Mashreqbank: Consolidated Interim Financial Information - 31 March 2022

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1. Mashreqbank PSC Group Condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022
2. Mashreqbank PSC Group Review report and condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 Contents Pages Review report on condensed consolidated interim financial information 1 Condensed consolidated statement of financial position 2 Condensed consolidated statement of profit or loss 3 Condensed consolidated statement of other comprehensive income 4 Condensed consolidated statement of changes in equity 5-6 Condensed consolidated statement of cash flows 7-8 Notes to the condensed consolidated interim financial information 9 – 64
5. Mashreqbank PSC Group Condensed consolidated statement of profit or loss for the period from 1 January 2022 to 31 March 2022 (un-audited) Notes Interest income Income from Islamic financing and investment products Total interest income and income from Islamic financing and investment products Interest expense Distribution to depositors – Islamic products Net interest income and income from Islamic products net of distribution to depositors Fee and commission income Fee and commission expense Net fee and commission income Net investment income Other income, net Operating income General and administrative expenses Operating profit before impairment Allowances for impairment, net Profit before tax Tax expense Profit for the period 17 Attributed to: Owners of the Parent Non-controlling interests Earnings per share (AED) 18 For the three month period ended 31 March 2022 2021 AED ’000 AED ’000 1,119,872 1,013,356 122,986 110,149 1,242,858 (372,782) (40,962) 1,123,505 (376,906) (48,868) 829,114 1,026,132 (572,029) 454,103 17,845 262,820 1,563,882 (669,820) 894,062 (252,141) 641,921 (11,836) 630,085 697,731 874,543 (425,501) 449,042 28,595 233,849 1,409,217 (619,931) 789,286 (710,807) 78,479 (14,092) 64,387 606,132 23,953 630,085 3.02 42,985 21,402 64,387 0.24 The accompanying notes form an integral part of this condensed consolidated interim financial information. (3)
6. Mashreqbank PSC Group Condensed consolidated statement of other comprehensive income for the period from 1 January 2022 to 31 March 2022 (un-audited) For the three month period ended 31 March Profit for the period 2022 AED ’000 2021 AED ’000 630,085 64,387 70,887 23,508 (14,635) (5,899) (505,064) (613,664) (448,812) 181,273 437 (595,618) (531,231) 141,252 40,021 181,273 (555,591) 24,360 (531,231) Other comprehensive income/(loss) Items that will not be reclassified subsequently to profit or loss: Changes in fair value of financial assets measured at fair value through other comprehensive income (equity instruments) Items that may be reclassified subsequently to profit or loss: Changes in currency translation reserve Changes in fair value of financial assets measured at fair value through other comprehensive income (debt instruments) Cash flow hedges - fair value loss arising during the period Total other comprehensive loss for the period Total comprehensive income/(loss) for the period Attributed to: Owners of the Parent Non-controlling interests The accompanying notes form an integral part of this condensed consolidated interim financial information. (4)
7. Mashreqbank PSC Group Condensed consolidated statement of changes in equity for the period from 1 January 2022 to 31 March 2022 (un-audited) Issued and paid up capital AED’000 Balance at 1 January 1,775,308 2021 Profit for the period Other comprehensive income/ (loss) Total comprehensive income/(loss) for the period Transfer from investments revaluation reserve to retained earnings Transaction with common control entity Transaction with noncontrolling interest (NCI) Balance at 31 March 1,775,308 2021 Currency translation reserve AED’000 Investments revaluation reserve AED’000 Retained earnings AED’000 Equity attributable to owners of the Parent AED’000 (437) 16,888,178 42,985 19,430,728 42,985 Statutory and legal reserves AED’000 General reserve AED’000 912,099 - 312,000 - (98,332) - (358,088) - - - (4,401) (594,612) 437 - - - (4,401) (594,612) 437 42,985 (555,591) 24,360 (531,231) - - - (3,657) - 3,657 - - - - - - - - 5,601 5,601 - 5,601 - - - - - - - (11,032) (11,032) 912,099 312,000 (102,733) (956,357) - 16,940,421 18,880,738 The accompanying notes form an integral part of this condensed consolidated interim financial information. Cashflow hedge reserve AED’000 (598,576) Noncontrolling interests AED’000 Total AED’000 757,680 20,188,408 21,402 64,387 2,958 (595,618) 771,008 19,651,746 (5)
8. Mashreqbank PSC Group Condensed consolidated statement of changes in equity for the period from 1 January 2022 to 31 March 2022 (un-audited) Issued and paid up capital AED’000 Balance at 1 January 2,006,098 2022 Profit for the period Other comprehensive income/(loss) Total comprehensive (loss)/income for the period Payment of dividends (Note 15) Transaction with noncontrolling interest (NCI) (Note 16) Transfer from investments revaluation reserve to retained earnings Balance at 31 March 2,006,098 2022 Statutory and legal reserves AED’000 Currency translation reserve AED’000 Investments revaluation reserve AED’000 General reserve AED’000 1,012,320 312,000 (116,116) (547,489) - - (12,467) (452,413) - - (12,467) (452,413) - - - - - 1,012,320 Retained earnings AED’000 Equity attributable to owners of the Parent AED’000 - 17,561,412 606,132 20,228,225 606,132 Cashflow hedge reserve AED’000 Total AED’000 796,062 21,024,287 23,953 630,085 - (464,880) 16,068 (448,812) - 606,132 141,252 40,021 181,273 - - - - - - - - - - - - - - - 9,501 - (9,501) - - 312,000 (128,583) (990,401) - 18,158,043 20,369,477 The accompanying notes form an integral part of this condensed consolidated interim financial information. - Noncontrolling interests AED’000 - 836,083 21,205,560 (6)
9. Mashreqbank PSC Group Condensed consolidated statement of cash flows for the period from 1 January 2022 to 31 March 2022 (un-audited) For the three month period ended 31 March Cash flows from operating activities Profit before taxation for the period Adjustments for: Depreciation and amortisation Allowances for impairment, net Gain/(loss) on disposal of property and equipment Unrealised loss on other financial assets held at FVTPL Net realized gain from sale of other financial assets measured at FVTPL Dividend income from other financial assets measured at FVTOCI Net realised gain from sale of other financial assets measured at amortised cost/ FVTOCI Unrealised gain on derivatives Operating cash flows before tax paid and changes in operating assets and liabilities Tax paid Changes in operating assets and liabilities (Increase)/decrease in deposits with central banks (Increase)/decrease in deposits and balances due from banks maturing after three months Increase in loans and advances measured at amortised cost Increase in Islamic financing and investment products measured at amortised cost (Increase)/decrease in reinsurance assets (Increase)/decrease in other assets Increase in financial assets carried at FVTPL Increase in repurchase agreements with banks Increase in customers’ deposits (Decrease)/increase in Islamic customers’ deposits Increase in deposits and balances due to banks Increase in insurance contract liabilities Increase in other liabilities Net cash generated from operating activities 2022 AED ’000 2021 AED ’000 641,921 78,479 61,152 252,141 (1,157) 11,892 63,582 710,807 2,001 7,942 (6,574) (4,255) (9,404) (7,948) (13,519) (34,228) (24,158) (5,044) 902,224 (11,836) 821,406 (14,092) (516,948) 791,210 (1,308,062) 612,800 (4,731,226) (42,286) (180,526) (1,468,498) (12,697) 27,957 2,925,790 (180,639) 3,294,570 211,985 1,347,475 257,283 (4,186,968) (204,855) 7,157 170,476 (726,871) 152,483 703,831 1,240,681 723,299 99,959 582,662 773,178 The accompanying notes form an integral part of this condensed consolidated interim financial information. (7)
10. Mashreqbank PSC Group Condensed consolidated statement of cash flows for the period from 1 January 2022 to 31 March 2022 (un-audited) (continued) For the three month period ended 31 March Cash flows from investing activities Purchase of property and equipment Purchase on intangible assets Proceeds from sale of property and equipment Purchase of other financial assets measured at fair value or amortised cost Proceeds from sale of other financial assets measured at fair value or amortised cost Dividend income from other financial assets measured at FVTOCI Investment in associate Net cash generated from /(used in) investing activities Cash flows from financing activities Transaction with NCI Medium term notes redeemed Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period 2022 AED ’000 2021 AED ’000 (28,850) (32,368) 9,245 (29,122) (10,456) 82 (10,431,041) (11,830,030) 11,534,496 9,178,400 9,404 (28,200) 1,032,686 7,948 (2,683,178) (493,759) (493,759) (11,032) (439,373) (450,405) 796,210 12,467 21,302,038 22,110,715 (2,360,405) 4,401 20,840,615 18,484,611 The accompanying notes form an integral part of this condensed consolidated interim financial information. (8)
11. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 1 General information Mashreqbank PSC (the “Bank”) was incorporated in the Emirate of Dubai in 1967 under a decree issued by The Ruler of Dubai. The Bank operates through its branches in the United Arab Emirates, Bahrain, Kuwait, Egypt, Hong Kong, India, Qatar, the United Kingdom and the United States of America. The address of the Bank’s registered office is P.O. Box 1250, Dubai, United Arab Emirates. At 31 March 2022 and 31 December 2021, Mashreqbank PSC Group (the "Group") comprises of the Bank and the following direct subsidiaries: Name Subsidiary Oman Insurance Company (PSC) Place of incorporation Proportion of (or registration) and ownership operation interest % United Arab Emirates 64.46 Insurance & reinsurance Mindscape FZ LLC United Arab Emirates 100.00 IT services Mashreq Securities LLC United Arab Emirates 99.98 Brokerage Mashreq Capital (DIFC) Limited United Arab Emirates 100.00 Brokerage and asset & fund management Mashreq Al Islami Finance Company (PJSC) United Arab Emirates 99.80 Islamic finance company Injaz Services FZ LLC United Arab Emirates 100.00 Service provider Invictus Limited Cayman Islands 100.00 Special purpose vehicle Al Taqania Employment Services One Person Company LLC United Arab Emirates 100.00 Employment Services Al Kafaat Employment Services One Person Company LLC United Arab Emirates 100.00 Employment Services Mashreq for Business Process Support (Sole Person Company) Egypt 100.00 Employment Services Mashreq Global Services (SMC private) Limited Pakistan 100.00 Employment Services Shorouq Commodities Trading DMCC United Arab Emirates 100.00 Trading IDFAA Payment Services LLC United Arab Emirates 100.00 Payment service provider Osool – A Finance Company (PJSC)* United Arab Emirates 98.00 Finance Principal activity As at 31 March 2022, the Bank had the following associates and joint venture: Associate Emirates Digital Wallet LLC United Arab Emirates 23.22 Digital wallet service Depa PLC United Arab Emirates 24.18 Interior Contracting United Arab Emirates 51.00 Digital wallet service Joint venture Noon Digital Pay LLC *Under liquidation. (9)
12. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 2 Application of new and revised International Financial Reporting Standards (“IFRS”) 2.1 New and revised IFRS adopted in the condensed consolidated interim financial information The following new and revised IFRS, which became effective for annual periods beginning on or after 1 January 2022, have been adopted in this interim financial information. The application of these revised IFRSs, except where stated, have not had any material impact on the amounts reported for the current and prior periods. • Narrow-scope amendments to IFRS 3, IAS 16, IAS 17 and some annual improvements on IFRS 9 and IFRS 16Amendments to IFRS 3, ‘Business combinations’ update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. Amendments to IAS 16, ‘Property, plant and equipment’ prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss. Amendments to IAS 37, ‘Provisions, contingent liabilities and contingent assets’ specify which costs a company includes when assessing whether a contract will be loss-making. Annual improvements make minor amendments to IFRS 9, ‘Financial instruments’, and the Illustrative Examples accompanying IFRS 16, ‘Leases’. (10)
13. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 2 Application of new and revised International Financial Reporting Standards (“IFRS”) (continued) 2.2 New and revised IFRS in issue but not yet effective and not early adopted New and revised IFRS • IFRS 17, ‘Insurance contracts’ - On 18 May 2017, the IASB finished its long-standing project to develop an accounting standard on insurance contracts and published IFRS 17, ‘Insurance Contracts’. IFRS 17 replaces IFRS 4, which currently permits a wide variety of practices. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features. Effective for annual periods beginning on or after 1 January 2023 The standard applies to annual periods beginning on or after 1 January 2023, with earlier application permitted if IFRS 15, ‘Revenue from contracts with customers’ and IFRS 9, ‘Financial instruments’ are also applied. IFRS 17 requires a current measurement model, where estimates are remeasured in each reporting period. The measurement is based on the building blocks of discounted, probability-weighted cash flows, a risk adjustment and a contractual service margin (“CSM”) representing the unearned profit of the contract. A simplified premium allocation approach is permitted for the liability for the remaining coverage if it provides a measurement that is not materially different from the general model or if the coverage period is one year or less. However, claims incurred will need to be measured based on the building blocks of discounted, risk-adjusted, probability weighted cash flows. Management expects that the adoption of IFRS 17 will have an impact on the amounts reported and disclosures made in these consolidated financial statements in respect of its insurance contracts issued and reinsurance contracts held. However, it is not practicable to provide a reasonable estimate of the effects of the application of this standard until the Group performs a detailed review. Management has completed the gap analysis in relation to this standard and is currently in the process of performing a detailed assessment of the impact of the above new standard on the Group's consolidated financial statements. Due to the short term nature of the majority of the contracts issued by the Group, the Premium Allocation Approach (PAA) model will be applied and the general model / variable fee approach model will be applied to the insurance contracts that do not meet the PAA eligibility criteria. (11)
14. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 2 Application of new and revised International Financial Reporting Standards (“IFRS”) (continued) 2.2 New and revised IFRS in issue but not yet effective and not early adopted (continued) Effective for annual periods beginning on or New and revised IFRS after • Amendments to IFRS 17, ‘Insurance Contracts’- The IASB 1 January 2023 issued the amendments to IFRS 17, ‘Insurance contracts’, on 25 June 2020, together with an amendment to IFRS 4, so that eligible insurers can still apply IFRS 9 alongside IFRS 17. This concluded the IASB’s targeted amendments to IFRS 17 which aimed to ease implementation of the standard by reducing implementation costs and making it easier for entities to explain, to investors and others, the results from applying IFRS 17. • • Amendments to IAS 1, Presentation of financial statements’ Deferred until on classification of liabilities - These narrow-scope amendments accounting periods to IAS 1, ‘Presentation of financial statements’, clarify that starting not earlier liabilities are classified as either current or non-current, than 1 January 2024 depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date (for example, the receipt of a waiver or a breach of covenant). The amendment also clarifies what IAS 1 means when it refers to the ‘settlement’ of a liability. Amendment to IAS 12 – deferred tax related to assets and 1 January 2023 liabilities arising from a single transaction- These amendments require companies to recognise deferred tax on transactions that, on initial recognition give rise to equal amounts of taxable and deductible temporary differences. (12)
15. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 2 Application of new and revised International Financial Reporting Standards (“IFRS”) (continued) 2.2 New and revised IFRS in issue but not yet effective and not early adopted (continued) Effective for annual periods beginning on or New and revised IFRS after • Amendments to IAS 1, ‘Presentation of financial statements’, 1 January 2023 IFRS Practice statement 2 and IAS 8,’ Accounting policies, changes in accounting estimates and errors’ The IASB amended IAS 1, ‘Presentation of Financial Statements’, to require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendment also clarifies that accounting policy information is expected to be material if, without it, the users of the financial statements would be unable to understand other material information in the financial statements. Further, the amendment to IAS 1 clarifies that immaterial accounting policy information need not be disclosed. However, if it is disclosed, it should not obscure material accounting policy information. To support this amendment, the Board also amended IFRS Practice Statement 2, ‘Making Materiality Judgements’, to provide guidance on how to apply the concept of materiality to accounting policy disclosures. The amendment to IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’, clarifies how companies should distinguish changes in accounting policies from changes in accounting estimates. The distinction is important, because changes in accounting estimates are applied prospectively to future transactions and other future events, but changes in accounting policies are generally applied retrospectively to past transactions and other past events as well as the current period. The Group is currently assessing the impact of these standards, interpretations and amendments on the future financial statements and intends to adopt these, if applicable, when they become effective. (13)
16. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies 3.1 Basis of preparation This condensed consolidated interim financial information of the Group is prepared under the historical cost basis except for certain financial instruments, including derivatives, investment properties and reserves for unit linked policies which are measured at fair value. This condensed consolidated interim financial information is prepared in accordance with International Accounting Standard 34: Interim Financial Reporting (“IAS 34”), issued by the International Accounting Standard Board (‘IASB’) and also comply with the applicable requirements of the laws in the U.A.E. The accounting policies used in the preparation of this condensed consolidated interim financial information is consistent with those used in the audited annual consolidated financial statements for the year ended 31 December 2021. This condensed consolidated interim financial information does not include all the information and disclosures required in full consolidated financial statements and should be read in conjunction with the Group’s consolidated financial statements for the year ended 31 December 2021. In addition, results for the period from 1 January 2022 to 31 March 2022 are not necessarily indicative of the results that may be expected for the financial year ending 31 December 2022. As required by the Securities and Commodities Authority of the U.A.E. (“SCA”) Notification No. 2624/2008 dated 12 October 2008, accounting policies relating to financial assets, cash and cash equivalents, Islamic financing and investing assets and investment properties have been disclosed in the condensed consolidated financial information. On 20 September 2021, the UAE Federal Decree Law No. 32 of 2021 ("Companies Law") was issued and came into effect on 2 January 2022 which repealed the UAE Federal Law No. 2 of 2015. The Group has 12 months from 2 January 2022 to comply with the provisions of the UAE Federal Decree Law No 32 of 2021. The Bank is in the process of reviewing the new provisions and will apply the requirements thereof no later than one year from the date on which the amendments came into effect. 3.2 Basis of consolidation This condensed consolidated interim financial information incorporates the financial information of the Bank and entities controlled by the Bank. Control is achieved where the Bank has the power over 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 the amount of the investor’s returns. The condensed consolidated interim financial information comprises the financial information of the Bank and of the subsidiaries as disclosed in Note 1. The financial information of the subsidiaries are prepared for the same reporting period as that of the Bank, using consistent accounting policies. (14)
17. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.3 Financial assets All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. For financial assets or financial liabilities not at fair value through profit or loss, at initial recognition, the Group measures a financial asset or financial liability at its fair value plus or minus transactions costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability, such as fee and commissions. Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are expensed in profit or loss. Immediately after initial recognition, an expected credit loss allowance (‘ECL’) is recognized for financial assets measured at amortised cost and investment in debt instruments measured as FVTOCI, which results in an accounting loss being recognized in profit or loss when an asset is newly originated. Classification of financial assets For the purposes of classifying financial assets, an instrument is an ‘equity instrument’ if it is a non-derivative and meets the definition of ‘equity’ for the issuer except for certain nonderivative puttable instruments presented as equity by the issuer. All other non-derivative financial assets are ‘debt instruments’. Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as loans and government and corporate bonds. Debt instruments, including loans and advances and Islamic financing and investments products, are measured at amortised cost if both of the following conditions are met: (i) (ii) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest/profit on the principal amount outstanding. (15)
18. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.3 Financial assets (continued) Classification of financial assets (continued) All other financial assets are subsequently measured at fair value. Based on these factors, the Group classifies its debt instruments into one of the following three measurement categories: • Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and Interest (‘SPPI’), and that are not designated at fair value through profit or loss (‘FVTPL’), are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognized. • Fair value through other comprehensive income (‘FVTOCI’): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent solely payments of principal and interest, and that are not designated at FVTPL, are measured at FVTOCI. Movement in carrying amount are taken through Other Comprehensive Income (‘OCI’), except for the recognition of impairment gains and losses, interest revenue and foreign exchange gains and losses on the instruments’ amortised cost which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss and recognized in ‘Net investment income’. • Fair value through profit or loss (‘FVTPL’): Assets that do not meet the criteria for amortised cost or FVTOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and presented in the statement of profit or loss within ‘Net investment income’ in the period in which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for trading, in which case they were presented separately in ‘Net investment income’. (16)
19. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.3 Financial assets (continued) Classification of financial assets (continued) Business model: the business model reflects how the Group manages the assets in order to generate cash flows. That is, whether the Group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of ‘other’ business model and measured at FVTPL. Factors considered by the Group in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management personnel, how risks are assessed and managed, and how managers are compensated. SPPI: Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Group assesses whether financial instruments’ cash flows represent solely payments of principal and interest (the ‘SPPI test’). In making this assessment, the Group considers whether contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and an interest rate that is consistent with basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss. Financial assets with embedded derivatives are considered in their entirely when determining whether their cash flows are solely payment of principal and interest. The Group reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period. Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares. (17)
20. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.3 Financial assets (continued) Classification of financial assets (continued) The Group subsequently measures all equity investments at fair value through profit or loss, except where the Group’s management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Group’s policy is to designate equity investments as FVTOCI when those investments are held for purposes other than to generate investment returns. When this election is used, fair value gains and losses are recognized in OCI and are not subsequently reclassified to profit or loss, including on disposal. On disposal of these equity investments, any related balance within the FVOCI reserve is reclassified to retained earnings. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognized in profit or loss as investment income when the Group’s right to receive payments is established Amortised cost and effective interest method The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees paid or received that are integral to the effective interest rate, such as origination fees. When the Group revises the estimates of future cash flows, the carrying amount of the respective financial asset or financial liability is adjusted to reflect the new estimate discounted using original effective interest rate. Any changes are recognized in profit or loss. Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have subsequently become creditimpaired (or stage 3), for which interest income is calculated by applying the effective interest rate to their amortised cost (i.e. net of the expected credit loss provision). (18)
21. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.3 Financial assets (continued) (i) Impairment The Group assesses on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument assets carried at amortised cost and FVTOCI and with the exposure arising from loan commitments and financial guarantee contracts. The Group recognizes a loss allowance for such losses at each reporting date. The measurement of ECL reflects: • • An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; The time value of money; and Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. (ii) Modification of loans • The Group sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors: • • • • • • If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay. Whether any substantial new terms introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan. Significant extension of the loan term when the borrower is not in financial difficulty. Significant change in the interest rate. Change in the currency the loan is denominated in. Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan. If the terms are substantially different, the Group derecognizes the original financial asset and recognizes a ‘new’ asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. However, the Group also assesses whether the new financial asset recognized is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amount are also recognized in profit or loss as a gain or loss on derecognition. If the terms are not substantially different, the renegotiation or modification does not result in the derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognizes a modification gain or loss in profit or loss. (19)
22. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.3 Financial assets (continued) (ii) Modification of loans (continued) The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate. (iii) Derecognition other than on a modification Financial assets, or a portion thereof, are derecognized when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownerships, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control. The Group enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Group: • • • Has no obligation to make payments unless it collects equivalent amounts from the assets; Is prohibited from selling or pledging the assets; and Has an obligation to remit any cash it collects from the assets without material delay. Collateral (shares and bonds) furnished by the Group under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and criteria for derecognition are therefore not met. This also applies to certain securitisation transactions in which the Group retains a subordinated residual interest. 3.4 Financial liabilities Classification and subsequent measurement Financial liabilities (including deposits and balances due to banks, repurchase agreements with banks, medium term loans and customer deposits) are initially recognised at fair value and subsequently measured at amortised cost, except for: • Financial liabilities at fair value through profit or loss: this classification is applied to derivatives, financial liabilities held for trading and other financial liabilities designated as such on initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the change in fair value due to credit risk) and partially profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk of the liability are also presented in profit or loss; (20)
23. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.4 Financial liabilities (continued) Classification and subsequent measurement (continued) • • Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition whereby for financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Group recognises any expense incurred on the financial liability; and Financial guarantee contracts and loan commitments. Derecognition Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). When replacing an existing debt with a new debt from a new lender, the existing debt would be de-recognized in the financial statements, with the difference between the carrying amount and the fair value of the consideration paid recognized in profit or loss. However, when modifying or exchanging a debt while keeping the original lender, the International Financial Reporting Standards (IFRS) have specific guidance on whether the transaction results in a derecognition or is accounted for differently. This analysis is driven by the question whether the modification is “substantial” or whether the original debt has been replaced by another debt with “substantially” different terms. 3.5 Financial guarantee contracts and loan commitments Financial guarantees are contracts that require the Group to make specified payments to reimburse the holders for a loss they incur because a specified debtor fails to make payment when due, in accordance with the terms of a debt instrument. Loan commitments are irrevocable commitments to provide credit under pre-specified terms and conditions. Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of: - The amount of the loss allowance; and The premium received on initial recognition less income recognized in accordance with the principles of IFRS 15. Loan commitments provided by the Group are measured as the amount of the loss allowance. (21)
24. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.6 Foreign exchange gains and losses The fair value of financial assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of each reporting period. The foreign exchange component forms part of its fair value gain or loss. Therefore, • for financial assets that are classified as at FVTPL, the foreign exchange component is recognised in the condensed consolidated interim statement of profit or loss; • for financial assets that are monetary items and designated as at FVTOCI, any foreign exchange component is recognized in consolidated statement of profit or loss; • for financial assets that are non-monetary items and designated as at FVTOCI, any foreign exchange component is recognised in the consolidated statement of comprehensive income; and • for foreign currency denominated debt instruments measured at amortised cost at the end of each reporting period, the foreign exchange gains and losses are determined based on the amortised cost of the financial assets and are recognised in the consolidated statement of profit or loss. 3.7 Islamic financing and investment products In addition to conventional banking products, the Group offers its customers certain non-interest based banking products, which are approved by its Shari’ah Supervisory Board. Any conventional terminologies that are used only for reasons of legal requirement, explanation and/or clarity will be considered as replaced with its Shari’ah compliant equivalent and will not impact the Islamic products or documentation in terms of their Shari’ah compliance. All Islamic banking products are accounted for in conformity with the accounting policies described below: (i) Accounting policy Islamic financing and investing products are 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 flows through the expected life of the financial asset or liability, or, where appropriate, a shorter period. Allowance for impairment is made against Islamic financing and investing products is measured in accordance with note 3.3(i). Islamic financing and investing products are written off only when all possible courses of action to achieve recovery have proved unsuccessful. (ii) Revenue recognition policy Income from Islamic financing and investing assets are recognised in the condensed consolidated statement of profit or loss using the effective profit method. (22)
25. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.7 Islamic financing and investment products (continued) (ii) Revenue recognition policy (continued) 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. (iii) Islamic customers’ deposits and distributions to depositors Islamic customers’ deposits are initially measured at fair value which is normally consideration received net of directly attributable transaction costs incurred, and subsequently measured at their amortised cost using the effective profit method. Distributions to depositors (Islamic products) are calculated according to the Group’s standard procedures and are approved by the Group’s Sharia’a Supervisory Board. 3.8 Investment properties Investment properties are properties held to earn rentals and/or for capital appreciation including property under construction for such purposes. Investment properties are measured initially at cost, including transaction costs. Cost 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 cost of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are measured at fair value, which reflects market conditions at the reporting date. Gains and losses arising from changes in the fair value of investment properties are included in the condensed consolidated statement of profit or loss in the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the condensed consolidated profit or loss in the period in which the property is derecognised. Transfer is made to or from investment property only when there is a change in use evidenced by the end of owner-occupation or commencement of an operating lease to another party. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property and equipment up to the date of the change in use. Fair value is determined by open market values based on valuations performed by independent surveyors and consultants or broker’s quotes. (23)
26. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 3 Summary of significant accounting policies (continued) 3.9 Leasing The group leases various branches, offices and premises for ATMs. Rental contracts are typically made for fixed periods of 12 months to 5 years, but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; and • any lease payments made at or before the commencement date less any lease incentives received Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. 3.10 Financial risk management The Group’s financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements for the year ended 31 December 2021, except for those matters described in note 4.2. 3.11 Cash and cash equivalents For the purposes of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and other balances with the Central Bank of the UAE (excluding statutory reserve) and money market placements which are maturing within three months from the value date of the deposit or placement. Cash and cash equivalents are carried at amortised cost in the consolidated statement of financial position. (24)
27. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management 4.1 Credit risk Credit risk is the risk of suffering a financial loss as a result of any of the Group’s customers failing or unwilling to fulfil their contractual obligations to the Group. Credit risk arises mainly from loan and advances, loan commitments arising from such lending activities, trade finance and treasury activities but can also arise from financial guarantees, letter of credit, endorsements and acceptances. The Group is also exposed to credit risk arising from investments in debt instruments, derivatives as well as settlement balances with market counterparties. The Chief Credit Officer (“CCO”) of the Group is responsible for overseeing all aspects of credit risk management supported by a team of experienced and trained credit managers. The CCO and credit managers have delegated authority within the risk management framework to approve credit transactions and manage credit risk on an ongoing basis. Credit risk is the single largest risk from the Group’s business of extending loans and advances (including loan commitments, letters of credit and letters of guarantee) and carrying out investment in securities and debts; management therefore carefully manages its exposure to credit risk. Credit risk management and controls are centralized under the CCO function with regular governance and monitoring exercised by the Board Risk Committee (“BRC”), Board Credit Committee (“BCC”) and Enterprise Risk Committee (“ERC”). Specifically, the BCC reviews and approves credit proposals that are beyond lending authorities delegated to management by the Board of Directors. In addition, BRC and BCC monitor key elements of the Bank’s credit risk profile relative to the Bank’s risk appetite. The Board Committees are supported by ERC through detailed review and monitoring of credit portfolio, including exposure concentrations. An Early Alert Committee (“EAC”) is also in place to review and proactively identify potential problematic exposures within Corporate and Investment Banking (“CIBG”) and International Banking (“IBG”) business groups and determine appropriate strategies. The EAC, along with the IFRS 9 Forum (a forum in place to oversee all aspects of the Group’s IFRS 9 framework), plays an important role in ensuring that credit fundamentals are linked to determination of Significant Increase in Credit Risk (SICR) and staging for IFRS 9 purposes. (25)
28. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) (i) The following tables explains the changes in the gross carrying for loans and advances (including Islamic financing and investment products) measured at amortised cost Stage 1 12-month Gross carrying amount as at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 3 Transfer from Stage 2 to Stage 1 New financial assets originated Repayments and other movements Write-offs Gross carrying amount as at 31 March 76,512 6,262 (1,663) (17) 237 26,720 Total 5,434 88,207 1,663 (140) (237) - 17 140 - 26,720 (19,904) - (1,804) - (176) (361) (21,884) (361) 81,885 5,744 5,054 92,682 Stage 1 12-month Gross carrying amount as at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 Transfer from Stage 2 to Stage 1 New financial assets originated Repayments and other movements Write-offs Gross carrying amount as at 31 December 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) Total 67,110 (3,974) (223) 82 46,689 5,598 3,974 (975) (82) - 4,637 223 975 - 77,344 46,689 (33,172) - (2,253) - 629 (1,030) (34,796) (1,030) 76,512 6,262 5,434 88,207 (26)
29. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) ii) The following tables explain the changes in the loss allowance for loans and advances (including Islamic financing and investment products) measured at amortised cost: Stage 1 12-month ECL Loss allowance as at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 New financial assets originated Changes in PDs/LGDs/EADs Write-offs Loss allowance as at 31 March 563 (94) (29) 6 235 (107) 574 Stage 1 12-month ECL Loss allowance as at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 New financial assets originated Changes in PDs/LGDs/EADs Write-offs Loss allowance as at 31 December 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime ECL ECL AED (in million) 1,247 94 (6) (12) 46 1,369 4,911 29 12 (147) (361) 4,444 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime ECL ECL AED (in million) Total ECL 6,721 235 (208) (361) 6,387 Total ECL 615 2,287 2,909 5,811 (152) (15) 1 328 (214) - 152 (1) (748) (443) - 15 748 2,269 (1,030) 328 1,612 (1,030) 563 1,247 4,911 6,721 (27)
30. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) iii) The credit risk exposures relating to on-balance sheet items (excluding loans and advances and Islamic financing and investment products ) are as follows: Due from banks Investment-grade BB+ & below Unrated Loss allowance Due from banks Investment-grade BB+ & below Unrated Loss allowance Stage 1 12-month 5,486 12,406 11,177 29,069 (87) 28,982 Stage 1 12-month 5,765 12,104 8,115 25,984 (92) 25,892 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 39 913 1,733 2,685 (28) 2,657 35 35 (17) 18 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 73 1,360 1,477 2,910 (15) 2,895 79 79 (61) 18 Total 5,525 13,319 12,945 31,789 (132) 31,657 Total 5,838 13,464 9,671 28,973 (168) 28,805 Exposures of AED 1.3 billion and AED 135 million were transferred from stage 1 to 2 and stage 2 to 1 respectively during the three month period ended 31 March 2022. There were no other transfers between stages during the period ended 31 March 2022. Other financial assets measured at amortised cost and FVTOCI (debt securities) Investment-grade BB+ & below Unrated Loss allowance Stage 1 12-month 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime Total AED (in million) 17,006 4,768 365 22,139 (57) 22,082 - 2 2 (2) - 17,006 4,768 367 22,141 (59) 22,082 (28)
31. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) Other financial assets measured at amortised cost and FVTOCI (debt securities) Investment-grade BB+ & below Unrated Loss allowance 31 December 2021 (audited) Stage 2 Stage 3 Stage 1 12-month 14,129 4,201 5,456 23,786 (27) 23,759 Lifetime Lifetime AED (in million) - 2 2 (2) - Total 14,129 4,201 5,458 23,788 (29) 23,759 There were no transfers between stages during the period ended 31 March 2022. Other assets Other assets Loss allowance Carrying amount Other assets Other assets Loss allowance Carrying amount Stage 1 12-month - Stage 1 12-month - 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 643 (18) 625 453 (423) 30 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 567 (20) 547 435 (420) 15 Total 1,096 (441) 655 Total 1,002 (440) 562 There were no transfers between stages during the period ended 31 March 2022. (29)
32. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) Stage 1 12-month Acceptances Loss allowance 12,193 (18) Stage 1 12-month Acceptances Loss allowance 14,137 (26) 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 111 (2) - 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 204 (4) - Total 12,304 (20) Total 14,341 (30) There were no transfers between stages during the period ended 31 March 2022 and 31 March 2021. (30)
33. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) (iv) The following tables explains the changes in the balances for off-balance sheet items (LC, LGs and commitments): Stage 1 12-month As at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 2 to Stage 3 Transfer from Stage 2 to Stage 1 New contracts originated Other movements As at 31 March Total 50,120 6,081 1,241 57,442 (847) 214 11,674 (6,743) 54,418 847 (25) (214) (990) 5,699 25 (85) 1,181 11,674 (7,818) 61,298 Stage 1 12-month As at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 Transfer from Stage 2 to Stage 1 New contracts originated Other movements As at 31 December 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime AED (in million) 49,114 4,258 2,382 (3,810) 182 20,879 (16,245) 50,120 3,810 (16) (182) (1,789) 6,081 16 (1,157) 1,241 Total 55,754 20,879 (19,191) 57,442 (31)
34. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.1 Credit risk (continued) v) The following tables explain the changes in the loss allowance for LC, LGs, commitments and acceptances: Stage 1 12-month ECL As at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 2 to Stage 3 Transfer from Stage 2 to Stage 1 New financial assets originated Changes in PDs/LGDs/EADs As at 31 March Total ECL 88 42 409 539 (2) 1 20 (34) 73 2 (2) (1) (5) 36 2 264 675 20 225 784 Stage 1 12-month ECL As at 1 January Transfers Transfer from Stage 1 to Stage 2 Transfer from Stage 2 to Stage 1 New financial assets originated Changes in PDs/LGDs/EADs As at 31 December 31 March 2022 (un-audited) Stage 2 Stage 3 Lifetime Lifetime ECL ECL AED (in million) 31 December 2021 (audited) Stage 2 Stage 3 Lifetime Lifetime ECL ECL AED (in million) 92 52 (14) 3 69 (62) 88 14 (3) (21) 42 325 84 409 Total ECL 469 69 1 539 (32)
35. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario Economic fallout from COVID-19 crisis has now mostly been contained through the advent of global vaccination drives along with targeted economic measures. With infection and death rates now coming under control, lockdown and other restrictions have eased, which has in turn led to a return of normalcy and a pick-up in economic activity. While the Group continues to closely monitor the situation and work closely with clients to work through any residual elements of COVID-19 related stresses, it is management’s view that economic risks associated with the pandemic have moderated to a great extent at present. In addition, the Group is currently focused on managing direct and indirect impacts resulting from the Russia and Ukraine conflict and the resultant geopolitical fall-out. Impact of current Macroeconomic environment on measurement of ECL The Group has robust governance in place to ensure appropriateness of the IFRS 9 framework and resultant Expected Credit Loss (“ECL”) estimates at all times. Specifically, all aspects of the IFRS 9 framework are overseen by the ERC and a dedicated IFRS 9 Forum (“the forum”). The forum is chaired by the Head of Enterprise Risk Management with participation from business, Finance, credit & risk management departments. The Group, through the forum, reviews the appropriateness of inputs and methodology for IFRS 9 ECL on an ongoing basis. In addition, the Group continues to review the appropriateness of ECL provisions in light of changes in macroeconomic environment, risk profile as well as any actual and expected increase in credit risk. (33)
36. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario (continued) With respect to monitoring of COVID-19 impacts, the Group continues to: (i) Classify clients benefitting from payment deferrals into two groups; (a) Group 1: clients those are temporarily and mildly impacted; and (b) Group 2: clients that are significantly impacted and potential stage migrations; and (ii) Revise to IFRS 9 model inputs pertaining to macroeconomic forecasts in case the situation demands; Grouping of clients have been carried out based on an assessment of Significant Increase in Credit Risk (“SICR”) for clients benefiting from payment deferrals. The Group has applied knowledge of its clients and judgement in assessing SICR and whether the impact of COVID19 is temporary or longer term. Specifically, clients that are expected to face liquidity constraints without substantial changes in their creditworthiness have been classified in Group 1. For these clients, the Group holds the view that, despite being subject to payment deferrals, there is insufficient deterioration in credit quality to trigger a stage migration. On the other hand, clients that are expected to face substantial changes in their creditworthiness beyond liquidity issues have been classified as Group 2. Ultimately grouping of borrowers assists in determining whether a stage migration is warranted. As at 31 March 2022, the proportion of clients benefitting from deferrals along with their exposures and ECL is as follows: Group 1 Sector Manufacturing Construction Trade Transport and communication Services Financial institutions Personal* Residential mortgage* Government and related enterprises Total gross carrying amount 15,287 8,340 15,390 Group 2 Gross Gross carrying carrying amount ECL amount AED (in million) 25 907 39 37 407 3 4 ECL - 3,681 12,186 3,065 13,775 8,502 251 746 1,213 943 10 8 24 - 492 449 44 4 14,256 94,482 75 4,567 84 982 48 *The above categories of "Personal" and "Residential Mortgage" mainly comprises of Retail portfolio of the Bank. (34)
37. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario (continued) Impact of current Macroeconomic environment on measurement of ECL The Bank has deferred payments for customers in line with the economic relief programs announced in the countries, where the Bank operates. Due to the payment deferrals, the contractual cashflows from these credit exposures (totaling to AED 141 million) have been modified and in accordance with IFRS 9 requirements the Group has recognized a modification loss of AED 1 million, which is included as part of the ECL disclosed in note 4.1. With respect to the Russia and Ukraine conflict, a significant majority of the Group’s exposure to Russia and Ukraine is to Financial Institution in these countries. In light of the current economic situation and ongoing sanctions, the Group has proactively chosen to set aside a credit Judgmental Overlay (“JO”) of AED 19 million within the Group’s ECL. The Group has utilized stressed / punitive credit ratings and haircuts on securities, where relevant, within the ECL framework to quantify the Credit JO, thereby ensuring a pragmatic view and sufficient coverage from a provision standpoint. The Group is monitoring the day-to-day situation of the crisis and is actively managing down any direct exposure. Reasonableness of ECL estimates The Group performs historical analysis to determine key economic variables that impact credit risk across different portfolios. Macroeconomic forecasts 1 for these economic variables are used to estimate risk parameters (PD and LGD) on a forward-looking basis for all borrowers and instruments that are in scope of IFRS 9 ECL framework. In accordance with IFRS 9 requirements, the Group estimates these risk parameters under optimistic, base and pessimistic scenarios with representative weights used to measure ECL. The models have been refreshed with latest macro-economic data for the period ended 31 March 2022. From a sensitivity analysis point of view, if the pessimistic scenario was changed by +10% / 10%, ECL would change by +/- AED 19 million. The Group had previously maintained a Credit Judgmental Overlay (“JO”) of AED 175 million to reflect potential increase in credit risk emanating from impact of COVID 19 in the credit environment. The Group is of the view that risks associated with the pandemic have now mostly crystalized and are reflected in the business performance. Accordingly, the JO has been discontinued as of 30 September 2021. Even though the JO has been discontinued, the Group continues to closely monitor the impact of COVID-19 crisis on credit portfolios and overall levels of credit risk. Most corporate borrowers within vulnerable sectors have been internally re-rated in 2021 using their most up to date financial position. Accordingly, any deterioration in credit quality since the onset of the pandemic is now reflected in the ECL estimation. The Bank utilizes ‘Abu Dhabi Stock Index’, ‘Annual change in UAE Current Account to GDP Ratio’, 'UAE Budget expenditure as a% of GDP', 'Oil Price', 'World Industrial Production Growth' and 'World GDP growth' as leading macroeconomic variables, amongst others, within the Bank's IFRS 9 models. Values for these have changed by + 22%, +120%, -5%, 107%, 8% and -48.8% respectively under the adverse scenario for year 1 relative to previous quarter projections. Normalized scenario probability used by the Bank is based on 60% base, 20% optimistic and 20% pessimistic scenario probability. 1 (35)
38. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario (continued) Liquidity management The effects of the COVID-19 crisis on the economy continue to be felt by the UAE banks. The gradual recovery in the oil prices along with renewed access to the international capital markets by GCC sovereigns and financial institutions however, have eased the concerns regarding GCC Governments’ finances and banking sector’s liquidity. In this environment, the Group has taken measures to manage its liquidity carefully. The Bank’s ALCO meets regularly with primary focus on monitoring cash flows and forecasts, across all jurisdictions in which the Bank operates. The Bank has strengthened its liquidity buffer significantly through raising deposits. The CBUAE has adopted a proactive approach in order to ensure flow of credit to the economy, especially to sectors severely impacted by the COVID-19 crisis. The CBUAE announced a comprehensive Targeted Economic Support Scheme (“TESS”) effective from 15 March 2020, allowing UAE Banks to access zero cost funding and pass on the benefit to their clients through Principal and Interest deferrals. CBUAE also reduced Reserve Requirement against CASA balances, providing an immediate boost to UAE Banks’ liquidity. CBUAE also reduced Reserve Requirement against CASA balances, providing an immediate boost to UAE Banks’ liquidity. Given the increase in economic activity and stability of the financial system, CBUAE is starting a gradual and well calibrated withdrawal of some of the TESS facilities, which is scheduled to be concluded by mid of 2022. The combination of above measures by the CBUAE along with prudent liquidity management by the Bank, has helped to ensure that the Bank is able to meet its clients’ banking services requirements effectively and without disruption. Recently, while the Russia Ukraine crisis negatively impacted US and European markets, it has not had a discernable impact on liquidity in the UAE due to the accompanying rise in oil prices and the increase in Government and Related Enterprises (“GRE”) cash balances. LIBOR transition The Group is actively preparing for the transition to Alternative Reference Rates (ARR) under the supervision of a cross-functional working committee, which includes representatives from Risk, Finance, Technology, Legal, Marketing and relevant business units. In line with the disclosures in the financial statements for the year ended 31 December 2021, the Group’s transition program has commenced and will be running until the final publication date of LIBOR on 30 June 2023. (36)
39. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario (continued) LIBOR transition (continued) Financial instruments impacted by IBOR reform The exposures impacted by the LIBOR Transition reference USD LIBOR are summarized in the table below. None of these instruments had been transitioned to an Alternative Reference Rate (SOFR) as at 31 March 2022. 31 March 2022 AED (in million) Non-derivative financial assets Non-derivative financial liabilities Derivatives 29,483 1,592 27,884 As at 31 March 2022, the Group did not hold any off-balance sheet commitments and financial guarantees linked to LIBOR. Hedge accounting The Group did not enter into any any LIBOR-linked hedging instruments since January 2022. The existing contracts are due from transition on 30 June 2023. (37)
40. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario (continued) Insurance subsidiary of the Group The Bank’s insurance subsidiary ("subsidiary") assessed the impact of Covid-19 on business continuity, claims and reserving, control environment, credit risk, fair value of investment properties, impairment of financial investments measured at amortised cost, liquidity and solvency. The subsidiary mainly noticed a decrease in health care and life insurance claims, and developments in existing Business Interruption claims due to COVID-19. The subsidiary is monitoring the loss experience and has appropriately calculated its technical reserves as at 31 March 2022. Since 2019, the subsidiary has developed a robust risk appetite framework and capital thresholds based on the pandemic risk and other risk stress scenarios. The subsidiary conducts more regular reviews on its reinsurers in relation to the counterparty credit ratings, financial metrics, credit outlook and changes to their structures, if any. The current security list has more than 90% of “A” and above rated reinsurance securities. The liquidity position of the subsidiary remains strong. Further enhancements and developments to strengthen the processes and credit controls have resulted in an efficient receivable management. The subsidiary continued to have robust collections and the measures taken have contributed to controlled and healthy receivable book as at 31 March 2022. The subsidiary continues to assess the impact of Covid-19 on the Group's operations and takes necessary actions as needed. On 10 February 2022, Oman Insurance’s Syndicate 2880 received Lloyd’s approval to commence underwriting. Syndicate 2880 was launched under the Syndicate-in-a-box initiative (SIAB) and will operate on the Lloyd’s platform under the Dubai International Financial Centre (DIFC). As part of SIAB arrangement, Oman Insurance has also incorporated “OIC Corporate Member Limited”, a private limited company in England and Wales, United Kingdom as a fully owned subsidiary of Oman Insurance Company P.S.C. (“OIC”). As part of SIAB arrangement, OIC on behalf of ‘OIC Corporate Member Limited’ has pledged certain bonds having nominal value of USD 27,730 thousand to be held at Lloyd’s deposit with the beneficial ownership remains with OIC. Net book value of these bonds is AED 111,528 thousand as at 31 March 2022. (38)
41. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 4 Risk management (continued) 4.2 Risk management in the current economic scenario (continued) Insurance subsidiary of the Group (continued) Aditionally, on 23 February 2022, OIC and ASSICURAZIONI GENERALI S.p.A acting through its branch office in the UAE ("Generali UAE") signed an agreement to transfer the life insurance portfolio of Generali UAE to OIC. This portfolio transfer is expected to be completed in Q3 2022 subject to the necessary required regulatory approvals. Also on 4 March 2022, a share sale and purchase agreement was signed between Oman insurance company P.S.C. (OIC) and VHV Reasürans A.Ş. - Istanbul, Turkey (a company of VHV Group - Hannover, Germany) for OIC to fully sell 100% shareholding in the Group’s subsidiary Dubai Sigorta A.Ş., Turkey, subject to the required regulatory approvals. The financial effect of this transaction will be reflected in the condensed consolidated interim financial information once the regulatory approvals are obtained and necessary transaction is completed. 4.3 Compliance risk Contingent liabilities In 2015, the Bank became aware that certain historical US dollar payment processing activities involving Sudan may have potentially breached US sanction laws in effect at the time. The Bank proactively cooperated with the UAE and the US regulators and appointed external legal advisors to assist in the review of these transactions, which occurred prior to March 2009, including compliance with US sanction laws as well as its own compliance processes. In 2018, the Bank formally submitted the findings of the review to the regulators in both the UAE and the US. Certain US agencies and regulators concluded their reviews without levying any penalties. During the year ended 31 December 2021 the Bank reached a settlement with the Office of Foreign Assets Control (OFAC), the New York State Department of Financial Services (DFS) and the Federal Reserve Board of Governors (FRB). As part of the settlement the Bank agreed to pay $100 million to the DFS which was fully provided for in the consolidated financial statements for the year ended 31 December 2021. Dialogue with a US agency on the same matter is ongoing and, based on legal advice, it is premature at this stage to determine if the Bank is likely to be subject to any further penalty or the quantum of the penalty. The Group, on a continuous basis, identifies and assesses such risks and recognizes provisions, in consultation with its legal counsel, in accordance with the accounting policy for provisions as disclosed in the annual consolidated financial statements for the year ended 31 December 2021. (39)
42. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 5 Critical accounting judgements and key sources of estimation of uncertainty The preparation of condensed consolidated interim financial information requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing this condensed consolidated interim financial information, the significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2021. (40)
43. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 6 Other financial assets (a) The analysis of the Group’s other financial assets is as follows: Other financial assets measured at fair value (i) Other financial assets measured at fair value through profit and loss (FVTPL) 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 1,600,222 1,548,129 36,761 958 37,668 1,113 642,881 2,280,822 686,534 2,273,444 11,334,410 13,480,719 661,591 66,393 577,857 53,589 54,836 12,117,230 55,514 14,167,679 Total other financial assets measured at fair value (A) 14,398,052 16,441,123 (iii) Other financial assets measured at amortised cost Debt securities Less: Allowance for impairment 10,801,542 (52,984) 10,302,332 (24,508) Total other financial assets measured at amortised cost (B) Total other financial assets [(A) +(B)] 10,748,558 25,146,610 10,277,824 26,718,947 Debt securities Equities Quoted Unquoted Mutual and other funds (ii) Other financial assets measured at fair value through other comprehensive income (FVTOCI) Debt securities Equities Quoted Unquoted Mutual and other funds (41)
44. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 6 (b) Other financial assets (continued) The geographical analysis of other financial assets is as follows: Balances within the U.A.E. Balances outside the U.A.E. Less: Allowance for impairment 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 9,059,752 16,139,842 25,199,594 (52,984) 25,146,610 10,908,883 15,834,572 26,743,455 (24,508) 26,718,947 (c) During the period from 1 January 2022 to 31 March 2022, dividends received from financial assets measured at FVTOCI amounting to AED 9.4 million (period ended 31 March 2021: AED 8 million) were recognised as net investment income in the condensed consolidated statement of profit or loss. (d) At 31 March 2022, certain financial assets measured at amortised cost, financial assets measured at fair value included debt securities with an aggregate carrying value of AED 2,935 million (fair value of AED 2,985 million) [31 December 2021: carrying value of AED 2,890 million (fair value of AED 2,905 million)] which were collateralised as at that date against repurchase agreements with banks (“Repo”) of AED 2,343 million (31 December 2021: AED 2,288 million). (e) During the period, the Group has reviewed its portfolio and sold certain other financial assets measured at amortised cost, resulting in a gain of AED 0.02 million (period ended 31 March 2021: gain of AED 12 million) on the sale. (42)
45. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 7 Loans and advances measured at amortised cost (a) The analysis of the Group’s loans and advances measured at amortised cost is as follows: 31 March 31 December 2022 2021 (un-audited) (audited) AED’000 AED’000 Loans Overdrafts Credit cards Others Total Less: Allowance for impairment (b) 67,186,455 7,093,749 1,959,356 711,390 76,950,950 (5,762,766) 71,188,184 63,354,455 6,465,665 1,915,726 790,801 72,526,647 (6,094,077) 66,432,570 The analysis of loans and advances measured at amortised cost by industry sector is as follows: Manufacturing Construction Trade Transport and communication Services Financial institutions Personal Residential mortgage Government and related enterprises Less: Allowance for impairment 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 13,520,011 6,893,684 14,409,451 3,487,409 9,505,919 1,900,462 8,774,048 7,215,064 11,244,902 76,950,950 (5,762,766) 71,188,184 11,404,850 6,939,219 14,706,291 3,065,888 7,368,222 2,532,671 8,196,625 6,819,805 11,493,076 72,526,647 (6,094,077) 66,432,570 (43)
46. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 7 Loans and advances measured at amortised cost (continued) (c) The analysis of allowance for impairment on loans and advances measured at amortised cost by industry sector is as follows: 31 March 2022 (un-audited) AED’000 Manufacturing Construction Trade Transport and communication Services Financial institutions Personal Residential mortgage Government and related enterprises (d) 240,010 1,841,822 628,512 480,742 551,066 14,092 1,763,484 191,144 51,894 5,762,766 31 December 2021 (audited) AED’000 246,502 2,017,902 684,979 531,710 660,663 14,630 1,777,812 99,050 60,829 6,094,077 The movements in the allowance for impairment and suspended interest on loans and advances measured at amortised cost are as follows: Balance at the beginning of the period / year Impairment allowance for the period / year Interest in suspense Exchange rate and other adjustments Written off during the period / year Balance at the end of the period / year 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 6,094,077 (32,728) 65,208 (2,826) (360,965) 5,762,766 5,403,626 1,529,908 150,359 39,720 (1,029,536) 6,094,077 (e) The allowance for impairment includes a specific provision of AED 3,867 million for stage 3 loans of the Group as at 31 March 2022 (31 December 2021: AED 4,347 million). (f) At 31 March 2022, certain loans and advances measured at amortised cost with an aggregate carrying value of AED 1,332 million (fair value of AED 892 million) [31 December 2021: carrying value of AED 1,332 million (fair value of AED 945 million)] were collateralised as at that date against repurchase agreements with banks (“Repo”) of AED 414 million (31 December 2021: AED 441 million). (44)
47. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 8 Islamic financing and investment products measured at amortised cost The analysis of the Group’s Islamic financing and investment products measured at amortised cost is as follows: 31 March 31 December 2022 2021 (un-audited) (audited) AED’000 AED’000 Financing Murabaha 11,887,377 11,403,396 Ijarah 5,184,886 5,344,195 17,072,263 16,747,591 (a) Investment Wakalah 458,310 458,310 464,826 464,826 Total 17,530,573 17,212,417 Less: Unearned income Allowance for impairment (1,800,088) (623,827) 15,106,658 (1,532,000) (626,963) 15,053,454 (b) The analysis of Islamic financing and investment products measured at amortised cost by industry sector is as follows: Manufacturing Construction Trade Transport and communication Services Financial institutions Personal Residential mortgage Government and related enterprises Total Less: Unearned income Allowance for impairment 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 1,767,033 1,446,772 980,457 193,544 2,679,761 1,164,133 5,001,041 1,286,882 3,010,950 17,530,573 (1,800,088) (623,827) 15,106,658 1,878,933 1,875,799 1,001,147 291,898 2,692,387 1,098,307 4,331,202 1,202,193 2,840,551 17,212,417 (1,532,000) (626,963) 15,053,454 (45)
48. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 8 Islamic financing and investment products measured at amortised cost (c) The analysis of allowance for impairment on Islamic financing and investment products measured at amortised cost by industry sector is as follows: (continued) 31 March 2022 (un-audited) AED’000 Manufacturing Construction Trade Transport and communication Services Financial institutions Personal Residential mortgage Government and related enterprises (d) 5,215 381,444 109,884 5,387 6,674 2,628 14,836 44,255 53,504 623,827 7,957 378,133 109,196 7,885 17,002 3,707 11,299 36,947 54,837 626,963 The movement in the allowance for impairment of Islamic financing and investment products measured at amortised cost are as follows: 31 March 2022 (un-audited) AED’000 Balance at the beginning of the period / year Impairment allowance for the period / year Profit in suspense Exchange rate and other adjustments Written off during the period / year Balance at the end of the period / year (e) 31 December 2021 (audited) AED’000 626,963 (8,215) 5,007 72 623,827 31 December 2021 (audited) AED’000 407,330 203,822 16,042 (231) 626,963 The allowance for impairment includes a specific provision of AED 577 million for stage 3 Islamic financing and investment exposure of the Group as at 31 March 2022 (31 December 2021: AED 564 million). (46)
49. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 9 Investment properties At fair value Balance at beginning of the period / year Change in fair value during the period Balance at the end of the period / year 31 March 2022 (un-audited) AED ’000 462,829 462,829 31 December 2021 (audited) AED ’000 449,715 13,114 462,829 All of the Group’s investment properties are freehold properties and located in the U.A.E. The fair value of investment properties as at 31 December 2021 has been arrived at on the basis of valuations carried out by third party valuers and also are in accordance with the Royal Institute of Chartered Surveyor (RICS) Valuation Standards. The valuers performing the valuation have necessary qualifications, skills, understanding and knowledge to undertake the valuation competently and possess recent market experience in the valuation of properties in the United Arab Emirates. The valuers are not related to the Group. The fair value of the Group’s investment properties is based on unobservable market inputs, i.e. Level 3. Management has assessed the fair value of investment properties and the carrying value approximately the fair value as at 31 March 2022. (47)
50. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 10 Property and equipment During the period, the Group purchased AED 29 million (period ended 31 March 2021: AED 29 million) of various types of property and equipment and disposed of property and equipment with a net book value of AED 9 million (period ended 31 March 2021: AED 4 million). 11 Deposits and balances due to banks The analysis of deposits and balances due to banks is as follows: Time Demand Overnight 12 31 March 2022 (un-audited) AED ’000 31 December 2021 (audited) AED ’000 14,828,867 4,897,132 3,135,057 22,861,056 13,947,840 3,192,445 2,426,201 19,566,486 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 58,229,537 6,188,015 25,659,140 90,076,692 50,248,066 6,109,303 30,793,533 87,150,902 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 3,941,509 201,700 10,008,239 14,151,448 3,586,227 191,227 10,554,633 14,332,087 Customers' deposits The analysis of customers’ deposits is as follows: Current and other accounts Saving accounts Time deposits 13 Islamic customers’ deposits The analysis of Islamic customers’ deposits is as follows: Current and other accounts Saving accounts Time deposits (48)
51. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 14 Medium-term notes 31 March 2022 (un-audited) AED ’000 Medium term notes 6,821,360 31 December 2021 (audited) AED ’000 7,315,119 The maturities of the medium-term notes (MTNs) issued under the programme are as follows: 31 March 2022 (un-audited) AED’000 Year 2022 2023 2024 2025 2029 1,609,195 387,052 3,983,339 811,891 29,883 6,821,360 31 December 2021 (audited) AED’000 2,095,531 389,753 3,989,012 799,917 40,906 7,315,119 The Group established a Euro Medium Term Note (EMTN) programme for USD 5 billion (AED 18.37 billion) under an agreement dated 15 March 2010. During the three month period ended 31 March 2022, medium-term notes of AED 0.4 billion were redeemed. 15 Issued and paid up capital At the general meeting held on 9 November 2021, the shareholders approved increase in the share capital of the Bank to AED 2,006,098,300 by issuing 23,079,007 bonus shares based on the existing face value of AED 10 per share, which is a non cash transaction. As at 31 March 2022, 200,609,830 ordinary shares of AED 10 each (31 December 2021: 200,609,830 ordinary shares of AED 10 each) were fully issued and paid up. At the Annual General Meeting of the shareholders held on 20 April 2022, the shareholders approved a cash dividend of 10% for the year ended 31 December 2021 (31 December 2020: cash dividend of nil) of the issued and paid up capital amounting to AED 201 million. (49)
52. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 16 Non-controlling interests At beginning of the period/year Share of profit for the period/year Share of other comprehensive income for the period/year Dividend paid Transaction with NCI At end of the year 17 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 796,062 23,953 16,068 836,083 757,680 73,508 12,024 (32,825) (14,325) 796,062 General and administrative expenses General and administrative expenses include senior management remuneration and director fees of AED 13 million for the three month period ended 31 March 2022 (three month period ended 31 March 2021 : AED 10 million). 18 Earnings per share The basic earnings per share is calculated by dividing the net profit attributable to owners of the Parent by the weighted average number of ordinary shares in issue during the period. For the three month period ended 31 March 31 March 2022 2021 (un-audited) (un-audited) Profit for the period (AED’000) (Attributed to owners of the Parent) Weighted average number of shares in issue Basic earnings per share (AED) 606,132 200,609,830 3.02 42,985 200,609,830 0.24 In accordance with IAS 33 “Earnings Per Share”, the impact of bonus shares issued have been considered retrospectively while computing the weighted average number of ordinary shares during all periods presented. There were no potentially dilutive shares as of 31 March 2022 and 31 March 2021. (50)
53. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 19 Cash and cash equivalents Cash and cash equivalents consist of cash on hand, current accounts and other balances with central banks, certificates of deposits, balances with banks and money market placements which are maturing within three months from the date of the deposit or placement, as below. Cash on hand Current accounts and other balances with central banks Certificates of deposit maturing within 3 months Deposits and balances due from banks maturing within 3 months 20 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 1,088,791 1,027,306 974,000 8,618,532 9,223,621 5,859,019 2,600,000 2,800,000 - 9,803,392 22,110,715 8,251,111 21,302,038 11,651,592 18,484,611 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 32,574,093 19,262,294 9,461,753 61,298,140 33,706,515 15,785,785 7,950,047 57,442,347 31 March 2021 (un-audited) AED’000 Contingent liabilities and commitments The analysis of the Group’s contingent liabilities is as follows: Guarantees Letters of credit Irrevocable undrawn credit facilities commitments (51)
54. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 21 Derivative financial instruments 31 March 2022 (un-audited) Held for trading: Forward foreign exchange contracts Foreign exchange options (bought) Foreign exchange options (sold) Credit default swaps Interest rate swaps Futures contracts purchased (Customer) Futures contracts sold (Customer) Futures contracts sold (Bank) Futures contracts purchased (Bank) Held as fair value / cash flow hedges: Cross currency swaps Positive fair value AED’000 Negative fair value AED’000 Notional Amount AED’000 404,134 4,022 1,017,787 52,628 6,990 698 83,210 1,569,469 399,460 3,795 543 720,985 83,136 406 7,025 52,738 1,268,088 77,403,320 753,945 202,479 29,384 33,421,450 2,079,073 285,667 372,299 2,092,716 116,640,333 97,173 1,666,642 42,638 1,310,726 1,951,278 118,591,611 31 March 2022 (un-audited) Other assets Positive fair value of derivatives Other liabilities Negative fair value of derivatives Level 1 AED’000 Level 2 AED’000 Level 3 AED’000 Total AED’000 - 1,666,642 - 1,666,642 - 1,310,726 - 1,310,726 (52)
55. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 21 Derivative financial instruments (continued) 31 December 2021 (audited) Held for trading: Forward foreign exchange contract Foreign exchange options (bought) Foreign exchange options (sold) Interest rate swaps Credit default swaps Futures contracts purchased (Customer) Futures contracts sold (Customer) Futures contracts purchased (Bank) Futures contracts sold (Bank) Held as fair value /cash flow hedges: Cross currency swaps Positive fair value AED’000 Negative fair value AED’000 Notional amount AED’000 249,452 513 606,997 237 47,450 142 1,301 23,481 929,573 194,982 336 662,173 271 23,481 1,301 142 47,451 930,137 56,973,978 1,880,243 1,622,613 34,035,738 55,095 1,208,485 47,595 47,595 1,217,320 97,088,662 98,613 1,028,186 40,123 970,260 1,960,813 99,049,475 31 December 2021 (audited) Other assets Positive fair value of derivatives Other liabilities Negative fair value of derivatives Level 1 AED’000 Level 2 AED’000 Level 3 AED’000 Total AED’000 - 1,028,186 - 1,028,186 - 970,260 - 970,260 Derivatives with positive fair value and negative fair value are included in other assets balance and other liabilities balance respectively. There were no transfers between levels during the period. 22 Seasonality of results No income of a seasonal nature was recorded in the condensed consolidated interim financial information for the three month period ended 31 March 2022 and 2021 respectively. (53)
56. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 23 Related party transactions (a) Certain related parties (such as, directors, key management personnel and major shareholders of the Group and companies of which they are principal owners) are customers of the Group in the ordinary course of business. Transactions with such related parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with external customers and parties. Such related party transactions are disclosed below. Related party balances included in the condensed consolidated statement of financial position are as follows: 31 March 31 December 2022 2021 AED’000 AED’000 (un-audited) (audited) Balances with major shareholders Loans and advances and islamic financing and 2,810,150 investment products measured at amortised cost 3,046,336 1,029,236 Deposits/ financial instruments under lien 1,083,092 1,854,305 Letter of credit and guarantees 1,524,993 (b) Balances with directors and key management personnel Loans and advances and islamic financing and investment products measured at amortised cost Deposits/ financial instruments under lien Letter of credit and guarantees 93,006 261,792 5,394 125,107 230,884 5,369 Balances with associates and joint venture Loans and advances and islamic financing and investment products measured at amortised cost Deposits/ financial instruments under lien Letter of credit and guarantees 15,459 34,268 169,297 - (54)
57. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 23 Related party transactions (continued) Profit for the period includes related party transactions as follows: 31 March 2022 AED’000 (un-audited) Transactions with major shareholders 18,170 Interest income Interest expense 393 Other income 10,493 (c) 31 March 2021 AED’000 (audited) 23,087 227 5,279 Transactions with directors and key management personnel Interest income Interest expense Other income 619 23 102 669 46 303 Transactions with associates and joint venture Interest income Interest expense Other income 227 426 - (55)
58. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 24 Segmental information IFRS 8 – Operating Segments – requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. Reportable segments Operating segments are identified on the basis of internal reports about the components of the Group that are regularly reviewed by the Group’s CEO (the Group’s chief operating decision maker) in order to allocate resources to the segment and to assess its performance. Information reported to the Group’s CEO for the purpose of resource allocation and assessment of performance is based on following strategic business units offering products and services to different markets. The Group’s reportable segments under IFRS 8 are therefore as follows: 1. Corporate and Investment Banking segment comprises of domestic corporate and commercial banking. It also includes global Financial Institution business. It offers complete suite of corporate banking products such as Trade finance, contracting finance, project finance, investment banking, cash management, correspondent banking, etc. 2. The Retail segment includes products and services offered to individuals or small businesses within U.A.E and Egypt. The product offerings to customers include, current accounts, savings accounts, fixed deposits, investment products, “Mashreq Millionaire” deposits, personal loans, mortgage loans, business loans, credit cards with unique loyalty programs, bank assurance, overdraft, priority banking, SME, private banking and wealth management services. 3. The Treasury & Capital Markets segment consists of customer flow business and proprietary business and funding centre management. Customer flow business includes transactions for foreign exchange, derivatives, margin FX, futures, hedging, investment products, domestic equities (brokerage) and asset management undertaken on behalf of customers. The proprietary business includes trading and investing activity undertaken on behalf of the Group. 4. The International Banking segment consists of Corporate business for the Group’s overseas banking branches. Product range covers complete suite similar to domestic corporate. 5. All Islamic banking products offered to customers are included under the Islamic Banking segment. These products are Ijarah Home Finance, Mudarabah Deposit, Mudarabah savings account, Musharaka finance, Murabaha commodity finance, Ijarah Equipment Finance, Sukuk Underwriting, Musharaka LC, Murabaha LC, TR Murabaha, Kafala, Wakalah Deposit, Reverse Murabaha Deposit & Sukuk Advisory. (56)
59. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 24 Segmental information (continued) Reportable segments (continued) 6. The Insurance subsidiary, Oman Insurance Company (PSC) Group – comprises the Insurance segment. The product offerings to customers include life, health, motor, marine cargo and hull, aviation, fire and general accident, engineering, liability and personal lines insurance. 7. Other consists of Head office and certain investments and assets held centrally due to their strategic significance to the Group. The accounting policies of the reportable segments are the same as the Group’s accounting policies. Segment profit represents the profit earned by each segment without allocation of general and administrative expenses, allowances for impairment and tax expenses. (57)
60. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 24 Segmental information (continued) Reportable segments (continued) Net interest income and earnings from Islamic products Other income, net Operating income Period from 1 January 2022 to 31 March 2022 (un-audited) Corporate & Investment banking AED’000 278,793 232,177 510,970 Retail AED’000 Treasury & capital markets AED’000 Islamic banking AED’000 International banking AED’000 Insurance AED’000 Other AED’000 Total AED’000 265,547 202,471 468,018 55,780 132,079 187,859 82,024 16,704 98,728 90,547 18,854 109,401 20,176 129,386 149,562 36,247 3,097 39,344 829,114 734,768 1,563,882 (669,820) 894,062 (252,141) 641,921 (11,836) 630,085 General and administrative expenses Operating profit before impairment Allowances for impairment, net Profit before taxes Tax expense Profit for the period Attributed to: Owners of the Parent Non-controlling interests Segment Assets 64,782,234 17,511,357 40,735,637 Segment Liabilities 57,041,608 37,970,007 17,290,868 31 March 2022 (un-audited) 15,116,566 16,030,794 14,789,919 11,074,345 606,132 23,953 630,085 7,994,140 20,410,528 182,581,256 5,764,546 17,444,403 161,375,696 (58)
61. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 24 Segmental information (continued) Reportable segments (continued) Net interest income and earnings from Islamic products Other income, net Operating income Period from 1 January 2021 to 31 March 2021(un-audited) Corporate & Investment banking AED’000 Retail AED’000 Treasury & capital markets AED’000 Islamic banking AED’000 International banking AED’000 Insurance AED’000 Other AED’000 Total AED’000 240,112 179,039 419,151 234,846 156,953 391,799 34,629 174,772 209,401 61,282 21,349 82,631 91,902 53,242 145,144 19,825 127,875 147,700 15,135 (1,743) 13,392 697,731 711,486 1,409,217 General and administrative expenses Operating profit before impairment Allowances for impairment, net Profit before taxes Tax expense Profit for the period (619,931) 789,286 (710,807) 78,479 (14,092) 64,387 Attributed to: Owners of the Parent Non-controlling interests Segment Assets Segment Liabilities 61,650,177 51,973,472 17,263,207 36,727,897 36,209,355 17,472,601 31 December 2021 (audited) 15,093,871 15,033,770 18,634,754 11,887,394 42,985 21,402 64,387 7,466,493 5,305,995 20,735,752 17,628,193 177,053,609 156,029,322 (59)
62. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 25 Fair value of financial instruments 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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. Valuation techniques and assumptions applied for the purposes of measuring fair value. The fair values of financial assets and financial liabilities are determined using similar valuation techniques and assumptions as used for the year ended 31 December 2021. Fair value of the Group’s financial assets that are measured at fair value on recurring basis. Some of the Group’s financial assets are measured at fair value at the end of the reporting period. The following table gives information about how the fair values of these financial assets are determined: (60)
63. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 25 Fair value of financial instruments (continued) Fair value of the Group’s financial assets and financial liabilities that are measured at fair value on a recurring basis (continued) Other financial assets Other financial assets measured at FVTPL Quoted debt investments Quoted equity investments Unquoted debt investments Mutual and other funds Unquoted equity investments Fair value as at Valuation techniques and key inputs Significant unobservable input Relationship of unobservable inputs to fair value Level 1 Quoted bid prices in an active market None Not applicable Level 1 Quoted bid prices in an active market None Not applicable 1,291,065 Level 2 Based on the recent similar transaction in market None Not applicable 642,881 686,534 Level 2 None Not applicable 958 1,113 2,280,822 2,273,444 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 328,724 36,761 257,064 37,668 1,271,498 Fair value hierarchy Level 3 Quoted prices in secondary market. Net assets valuation method due to the unavailability of market and comparable financial information. Net assets values were determined based on the latest available audited/ historical financial information. Higher the net assets Net assets value value of the investees, higher the fair value. (61)
64. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 25 Fair value of financial instruments (continued) Fair value of the Group’s financial assets and financial liabilities that are measured at fair value on a recurring basis (continued) Other financial assets Other financial assets measured at FVTOCI Fair value as at 31 March 31 December 2022 2021 (un-audited) (audited) AED’000 AED’000 Quoted equity investments 661,591 Unquoted debt investments 545,275 Quoted debt investments Unquoted equity investments Mutual and other funds 10,789,135 66,393 Fair value hierarchy 577,857 559,930 Level 1 12,920,789 Level 1 53,589 54,836 12,117,230 55,514 14,167,679 14,398,052 16,441,123 Level 3 Level 3 Level 2 Valuation techniques and key inputs Quoted bid prices in an active market Based on the recent similar transaction in market. Quoted bid prices in an active market Comparable sales transactions with appropriate haircut, Discounted cash flows (DCF) and for very insignificant assets, net assets as per financial statements. Quoted prices in secondary market. Significant unobservable input Relationship of unobservable inputs to fair value None Not applicable None Not applicable None Not applicable 1. Hair cut for comparable transactions. 2. Interest rate None 1. Changes in hair cut for comparable sales transactions will directly impact fair value. 2. Interest rate changes in DCF will directly impact the fair valuation calculation. Not applicable. There were no transfers between Level 1 and 2 during the period. (62)
65. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 25 Fair value of financial instruments (continued) Reconciliation of Level 3 fair value measurement of other financial assets measured at FVTPL Balance at the beginning of the period / year Purchases Disposals Change in fair value Balance at the end of the period / year 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 1,113 (155) 958 1,112 1 1,113 Reconciliation of Level 3 fair value measurement of other financial assets measured at FVTOCI Balance at the beginning of the period / year Purchases Disposals Change in fair value Balance at the end of the period / year 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 613,519 12,856 (14,707) 611,668 615,541 7,933 (1,118) (8,837) 613,519 Gains and losses included in condensed consolidated statement of comprehensive income include unquoted investments in equity instruments held at the end of the reporting period and are reported as changes of ‘investment revaluation reserve’. (63)
66. Mashreqbank PSC Group Notes to the condensed consolidated interim financial information for the period from 1 January 2022 to 31 March 2022 (continued) 26 Capital adequacy ratio As per the Central bank regulation for Basel III, the capital requirement as at 31 March 2022 is 13% inclusive of capital conservation buffer of 2.5%. However, as per the standards for issued by CBUAE for TESS program due to the COVID-19 crisis, banks are allowed to tap into the capital conservation buffer up to a maximum of 60% without supervisory consequences, effective from 15 March 2020 until 30 June 2022. The Bank is required to comply with the following minimum requirement: (i) (ii) (iii) (iv) CET1 must be at least 7% of risk weighted assets (RWA); Tier 1 capital must be at least 8.5% of risk weighted assets (RWA); and Total capital, calculated as sum of Tier 1 capital and Tier 2 capital must be at least 10.5% of risk weighted assets (RWA). In addition, banks are required to maintain a capital conservation buffer (CCB) of 2.5% of risk weighted assets (RWA) in the form of CET 1. The capital adequacy ratio is computed based on circulars issued by the U.A.E. Central Bank as per Basel III. Capital base Tier 1 capital Tier 2 capital Total capital base (A) Risk-weighted assets Credit risk Market risk Operational risk Total risk-weighted assets (B) Capital adequacy ratio (%) [(A)/(B) x 100] 27 31 March 2022 (un-audited) AED’000 31 December 2021 (audited) AED’000 19,918,250 1,779,552 21,697,802 19,785,886 1,693,975 21,479,861 142,364,153 3,130,974 9,444,816 154,939,943 135,518,028 3,206,199 9,444,817 148,169,044 14.00% 14.50% Subsequent events There have been no events subsequent to the statement of financial position date that would significantly affect the amounts reported in the condensed consolidated interim financial information as at and for the three-month period ended 31 March 2022. 28 Approval of condensed consolidated interim financial information The condensed consolidated interim financial information on pages 2 to 64 were approved by the Board of Directors on 27 April 2022. (64)