Commercial Bank of Dubai Consolidated Financial Statements - 31 December 2016

Transcription

10. Commercial Bank of Dubai PSC Consolidated income statement For the year ended 31 December 2016 Note 2016 AED '000 2015 AED'000 Interest income and income from Islamic financing Interest expense and distributions to Islamic depositors Net interest income and net income from Islamic financing 18 19 2,287,803 (562,650) 1,963,031 (323,000) 1,725,153 1,640,031 Net fees and commission income Net gains from foreign exchange and derivatives Net gains from investments at fair value through profit or loss - held for trading Net gains from sale of available-for-sale investments Share of profit of an associate Dividend income Other income Total operating income 20 495,262 134,347 498,250 116,576 21 924 57,470 3,408 7,449 38,025 2,462,038 1,247 49,266 4,741 6,067 36,059 2,352,237 9 22 Impairment allowances on loans and advances and Islamic financing Recoveries Impairment allowance on investments securities Impairment allowance against investment properties 7 8 10 Total net income (683,311) 115,214 (8,226) (12,120) 1,873,595 Staff and other expenses Depreciation and amortisation Total operating expenses 23 10,11 Net profit for the year Basic and diluted earnings per share 25 (817,393) (53,137) (870,530) (808,145) (50,639) (858,784) 1,066,229 AED 0.36 AED 0.38 Appropriations have been reflected in the consolidated statement of changes in equity. 8 1,925,013 1,003,065 The attached notes on pages 12 to 81 form part of these consolidated financial statements. The report of the Auditors is set out on pages 1 to 6. (501,396) 86,800 (12,628) -
11. Commercial Bank of Dubai PSC Consolidated statement of comprehensive income For the year ended 31 December 2016 2016 AED '000 2015 AED'000 1,003,065 1,066,229 14,445 1,297 Changes in available-for-sale (AFS) investments: Realised gains on sale of AFS investments Revaluation of AFS investments (net of impairment) Net change in AFS investments (57,470) 67,333 9,863 (49,266) (28,133) (77,399) Other comprehensive income / (loss) for the year 24,308 (76,102) Net profit for the year Other comprehensive income: Changes in fair value of effective portion of cash flow hedge 1,027,373 Total comprehensive income for the year 990,127 Balances of all items inluded in other comprehesive income (as above) could be recycled to consolidated income statement in subsequent period. The attached notes on pages 12 to 81 form part of these consolidated financial statements. The report of the Auditors is set out on pages 1 to 6. 9
12. Commercial Bank of Dubai PSC Consolidated statement of changes in equity For the year ended 31 December 2016 At 1 January 2015 Transactions with shareholders , recorded directly in equity Cash dividend paid for 2014 (25%) Proposed cash dividend for 2015 (20%) Bonus shares issued for 2014 (25%) Share of Directors' remuneration of associate (note 9) Comprehensive income Net profit for the year Other comprehensive loss for the year Total comprehensive income Directors' remuneration paid for 2014 Proposed directors remuneration for 2015 Transfer to legal reserve Transfer to General reserve At 31 December 2015 Transactions with shareholders, recorded directly in equity Cash dividend paid for 2015 (20%) Proposed cash dividend for 2016 (20%) Others (note 9) Share of Directors' remuneration of associate (note 9) Comprehensive income Net profit for the year Other comprehensive income for the year Total comprehensive income Directors' remuneration paid for 2015 Proposed directors remuneration for 2016 Transfer to General reserve At 31 December 2016 Share capital AED'000 2,242,187 560,547 2,802,734 2,802,734 Legal reserve Capital reserve AED'000 AED'000 1,380,495 38,638 - - 20,872 1,401,367 38,638 - - 1,401,367 38,638 The attached notes on pages 12 to 81 form part of these consolidated financial statements. The report of the Auditors is set out on pages 1 to 6. 10 General reserve AED'000 1,121,095 106,623 1,227,718 100,307 1,328,025 Cumulative changes in fair values of AFS investments and cash flow hedge instruments AED'000 69,808 Retained earnings AED'000 1,826,556 Proposed distributions AED'000 1,131,634 Total AED'000 7,810,413 - (560,547) (649) (560,547) 560,547 (560,547) - (560,547) (649) (76,102) (76,102) (6,294) 1,066,229 1,066,229 (11,000) (20,872) (106,623) 2,193,094 (10,540) 11,000 571,547 1,066,229 (76,102) 990,127 (10,540) 8,228,804 - (560,547) (4,807) (200) (560,547) 560,547 - (560,547) (4,807) (200) 24,308 24,308 18,014 1,003,065 1,003,065 (11,000) (100,307) 2,519,298 (11,000) 11,000 571,547 1,003,065 24,308 1,027,373 (11,000) 8,679,623
13. Commercial Bank of Dubai PSC Consolidated statement of cash flows For the year ended 31 December 2016 Note OPERATING ACTIVITIES Net profit for the year Adjustments for : Depreciation and amortisation Loss on disposal of property and equipment Dividend income (Increase) /decrease in investment in an associate Amortisation of premium / discounts on investments Net unrealised (gains) /losses on investments at fair value through profit or loss - held for trading Forex translation loss Realised gains on sale of investments Net unrealised income on derivatives Impairment of AFS Investment Impairment allowance against investment properties Amortisation of transaction cost on notes and medium term borrowings 8 10 Increase in statutory reserve with the Central Bank Decrease / (increase) in negotiable Central Bank certificate of deposits with original maturity of more than three months Increase in due from banks with original maturity of more than three months Increase in loans and advances and Islamic financing, net Increase in other assets Increase in customers' deposits and Islamic customers' deposits Increase / (decrease) in other liabilities (Decrease) / increase in due to banks with original maturity of more than three months Directors' remuneration paid Share of Directors' remuneration of associate Net cash flow from operating activities INVESTING ACTIVITIES Purchase of investments Purchase of property and equipment Increase in investment properties Dividend income Proceeds from sale of investments Proceeds from sale of property and equipment Net cash flow used in investing activities 11 10 1,003,065 1,066,229 53,137 444 (7,449) (546) 67,002 50,639 3 (6,067) 2,561 53,851 13,931 (57,648) (1,183) 8,226 12,120 10,187 1,101,286 (238,877) 1,293 4,949 (50,411) (3,491) 12,628 8,038 1,140,222 (234,841) 300,000 (300,000) (40,786) (7,199,319) (16,250) 8,313,437 (24,608) (15,285) (11,000) (200) 1,518,680 152,015 (10,540) (649) 1,778,681 (5,549,714) (67,112) (63,467) 7,449 4,732,818 554 (939,472) (3,326,709) (50,287) (2,430) 6,067 2,191,968 761 (1,180,630) 577,656 (560,547) 17,109 1,462,658 (560,547) 902,111 26 Supplemental disclosure: Interest income and income from Islamic financing received Interest expense and distributions to Islamic depositors paid The attached notes on pages 12 to 81 form part of these consolidated financial statements. The report of the Auditors is set out on pages 1 to 6. 11 2015 AED'000 (177,773) (2,941,717) (25,487) 3,299,048 228,685 FINANCING ACTIVITIES Notes and medium term borrowings 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 2016 AED'000 596,317 4,962,375 5,558,692 1,500,162 3,462,213 4,962,375 2,248,981 517,159 1,956,541 259,402
14. Commercial Bank of Dubai PSC Notes to the consolidated financial statements For the year ended 31 December 2016 1 LEGAL STATUS AND ACTIVITIES Commercial Bank of Dubai PSC (“the Bank”) was incorporated in Dubai, United Arab Emirates (U.A.E.) in 1969 and is registered as a Public Shareholding Company (PSC) in accordance with Federal Law No. 8 of 1984 (as amended). The Federal Law No. 2 of 2015, concerning Commercial Companies has come into effect from 1 July 2015, replacing the existing Federal Law No. 8 of 1984. In order to comply with the new Commercial Companies Law, the Bank held its General Assembly meeting on 26 June 2016 to amend its articles of association. The amendment will be applied after obtaining necessary regulatory approvals. The Bank expects to be compliant on or before the end of grace period on 30 June 2017. The Bank is listed on the Dubai Financial Market. The Bank’s principal activity is commercial banking. The consolidated financial statements of the Group for the year ended 31 December 2016 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. 8 of 1984 (as amended) in Dubai, United Arab Emirates. The Federal Law No. 2 of 2015, concerning Commercial Companies has come into effect from 1 July 2015, replacing the existing Federal Law No. 8 of 1984. The Bank holds a 100% interest. Its principal activity is broking for local shares and bonds. b) Attijari Properties LLC, is registered as a limited liability company in accordance with Federal Law No. 8 of 1984 (as amended) in Dubai, United Arab Emirates. The Federal Law No. 2 of 2015, concerning Commercial Companies has come into effect from 1 July 2015, replacing the existing Federal Law No. 8 of 1984. The Bank holds a 100% interest. Its principal activity is self-owned property management services and buying & selling of real estate. c) CBD (Cayman) Limited is a special purpose entity (SPE) registered in British Virgin Island. The SPE has been established for any future issuance of debts securities. d) During 2016, the Bank has incorporated a wholly owned subsidiary, CBD (Cayman II) Limited, which is a special purpose entity (SPE) registered in British Virgin Island. The SPE has been established to transact and negotiate derivatives agreements. e) National General Insurance Co. (PSC) is an associate of the Bank and is listed on the Dubai Financial Market. It underwrites all classes of life and general insurance business as well as certain reinsurance business. The Bank holds 17.8% interest in the associate. The management believes that it has significant influence on the associate by virtue of having representation on the board of directors of the associate. The registered address of the Bank is Al Ittihad Street, P.O. Box 2668, Dubai, United Arab Emirates. 2 BASIS OF PREPARATION a) 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. 12
15. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 2 BASIS OF PREPARATION (continued) a) Statement of compliance (continued) Along with these consolidated financial statements, the Group has presented Basel II Pillar 3 disclosures in accordance with the guidelines issued by the Central Bank of the UAE. The application of Basel II Pillar 3 guidelines has impacted the type and amount of disclosures made in these consolidated financial statements, but has no impact on the reported profits or financial position of the Group. In accordance with the requirements of Basel II, the Group has provided full comparative information. 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. b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: • Derivative financial instruments are measured at fair value; • Financial instruments classified as fair value through profit or loss, held for trading and available for sale are measured at fair value; • Recognised assets and liabilities that are hedged item in a fair value hedge transaction are measured at fair value in respect of the risk that is hedged; and • Granted land is valued at market value on the date of grant. c) Functional and presentation currency The consolidated financial statements are presented in United Arab Emirates Dirhams (“AED”), which is the Bank’s functional currency, rounded to the nearest thousand unless otherwise stated. d) 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 3 (z). e) Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries, which it controls, as at 31 December 2016. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); • Exposure, or rights, to variable returns from its involvement with the investee; and • The ability to use its power over the investee to affect 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. 13
16. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 2 BASIS OF PREPARATION (continued) e) Basis of consolidation (continued) 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. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements of the Group from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) is attributed to the equity holders of the parent of the Group and non-controlling interest. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. • • • • • • • 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 consolidated income statement. Reclassifies the parent's share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. (i) Subsidiary A subsidiary is an entity that is controlled by the Bank. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 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. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. (ii) 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 investments in its associate are 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 income 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 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 income statement. 14
17. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 2 BASIS OF PREPARATION (continued) e) Basis of consolidation (continued) (ii) Associate (continued) 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 income statement. (iii) Transactions eliminated on consolidation Intra-group balances and income and expenses (except for foreign currency transactions gains or losses) arising from intra-group 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. a) Financial instruments 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 classifies its financial assets at initial recognition in the following categories: (i) Classification • Financial assets at fair value through profit or loss (FVPL): This category has the following two sub-categories: Financial assets held for trading Financial assets held for trading are those that are acquired principally for the purpose of sale in the near term. They are recorded at fair value. Fair value changes are recognised in consolidated income statement. Designated to be fair valued through profit or loss at inception The Group designates financial assets at fair value through profit or loss in the following circumstances: - The assets are managed, evaluated and reported internally on a fair value basis. - The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise. - The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. 15
18. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) a) Financial instruments (continued) (i) Classification (continued) • Loans and advances: Loans and advances are non-derivative financial assets with fixed and determinable payments that are not quoted in an active market. These arise when the Group provides money directly to the borrower with no intention of trading the receivable. • Held-to-maturity (HTM): Investments classified as held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the intention of and the ability to hold to maturity. HTM assets are carried at amortized cost less impairment loss if any. Sale of HTM assets is allowed only under the following circumstances: - The investment is close enough to maturity as to have no impact on fair value; - The principal is substantially received; - Isolated events beyond the Group’s control; - Significant credit deterioration; - Major business combination or disposal; or - Increase in regulatory capital requirements. • Available-for-sale (AFS): Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or not classified as (i) financial assets at fair value through profit or loss, (ii) loans and advances or (iii) held-to-maturity investments. AFS assets are carried at fair value, with fair value changes recognised in other comprehensive income (OCI). These assets may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. (ii) Initial recognition Purchases and sales of investment securities are recognised on the trade date which is the date on which the Group commits to purchase or sell the securities. Loans and advances are recognised when cash is advanced to the borrowers. Financial assets are initially recognised at fair value plus transaction costs, which approximates to its cost, for all financial assets not carried at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognised at fair value, which approximates to its cost. (iii) Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all the risks and rewards of ownership. A financial liability is derecognised when its contractual obligation is discharged, cancelled or expired. (iv) Subsequent measurement Financial assets available-for-sale and at fair value through profit or loss are subsequently carried at fair value. Loans and advances are carried at amortised cost using the effective interest method, less impairment allowances. (v) Embedded derivatives Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the consolidated income statement. 16
19. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) a) Financial instruments (continued) (vi) Gains and losses on subsequent measurement Gains and losses arising from changes in the fair value of the investments at fair value through profit or loss category are included in the consolidated income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale investments are recognised directly in other comprehensive income (OCI), until the financial asset is derecognised or impaired, at which time the cumulative gain or loss previously recognised in OCI is recognised in the consolidated income statement. In cases where available-for-sale investments with a fixed maturity are reclassified as held-to-maturity investments, the fair value gains or losses until the date of the reclassification are held in OCI and amortised over the remaining life of the held-to-maturity investments using the effective interest rate method. (vii) Fair value measurement principles The Group measures financial instruments, such as derivatives and investments in equity and certain fixed income instruments, at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: - In the principal market for the asset or liability, or - In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The 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. (viii) 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, based on the lowest level input that is significant to the fair value measurement as a whole: 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. 17
20. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) a) Financial instruments (continued) (viii) 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 notes 4.2 and 10. For assets and liabilities that are recognised in the financial statements on a recurring basis, 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. The Group determines the policies and procedures for both recurring fair value measurement, such as investment properties and unquoted AFS financial assets, and for non-recurring measurement, such as assets held for sale in discontinued operation. 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. (ix) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or financial liability to the net carrying amount of the financial asset or financial liability. (x) Identification and measurement of impairment At each reporting date the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets, and that the loss event has an impact on the future cash flows of the assets that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Group considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific asset and collective level. 18
21. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) a) Financial instruments (continued) (x) Identification and measurement of impairment (continued) Individually assessed loans At each reporting date, the Group assesses on a case-by-case basis whether there is any objective evidence that a loan is impaired. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. This procedure is applied to all accounts that are considered individually significant. In determining impairment losses on these loans, the following factors are considered: • the Group’s aggregate exposure to the customer; • the viability of the customer’s business model and capability to trade successfully out of financial difficulties and generate sufficient cash flow to service its debt obligations; • the amount and timing of expected receipts and recoveries; • the likely dividend available on liquidation or bankruptcy; • the extent of other creditors’ commitments ranking ahead of, or pari passu with, the Group and the likelihood of other creditors continuing to support the company; • the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident; • the realisable value of security (or other credit mitigants) and likelihood of successful repossession; • the likely deduction of any costs involved in recovery of amounts outstanding; and • the ability of the borrower to obtain, and make payments in, the currency of the loan if not local currency. • When available, the secondary market price of debt. Impairment losses are recognised in consolidated income statement and reflected in an allowance account against loans and advances. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Collectively assessed loans Impairment is determined on a collective basis in two different scenarios: • for loans subject to individual assessment to cover losses which have been incurred but have not yet been identified; and • for homogeneous groups of loans that are not considered individually significant. Incurred but not yet identified impairment Individually assessed loans for which no evidence of loss has been identified (performing loans) are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective loss. This arises from individual loan impairment at the reporting date which will only be specifically identified in the future. The collective impairment loss is determined after taking into account: • historical loss experience in portfolios of similar risk characteristics (for example, by industry sector, loan grade or product); • the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate specific allowance against the individual loan; and • management’s judgment as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. The period between a loss occurring and its identification is estimated by the management for each portfolio grouping. 19
22. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) a) Financial instruments (continued) (x) Identification and measurement of impairment (continued) Homogeneous groups of loans For homogeneous groups of loans that are not considered individually significant, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment on investments classified as available-for-sale The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in OCI to consolidated income statement as a recycle adjustment. The cumulative loss that is recycled from OCI to consolidated income statement is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in consolidated income statement. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in consolidated income statement, the impairment loss is reversed through consolidated income statement to the extent of amount earlier recognised as impairment loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is not reversed through the consolidated income statement and is recognised directly in other comprehensive income. Impairment on investments classified as associates 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. b) Derivative financial instruments (i) 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. (ii) 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. 20
23. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) b) Derivative financial instruments (continued) (ii) Initial and subsequent measurement (continued) The positive mark to market values (unrealised gains) of derivative financial instruments is included in other assets. While, the negative mark to market values (unrealised losses) of derivative financial instruments is included in other liabilities. (iii) Gains and losses on subsequent measurement The gains or losses from derivative financial instruments classified as held for trading are taken to the consolidated income statement. c) 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 (i) 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. (ii) 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. (iii) 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 income statement. (iv) 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 income statement. 21
24. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) c) Hedging instruments (continued) (v) 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 income statement. (vi) 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 income statement for the period. d) Due from banks Amounts due from banks are initially recognised at fair value and subsequently measured at amortised cost less provision for impairment, if any. e) Loans and advances and Islamic financing Loans and advances 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’a Supervisory Board. Islamic Financing consists of the following: Murabaha An agreement whereby the Group sells to a customer, commodity or asset (subject asset), 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. Ijarah Ijarah 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. 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. 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. The effective profit rate is the rate that exactly discounts estimated future cash flow through the expected life of the financial asset or liability. 22
25. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) f) Investment properties carried at cost and held for sale The Group holds certain properties for its own use as well as to lease out. The leased out or intended to lease out components have been classified as investment properties. Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred, if the recognition criteria are met and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less any accumulated depreciation and accumulated impairment losses. Depreciation is charged using straight line method over the useful life of the asset. Estimated useful life of buildings is 20 to 30 years. Investment properties are 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 are recognised in the consolidated income statement under ‘other income’ in the year of retirement or disposal. Transfers are made to investment properties when, and only when there is change in use evidenced by ending of owner-occupation, commencement of an operating lease of another party or ending of construction or development. Transfers are made from investment properties when, and only when, there is a change in use evidenced by commencement of owner-occupation. 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 have been completed within one year from the date of classification. g) 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 income statement 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 income statement. Property and equipment is impaired if the carrying amount of the asset or its cash generating unit exceed its recoverable amount. The impairment loss is recognised in the consolidated income statement. 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: 20 to 30 years Buildings Leasehold improvements 5 years Furniture, equipment and vehicles 3 to 5 years Depreciation methods, useful lives and residual values are reassessed at each reporting date and prospectively adjusted if appropriate. Capital work in progress is initially recorded at cost, and upon completion is transferred to the appropriate category of property and equipment and thereafter depreciated in accordance with the Group’s policies. 23
26. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) h) Due to banks, Notes and medium term borrowing Amounts due to banks, notes and medium term borrowing are initially measured at fair value plus transaction costs, and are subsequently measured at amortised cost using the effective interest method. i) Repurchase agreement When the Group sells a financial asset and simultaneously enters into an agreement to repurchase the asset at a fixed price on a future date the agreement is accounted for as a term borrowing depending on period of the agreement, and the underlying asset continues to be recognised in the Group’s financial statement. j) Customers’ deposits and Islamic Customers’ deposits Customers’ 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 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. 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. Islamic customers’ deposits are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective profit method. k) 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. 24
27. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) l) Employees’ terminal benefits and long-term incentive arrangements Provision is made for amounts payable under the UAE Federal Labour Law applicable to non UAE nationals’ accumulated periods of service at the reporting date. The Group pays its contributions in respect of UAE nationals and GCC citizens under the UAE Pension and Social Security Law. Effective from 1 January 2007, the Group introduced a long term incentive plan (“the plan”). Under this plan certain key employees are eligible for an incentive at the offering date contingent upon the Group’s performance up to an award date. The award is the percentage of the actual salary of the eligible key employees. The salary includes the basic salary, allowance, national allowance and cost of living allowance as at the effective date. The obligation towards the plan is accrued in the period when the key employees are eligible for such awards in accordance with the plan. m) 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. n) Dividend on ordinary shares Dividends payable on ordinary shares are recognised as a liability in the period in which they are approved by the Bank’s shareholders. o) Offsetting Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when, and only when, the Group has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or of gains and losses arising from a group of similar transactions such as in the Group’s trading activity. p) 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 less than three months. Cash and cash equivalents are carried at amortised cost in the statement of financial position. q) Revenue recognition (i) Interest income and expense Interest income and expense for all interest bearing financial instruments except for those classified as held for trading or designated at fair value through profit or loss, are recognised in ‘interest income’ and ‘interest expense’ in the consolidated income statement 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 classified as held for trading or designated at fair value through profit or loss is recognised as trading income. 25
28. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) q) Revenue recognition (continued) (i) Interest income and expense (continued) The effective interest rate is the rate that discounts estimated future cash receipts and payments earned or paid on a financial asset or a liability through its expected life or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. When calculating effective interest rates, the Group estimates cash flows considering all contractual terms of the financial instruments, but not future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. (ii) Income from Islamic financing and distributions to depositors Income from Islamic financing is recognised in the consolidated income statement using the effective profit method. The calculation of the effective profit rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective profit rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset. Distribution to Depositors (Islamic products) is calculated according to the Group’s standard procedures and is approved by the Group’s Sharia’a Supervisory Board. (iii) Fees and commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of effective interest rate. Other fees and commission income earned from the provision of services are recognised as revenue, as and when the services are rendered or on a time proportion basis as applicable. (iv) Income from investments Net income from investments at fair value through profit or loss which arises from gains and losses resulting from disposal, and from the fair valuation of such investments, are recognised when they occur. Gains resulting from disposal of AFS investments are recognised in profit or loss when they occur. Gains resulting from valuation are recognised in OCI until disposal at which time it will be recycled to profit or loss. (v) Property related income Property related income includes rental income, which is recognised on a straight line basis over the term of the lease. (vi) Dividend income Dividend income is recognised when the Group’s right to receive the payment is established. (vii) Share of profit from associate Share of profit from associate reflects the Group’s share of the results of operations of the associate. 26
29. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) q) Revenue recognition (continued) (viii) 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, which are stated at historical cost, are translated at the foreign exchange rate ruling at that 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 to AED 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 income statement. r) Leasing The Group has entered into leasing arrangements which based on the evaluation of the terms and condition of the leasing arrangement has been classified as operating lease. Leases are classified as operating leases if risk and reward incidental to ownership of the leased asset lie with lessor. Group as lessor Asset subjected to operating lease are presented in the consolidated statement of financial position according to the nature of the asset. Income from operating leases are recognised in the consolidated income statement on straight line basis over the lease term. Group as lessee Lease payments under operating leases are recognised as expense on a straight line basis over the lease term. s) 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. t) Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the consolidated income statement, and the best estimate of amount required to settle any financial obligation arising as a result of the guarantee. 27
30. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) u) Derivative product types 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 overthe-counter market. 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 are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. I. Derivative related credit risk Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that are favorable to the Group and potential future fluctuations. The majority of the fair value of favorable contracts (and therefore credit risk) is exposure to financial institutions. II. Derivatives held or issued for trading purposes Most of the Group’s derivative trading activities relate to sales and position coverage. Sales activities involve offering products to customers at competitive prices in order to enable them to transfer, modify or reduce current and expected risks. Interest rate derivatives trading are conducted under Board approved limits. Derivatives are initially recognised in the consolidated financial statements at its fair value, being the premium received / paid. Subsequent to initial recognition derivatives (held for trading) are measured at fair value with fair value changes recognised in the consolidated income statement. v) 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 Group 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. w) 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. 28
31. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) x) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Business Committee of the Group to make decisions about resources allocated to the segment and assess its performance, and for which distinct financial information is available. Segment results that are reported to the Business Committee of the Group include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. y) Related Parties An entity is considered related party of the Group if: a) A person or a close member of that person's family is related to the Group if that person: i. has control or joint control of the Group; ii. has significant influence over the Group; or iii. is a member of the key management personnel of the Group. b) An entity is related to a Group if any of the following conditions applies: i. The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). ii. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). iii. Both entities are joint ventures of the same third party. iv. One entity is a joint venture of a third entity and the other entity is an associate of the third entity. v. The entity is controlled or jointly controlled by a person identified in (a). vi. A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). z) Use of estimates and judgments 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. In particular, considerable management judgment is required in respect of the following issues: Impairment losses on loans and advances and Islamic financing The Group reviews its loan portfolios to assess impairment at each reporting date. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. 29
32. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) z) Use of estimates and judgments (continued) Impairment losses on loans and advances and Islamic financing (continued) This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows (excluding future expected credit losses that have not yet been incurred). The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Held-to-maturity investments The Group follows the guidance of IAS 39 in classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as availablefor-sale. The investments would therefore be measured at fair value and not amortized cost. Impairment of available-for-sale investments The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology or operational and financing cash flows. Impairment of investment property Investment properties are assessed for impairment based on assessment of cash flows on individual cashgenerating units when there is indication that those assets have suffered an impairment loss. Cash flows are determined with reference to recent market conditions, prices existing at the end of the reporting period, contractual agreements and estimations over the useful lives of the assets and discounted using a range of discounting rates that reflects current market assessments of the time value of money and the risks specific to the asset. The net present values are compared to the carrying amounts to assess any probable impairment. Impairment of non-financial assets The carrying amounts of the Group's assets are reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the consolidated income statement. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Nonfinancial assets, which suffered impairment, are reviewed for possible reversal of the impairment at each reporting date. 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, managements is not aware of any material uncertainities that may cast significant doubt on the Bank's ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. 30
33. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) aa) Standards and interpretation Issued and effective for accounting periods beginning on 1 January 2016 Following are the amendments to IFRSs which have been applied by the Group in these consolidated financial statements. The adoption of these amendments has no significant impact on the financial performance or position of the Group. Amendments that are relevant to the Group’s financial statements are set out below: Amendments to IAS 1 - Disclosure Initiative The amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify: • The materiality requirements in IAS 1 • That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated • That entities have flexibility as to the order in which they present the notes to financial statements • That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss. Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement of profit or loss and OCI. Annual Improvements 2010-2012 Cycle These improvements are effective for annual periods beginning on or after 1 January 2016. They include: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Assets (or disposal groups) are generally disposed of either through sale or distribution to owners. The amendment clarifies that changing from one of these disposal methods to the other would not be considered a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of the requirements in IFRS 5. IFRS 7 Financial Instruments: Disclosures (i) Servicing contracts: The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and the arrangement against the guidance for continuing involvement in IFRS 7 in order to assess whether the disclosures are required. The assessment of which servicing contracts constitute continuing involvement must be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments. (ii)Applicability of the amendments to IFRS 7 to condensed interim financial statements: The amendment clarifies that the offsetting disclosure requirements do not apply to condensed interim financial statements, unless such disclosures provide a significant update to the information reported in the most recent annual report. This amendment must be applied retrospectively. IAS 19 Employee Benefits The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. 31
34. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) aa) Standards and interpretation (continued) Issued but not yet effective for accounting periods beginning on or after 1 January 2016 IFRS 9 – Financial instruments The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. (a) Classification and measurement IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: (i) amortised cost (ii)fair value through other comprehensive income (OCI); and (iii)fair value through profit and loss The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. For financial liabilities, there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value, through profit or loss. (b) Impairment There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and receivables, either on a 12-month or lifetime basis. (c) Hedging IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. 32
35. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 3 SIGNIFICANT ACCOUNTING POLICIES (continued) aa) Standards and interpretation (continued) Issued but not yet effective for accounting periods beginning on or after 1 January 2016 (continued) IFRS 15, ‘Revenue from contracts with Customers’. This is the converged standard on revenue recognition. It replaces IAS 11, ‘Construction contracts’, IAS 18,’Revenue’ and related interpretations. Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The new standard will be effective for annual periods beginning on or after 1 January 2018. IFRS 16 – Leases IFRS 16 Leases requires lessees to recognise assets and liabilities for most leases. For lessors, there is little change to the existing accounting in IAS 17 Leases. The new standard will be effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been applied. IAS 7 – Statement of cash flows The amendments to IAS 7 Statement of Cash Flows are part of the IASB’s Disclosure Initiative and help users of financial statements better understand changes in an entity’s debt. The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). The amendments are effective for annual periods beginning on or after 1 January 2017. Transfers of investment property – amendments to IAS 40 The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. The amendments are effective for annual periods beginning on or after 1 January 2018. The Group is in the process of analyzing the impact of IFRS 9. The Group has assessed the impact of other standards, amendments to standards, revisions and interpretations. Based on the assessment, the above standards, amendments to standards, revisions and interpretations (excluding IFRS 9) are not expected to have a material impact on the consolidated financial statements of the Group as at the reporting date. 33
36. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 4 FINANCIAL ASSETS AND LIABILITIES 4.1 Financial assets and liabilities classification The table below sets out the Group’s assets and liabilities classification in accordance with the categories of financial instruments in IAS 39: Fair value through Profit or loss AED’000 2016 Cash and balances with central bank Due from banks Loans and advances and Islamic financing Investment securities Bankers acceptances Other assets Total financial assets Due to banks Customers’ deposits and Islamic customers’ deposits Notes and medium term borrowing Due for trade acceptances Other liabilities Total financial liabilities 2015 Cash and balances with central bank Due from banks Loans and advances and Islamic financing Investment securities Bankers acceptances Other assets Total financial assets 77,330 77,330 Held-tomaturity AED’000 Loans and receivables AED’000 Availablefor-sale at fair value AED’000 388,293 388,293 41,962,538 41,962,538 7,029,984 7,029,984 Other amortised cost AED’000 Total carrying amount AED’000 6,712,466 3,724,254 3,056,956 285,460 13,779,136 6,712,466 3,724,254 41,962,538 7,418,277 3,056,956 362,790 63,237,281 - - - - 1,560,148 1,560,148 - - - - 43,773,824 43,773,824 55,438 55,438 - - - 6,080,537 3,056,956 759,320 55,230,785 6,080,537 3,056,956 814,758 55,286,223 19,898 46,253 66,151 - 6,668,065 2,591,717 1,871,598 249,094 11,380,474 6,668,065 2,591,717 39,020,821 6,623,029 1,871,598 295,347 57,070,577 - 39,020,821 39,020,821 6,603,131 6,603,131 Due to banks Customers’ deposits and Islamic customers’ deposits Notes and medium term borrowing Due for trade acceptances Other liabilities - - - 1,111,462 1,111,462 - - - - 40,474,776 40,474,776 39,988 - - - 5,492,694 1,871,598 533,476 5,492,694 1,871,598 573,464 Total financial liabilities 39,988 - - - 49,484,006 49,523,994 The carrying values of the financial assets and liabilitites (that are not stated at fair value) are not significantly different from their fair values. 34
37. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 4 FINANCIAL ASSETS AND LIABILITIES (continued) 4.2 Fair value measurement – Fair value hierarchy: The below table, shows the fair value hierarchy of the financial assets and the financial liabilities: Level 1 Level 2 Level 3 AED’000 AED’000 AED’000 2016 Investments Equity 144,931 Fund of funds - Fixed and floating rate securities 6,809,566 - - 75,487 - - - Positive market value of forward foreign exchange contracts and other derivatives Held for trading - 59,191 - Held for fair value hedge - 16,092 - Held for cash flow hedge - 2,047 - - - - Held for trading - (51,282) - Held for fair value hedge - (2,805) - Held for cash flow hedge - (1,351) - 97,379 - - - Negative market value of forward foreign exchange contracts and other derivatives 6,954,497 2015 Investments Equity 149,413 Fund of funds - Fixed and floating rate securities 6,209,451 264,165 - - - Positive market value of forward foreign exchange contracts and other derivatives Held for trading - 45,307 - Held for cash flow hedge - 946 - - - - (39,988) - 270,430 - Negative market value of forward foreign exchange contracts and other derivatives Held for trading 6,358,864 During the year there were no transfers between Level 1 and Level 2 of the fair value hierarchy above and no financial instruments were classified within level 3 of the fair value hierarchy at any time during the current or prior year. Further, there has been no change in the valuation techniques in relation to valuation of financial instruments during the current or prior year. 35
38. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 5 CASH AND BALANCES WITH CENTRAL BANK Cash on hand Balances with U.A.E Central Bank - Clearing account balances - Statutory reserves - Negotiable certificates of deposit 2016 2015 AED'000 AED'000 515,182 530,397 718,248 497,509 2,879,036 2,640,159 2,600,000 3,000,000 6,712,466 6,668,065 Statutory reserves are not available for use in the Group’s day to day operations and cannot be withdrawn without the approval of the Central Bank. The level of reserves required changes periodically in accordance with the directives of the Central Bank. 6 DUE FROM BANKS Current and demand deposits Placements Loans to Banks 2016 2015 AED'000 AED'000 718,858 105,858 2,656,461 2,138,058 348,935 347,801 3,724,254 2,591,717 Placements include cash collaterals amounting to AED 351.5 million (2015: AED 194.3 million) placed against repurchase agreements. The geographical concentration is disclosed in note 33b. 36
39. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 7 LOANS AND ADVANCES AND ISLAMIC FINANCING The composition of the loans and advances and Islamic financing portfolio is as follows: Loans and advances Overdrafts Loans 2016 2015 AED'000 4,591,758 AED'000 4,911,254 32,636,897 30,788,689 Advances against letters of credit and trust receipts 1,275,189 1,137,057 Bills discounted 1,437,892 1,210,009 39,941,736 38,047,009 Murabaha 2,173,745 1,846,936 Ijara 2,516,634 1,513,593 Gross loans and advances Islamic financing Musharaka - Others 481,723 Gross Islamic financing Gross loans and advances and Islamic financing 10,947 278,961 5,172,102 3,650,437 45,113,838 41,697,446 Allowances for impairment losses (3,151,300) (2,676,625) Net loans and advances and Islamic financing 41,962,538 39,020,821 The movements in allowances for impairment losses are as follows: Interest suspended Specific provisions Collective provisions Total Opening balance 1 January 2016 AED'000 381,943 AED'000 1,615,893 AED'000 678,789 AED'000 2,676,625 Interest not recognised / new provisions raised 291,039 590,770 92,541 974,350 Written-off (51,221) (278,579) - (329,800) Recoveries / reversal to income (91,100) (78,775) - Closing balance 31 December 2016 530,661 1,849,309 771,330 Interest suspended Specific provisions Collective provisions Total Opening balance 1 January 2015 AED'000 497,642 AED'000 2,014,080 AED'000 525,219 AED'000 3,036,941 Interest not recognised / new provisions raised 186,990 347,826 153,570 688,386 Less: (169,875) 3,151,300 Less: Written-off (237,698) (664,588) - Recoveries / reversal to income (64,991) (81,425) - Closing balance 31 December 2015 381,943 1,615,893 678,789 (902,286) (146,416) 2,676,625 The economic sector composition of the loans and advances and Islamic financing is set out in note 33b. In addition to the recoveries of AED 169.9 million, the Bank has received certain properties, amounting to AED 55.4 million, as a settlement against a previously written off loan. As at 31 December 2016, the properties received have been included under investment properties (note 10). During the year ended 31 December 2016, 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 was AED 295 million (2015: NIL). The negative fair value of the hedged component was AED 108 thousand (2015: NIL). 37
40. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 8 INVESTMENT SECURITIES UAE AED'000 GCC AED'000 International Total AED'000 AED'000 2016 Held for trading Fixed rate securities - Government - - - - - Others - - - - Available-for-sale Equities 144,931 Fund of funds - - - 144,931 11,701 63,786 75,487 Fixed rate securities - Government 2,316,693 749,208 249,688 3,315,589 - Others 1,774,259 1,136,540 349,113 3,259,912 188,457 45,608 - 234,065 269,902 103,163 15,228 388,293 4,694,242 2,046,220 677,815 7,418,277 Floating rate non-government securities Held to maturity Fixed rate non-government securities Total investment securities UAE AED'000 GCC AED'000 International Total AED'000 AED'000 2015 Held for trading Equities - - - - 16,284 - - 16,284 Fixed rate securities - Government - Others 3,614 3,614 Available-for-sale Equities 149,413 Fund of funds 149,413 458 21,127 242,580 264,165 - Government 2,208,097 396,761 126,556 2,731,414 - Others 1,693,656 771,333 532,876 2,997,865 333,720 61,795 64,759 460,274 4,405,242 1,251,016 966,771 6,623,029 Fixed rate securities Floating rate non-government securities Total investment securities Included in available-for-sale investment securities is an amount of AED 1,399.2 million (2015: AED 665.2 million), pledged under repurchase agreements with banks (note 15). There are certain AFS securities which have a significant or prolonged decline in their market value as compared to their cost which resulted in an impairment loss of AED 8.2 million (2015: AED 12.6 million). As at 31 December 2016, the fair value of HTM securities is AED 387.9 million (2015: Nil). The fair value represent level 1 of the fair value hierarchy. 38
41. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 8 INVESTMENT SECURITIES (continued) 8.1 AFS debt securities The below table shows the rating of AFS and HTM debt securities: 2016 2015 AED'000 AED'000 Rated Aaa to Aa3 1,204,304 492,159 Rated A1 to A3 2,385,142 2,296,764 Rated Baa1 to Baa3 2,214,364 2,320,484 Rated below Baa3 288,903 53,833 Unrated-Government 951,785 975,290 Unrated-others 153,361 51,023 7,197,859 6,189,553 The above represents rating from ECAI as per Central Bank U.A.E. 8.2 Fund of funds investments This represents investments in global and regional asset management funds as a part of the Group’s strategy of diversifying its holdings. These investments are carried at net assets value provided by the respective fund managers. 9 INVESTMENT IN AN ASSOCIATE Equity accounting was applied using management information available at the time of the Board approval date and subsequent changes are not considered material. The following is the aggregated financial information of the associate: Assets Liabilities Revenue At 1 January Share of profit of associate Dividends received Share of Directors' remuneration of associate Others At 31 December 2016 2015 AED'000 AED'000 1,261,476 1,093,247 827,028 631,111 26,761 38,288 2016 2015 AED'000 AED'000 82,029 84,590 3,408 4,741 (2,662) (6,653) (200) (649) (4,807) - 77,768 82,029 Others represents Bank’s share of the adjustments which were recognized by an associate due to early adoption of new financial regulations for insurance companies in 2015. 39
42. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 10 INVESTMENT PROPERTIES The movement in investment properties during the year is as follows: 2016 2015 AED'000 AED'000 436,173 342,822 Cost At 1 January Additions At 31 December 63,467 93,351 499,640 436,173 102,412 92,831 Depreciation / Impairment At 1 January Impairment allowance against investment properties (see note below) Charge for the year At 31 December 12,120 - 9,917 9,581 124,449 102,412 375,191 333,761 Net book value At 31 December Investment properties comprises buildings. Rental income from investment properties leased under operating lease recorded in other income is AED 31.3 million (2015: AED 32.9 million). The fair value of investment properties as at 31 December 2016 is not materially different from their carrying value. During the year ended 31 December 2015, property with a carrying value of AED 91 million was transferred from other assets to investment properties. This non cash transaction is included in additions during the year ended 31 December 2015. Investment properties includes certain properties held for sale amounting to AED 142.3 million (2015: AED 91 million), these properties were acquired in settlement of a previously written off loan. This includes an amount of AED 43.3 million, net of impairment allowance of AED 12.1 million (gross value AED 55.4 million) (note 7). 40
43. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 11 PROPERTY AND EQUIPMENT Freehold land and buildings AED’000 Leasehold improvements AED’000 Furniture, equipment & vehicles AED’000 Capital work in progress (CWIP) AED’000 Total AED’000 Cost At 1 January 2016 Additions during the year Transfer from CWIP Disposals At 31 December 2016 391,374 3,682 395,056 57,854 2,935 (5,121) 55,668 330,583 2,849 12,673 (1,940) 344,165 9,112 57,646 (12,673) (290) 53,795 788,923 67,112 (7,351) 848,684 Depreciation At 1 January 2016 Charge for the year On disposals 148,003 10,401 - 36,663 5,646 (4,675) 271,940 27,173 (1,678) - 456,606 43,220 (6,353) At 31 December 2016 158,404 37,634 297,435 - 493,473 236,652 18,034 46,730 53,795 355,211 Net book values At 31 December 2016 Freehold land and buildings AED’000 Leasehold improvements AED’000 Furniture, equipment & vehicles AED’000 Capital work in progress AED’000 Total AED’000 Cost At 1 January 2015 Additions during the year Transfers Disposals At 31 December 2015 385,328 6,046 391,374 38,404 3,549 15,901 57,854 305,506 6,590 20,831 (2,344) 330,583 12,269 34,102 (36,732) (527) 9,112 741,507 50,287 (2,871) 788,923 Depreciation At 1 January 2015 Charge for the year On disposals 137,474 10,529 - 32,693 3,970 - 247,488 26,559 (2,107) - 417,655 41,058 (2,107) At 31 December 2015 148,003 36,663 271,940 - 456,606 243,371 21,191 58,643 9,112 332,317 Net book values At 31 December 2015 Freehold land and buildings includes the market value of a plot of land granted to the Group by the Government of Dubai in 1998. Granted land is valued at market value on the date of grant. The Group assessed whether there is an indication that an asset may be impaired and concluded that there was no indication of impairment. 41
44. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 12 OTHER ASSETS Interest receivable 13 2016 2015 AED'000 AED'000 262,790 223,968 Accounts receivable and prepayments 56,995 70,330 Positive mark to market value of derivatives (note 29) 77,330 46,253 397,115 340,551 DUE TO BANKS Current and demand deposits Short term borrowings 2016 2015 AED'000 AED'000 495,615 216,975 1,064,533 894,487 1,560,148 1,111,462 Short term borrowings include cash collaterals against repurchase agreements amounting to AED 358 million (2015: AED 214 million). 14 CUSTOMERS’ DEPOSITS AND ISLAMIC CUSTOMERS’ DEPOSITS Customers' deposits Current and demand accounts 2016 2015 AED'000 AED'000 15,502,051 Savings accounts Time deposits Islamic customers’ deposits Current and demand accounts 1,495,090 17,842,136 16,954,852 35,030,683 32,575,541 2016 2015 AED'000 AED'000 1,462,891 Mudaraba savings accounts Investment and Wakala deposits Total customers' deposits and Islamic customers' deposits By sector: Government Corporate Personal 42 14,125,599 1,686,496 1,082,054 546,084 548,916 6,734,166 6,268,265 8,743,141 7,899,235 43,773,824 40,474,776 2016 2015 AED'000 AED'000 10,815,329 8,664,490 21,960,612 10,997,883 21,919,592 43,773,824 40,474,776 9,890,694
45. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 15 NOTES AND MEDIUM TERM BORROWINGS Syndicated loan Repurchase agreements - I Repurchase agreements - II Euro medium term notes - I Euro medium term notes - II 15.1 15.2 15.2 15.3 15.3 2016 2015 AED'000 AED'000 1,641,103 1,648,767 551,442 551,442 591,799 1,830,527 1,828,467 1,465,666 1,464,018 6,080,537 5,492,694 15.1 Syndicated loan In June 2016, the Group entered into a club deal of USD 450 million (AED 1,653 million) for a term of 3 years with an option to roll over on a quarterly or semi-annual basis. This replaced the syndicated loan arrangement of USD 450 million maturing in December 2016, which was prepaid in June 2016 and carried interest at the rate of 3 month LIBOR plus 125 basis points payable on a quarterly basis. The current arrangement carries interest at the rate of 3 month LIBOR plus 125 basis points payable on a quarterly basis. 15.2 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 551.3 million) with arrangements to repurchase them at a fixed future date in July 2017. During the period ended 30 June 2016 the arrangement of repurchase has been extended for additional five years till 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 591.7 million) with arrangements to repurchase them at a fixed future date in June 2021. These securities are carried at fair value amounting to AED1,399.2 million (USD 380.9 million) (2015: AED 665.2 million (USD 181.1 million)). 15.3 Euro medium term notes In 2013, CBD activated its Euro Medium Term Note (EMTN) program. These notes can be issued by way of private or public placements and in each case on a syndicated or non-syndicated basis. These notes can be priced at fixed rate, floating rate or can be index linked. The maximum issuance under the program was USD 2 billion (AED 7.3 billion). At the Annual General Meeting (AGM) held on 28 February 2016 shareholders approved the increase of the program limit up to a total of USD 3 Billion (AED 11 billion). In May 2013, CBD issued USD 500 million (AED 1,836.5 million) of conventional bonds. These notes were priced at 3.375 per cent fixed rate and mature on 21 May 2018. In November 2015, CBD issued USD 400 million (AED 1,469.2 million) of conventional bonds. These notes were priced at 4 per cent fixed rate and mature on 17 November 2020. 16 OTHER LIABILITIES Interest payable Employees' terminal benefits Accounts payable 2016 2015 AED'000 AED'000 162,534 117,043 65,722 66,777 316,366 185,602 Accrued expenses 90,212 83,103 Manager cheques 160,167 137,957 Unearned fee income and deferred credits 78,249 54,084 Negative mark to market value of derivatives (note 29) 55,438 39,988 928,688 684,554 43
46. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 17 EQUITY Share capital The fully paid up and authorised ordinary share capital as at 31 December 2016 comprised 2,802,733,968 ordinary shares of AED 1 each (2015: 2,802,733,968 shares of AED 1 each). The movement in no. of shares during the year is as follows: 2016 2,802,733,968 As at 1 January - Bonus shares issued during the year 2,802,733,968 As at 31 December 2015 2,242,187,174 560,546,794 2,802,733,968 Legal reserve The Group's Article of Association in line with regulatory requirements require a minimum of 10% of annual net profit to be transferred to legal reserve, until such time as this reserve equals 50% of share capital. During the year no transfer to legal reserve was required (2015: AED 20,872 thousand) to meet the minimum regulatory requirement. The legal reserve is not available for distribution except under the circumstances stipulated by the relevant law. Capital reserve This reserve represents the market value of the granted land at the date of grant as explained in note 11, and is not available for distribution to the shareholders. General reserve In accordance with the Group’s Articles of Association, 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. During the current year an amount of AED 100,307 thousand (2015: AED 106,623 thousand) was transferred to the general reserve. This reserve may only be used for the purposes recommended by the Board of Directors and approved by the Shareholders. Cumulative changes in fair values of AFS investments and cash flow hedge instruments This represents the net change in the fair values of available-for-sale investments and derivative instruments designated as cash flow hedge instruments held by the Group at reporting date. This reserve is not available for distribution to the shareholders until realised. Proposed distribution The Board of Directors have proposed the following distribution for approval by the Annual General Meeting of the shareholders to be held in March 2017. i) Proposed cash dividend A cash dividend of 20% (2015: 20%) of the share capital amounting to AED 560,546,794 (2015: AED 560,546,794) is proposed representing a dividend of AED 0.2 per share (2015: AED 0.2 per share). ii) Proposed bonus issue No bonus issue is proposed (2015: nil). iii) Proposed directors’ remuneration This represents Directors’ remuneration amounting to AED 11,000,000 (2015: AED 11,000,000) which has been treated as an appropriation from equity. 44
47. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 18 INTEREST INCOME AND INCOME FROM ISLAMIC FINANCING 2016 2015 AED'000 AED'000 Interest income Loans and advances Negotiable certificates of deposit with the Central Bank Due from banks 1,847,774 1,652,277 4,940 1,315 11,133 4,973 Investment securities - Held-to-maturity bonds 2,445 - Available-for-sale bonds - 182,994 155,658 2,049,286 1,814,223 2016 2015 AED'000 AED'000 Income from Islamic financing Murabaha 94,712 60,814 117,854 82,955 Musharaka 46 522 Negotiable certificates of deposit with Central Bank 46 148 Ijara Investment securities - Available-for-sale sukuk Total interest income and income from Islamic financing 19 25,859 4,369 238,517 148,808 2,287,803 1,963,031 INTEREST EXPENSE AND DISTRIBUTION TO ISLAMIC DEPOSITORS 2016 2015 AED'000 AED'000 Interest expense Due to banks 6,122 2,500 Customers' deposits 242,513 142,323 Notes and medium term borrowings 184,393 116,196 Others 2,578 1,948 435,606 262,967 127,044 60,033 Distribution to Islamic depositors Islamic customers’ deposits Total interest expense and distribution to Islamic depositors 127,044 60,033 562,650 323,000 Distribution to Islamic depositors represents the share of income allocated to Islamic depositors of the Group. The allocation and distribution is approved by the Group’s Sharia’a Supervisory Board. 45
48. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 20 NET FEES AND COMMISSION INCOME 2016 2015 AED'000 AED'000 Lending activities 148,763 162,066 Trade finance activities 138,631 138,553 Account operating activities 164,925 158,176 Cards income and brokerage fees Cards, commissions and brokerage expenses 21 82,568 75,073 534,887 533,868 (39,625) (35,618) 495,262 498,250 NET GAINS FROM INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS - HELD FOR TRADING 2016 2015 AED'000 AED'000 Net realised gains on sale of investments at fair value through profit or loss- held for trading 924 Net unrealised gains / (losses) on investments at fair value through profit or loss- held for trading 924 22 1,247 DIVIDEND INCOME Investments at fair value through profit or loss – held for trading Available-for-sale investments 23 2,540 (1,293) 2016 2015 AED'000 AED'000 - 16 7,449 6,051 7,449 6,067 STAFF AND OTHER EXPENSES Staff and other expenses include staff related expenses of AED 609.6 million (2015: AED 606.7 million) and sitting fees paid to directors for attending committee meetings during the year ended 31 December 2016 of AED 2.9 million (2015: AED 2.9 million) and corporate social responsibility (CSR) related expenses of AED 1.94 million (2015: AED 2.97 million). 46
49. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 24 OPERATING LEASES Group as lessee General and administrative expenses include rental expense under operating leases of AED 21.1 million (2015: AED 21.94 million). Future minimum lease payments under non-cancellable operating leases as at 31 December are, as follows: Less than 1 year From 1 year to 5 years 25 2016 2015 AED'000 AED'000 8,288 10,284 10,670 14,040 18,958 24,324 BASIC AND DILUTED EARNINGS PER SHARE The earnings per share (EPS) is based on the Group’s profit for the year amounting to AED 1,003.1 million (2015: AED 1,066.2 million), and on the weighted average number of shares in issue totaling 2,802,733,968 (2015: 2,802,733,968). There was no dilutive effect on earnings per share. 26 CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flow comprise the following consolidated statement of financial position amounts: 2016 2015 AED'000 AED'000 Cash on hand 515,182 530,397 Balances with the U.A.E. Central Bank 718,248 497,509 Negotiable certificates of deposit with the U.A.E. Central Bank with original maturity less than three months 2,500,000 2,600,000 Due from banks with original maturity less than three months 3,198,680 2,243,916 6,932,110 5,871,822 Due to banks with original maturity less than three months (1,373,418) 5,558,692 47 (909,447) 4,962,375
50. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 27 CONTINGENT LIABILITIES AND COMMITMENTS Contingent liabilities represent credit-related commitments to extend letters of credit, guarantees and forward foreign exchange contracts which are designed to meet the requirements of the Group’s customers toward third parties. 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. 2016 2015 AED'000 AED'000 Contingent liabilities: Letters of credit 1,157,549 1,071,325 Guarantees 8,446,494 7,868,227 9,604,043 8,939,552 807,563 13,682,630 14,490,193 708,740 16,513,865 17,222,605 32,809 16,800 24,127,045 26,178,957 Undrawn commitments to extend credit: - irrevocable - revocable Capital commitments: Capital expenditure commitments Total contingent liabilities and commitments Acceptances Under IAS 39, acceptances are recognised on balance sheet with a corresponding liability. Accordingly, there is no off balance sheet commitment for acceptances. 28 FIDUCIARY ASSETS Assets held under fiduciary capacity on behalf of clients amounted to AED 1,196.6 million (2015: AED 1,568.4 million). 48
51. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 29 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. 31 December 2016 Cash flow hedge instrument Fair value hedge instruments Forward foreign exchange contracts and other derivatives assets Forward foreign exchange contracts and other derivatives liabilities Positive market value Negative market value Notional amount Less than From three three months to months one year AED'000 AED'000 AED'000 AED'000 89,345 555,144 - AED'000 - From one year to five years Over Five years AED'000 AED'000 29,751 114,669 59,594 440,475 2,047 16,092 1,351 2,805 59,191 - 5,286,473 2,481,758 661,802 903,994 1,238,919 77,330 51,282 55,438 3,320,197 9,251,159 1,435,237 3,916,995 463,109 1,124,911 411,776 1,460,190 1,010,075 2,749,063 Positive market value Negative market value Notional amount Less than From three three months to months one year From one year to five years Over Five years AED'000 AED'000 AED'000 AED'000 AED'000 AED'000 AED'000 40,716 30,092 60,185 636,913 1,012,770 31 December 2015 Cash flow hedge instrument Forward foreign exchange contracts and other derivatives assets Forward foreign exchange contracts and other derivatives liabilities 946 - 130,993 - 45,307 - 6,478,294 4,277,428 551,183 - 39,988 5,038,760 1,822,424 1,799,861 442,455 974,020 46,253 39,988 11,648,047 6,099,852 2,391,760 1,109,460 2,046,975 Cash-flow hedge instruments include interest rate and cross currency swaps. Fair value hedge instruments include interest rate swaps. The hedged forecast cash-flows which are expected to occur over the future years and are expected to affect profit or loss, are insignificant. 49
52. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 30 SEGMENTAL REPORTING The primary format, business segments, is based on the Group’s management and internal reporting structure that are regularly reviewed by the Executive Committee in order to allocate resources to the segment and to assess its performance. Business segments pay to and receive interest from the Treasury to reflect the allocation of capital and funding costs. Business segments Corporate banking Includes loan and other credit facilities, deposits, trade finance products and ecommerce solutions to large corporate clients (including Government related entities). Commercial banking Includes loans, working capital financing, trade finance and deposits products to commercial (mid-sized) clients. Personal banking Includes current accounts, easy access saving accounts, fixed rate deposit accounts, personal loans, overdraft facilities, vehicle finance, mortgage products, loans and other credit facilities to business (small) clients, high net-worth (Al Dana), mid-tier clients (personal) and modest income group (direct). Treasury and investments Undertakes balance sheet management deals and manages the Group’s proprietary investment portfolio. It also has derivatives for trading and risk management purposes. Interest is charged or credited to business segments and branches to match funding transfer pricing rates which approximate the cost of funds. Geographical The Group operates in one geographic area, the United Arab Emirates. Segmental analysis for the year ended 31 December 2016 and 31 December 2015 is as follows: Corporate Commercial banking banking AED’000 AED’000 Personal banking Treasury & investments Total AED’000 AED’000 AED’000 31 December 2016 Assets 29,373,935 9,375,467 7,611,437 17,718,937 64,079,776 Liabilities 25,972,735 7,149,853 14,548,864 7,728,701 55,400,153 31 December 2015 Assets 25,699,906 9,503,540 6,964,489 15,695,953 57,863,888 Liabilities 22,454,974 7,319,060 13,229,375 6,631,675 49,635,084 50
53. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 30 SEGMENTAL REPORTING (continued) Corporate Commercial banking banking Personal banking Treasury & investments Total AED’000 AED’000 AED’000 AED’000 AED’000 Net interest income and net income from Islamic financing 502,002 384,120 530,741 308,290 1,725,153 Non-interest & other income 208,988 170,539 265,237 92,121 736,885 Total operating income 710,990 554,659 795,978 400,411 2,462,038 Expenses (note a) 199,250 162,066 468,708 40,506 870,530 Net provisions (note b) (33,204) 299,373 301,449 20,825 588,443 166,046 461,439 770,157 61,331 1,458,973 544,944 93,220 25,821 339,080 1,003,065 Net interest income and net income from Islamic financing 486,358 412,419 449,943 291,311 1,640,031 Non-interest & other income 225,897 163,244 246,509 76,556 712,206 Total operating income 712,255 575,663 696,452 367,867 2,352,237 Expenses (note a) 155,463 153,835 510,104 39,382 858,784 Net provisions (note b) 128,481 132,454 145,898 20,391 427,224 283,944 286,289 656,002 59,773 1,286,008 428,311 289,374 40,450 308,094 1,066,229 31 December 2016 Net profit for the year 31 December 2015 Net profit for the year (a) This includes staff and other expenses and depreciation and amortization. (b) This includes impairment allowances on loans and advances and Islamic financing, recoveries, impairment allowance on investment securities and impairment allowance against investment properties. 51
54. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 31 RELATED PARTY TRANSACTIONS AND BALANCES As at 31 December 2016 and 31 December 2015, Investment Corporation of Dubai (“ICD”) owns 20% share capital of the Bank. ICD is wholly owned by the Government of Dubai (the “Government”). Other than the transactions disclosed below, the Group enters into transactions with other Government entities. In accordance with the exemption available in the revised IAS 24, the other transactions with such related Government entities are not collectively or individually significant and have not been disclosed. 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 Loans and advances and Islamic financing, net Government related parties Other related parties 2016 2015 2016 2015 2016 2015 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 172,873 187,636 2,098,803 1,740,082 Due from banks - - 275,475 600,000 - - Investment securities Acceptances - - 848,652 820,465 - - - - 216,067 1,221 11,792 10,850 Letters of credit - - 828 1,988 22,698 14,776 Letters of guarantees Undrawn commitments to extend credit - - 173,011 175,202 711,539 515,466 17,003 15,732 1,611,097 1,449,364 580,451 467,478 Due to banks Customers' deposits and Islamic customers' deposits - - 24,884 15,775 Interest income and commission income 7,498 Interest expense Dividend from an associate 5,134,963 5,106,007 1,702,570 829,458 2,562,735 8,505 67,275 50,118 37,804 31,262 10 74,787 46,183 30,297 24,961 2,662 6,653 - - 54 - 18,846 1,001,567 - 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. The terms of transactions with related parties are comparable to third party transactions and do not involve more than normal amount of risk. No specific allowance for impairment losses has been made on balances with key management personnel and their immediate relations at the year end. Proposed directors remuneration for 2016 AED 11 million (2015: 11 million) is reflected in consolidated statement of changes in equity. Sitting fees paid to directors for attending committee meetings during the year ended 31 December 2016 amounted to AED 2.9 million (2015: AED 2.9 million). Key management compensation Salaries Post-employment benefits Other benefits 52 2016 2015 AED'000 AED'000 14,284 11,835 648 786 5,935 7,622
55. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 32 RISK MANAGEMENT OBJECTIVES AND POLICIES 32.1 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(CIC) and Nomination & Remuneration Committee (REMCO). Management actively manages risk, primarily through the Risk Department with oversight by the Executive Committee (EXCO), Business Committee (BC), Assets & Liabilities Committee (ALCO), Credit Committee (CC), IT Steering Committee (ITSC), Information Security Risk Committee (ISRC), Compliance Committee (CCO), Investment Committee (IC) and Human Resources Committee (HRC). 32.2 Control Environment a) Group Risk Group Risk Department comprises credit, market, operational and IT risks units. Its responsibilities include the following: • Developing a strategy, policy and framework for risk management such that these are aligned with business requirements; • Providing support to the Group in implementation of the framework; • Bringing together analysis of risk concentrations and sensitivities across the Group; • Acting as a point of reference for risk and control matters, providing advice to management, sharing best practices and carrying out special reviews as directed by ALCO; and • Providing independent assessment of, and challenge to the business areas’ risk management and profiles to ensure that they are maintained in a robust manner. b) Internal Audit The role of the Internal Audit Department within the Group is to provide independent and objective assurance that the process for identifying, evaluating and managing significant risks faced by the Group is appropriate and effectively applied. In addition, it also provides an independent check on the compliance with laws and regulations and measuring compliance with the Group’s policies and procedures. Additionally, Internal Audit provides consulting services which are advisory in nature, and are generally performed at the specific request of the ACC or Management. It is led by the Head of Internal Audit who reports to the ACC of the Board of Directors, with administrative reporting to the Chief Executive Officer of the Bank. 53
56. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 32 RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 32.2 Control Environment (continued) b) Internal Audit (continued) 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 Bank. 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. 54
57. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 32 RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 32.2 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 the values of integrity and sound professional conduct within the Group 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, FATCA and CRS requirements. Fraud prevention The Bank 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 bank’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. 55
58. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 32 RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 32.3 Disclosure policy The Group has laid down the disclosure policy to ensure compliance with all regulations and guidelines issued by the lead regulator Central Bank of the UAE (CBUAE), International Financial Reporting Standards (IFRS), Securities and Commodities Authority (SCA) and Dubai Financial Market (DFM). The following are the key features of the Group’s disclosure policy concerning disclosure of financial information: a) Materiality thresholds Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of consolidated financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement, and / or any material information that might affect the share price. The Group, in order to ensure adequate disclosure lays down qualitative materiality threshold, so that no material information is omitted or misstated; at the same time it does not jeopardize its competitive position. b) Control framework In order to ensure true and fair disclosure, the Group has established controls including detailed procedures for finalization and review of financial disclosures. In addition, the consolidated financial statements are subject to a quarterly review and year end audit procedures by the Group’s external auditors. 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 II Pillar 3, relevant laws of the U.A.E, SCA requirement and other guidelines from CBUAE is made on annual basis. Disclosures of material non-public financial information are made as follows: • Uploading quarterly reviewed and annual audited consolidated financial statements along with Directors’ report to DFM and SCA websites; • Posting quarterly and annual consolidated financial statements on the Group’s website; • Publishing of annual audited consolidated financial statements in both Arabic and English newspapers after the approval of the Central Bank of UAE and the Shareholders at the Annual General Meeting (AGM); • Management discussion and analysis in Arabic and English newspapers in a manner that ensures wide dissemination; and • Publication of the annual report which includes audited consolidated financial statements. • Investor’s pack is presented on Bank’s website on a quarterly and annual basis. 56
59. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT a) Introduction and overview The Group has exposure to the following primary risks: • Credit risk • Liquidity risk • Market risk • Operational risk Risk is inherent to the Group’s business and activities. The Group’s ability to identify, assess, monitor and manage each type of risk to which the Group is exposed is an important factor in its financial stability, performance and reputation. The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, through its training, management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The 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 loans and advances, Islamic financing, amounts due from banks and investment in debt securities. For reporting purpose credit risk on Islamic financing is reported as component of credit risk on loans and advances. For risk management purposes, credit risk arising on trading investments is managed independently. (i) Management of credit risk Credit Committee (CC) manages the credit risk of the Group by continuous review and update of credit limits, credit policies, process and frame-work, the approval of specific exposures and work out proposals, constant revaluation of the loans portfolio and the sufficiency of provisions thereof. 57
60. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (ii) Impaired loans and advances, Islamic financing and investment in debt securities Individually impaired loans and advances, Islamic financing and investment in debt securities are financial assets for which the Group determines that there is objective evidence of impairment and it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the agreements. The Group Credit Risk Rating Methodology, which has been internally developed based on actual historical data, is in line with the requirements set out in the Basel II Accord and has a 14-grades frame-work, whereby: • The first 9 grades are assigned to non-defaulting borrowers / performing accounts; • Grade 10 reflects irregular accounts; and • The last 4 grades are for defaulting borrowers / non- performing accounts. Grades Asset quality Risk significance 1 2-5 Normal Normal Good, top performing assets and debt securities with External Credit Assessment (ECA) of "A" and better than "A" and unrated bonds internally assessed as top performing. Good, above average performing assets 6-9 Normal Good, below average performing assets 10 OLEM Watch-list loans / performing 11-12 Substandard - Interest Suspended / Specific provision starts / nonSub-standard performing 13 Doubtful Doubtful of recovery / non-performing 14 Loss Loss (fully provided for, or written off) / non-performing The methodology provides a multi-dimensional approach to the Group’s Credit Risk Rating, where credit is assessed and rated on two dimensions, as follows: • 1st Dimension: which assesses / rates the borrower’s probability of Default (PD); and • 2nd Dimension: which assesses / rates the facility and the Loss-Given Default (LGD). Both dimensions create a Credit-Risk Rating Grid/Matrix which plays a key role in pricing, approval, and credit monitoring. In order to achieve this, the Group has priced facilities using Risk Adjusted Return on Capital (RAROC). (iii) Past due but not impaired loans These are the loans where contractual interest or principal payments are past due, but the Group believes that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage of collection of amounts owed to the Group. 58
61. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (iv) Loans with renegotiated terms Loans with renegotiated terms include loans, the repayment plan of which have been rescheduled with no other concession in amount or rate of interest. Rescheduling activity is designed to manage customer relationships. Following rescheduling, an overdue account will normally be reset from delinquent to current status. Rescheduling is done based on indications or criteria which, in the opinion of management, evidence the probability that payment will continue. Management continuously monitors the progress on renegotiated loans to ensure compliance with the terms at all times. (v) Restructured performing loans / under restructuring Restructured performing loans or loans under restructuring represent loans, whose terms have been restructured or are under restructuring and involve a concession in rate of interest. These loans are not delinquent; however appropriate impairment loss is recognised on such loans. At 31 December 2016, restructured performing loans and loans under restructuring amount to AED 638.2 million (2015: AED 631.8 million). 59
62. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (vi) 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 impairment losses, if any. Loans and receivables 2016 2015 AED'000 AED'000 i. Neither past due nor impaired Grades 1: good, top performing assets Grade 2-9: good, performing assets Grade 10: watch- list loans /performing Carrying amount Due from banks 2016 2015 AED'000 AED'000 12,372,359 27,049,295 9,741,791 26,433,442 3,724,254 - 2,591,717 - 1,728,680 41,150,334 1,153,720 37,328,953 3,724,254 2,591,717 - Debt securities 2016 2015 AED'000 AED'000 5,284,847 1,913,012 4,382,828 1,826,623 7,197,859 6,209,451 - ii. Past due but not impaired In Grade 1 to 10 Less than 30 days 30 - 60 days 60 - 90 days Over 90 days Carrying amount iii. Individually impaired Grade 11 & 12: Substandard Grade 13: Doubtful Grade 14: Loss Carrying amount iv. Impaired on portfolio basis – Retail Grade 11 & 12: Substandard 271,079 174,579 129,437 341,327 287,307 862,402 389,901 201,894 540,188 1,473,310 793,390 566,705 1,202,040 2,562,135 - - - - 1,142,155 - 1,132,527 342,423 2,617,105 - 68,094 - - - - - - - - - - - - - - Grade 13: Doubtful Grade 14: Loss 92,525 381,535 64,907 Carrying amount 538,967 208,115 1,869 278,078 Total carrying amount 45,113,838 41,697,446 Specific provision for impairment (1,215,674) (1,009,465) - - - - Portfolio provision for impairment related to (iv) above (213,522) (98,450) - - - - (420,113) (530,661) (507,978) (381,943) - - - - Total provisions for impairment (771,330) (3,151,300) (678,789) (2,676,625) - - - - Carrying amount net of impairment 41,962,538 39,020,821 Specific provision for individually restructured loans and under restructuring /OLEM Interest in suspense Collective provision for impairment related to (i) and (ii) above 60 3,724,254 3,724,254 2,591,717 2,591,717 7,197,859 7,197,859 6,209,451 6,209,451
63. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (vii) Allowances for impairment The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are specific loss component that relate to individually significant exposures, and a collective loan loss allowance established for group of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Assets carried at fair value through profit or loss is not subject to impairment testing 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 individually impaired and restructured loans / under restructuring) loans by sector is shown below: Commercial and Business:Manufacturing Construction Real estate Trade Services Business and investment Total commercial and business Banks and financial institutions Government and public sector entities Personal - mortgage Personal - loans Others Total carrying amount Impaired loans AED'000 44,773 12,193 267,408 1,311,942 763,278 222,114 2,621,708 305,016 165,594 8,784 3,101,102 Collateral AED'000 907 550 229,534 319,306 361,780 3,351 915,428 206,875 80 1,200 1,123,583 2015 Commercial and Business:Manufacturing Construction Real estate Trade Services Business and investment Total commercial and business Banks and financial institutions Government and public sector entities Personal - mortgage Personal - loans Others Total carrying amount 56,711 16,026 294,073 944,064 1,030,291 164,713 2,505,878 270,912 106,956 11,437 2,895,183 25,514 248,974 333,284 95,467 16,481 719,720 285,280 1,764 1,006,764 2016 Specific provision and interest in suspense AED'000 22,329 6,219 106,734 1,013,674 324,591 195,916 1,669,463 169,359 115,429 5,606 1,959,857 46,039 7,633 116,399 697,679 315,293 86,993 1,270,036 131,351 77,141 11,330 1,489,858 In addition to the specific provision, the Group held AED 771.3 million (2015: AED 678.8 million) as collective provisions. 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 carrying value of unfunded exposures pertaining to impaired loans amounted to AED 98.7 million (2015: AED 112.1 million). 61
64. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (vii) Allowances for impairment (continued) Set out below is an analysis of the gross and net (of provisions for impairment) amounts of individually impaired assets by risk grade: 31 December 2016 Grade11&12: Substandard Grade 13: Doubtful Grade 14: Loss Total Gross AED'000 793,390 566,705 1,202,040 2,562,135 31 December 2015 Grade11&12: Substandard Grade 13: Doubtful Grade 14: Loss Total 1,142,155 1,132,527 342,423 2,617,105 Specific provision and interest in suspense AED'000 243,175 334,678 1,041,767 1,619,620 291,690 748,117 259,599 1,299,406 Net AED'000 550,215 232,027 160,273 942,515 850,465 384,410 82,824 1,317,699 In addition to specific provisions and interest in suspense the Group also holds collaterals against the nonperforming loans. Realisable value of these collaterals is taken into account to calculate provision requirement. (viii) Write - off policy The Group writes off a loan / investment in debt security (and any related allowances for impairment) when the Group Credit Committee determines that the loan / security is uncollectible. This determination is reached after considering information such as the significant deterioration in the borrower’s/issuer’s financial position such that the borrower / issuer can no longer pay the obligation, or proceeds from collateral will not be sufficient to pay back the entire exposure or all possible efforts of collecting the amounts have been exhausted. For smaller balances of standardized loans, write off decisions are generally based on a product-specific past due status. (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 2016 or 2015. Analysis of collateral by type is presented in the following table: Pledged deposits Properties Hypothecation & mortgages Pledge of shares Government and bank guarantees Bills discounted-cheques Others Total collaterals 2016 2015 AED'000 1,627,016 12,499,079 1,141,209 864,012 130,073 624,051 AED'000 1,762,628 12,502,324 1,331,345 844,874 115,823 657,547 50,830 16,936,270 170,651 17,385,192 The above represents collateral value restricted to the lower of loan balance or collateral value. 62
65. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (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 2016 Loans and advances and Islamic financing AED'000 Due from banks AED'000 Equity Cash, balances securities and with Central Debt fund of funds bank and securities other assets AED'000 AED'000 AED'000 Contingent Total funded Undrawn liabilities and exposures commitments acceptances AED'000 AED'000 AED'000 Concentration by sector Commercial and Business:Manufacturing Construction Real estate Trade Services Business and investment Total commercial and business 1,183,406 1,412,070 4,550,842 7,362,536 6,666,446 11,993,430 33,168,730 Banks and financial institutions Government and public sector entities Personal-mortgage Personal-schematic Others Total carrying amount 910,237 5,056,247 2,308,945 3,276,700 392,979 45,113,838 3,724,254 3,724,254 463,546 463,546 94,666 9,945 104,611 3,418,724 3,315,589 7,197,859 109,647 6,160 220,418 63 77,768 6,197,284 1,659,338 7,934,390 1,183,406 1,412,070 4,550,842 7,362,536 6,761,112 12,466,921 33,736,887 1,043,931 820,751 682,483 2,617,930 2,333,058 2,579,169 10,077,322 580,419 422,675 1,588,460 4,220,127 4,578,323 145,183 11,535,187 8,240,630 14,569,120 2,308,945 3,276,700 2,058,477 64,190,759 1,561,452 1,777,603 55,069 730,631 288,116 14,490,193 598,777 360,053 23,066 143,916 12,660,999
66. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (x) Concentration (continued) Concentration of credit risk by sector for 2015 Loans and advances and Islamic financing AED'000 Concentration by sector Commercial and Business:Manufacturing Construction Real estate Trade Services Business and investment Total commercial and business 1,508,709 1,148,045 3,863,885 7,345,095 5,796,587 10,405,974 30,068,295 Banks and financial institutions Government and public sector entities Personal-mortgage Personal-schematic Others Total carrying amount 771,527 5,460,304 2,296,432 2,697,381 403,507 41,697,446 Due from banks AED'000 2,591,717 2,591,717 Equity Cash, balances securities and with Central Debt fund of funds bank and securities other assets AED'000 AED'000 AED'000 261,125 261,125 84,425 7,922 92,347 3,200,628 2,747,698 6,209,451 312,135 9,096 413,578 Acceptances are part of unfunded exposures; in line with the Basel II, Pillar 3 disclosure requirements. 64 82,029 6,137,668 1,538,506 7,758,203 Contingent Total funded Undrawn liabilities and exposures commitments acceptances AED'000 AED'000 AED'000 1,508,709 1,148,045 3,863,885 7,345,095 5,881,012 10,675,021 30,421,767 434,304 1,080,241 639,769 4,299,972 3,556,464 2,640,092 12,650,842 353,446 300,614 878,333 3,375,498 3,941,851 25,881 8,875,623 6,958,036 14,345,670 2,296,432 2,697,381 1,951,109 58,670,395 886,256 2,964,165 28,772 329,511 363,059 17,222,605 628,966 209,173 19,106 1,078,282 10,811,150
67. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (x) Concentration (continued) Concentration of credit risk by geographic location: Loans and advances and Islamic financing AED'000 Due from banks AED'000 Equity Debt securities and securities fund of funds AED'000 AED'000 Cash, balances with Central bank and other assets AED'000 Contingent Total funded Undrawn liabilities and exposures commitments acceptances AED'000 AED'000 AED'000 2016 Concentration by location UAE GCC Middle East Europe USA Asia Others Total carrying amount 44,184,796 372,741 57,724 127,405 5,399 365,773 45,113,838 1,397,924 626,540 37,139 1,133,596 61,513 406,851 60,691 3,724,254 4,549,311 2,034,519 186,457 116,866 264,190 46,516 7,197,859 144,931 11,701 63,786 220,418 7,934,390 7,934,390 58,211,352 3,045,501 94,863 1,511,244 178,379 676,440 472,980 64,190,759 14,315,967 28,744 68,650 5,326 71,506 14,490,193 12,059,074 76,094 26,049 219,712 71,476 202,316 6,278 12,660,999 2015 Concentration by location UAE GCC Middle East Europe USA Asia Others Total carrying amount 41,144,705 342,041 1,049 83,982 19,749 105,920 41,697,446 1,217,948 623,551 38,276 411,377 36,156 206,717 57,692 2,591,717 4,255,371 1,229,889 225,398 59,250 395,424 44,119 6,209,451 149,871 21,127 242,580 413,578 7,758,203 7,758,203 54,526,098 2,216,608 39,325 963,337 95,406 621,890 207,731 58,670,395 17,056,790 41,763 1,594 107,467 14,991 17,222,605 10,202,408 178,348 61,375 286,657 70,854 11,508 10,811,150 65
68. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) b) Credit risk (continued) (x) Concentration (continued) Concentration of credit risk by currency: Loans and advances and Islamic financing AED'000 Due from banks AED'000 Equity Debt securities and securities fund of funds AED'000 AED'000 Cash, balances with Central bank and other assets AED'000 Contingent Total funded Undrawn liabilities and exposures commitments acceptances AED'000 AED'000 AED'000 2016 Concentration by currency AED Other currencies Total carrying amount 38,681,032 6,432,806 45,113,838 475,017 3,249,237 3,724,254 28,064 7,169,795 7,197,859 144,931 75,487 220,418 7,453,032 481,358 7,934,390 46,782,076 17,408,683 64,190,759 11,124,243 3,365,950 14,490,193 9,416,001 3,244,998 12,660,999 2015 Concentration by currency AED Other currencies Total carrying amount 35,263,071 6,434,375 41,697,446 670,021 1,921,696 2,591,717 30,016 6,179,435 6,209,451 149,413 264,165 413,578 7,428,834 329,369 7,758,203 43,541,355 15,129,040 58,670,395 14,965,007 2,257,598 17,222,605 9,122,744 1,688,406 10,811,150 Majority of assets denominated in other currencies are in USD to which AED is pegged. 66
69. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) c) Settlement risk The Group’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of counterparty to honour its obligations to deliver cash, securities or other assets as contractually due. Any delays in settlement are rare and are monitored and quantified as part of the Group’s Internal Capital Adequacy Assessment Procedures (ICAAP) framework and Operational Risk Management. For certain types of transactions, the Group mitigates this risk by conducting settlements through a settlement / clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval / limit monitoring process described above. Acceptance of settlement risk on free settlement trades requires transaction specific or counterparty specific approvals from the Group Risk Management Department. d) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by delivering cash or other financial assets. It includes the risk of the inability to fund assets at contracted maturities and rates and the inability to liquidate assets at reasonable prices and in the required timeframe and the inability to meet obligations as they become due. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to diminish. (i) Management of liquidity risk Liquidity risk is managed by the Treasury and Asset and Liability management (ALM) department in line with the regulatory, internal policies and guidelines. The Group’s approach to manage liquidity risk is to ensure that it has adequate funding from diversified sources at all times to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage of the Group’s reputation. Funds are raised using a broad range of instruments including customers’ deposits, medium term borrowings, money market instruments, subordinated debts and capital. The treasury and ALM department monitors the liquidity profile of financial assets and liabilities and the projected cash flows arising from existing and future business. Treasury maintains a portfolio of short-term liquid assets and inter-bank placements to ensure that sufficient liquidity is maintained. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and abnormal market conditions. The Group’s liquidity management process, as carried out within the Group and monitored by Group’s treasury, includes: • Day to day funding is managed by monitoring future cash flows to ensure that requirements can be met these include replenishment of funds as they mature or are borrowed by customers. The Group maintains an active presence in global money market to facilitate funding activities; • Maintenance of a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow; • Managing balance sheet liquidity ratios against internal and regulatory requirements; • Managing the concentration and profile of debt maturities; and • Repurchase arrangements with various Banks which allow it to repo its fixed income investments to meet any liquidity needs that may arise. 67
70. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) Liquidity risk (continued) (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 83.67% as at 31 December 2016 (2015: 84.55%). 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); • Third party liabilities maturing within one month to total third party liabilities; • Customers’ deposits maturing within one month to total customers’ deposits; • Deposits’ concentration; and • Basel III ratios (including LCR, NSFR, etc.) are also monitored internally and shared with the Board on quarterly basis. 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 2016 was as follows: Less than 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years AED'000 AED'000 AED'000 AED'000 AED'000 6,712,466 6,097,284 3,724,254 3,198,680 41,962,538 7,418,277 Total Assets Cash and balances with Central Bank Due from banks Loans and advances and Islamic financing Investment securities Investment in associate Investment properties Property and equipment Bankers acceptances - Over 5 years AED'000 100,000 - - 176,639 293,840 55,095 - 4,515,148 2,666,059 2,194,084 13,789,675 18,797,572 268,251 392,497 781,921 3,953,109 1,802,081 No Fixed Maturity AED'000 515,182 220,418 77,768 - - - - - 77,768 375,191 - - - - - 375,191 355,211 355,211 - 771,398 - 3,056,956 229,017 Other assets 397,115 397,115 Total assets 64,079,776 14,705,495 4,006,593 5,423,403 1,560,148 1,448,418 75,000 36,730 Customers’ deposits and Islamic customers’ deposits 43,773,824 25,549,254 7,455,098 9,216,685 Notes and medium term borrowings 6,080,537 - 2,053,558 - - - 2,983 - - - 17,800,862 20,599,653 1,543,770 Liabilities and equity Due to banks - - - - - - 1,552,269 518 - 6,080,537 - - 2,983 - - - - 65,722 Due for trade acceptances Other liabilities 3,056,956 229,017 928,688 862,966 Total liabilities 55,400,153 28,089,655 8,301,496 11,306,973 7,635,789 518 65,722 8,679,623 (13,384,160) (4,294,903) (5,883,570) 10,165,073 20,599,135 1,478,048 Gap representing equity 771,398 - 68 2,053,558 -
71. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) d) Liquidity risk (continued) The maturity profile of the assets and liabilities at 31 December 2015 was as follows: Total Less than 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years AED'000 AED'000 AED'000 Over 5 years Assets Cash and balances with Central Bank Due from banks AED'000 AED'000 6,668,065 5,737,668 2,591,717 2,201,996 150,976 55,095 183,650 Loans and advances and Islamic financing 39,020,821 5,800,632 2,247,312 1,658,659 13,063,738 16,250,480 6,623,029 30,947 196,567 808,196 3,811,563 1,362,178 Investment securities Investment in associate Investment properties Property and equipment Bankers acceptances - 400,000 - AED'000 - No Fixed Maturity AED'000 530,397 413,578 82,029 - - - - - 82,029 333,761 - - - - - 333,761 - - - 332,317 - - 332,317 1,871,598 - - 280,890 326,042 - 1,264,666 Other assets 340,551 340,551 Total assets 57,863,888 14,392,684 2,920,897 4,186,616 - 1,111,462 735,987 173,460 202,015 Customers’ deposits and Islamic customers’ deposits 40,474,776 23,316,579 7,686,238 9,017,977 Notes and medium term borrowings 5,492,694 1,648,767 17,058,951 17,612,658 1,692,082 Liabilities and equity Due to banks - - - - 453,982 - - 3,843,927 - - - - - - - 66,777 - 66,777 Due for trade acceptances Other liabilities 1,871,598 684,554 617,777 Total liabilities 49,635,084 24,951,233 8,185,740 12,133,425 4,297,909 8,228,804 (10,558,549) (5,264,843) (7,946,809) 12,761,042 Gap representing equity 280,890 326,042 - 1,264,666 - 17,612,658 1,625,305 The table below shows the maturity of the Group’s contingent liabilities and credit commitments: Total Less than 1 From 1 to 3 month months From 3 months to 1 year From 1 to 5 years Over 5 years 2016 AED'000 AED'000 AED'000 AED'000 AED'000 Contingent liabilities 9,604,043 2,337,696 2,866,603 3,940,410 430,409 28,925 Credit commitments 14,490,193 4,214,905 3,049,218 3,125,276 1,217,158 2,883,636 Total 24,094,236 6,552,601 5,915,821 7,065,686 1,647,567 2,912,561 Contingent liabilities 8,939,552 1,871,689 837,997 2,736,030 443,629 3,050,207 Credit commitments 17,222,605 5,003,277 2,801,240 2,969,760 2,530,864 3,917,464 Total 26,162,157 6,874,966 3,639,237 5,705,790 2,974,493 6,967,671 AED'000 2015 69
72. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) d) Liquidity risk (continued) The tables below show undiscounted contractual cash flows on the Group’s financial liabilities: Total AED'000 Less than 1 From 1 to 3 month months AED'000 AED'000 From 3 months to 1 year From 1 to 5 years AED'000 AED'000 2016 Due to banks Customers' deposits and Islamic customers' deposits 1,561,294 1,448,882 75,138 37,274 44,106,069 25,513,657 7,577,295 9,143,975 1,871,142 - Notes and medium term borrowings 6,593,642 6,235 2,309 139,696 6,445,402 Due for trade acceptances 3,056,956 229,017 771,398 2,053,558 2,983 Other liabilities 652,224 652,224 Total liabilities 55,970,185 27,850,015 Total AED'000 8,426,140 Less than 1 From 1 to 3 month months AED'000 AED'000 - - 11,374,503 8,319,527 From 3 months to 1 year From 1 to 5 years AED'000 AED'000 2015 Due to banks Customers' deposits and Islamic customers' deposits 1,111,857 591,738 317,231 202,888 40,682,845 23,343,932 7,732,719 9,148,226 457,968 4,194,763 Notes and medium term borrowings 6,011,794 3,192 7,701 1,806,138 Due for trade acceptances 1,871,598 280,890 326,042 1,264,666 Other liabilities 446,421 446,421 Total liabilities 50,124,515 24,666,173 70 8,383,693 12,421,918 - 4,652,731
73. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) e) Market risk Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads, will affect the Group’s income and / or value of a financial instrument. The Group manages its market risk in order to achieve optimum returns while maintaining market risk exposures within set risk appetite. (i) Management of market risk The Board of Directors 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 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: 2016 Net interest income 50 b.p. 100 b.p. AED'000 AED'000 2015 Net interest income 50 b.p. 100 b.p. AED'000 AED'000 Upward Parallel Shift 17,362 49,663 18,489 60,171 Downward Parallel Shift (5,426) (10,852) (10,010) (20,020) Interest rate movement is not expected to have a material impact on the capital. 71
74. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) e) Market risk (continued) A summary of the Group’s interest rate sensitivity position based on contractual re-pricing arrangements or maturity dates, whichever dates are earlier is as follows: 31 December 2016 Assets Cash and balances with Central Bank Due from banks Loans and advances and Islamic Provisions Investment securities Investment in associate Investment properties Property and equipment Bankers acceptances Other assets Total assets Liabilities Due to banks Customers’ deposits and Islamic customers’ deposits Notes and medium term borrowings Due for trade acceptances Other liabilities Total liabilities Interest rate sensitivity gap Cumulative interest rate sensitivity gap Represented by equity 31 December 2015 Assets Cash and balances with Central Bank Due from banks Loans and advances and Islamic Provisions Investment securities Investment in associate Investment properties Property and equipment Bankers acceptances Other assets Total assets Liabilities Due to banks Customers’ deposits and Islamic customers’ deposits Notes and medium term borrowings Due for trade acceptances Other liabilities Total liabilities Interest rate sensitivity gap Cumulative interest rate sensitivity gap Represented by equity From 6 months to 1 year Over 1 Year AED'000 AED'000 Non-interest bearing AED'000 Less than 3 months AED'000 From 3 to 6 months AED'000 4,112,466 1,070,401 3,101,102 (3,151,300) 220,418 77,768 375,191 355,211 3,056,956 397,115 9,615,328 2,500,000 2,304,918 33,117,735 807,516 38,730,169 100,000 238,745 1,558,190 245,304 2,142,239 495,615 1,027,803 36,730 16,175,600 17,297,137 4,475,028 4,276,020 1,550,039 43,773,824 3,056,956 928,688 20,656,859 (11,041,531) (11,041,531) 1,631,596 19,956,536 18,773,633 7,732,102 591,799 5,103,557 (2,961,318) 4,770,784 551,442 4,827,462 (3,196,303) 1,574,481 3,305,700 4,855,739 7,105,142 8,679,623 6,080,537 3,056,956 928,688 55,400,153 8,679,623 55,095 1,131,254 444,810 1,631,159 - 55,095 6,205,557 5,700,229 11,960,881 - Total AED'000 6,712,466 3,724,254 45,113,838 (3,151,300) 7,418,277 77,768 375,191 355,211 3,056,956 397,115 64,079,776 1,560,148 8,679,623 3,668,065 105,858 2,953,197 (2,676,625) 413,578 82,029 333,761 332,317 1,871,598 340,551 7,424,329 2,600,000 2,484,867 24,470,140 576,696 - 992 1,952,116 237,108 - 400,000 1,763,123 575,281 - 10,558,870 4,820,366 - 30,131,703 2,190,216 2,738,404 15,379,236 216,975 894,487 13,525,710 14,256,133 1,871,598 684,554 16,298,837 (8,874,508) (8,874,508) 1,635,552 16,786,172 13,345,531 4,471,023 5,567,689 5,567,689 (3,377,473) 1,093,550 3,625,076 3,625,076 (886,672) 206,878 - 6,668,065 2,591,717 41,697,446 (2,676,625) 6,623,029 82,029 333,761 332,317 1,871,598 340,551 57,863,888 1,111,462 3,500,168 40,474,776 3,857,142 5,492,694 1,871,598 684,554 49,635,084 8,228,804 7,357,310 8,021,926 8,228,804 8,228,804 72
75. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) e) Market risk (continued) 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. f) 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: Currency Net spot Position Forward Position Net exposure 2016 2015 AED'000 US Dollar GCC currencies Great Britain Pound Japanese Yen Euro Others (118,224) 17,250 4,237 72,958 1,345 1,165 (275,105) 347,510 (4,389) (72,917) (174) - (393,329) 364,760 (152) 41 1,171 1,165 1,447,328 336,087 (350) (45) (5,800) 2,682 A summary of capital requirement for market risk under standardized approach of Basel II is set out below: 2016 AED'000 486 12,639 13,125 Foreign currency risk Interest rate risk 73 2015 AED'000 743 1,270 2,013
76. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) g) 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 available for sale investments. Analysis of equity portfolio: Publicly traded (quoted): Equity Privately held (unquoted): Funds of funds investments Total Analysis of gains or (losses) on equity investments: Realised gains on sale Unrealised loss in P/L Unrealised loss in OCI 2016 AED'000 144,931 2015 AED'000 149,413 75,487 220,418 264,165 413,578 2016 AED'000 27,240 (5,446) 2015 AED'000 26,448 (46) (11,298) The revaluation reserve on equity and funds of funds portfolio as at 31 December 2016 amounting to AED 20,259 thousand (2015: AED 25,705 thousand) was considered as Tier II capital. Analysis of capital requirement for equity investments under standardized approach of Basel II: Equity Funds of funds investment Total AFS 2016 Held for trading Total AED'000 AED'000 AED'000 AFS 2015 Held for trading Total AED'000 AED'000 AED'000 17,392 - 17,392 17,929 - 17,929 9,058 - 9,058 31,700 - 31,700 26,450 - 26,450 49,629 - 49,629 h) Operational risk Operational risk is defined by Basel as “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, this includes legal risk but excludes strategic and reputation risks”. The Group’s objective is to manage operational risk, so as to balance the avoidance of financial losses and damage to the Group’s reputation, with overall cost effectiveness and to avoid control procedures that restrict initiative, innovativeness and creativity. The primary responsibility for the overseeing the establishment of sound operational risk management framework and monitoring the operational risk profile of the Group vests with the senior management of the Group, The Bank 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. 74
77. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 33 FINANCIAL RISK MANAGEMENT (continued) h) Operational risk (continued) 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 Ethics); • Risk mitigation, including insurance wherever this is effective; and • Whistle Blowing and Incident Reporting Policies are channels available to all staff for reporting of any loss events or other wrongdoings. The Group has an approved framework for end-to-end management of its operational risks, which involves the active participation of the employees at all levels. The Operational Risk Management plan places an equal emphasis on the identification, assessment, control and reporting of operational risks and on quantification of potential risks and resultant losses therein, if any. Reports are produced covering Operational Risk dashboards, heat-maps, loss matrices, Operational Risk register and loss databases. The Group has in place an operational risk management system to collate operational risk information in an automated environment; this has enabled the bank to build operational risk databases to support migration to more complex approaches for computation of operational risk capital in the future. Group Risk Management continued its efforts towards increasing bank-wide awareness about the ORM concept, by organizing workshops, seminars and training courses on the subject, for the employees, throughout the year. On an ongoing basis, Risk and Control Self Assessments (RCSA) are being carried out by all branches and units to identify the operational risks and assess the effectiveness of existing controls, so as to plan any remedial actions (if required) and minimize recurrence of loss events. Moreover, the Group conducts an assessment of disaster recovery and business continuity position, as well as detailed system risk assessments of all new/upgraded IT systems and assessment of Operational Risk elements in any new products to be launched or procedures to be implemented. Compliance with policies and procedures is supported by periodic reviews undertaken by Internal Audit. A review of the insurance coverage available to the Bank 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 Bank's operational risk framework and status of operational risks across all areas of the Bank. 75
78. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 34 CAPITAL MANAGEMENT 34.1 Regulatory capital The Group’s regulator, the Central Bank of the UAE, sets and monitors regulatory capital requirements. The Group’s objectives when managing capital are as follows: • Safeguard the Group’s ability to continue as a going concern and optimize returns for shareholders; • 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. The Group also assesses its capital requirements internally taking into consideration growth requirements and business plans, and quantifies its Regulatory and Risk / Economic Capital requirements within its integrated ICAAP Framework. Risks such as Interest Rate Risk in the Banking Book, Concentration Risk, Strategic Risk, Legal and Compliance Risk, Stress Risk, Insurance Risk and Reputational Risk are all part of the ICAAP. The Group also calculates the Risk Adjusted Return on Capital (RAROC) for credit applications that are priced on a risk-adjusted basis. RAROC calculations are also built into the Credit Appraisal System. The Group’s regulatory capital adequacy ratio is set by the Central Bank of UAE (‘the Central Bank’). The Group has complied with all externally imposed capital requirements throughout the year. There have been no material changes in the Group’s management of capital during the year. The capital adequacy ratio should be a minimum of 12% analysed into two Tiers, of which Tier 1 capital adequacy must not be less than 8% as mandated by the U.A.E Central Bank. The Group’s regulatory capital is analyzed into two tiers: • Tier 1 capital, which includes ordinary share capital, legal reserve, general reserve and retained earnings; • Tier 2 capital, which includes fair value reserves relating to unrealised gains / losses on investments classified as available-for-sale and derivatives held as cash flow hedges and collective provision. The following limits have been applied for Tier 2 capital: - Total Tier 2 capital shall not exceed 67% of tier 1 capital; - Subordinated liabilities shall not exceed 50% of total Tier 1 capital; and - Collective provision shall not exceed 1.25% of total credit risk weighted assets. 76
79. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 34 CAPITAL MANAGEMENT (continued) 34.2 Capital resources and adequacy The table below summarizes the composition of regulatory capital and capital adequacy ratio calculation as per Basel II, of the Group: 31 December 2016 AED’000 31 December 2015 AED’000 Core Tier 1 capital Share capital 2,802,734 2,802,734 Legal reserve 1,401,367 1,401,367 General reserve 1,328,025 1,227,718 Retained earnings 2,519,298 2,193,094 Tier 1 capital 8,051,424 7,624,913 Upper Tier 2 capital Fair value reserve 8,107 (6,294) Collective provisions (up to allowable limit) 633,359 564,797 Tier 2 capital 641,466 558,503 8,692,890 8,183,416 50,668,746 45,183,729 109,379 16,780 Total capital base Risk weighted assets (RWA) Pillar 1 Credit risk Market risk Operational risk Risk weighted assets 4,409,191 4,140,976 55,187,316 49,341,485 Tier 1 ratio 14.59% 15.45% Capital adequacy ratio (Pillar) 1 15.75% 16.59% Capital adequacy ratio calculation is after netting off proposed distribution from capital base. 77
80. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 34 CAPITAL MANAGEMENT (continued) 34.2 Capital resources and adequacy (continued) Risk weighted capital requirement The Group has adopted the standardized approach for credit risk and market risk and basic indicator approach for operational risk for regulatory reporting purposes. The Group’s risk weighted capital requirement for credit, market and operational risk are given below: (i) Risk weights for credit risk The Group has a diversified funded and unfunded credit portfolio. The exposures are classified as per the Standard Portfolio approach mentioned under the Central Bank of UAE Basel II Capital Adequacy Framework covering the standardized approach for credit risk. The descriptions of the counterparty classes along with the risk weights used to derive the risk weighted assets are as follows: Funded exposure Claims on sovereigns These pertain to exposures to governments and their central banks. Claims on central banks and sovereigns are risk weighted in accordance with their ratings from acceptable external credit assessment institutions (ECAIs), except that, for all GCC sovereigns a 0% weight has been applied. Claims on non-commercial public sector entities (PSEs) Domestic currency claims on GCC non-commercial PSEs were treated as claims on GCC sovereign if their Central Bank or monetary authority treats them as such. Foreign currency claims on GCC PSE were treated one grade less favorable than its sovereign i.e. 20% risk weight were applied. Claims on other foreign noncommercial PSEs were treated one grade less favorable 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 favorable risk weighting. No claim on an unrated bank would receive a risk weight lower than that applied to claims on its sovereign of incorporation. Claims on corporate and government related entities portfolio Claims on corporate and government related entities (entities with greater than 50% government ownership) are risk weighted in accordance with ratings from acceptable ECAIs. Risk weight of 100% is applied on claims on unrated corporate and government related entities. Claims on regulatory retail exposures Retail claims that are included in the regulatory retail portfolio are assigned risk weights of 75% (except for past due loans), if they meet the criteria mentioned in the Central Bank of UAE BASEL-II 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%. 78
81. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 34 CAPITAL MANAGEMENT (continued) 34.2 Capital resources and adequacy (continued) (i) Risk weights for credit risk (continued) Claims secured by residential property A preferential risk weight of 35% was applied on claims that did not exceed AED 10 million to a single borrower and the claim was secured by residential property with LTV of up to 85%. Other claims secured on residential property were risk weighted 100%. Claims secured by commercial property 100% risk weight was applied on claims secured by commercial property. Past due exposures The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of specific provisions (including partial write-offs), is risk weighted as follows: - 150% risk weight when specific provisions are less than 20% of the outstanding amount of loan; - 100% risk weight when specific provisions are greater than 20% of the outstanding amount of loan. Equity portfolios 0% risk weight was applied on equity in trading book. Equity in banking book was risk weighted at 100%. The aggregate investments in insurance companies (including investment in associate held as per equity accounting) amounting to AED 82,327 thousand (2015: AED 91,877 thousand) have been risk weighted in accordance with Basel II. Other exposures These are risk weighted at 100%. Unfunded exposure For credit-related contingent items, the nominal value is converted to an exposure through the application of Credit Conversions Factors (CCF). The CCF is at 20%, 50% or 100% depending on the type of contingent item, and is used to convert off balance sheet notional amounts into an equivalent on balance sheet exposure. Undrawn commitments to extend credit represent commitments that have not been drawn down or utilized at the reporting date. The nominal amount provides the calculation base to which the CCF is applied for calculating the exposure. CCF 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. 79
82. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 34 CAPITAL MANAGEMENT (continued) 34.2 Capital resources and adequacy (continued) (i) Risk weights for credit risk (continued) Asset classes On & off balance sheet Gross outstanding 31 December 2016 AED’000 Credit risk mitigation (CRM) Exposure before CRM CRM Net exposure after credit conversion factors (CCF) AED’000 AED’000 AED’000 Claims on sovereigns Claims on non-commercial Public Sector Enterprises (PSEs) 7,920,694 Claims on banks Claims on corporates and government related enterprises (GRE) Claims included in the regulatory retail portfolio Claims secured by residential property Claims secured by commercial real estate 58,501,860 58,083,684 5,521,028 326,654 326,654 - 326,654 9,830,482 9,830,482 - 8,405,969 3,700,018 4,291,601 37,942,308 37,317,312 5,521,028 32,127 4,556,513 3,659,052 1,587,303 1,587,303 2,498 1,561,272 679,353 - 2,218,189 2,218,189 1,468,161 1,622,476 2,543,402 3,524,037 1,562,243 Other assets 1,945,404 1,940,885 91,700,864 89,316,375 45,240 4,371,466 46,643 - 1,940,885 1,425,703 66,339,865 50,668,746 50,668,746 TOTAL CREDIT RISK Asset classes AED’000 - 2,543,402 7,919,914 Risk weighted assets 7,920,694 Past due loans TOTAL CLAIMS On & off balance sheet On & off balance sheet 31 December 2015 Gross outstanding AED’000 Credit risk mitigation (CRM) Exposure before CRM AED’000 On & off balance sheet CRM AED’000 Net exposure after credit conversion factors (CCF) AED’000 AED’000 Claims on sovereigns Claims on non-commercial Public Sector Enterprises (PSEs) 7,293,658 7,293,658 - 1,356,580 1,356,580 - 805,630 Claims on banks Claims on corporates and government related enterprises (GRE) Claims included in the regulatory retail portfolio Claims secured by residential property Claims secured by commercial real estate 7,820,830 7,820,830 - 6,963,031 2,806,128 56,103,638 55,618,505 3,539,532 33,954,034 33,010,411 5,215,910 5,215,910 102,595 4,013,007 3,216,795 1,729,444 1,729,444 - 1,729,444 786,797 - 2,351,376 2,351,376 1,440,863 1,455,409 2,351,454 2,351,454 Past due loans 3,038,484 1,525,782 Other assets 2,052,533 2,051,082 86,962,531 84,963,245 TOTAL CLAIMS 33,776 3,675,903 7,225,959 Risk weighted assets 56,028 - 2,051,082 1,500,785 60,534,426 45,183,729 45,183,729 TOTAL CREDIT RISK 80
83. Commercial Bank of Dubai PSC Notes to the consolidated financial statements (continued) For the year ended 31 December 2016 34 CAPITAL MANAGEMENT (continued) 34.2 Capital resources and adequacy (continued) (i) Risk weights for credit risk (continued) 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 Credit Risk Mitigation techniques (CRM). The total exposure to Banks before CRM includes AED 8,958 million (2015: AED 7,549 million) rated exposure. Risk weighted assets as per standardized approach is set out below: 2015 2016 Exposure AED’000 Exposure prior to CRM Less: Eligible financial collateral Net exposure after CRM Risk weighted assets AED’000 Exposure AED’000 Risk weighted assets AED’000 55,036,110 64,210,329 48,845,843 4,371,466 4,367,364 66,339,865 50,668,746 3,675,903 60,534,426 3,662,114 45,183,729 70,711,331 (ii) Risk weights for market risk Capital requirement for market risk is calculated using standardized approach. The capital requirement for market risk is analyzed into capital requirement for interest rate risk, equity risk, foreign exchange risk and option risk. (iii) Risk weight for operation risk Capital requirement for operation risk is calculated using basic indicator approach. This Capital charge was computed using basic indicator approach by multiplying the three years average gross income by a predefined beta factor. 35 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. 81