances with Central Bank 3,812,743 9,350,000 - - - 13,162,743 Due from banks, net 2,871,638 1,294,459 - 52,797 - 4,218,894 31 December 2020 Assets Loans and advances and Islamic financing Over 1 Year Total Non-interest bearing Less than 3 months From 3 to 6 months From 6 months to 1 year AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Cash and balances with Central Bank 7,392,641 4,800,000 400,000 - - 12,592,641 Due from banks, net 1,459,479 824,848 - 143,408 - 2,427,735 4,433,994 50,840,697 3,828,819 1,685,954 3,249,797 64,039,261 31 December 2019 Assets Over 1 Year Total 5,165,565 56,965,327 3,635,414 971,100 2,311,893 69,049,299 Loans and advances and Islamic financing Expected credit losses (3,760,727) - - - - (3,760,727) Expected credit losses (3,858,451) - - - - (3,858,451) Investment securities 394,196 73,633 268,489 668,228 3,858,051 5,262,597 Investment securities 302,816 427,258 303,507 625,252 3,954,454 5,613,287 88,514 - - - - 88,514 85,127 - - - - 85,127 Investment properties, net 191,469 - - - - 191,469 Investment properties, net 198,896 - - - - 198,896 Property and equipment 290,025 - - - - 290,025 Property and equipment 273,583 - - - - 273,583 Bankers acceptances 5,972,327 - - - - 5,972,327 Bankers acceptances 5,346,819 - - - - 5,346,819 Other assets, net 2,886,419 - - - - 2,886,419 Other assets, net 1,349,993 - - - - 1,349,993 17,912,169 67,683,419 3,903,903 1,692,125 6,169,944 97,361,560 16,984,897 56,892,803 4,532,326 2,454,614 7,204,251 88,068,891 181,476 3,785,113 200,000 - - 4,166,589 20,698,320 23,129,308 9,878,999 9,361,111 266,595 63,334,333 - 1,138,236 624,410 1,468,426 - 3,231,072 Investment in associate Total assets Liabilities Investment in associate Total assets Liabilities 88,863 3,338,370 281,790 601,430 472,296 4,782,749 24,449,981 22,547,036 9,901,474 12,353,917 498,425 69,750,833 - 1,143,244 620,815 - - 1,764,059 Notes and medium term borrowings Due for trade acceptances 5,972,327 - - - - 5,972,327 Due for trade acceptances 5,346,819 - - - - 5,346,819 Other liabilities 2,137,857 - - - - 2,137,857 Other liabilities 1,773,508 - - - - 1,773,508 Total liabilities 32,649,028 27,028,650 10,804,079 12,955,347 970,721 84,407,825 Total liabilities 28,000,123 28,052,657 10,703,409 10,829,537 266,595 77,852,321 Interest rate sensitivity gap (14,736,859) 40,654,769 (6,900,176) (11,263,222) 5,199,223 12,953,735 Interest rate sensitivity gap (11,015,226) 28,840,146 (6,171,083) (8,374,923) 6,937,656 10,216,570 Cumulative interest rate sensitivity gap (14,736,859) 25,917,910 19,017,734 Cumulative interest rate sensitivity gap (11,015,226) 17,824,920 11,653,837 3,278,914 10,216,570 Due to banks Customer deposits and Islamic customer deposits Notes and medium term borrowings Represented by equity 7,754,512 12,953,735 12,953,735 Due to banks Customer deposits and Islamic customer deposits Represented by equity 10,216,570 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. 146 Commercial Bank of Dubai Annual Report 2020 147
75. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 35. FINANCIAL RISK MANAGEMENT (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: Analysis of capital requirement for equity investments under standardized approach of Basel III: e) Market risk (continued) f) Equity risk (continued) 2020 2019 FVOCI FVOCI AED’000 AED’000 4,663 5,123 Unquoted equity instruments and fund 42,907 40,010 Total 47,570 45,133 Equity Net spot Forward Net exposure Position Position 2020 2019 AED’000 Currencies 1,792,036 (2,321,924) (529,888) (258,557) (2,297,311) 2,339,477 42,166 63,791 (25,353) 24,636 (717) (61) 7,783 (318) 7,465 363 Euro 20,613 315 20,928 (1,574) Others 14,841 (9,777) 5,064 (7,174) US Dollar GCC currencies Great Britain Pound Japanese Yen A summary of capital requirement for market risk under standardized approach of Basel III is set out below: Foreign currency risk Interest rate risk 2020 2019 AED’000 AED’000 4,110 910 61,074 48,446 65,184 49,356 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 Investment Committee (IC) 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: 2020 2019 AED’000 AED’000 93,849 48,786 Unquoted equity instruments and fund (note 10) 300,347 254,030 Total 394,196 302,816 2020 2019 AED’000 AED’000 - 3,730 45,104 (12,561) Publicly traded (quoted): Equity (note 10) Privately held (unquoted): Analysis of gains or (losses) on equity investments: Realised gains on sale Unrealised gain / (loss) 148 Commercial Bank of Dubai 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 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 authorisation 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 Conduct); • 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. 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. Annual Report 2020 149
76. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 35. FINANCIAL RISK MANAGEMENT (continued) 36. CAPITAL MANAGEMENT (continued) g) Operational risk (continued) Group Risk Management are responsible for embedding bank-wide Operational Risk awareness, by delivering workshops, seminars and training courses on different operational risk disciplines, for the employees, throughout the year. As part of the Operational Risk framework in the Bank, Risk and Control Self Assessments (RCSA) are being carried out by all Business Units to identify and measure their operational risks and assess the effectiveness of existing controls. Action plans are agreed for any control weaknesses or unacceptable risks to mitigate the likelihood and / or impact of an Operational Risk event. Any Operational Risk events that occur are recorded and escalated to ensure timely remedial actions are taken, to reduce customer dissatisfaction and recover losses. 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 Board Risk Committee (BRC) 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 (‘CBUAE’), 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; • 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 recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. 36.1 Regulatory capital (continued) • • • CET1 capital is the highest quality form of capital, comprising 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. AT1 capital comprises eligible non-common equity capital instruments. 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%. 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. As per the Central Bank regulation for Basel III, the capital requirement as at 31 December 2020 is 13% inclusive of capital conservation buffer of 2.5%. However, effective from 15 March 2020 until 31 December 2021, banks are allowed to tap into the capital conservation buffer up to a maximum of 60% without supervisory consequences, as part of the measures adopted by the CBUAE to help banks deal with the COVID-19 crisis. The Bank has also applied the changes approved by the CBUAE to the capital treatment of Small and Medium - sized entities vide it’s circular dated 2 April 2020. 2020 2019 AED’000 AED’000 Share capital 2,802,734 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. 2,802,734 Legal and statutory reserve 1,401,367 1,401,367 General reserve 1,328,025 1,328,025 Retained earnings 4,537,750 4,006,186 Accumulated other comprehensive income 26,269 4,325 The Group also calculates the Risk Adjusted Return on Capital (RAROC) for credit applications that are priced on a risk-adjusted basis. RAROC calculations are also built into the Credit Appraisal System. IFRS transitional arrangement 44,133 - 10,140,278 9,542,637 (100,504) (65,860) 10,039,774 9,476,777 2,203,800 - 12,243,574 9,476,777 910,521 838,593 910,521 838,593 13,154,095 10,315,370 The CBUAE 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 Bank’s capital base is divided into three main categories, namely CET1, AT1 and Tier 2 (T2),depending on their characteristics. Common equity tier 1 (CET1) capital Regulatory deductions and adjustments Total CET1 capital Additional tier 1 (AT1) Capital (note 19.2) Tier 1 capital Tier 2 capital Eligible general provision Tier 2 capital Total regulatory capital 150 Commercial Bank of Dubai Annual Report 2020 151
77. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 36. CAPITAL MANAGEMENT (continued) 36. CAPITAL MANAGEMENT (continued) 36.2 Capital resources and adequacy (continued) Risk weighted assets (RWA) Credit risk Market risk Operational risk Risk weighted assets Tier 1 ratio Tier 2 ratio Capital adequacy ratio 36.2 Capital resources and adequacy (continued) 2020 2019 72,841,690 67,087,410 5,494,457 5,241,559 665,207 79,001,354 15.50% 1.15% 16.65% 470,053 72,799,022 13.02% 1.15% 14.17% Capital adequacy ratio calculation is after netting off proposed dividend distribution from capital base. 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 regulatory retail portfolio Retail claims that are included in the regulatory retail portfolio are assigned risk weights of 75% (except for those assets that are 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 real estate 100% risk weight was applied on claims secured by commercial property. Past due loans 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. All other assets are classified between ‘assets under higher-risk categories’ and ‘others’; and risk weighted at the prescribed risk weights. • 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 range 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. 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 corporates and government related enterprises 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. 152 Commercial Bank of Dubai Annual Report 2020 153
78. Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) Notes to the consolidated financial statements For the year ended 31 December 2020 (continued) 36. CAPITAL MANAGEMENT (continued) 36. CAPITAL MANAGEMENT (continued) 36.2 Capital resources and adequacy (continued) 36.2 Capital resources and adequacy (continued) Risk weighted assets On & off balance sheet Credit risk mitigation (CRM) Asset classes Gross outstanding Exposure before CRM AED’000 AED’000 AED’000 AED’000 Claims on sovereigns 14,631,671 14,631,671 - 14,630,991 353,197 Exposure Risk weighted assets Exposure 788,339 788,339 - 788,339 - Risk weighted assets AED’000 AED’000 AED’000 AED’000 - - - - - 106,252,699 83,357,178 96,844,464 76,991,738 Less: Eligible financial collateral 10,540,685 10,515,488 9,987,452 9,904,328 Net exposure after CRM 95,712,014 72,841,690 86,857,012 67,087,410 2020 Claims on non-commercial Public Sector Enterprises (PSEs) Claims on multi lateral development banks AED’000 On & off balance sheet Net exposure after credit conversion CRM factors (CCF) 9,331,332 89,633 8,373,101 3,724,439 73,041,290 73,041,290 9,251,018 46,207,489 45,008,034 Claims included in the regulatory retail portfolio 6,056,341 6,056,341 789,807 3,738,492 3,145,236 Claims secured by residential property 3,686,326 3,686,326 1,244 3,662,583 1,313,733 Claims on corporates and government related enterprises Claims secured by commercial real estate Past due loans Higher-risk categories Other assets TOTAL CLAIMS TOTAL CREDIT RISK 11,682,799 11,682,799 239,293 10,609,608 10,609,608 56,634 56,634 - 56,634 84,951 7,769,546 3,042,677 5,180,603 3,038,435 169,690 - 4,606,342 3,038,435 6,069,752 2,532,740 130,086,955 127,493,770 10,540,685 95,712,014 72,841,690 14,135,328 14,135,328 - 14,134,980 339,731 116,469 116,469 - 116,469 - 36,869 36,869 - 36,869 - 72,841,690 2019 Claims on sovereigns Claims on non-commercial Public Sector Enterprises (PSEs) Claims on multi lateral development banks Claims on banks 9,007,339 9,007,339 811,161 7,775,305 4,285,176 Claims on corporates and government related enterprises 73,377,719 73,377,719 8,777,622 46,297,868 45,699,054 Claims included in the regulatory retail portfolio 4,477,711 4,477,711 55,594 3,221,379 2,588,499 Claims secured by residential property 2,714,186 2,714,186 5,281 2,682,739 969,584 Claims secured by commercial real estate 9,191,134 9,191,134 81,742 7,911,834 7,911,834 Past due loans 5,947,960 3,243,585 256,052 2,904,164 3,679,087 28,995 28,995 28,995 43,493 1,750,999 1,746,410 - 1,746,410 1,570,952 120,784,709 118,075,745 9,987,452 86,857,012 67,087,410         67,087,410 Higher-risk categories Other assets TOTAL CLAIMS TOTAL CREDIT RISK Commercial Bank of Dubai 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 8,895 million (2019: AED 8,172 million) rated exposure. Risk weighted assets as per standardized approach is set out below: 9,331,332 Claims on banks 154 (i) Risk weights for credit risk (continued) 2020 Exposure prior to CRM 2019 (ii) Risk weights for market risk Capital requirement for market risk is calculated using standardized approach. The capital requirement for market risk is analysed 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 2020 155
79. 156 Commercial Bank of Dubai Annual Report 2020 157
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