National Bank of Bahrain: Consolidated Financial Statements - 31 December 2021

Transcription

1. NATIONAL BANK OF BAHRAIN GROUP CONSOLIDATED FINANCIAL STATEMENTS 31 December 2021
2. National Bank of Bahrain B .S.C. Consolidated Financial Statements – 31 December 2021 Table of Contents Independent auditors’ report to the shareholders ................................................................................... 1 Consolidated statement of financial position ........................................................................................... 6 Consolidated statement of profit or loss .................................................................................................. 7 Consolidated statement of comprehensive income ................................................................................ 8 Consolidated statement of changes in equity .......................................................................................... 9 Consolidated statement of cash flows ...................................................................................................... 10 Notes to the financial statements .............................................................................................................. 11 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. Reporting entity ...................................................................................................................................... 11 Significant accounting policies ............................................................................................................... 11 Financial risk management .................................................................................................................... 23 COVID-19 impact ................................................................................................................................... 25 Cash and cash equivalents .................................................................................................................... 26 Treasury bills .......................................................................................................................................... 26 Placements with banks and other financial institutions ......................................................................... 26 Loans and advances .............................................................................................................................. 26 Investment securities ............................................................................................................................. 29 Investment in associates ........................................................................................................................ 30 Interest receivable and other assets ...................................................................................................... 30 Property and equipment ......................................................................................................................... 30 Goodwill and other intangible assets ..................................................................................................... 31 Due to banks and other financial institutions ......................................................................................... 31 Borrowings under repurchase agreements ............................................................................................ 31 Customer deposits ................................................................................................................................. 31 Interest payable and other liabilities....................................................................................................... 31 Net impairment and other provisions ..................................................................................................... 32 Contingent liabilities and banking commitments .................................................................................... 32 Derivative and foreign exchange financial instruments ......................................................................... 33 Share capital .......................................................................................................................................... 34 Reserves ................................................................................................................................................ 34 Appropriations ........................................................................................................................................ 35 Interest income / interest expense ......................................................................................................... 35 Net fee and commission income ............................................................................................................ 35 Other income.......................................................................................................................................... 35 Staff expenses ....................................................................................................................................... 36 Other operating expenses ...................................................................................................................... 36 Net open foreign currency positions ...................................................................................................... 36 Related parties ....................................................................................................................................... 36 Assets under management .................................................................................................................... 37 Geographical distribution ....................................................................................................................... 37 Distribution by sector ............................................................................................................................. 37 Concentration of credit risk .................................................................................................................... 37 Interest rate risk ..................................................................................................................................... 39 Market risk .............................................................................................................................................. 40 Segment information .............................................................................................................................. 41 Maturity profile and liquidity risk ............................................................................................................. 42 Net stable funding ratio .......................................................................................................................... 43 Retirement benefit costs ........................................................................................................................ 44 Legal claims ........................................................................................................................................... 44 Earnings and dividend per share ........................................................................................................... 44 Accounting classification ........................................................................................................................ 45 Average balances .................................................................................................................................. 46 Shariah-compliant assets and liabilities ................................................................................................. 46 Capital adequacy ................................................................................................................................... 47 Deposit protection scheme .................................................................................................................... 47 Supplementary disclosures – impact of COVID-19 .................................................................................. 48
10. National Bank of Bahrain B .S.C. Consolidated Statement of Comprehensive Income For the year ended 31 December 2021 2020 BD millions US$ millions BD millions US$ millions 55.0 145.9 50.7 134.5 Net change in fair value (2.3) (6.1) (2.2) (5.8) Net amount transferred to profit or loss (3.2) (8.5) (3.5) (9.3) Net change in fair value of equity FVOCI investments (3.3) (8.8) 2.5 6.6 Total other comprehensive loss for the year (8.8) (23.4) (3.2) (8.5) Total comprehensive income for the year 46.2 122.5 47.5 126.0 45.1 119.6 50.1 132.9 1.1 2.9 46.2 122.5 Profit for the year Other comprehensive income: Items that are, or may be, reclassified to profit or loss: Fair value through other comprehensive income (debt investments) Items that will not be reclassified to profit or loss: Attributable to: Shareholders of the bank Non-controlling interest Total comprehensive income for the year The accompanying notes 1 to 47 are an integral part of these financial statements. 8 (2.6) 47.5 (6.9) 126.0
11. National Bank of Bahrain B .S.C. Consolidated Statement of Changes in Equity Other reserves and retained earnings For the year ended 31 December 2021 Share capital Balance at 31 December 2020 Unallocated Shares 170.3 Share premium Statutory reserve General reserve Fair value reserve (1.3) 10.5 85.1 32.4 24.1 Donation and charity reserve 15.2 Retained earnings 183.4 Total owners' equity 519.7 (33.8) Noncontrolling interest 6.6 Total equity BD millions US$ millions 526.3 1,396.0 (33.8) (89.6) 2020 appropriations: Cash dividend at 20% Bonus shares issued at 10% 17.0 - - - - - - (33.8) (0.1) - - - - - (16.9) - - - - Transfer to donations and charity reserve - - - - - - 2.7 (2.7) - - - Transfer to statutory reserve - - - 8.5 - - - (8.5) - - - Balance after 2020 appropriations 187.3 (1.4) 10.5 - 0.2 0.9 - - Profit for the year - - - - Other comprehensive income - - - - Total comprehensive income for the year Utilisation of donation and charity reserve - - - Disposal of equity securities - - Other movements - - Employee shares allocated 93.6 32.4 24.1 17.9 121.5 - 485.9 1.1 6.6 - - 492.5 1,306.4 1.1 2.9 145.9 - - - - - - (8.8) - - - (8.8) - (4.1) 53.9 - - - - 2.9 - (2.9) - - - - - - - - - (0.2) (0.2) (0.2) (0.4) (1.0) Comprehensive income for the year: Balance at 31 December 2021 (notes 21-23) 187.3 (1.2) 11.4 93.6 32.4 18.2 53.9 - 13.8 172.3 53.9 1.1 55.0 (8.8) - (8.8) (23.4) 45.1 (4.1) 1.1 - 46.2 (4.1) 122.5 (10.9) 527.8 7.5 535.3 1,419.9 The appropriations for the year 2021 will be submitted to the shareholders at the annual general meeting. These appropriations include BD 37.5 million for cash dividend at 20% (2020: 20%) and BD 2.7 million for donations and contributions. The Board of Directors has also proposed a one for ten bonus issue through utilisation of BD 18.7 million from retained earnings and the transfer of BD 9.4 million from retained earnings to the statutory reserve. Other reserves and retained earnings For the year ended 31 December 2020 Balance at 31 December 2019 Share capital Unallocated Shares Share premium Statutory reserve General reserve Fair value reserve 154.3 (1.4) 6.3 77.1 32.4 26.8 Donation and charity reserve 19.7 Retained earnings 217.1 Total owners' equity 532.3 (38.4) Noncontrolling interest Total equity BD millions US$ millions - 532.3 1,411.9 - (38.4) (101.8) 2019 appropriations: Cash dividend at 25% Bonus shares issued at 10% 15.5 - - - - - - (38.4) (0.1) - - - - - (15.4) - - - - Transfer to donations and charity reserve - - - - - - 3.7 (3.7) - - - Transfer to statutory reserve - - - 8.0 - - - (8.0) - - - (1.5) 6.3 493.9 - 493.9 Balance after 2019 appropriations 169.8 85.1 32.4 26.8 23.4 151.6 - 1,310.1 Employee shares allocated - 0.2 1.6 - - - - - 1.8 1.8 4.8 Acquisition of subsidiary (note 13) 0.5 - 2.6 - - - - - 3.1 12.0 15.1 40.0 Profit for the year - - - - - - - 53.3 (2.6) 50.7 134.5 Other comprehensive income - - - - - (3.2) - (3.2) - (3.2) (8.5) Total comprehensive income for the year Utilisation of donation and charity reserve - - - - - (3.2) - (8.2) 50.1 (8.2) (2.6) - 47.5 (8.2) 126.0 (21.8) Transfer to retained earnings - - - - - 0.5 - (0.5) Modification loss, net of government grant (note 4) - - - - - - - (20.6) Comprehensive income for the year: Other movements Balance at 31 December 2020 (notes 21-23) 170.3 (1.3) - - 10.5 85.1 Unallocated shares are shares that remain unallocated to employees under the employee share incentive scheme. The accompanying notes 1 to 47 are an integral part of these financial statements. 9 32.4 24.1 15.2 53.3 53.3 - (0.4) 183.4 - - (20.6) (2.7) (0.4) (0.1) 519.7 6.6 (23.3) (0.5) 526.3 (61.8) (1.3) 1,396.0
12. National Bank of Bahrain B .S.C. Consolidated Statement of Cash Flows For the year ended 31 December 2021 Note BD millions 2020 US$ millions BD millions US$ millions Cash flows from operating activities Profit for the year 55.0 145.9 50.7 134.5 Depreciation and amortisation 6.7 17.8 4.8 12.7 Amortisation of right-of-use leased property 2.2 5.8 1.5 4.0 22.5 59.7 28.0 74.3 Adjustments to reconcile profit for the year to net cash from operating activities: Net impairment and other provisions 18 Share of profits from associates, net (1.1) Profit for the year after adjustments 85.3 226.3 (2.9) (1.0) 84.0 (2.7) 222.8 Changes in operating assets and liabilities Balances with central banks (mandatory cash reserves) (4.9) (13.0) 37.4 99.2 (26.7) (70.8) 154.0 408.5 29.7 78.7 (51.2) (135.8) Loans and advances (234.8) (622.8) (290.3) (770.0) Investment securities (50.7) (134.5) 92.8 246.1 17.0 45.1 (28.3) (75.1) Due to banks and other financial institutions (26.5) (70.3) (70.2) (186.2) Borrowings under repurchase agreements Treasury bills Placements with banks and other financial institutions Interest receivable and other assets 108.7 288.3 4.5 11.9 Customer deposits 99.9 265.0 127.3 337.7 Interest payable and other liabilities (6.1) (16.2) (2.5) Net cash (used in) / from operating activities (9.1) (24.2) 57.5 1.1 2.9 0.8 2.1 - - 99.7 264.5 (6.6) 152.5 Cash flows from investing activities Dividend received from associates Cash flow arising on acquisition of subsidiary Disposal of associate Purchase of property and equipment, net Net cash (used in) / from investing activities 9.3 24.7 - (13.3) (35.3) (13.9) (36.9) - (2.9) (7.7) 86.6 229.7 Cash flows from financing activities Dividends paid (34.0) (90.2) (40.7) (108.0) Purchase of subsidiary 13 - - (58.8) (156.0) Government grants received 4 - - 4.6 12.2 (4.5) (11.9) (8.8) (23.3) Donations and charities paid Payment of lease liabilities (2.2) (5.8) (2.8) (7.4) Net cash used in financing activities (40.7) (107.9) (106.5) (282.5) Net (decrease) / increase in cash and cash equivalents (52.7) (139.8) 37.6 99.7 Cash and cash equivalents at 1 January 5 373.2 989.9 335.6 890.2 Cash and cash equivalents at 31 December 5 320.5 850.1 373.2 989.9 The accompanying notes 1 to 47 are an integral part of these financial statements. 10
13. Notes to the consolidated financial statements For the year ended 31 December 2021 1 . REPORTING ENTITY The National Bank of Bahrain B.S.C., a public shareholding company, was incorporated in the Kingdom of Bahrain by an Amiri decree in January 1957. The Bank is licensed by the Central Bank of Bahrain (CBB) as a conventional retail bank. The overseas branches in United Arab Emirates and Kingdom of Saudi Arabia operate under the laws of those respective countries. The Bank’s registered address is National Bank of Bahrain B.S.C., P.O.Box 106, NBB Tower, Government Avenue, Manama, Kingdom of Bahrain. The shares of the Bank are listed on the Bahrain Bourse, Manama, Kingdom of Bahrain. The consolidated financial statements include the results of the Bank and its subsidiary (together the Group). The Bank holds 78.8% of the share capital of Bahrain Islamic Bank B.S.C. (BISB) which operates under an Islamic retail banking license issued by the CBB. The Group is principally engaged in providing retail and wholesale commercial banking services, treasury and investment activities, and investment advisory services. 2. SIGNIFICANT ACCOUNTING POLICIES a. Statement of compliance The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), the requirements of the Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law 2006, along with applicable rules and regulations issued by the CBB, including the circulars on regulatory concessionary measures in response to the coronavirus pandemic (COVID-19). The basis of preparation is hereinafter referred to as ‘IFRS as modified by the CBB’. The CBB rules and regulations require the adoption of all International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), except for: - The retrospective recognition of modification losses arising from the deferral of loans, without additional interest charges, to qualifying Bahraini individuals and companies. The losses are recognised directly in equity, instead of the statement of profit or loss as required by IFRS. Any other modification gains or losses on financial assets are recognised in accordance with the applicable IFRS requirements. - The retrospective recognition of financial assistance received from the government and regulator in response to COVID-19. The grants are recognised in equity against the modification loss discussed above, instead of the statement of profit or loss as required by IAS 20. Any other financial assistance is recognised in accordance with the requirements of IAS 20. b. Basis of preparation The consolidated financial statements of the Group are presented in Bahraini Dinar (BD) being the functional currency of the Group. The US Dollar (US$) amounts are presented for the convenience of the reader. The Bahraini Dinar has been translated to US Dollar at the rate of BD 0.377 to US$ 1 (2020: BD 0.377 to US$ 1). The consolidated financial statements have been prepared on the historical cost convention except for financial instruments classified as fair value through profit or loss, fair value through other comprehensive income investments and derivative financial instruments which are measured at fair value. The principal accounting policies applied in the preparation of these financial statements have been consistently applied to all the years presented except as described below: 11
14. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) i) Adoption of new accounting policies No new issued standards have been adopted by the Group with effect from 1 January 2021. ii) Amendmends to standards A. Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16: Interest rate benchmark reform – Phase 2 The amendments address issues that might affect financial reporting as a result of the interest rate benchmark reform, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of the existing interest rate benchmark with a risk-free rate (RFR). The amendments provide practical relief from certain requirements of IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 and is effective for annual reporting periods beginning on or after 1 January 2021. The changes did not result in any material impact on the Group’s consolidated financial information. The Group adopted IBOR reform Phase 2 from its effective date, which allows as a practical expedient for changes to the basis for determining contractual cash flows to be treated as changes to a floating interest rate, provided that certain conditions are met. The conditions include that the change is necessary as a direct consequence of IBOR reform and that the transition takes place on an economically equivalent basis. The majority of LIBOR and other IBORs are to be discontinued after 31 December 2021 and replaced with certain Alternative Benchmark Rates, with the exception of certain USD LIBOR rates where cessation is delayed until 30 June 2023. IBOR reform Phase 2 provides temporary reliefs that allow the Group’s hedging relationships to continue upon the replacement of an existing interest rate benchmark with an RFR. The reliefs require the Group to amend hedge designations and hedge documentation. This includes redefining the hedged risk to reference an RFR, redefining the description of the hedging instrument and / or the hedged item to reference the RFR and amending the method for assessing hedge effectiveness. Updates to the hedging documentation must be made by the end of the reporting period in which a replacement takes place. The Group has undertaken a project under the oversight of a cross-functional IBOR Committee to manage its transition from LIBORs to alternative risk-free rates. The objectives of the IBOR Committee include evaluating the extent to which assets and liabilities are referenced to LIBOR cash flows, assessing whether contracts need to be amended as a result of these reforms, and managing IBOR reform communication with counterparties. The new contracts to be entered by the Group on or after 1 January 2022 will be based on using various alternative benchmark interest rates including certain “risk-free” rates. Non-derivative financial assets and liabilities The Group’s exposure to its floating non-derivative financial assets and liabilities is predominantly linked to USD LIBOR. The Group will transition these contracts to RFRs through bilateral agreements ahead of June 2023. The Group’s exposure to financial assets that are based on USD LIBOR maturing after June 2023 is BD 347.1 million (US$ 920.7 million) as at 31 December 2021. The Group’s exposure to LIBOR linked financial liabilities and non-USD floating exposures is insignificant. The Group is in discussion with the counterparties to effect an orderly transition of USD exposures to the relevant RFR. Derivatives The Group’s interest rate derivative instruments have floating legs predominantly linked to USD LIBOR. Such instruments are governed by the International Swaps and Derivatives Association (ISDA) Master Agreements. ISDA has defined a fall-back logic (ISDA protocol) to replace the LIBOR fixings following the transition. These fall-back rates are published by Bloomberg Index Securities Limited for use in legacy derivatives contracts. The existing contracts can be transitioned to these alternatives. The Group is required to transition USD LIBOR based derivatives not later than June 2023. The notional value of USD LIBOR derivatives maturing after June 2023 is BD 2,818.5 million (US$ 7,476.1 million) as at 31 December 2021. The Group has applied the hedging relief available under the amendments to IFRS 9 Financial Instruments relating to interest rate benchmark reforms and assessment of economic relationship between hedged items and hedging instruments. 12
15. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) iii) Standards issued but not yet effective A number of new standards are effective for annual periods beginning on or after 1 January 2022 where earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements. c. Foreign currencies i) Foreign currency transactions: Foreign currency transactions are initially recorded at rates of exchange prevailing at the value date of the transactions. Monetary assets and liabilities in foreign currencies are translated to respective functional currencies at the rates of exchange prevailing at the statement of financial position date. Realised and unrealised exchange gains or losses are recognised in the statement of profit or loss and included in other income. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in the statement of profit or loss, except for differences arising on the retranslation of fair value through other comprehensive income equity instruments which are recognised directly in other comperhensive income as part of fair value changes. ii) Foreign operations: The assets and liabilities of the overseas branches are translated into Bahraini Dinar at the spot exchange rate at the reporting date. The income and expenses of these overseas branches for the year are translated into Bahraini Dinar at average exchange rates. Differences resulting from the translation of the opening net investment in these overseas branches are recognised in other comprehensive income. d. Use of estimates and management judgement The Group’s financial statements and its financial results are influenced by accounting policies, assumptions, estimates and management judgement, which necessarily have to be made in the course of preparation of the financial statements. The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. All estimates and assumptions required in conformity with IFRS are best estimates undertaken in accordance with the application of the standards. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure the fair value of the financal instruments. The Group reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the statement of profit or loss. The Group has an internal credit rating model that uses qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. The credit grades are calibrated such that the risk of default increases at each higher risk grade. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. The Group also uses external credit ratings for certain exposures. When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and expert credit assessment and includes forward-looking information. In determining whether credit risk has increased significantly since initial recognition the following criteria are considered: I. II. III. Downgrade in risk rating according to the approved ECL policy. Facilities restructured during the previous twelve months. Facilities overdue by 30 days as at the reporting date subject to rebuttal in applicable circumstances. 13
16. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) d. Use of estimates and management judgement (Continued) The Group makes judgements as to whether there is any observable data indicating an impairment trigger followed by measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience for assets within credit risk characteristics and objective evidence of impairment similar to those in the portfolio to assess impairment. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period or in the period of the revision and future period if the revision affects both current and future periods. e. Accounting for income and expenses i) Interest income and expenses are recognised in the statement of profit or loss on an accrual basis using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest 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, to the net carrying amount of the financial asset or liability. The application of the effective interest rate method has the effect of recognising interest income and interest expense evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating the effective interest rate, cash flows are estimated taking into consideration all contractual terms of the financial instrument but excluding future credit losses. ii) Fees and commissions that are integral to the effective interest rate of a financial asset or liability are included in the calculation of the effective interest rate. Other fees and commissions are recognised as the related services are performed or received, and are included in fee and commission income. iii) Dividend income is recognised when the right to receive a dividend is established. iv) Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A provision is recognised for the amount expected to be paid under shortterm cash bonus or profit sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The Group has different retirement benefit schemes for its employees in Bahrain and its overseas branches, which are in accordance with the relevant labour laws of the respective countries. The retirement benefit scheme is in the nature of a ‘Defined Contribution Plan’ for employees who are covered by the social insurance pension schemes in Bahrain and the overseas branches. Other employees are entitled to leaving indemnities payable in accordance with the employment agreements or under the respective labour laws, based on length of service and final remuneration. This liability is unfunded and is provided for on the basis of the cost had all such employees left at the statement of financial position date. The cost of providing these retirement benefits is charged to the statement of profit or loss. The Group has a voluntary employees saving scheme. The Group and the employees contribute monthly on a fixed percentage of salaries basis to the scheme. The scheme is managed and administered by a board of trustees who are the employees of the Group. The Group’s share of contribution to this scheme is charged to the statement of profit or loss. v) Other expenses are recognised in the period in which they are incurred on an accrual basis. 14
17. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Financial assets and liabilities i. Recognition and initial measurement The Group initially recognised loans and advances and deposits on the date on which they are originated. A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. ii. Classification On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: - The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and - The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: - The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and - The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in other comprehensive income. This election is made on an investment-by-investment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Business model assessment The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: - the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining practical interest rate profile, realising cash flows through the sale of the assets; - how the performance of the portfolio is evaluated and reported to the Group’s management; - the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and - the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group’s stated objective for managing the financial assets is achieved and how cash flows are realised. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL. 15
18. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Financial assets and liabilities (Continued) Assessment whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, principal is defined as the fair value of the financial asset on initial recognition. Interest is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers: - contingent events that would change the amount and timing of cash flows; - leverage features; - prepayment and extension terms; - terms that limit the Group’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and - features that modify consideration of the time value of money – e.g. periodical reset of interest rates. The Group holds a portfolio of long-term fixed-rate loans for which the Group has the option to propose to revise the interest rate at periodic reset dates. There reset rights are limited to the market rate at the time of revision. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Group has determined that the contractual cash flows of these loans are SPPI because the option varies the interest rate in a way that is consideration for the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding. The Group classifies its financial liabilities, other than financial guarantees, as measured at amortised cost. iii. Reclassifications Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. iv. Customer deposits Customer deposits are initially recognised at their fair value and subsequently measured at their amortised cost using the effective interest rate method. v. Financial guarantees Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specific debtor fails to make payment when due in accordance with the contractual terms. Financial guarantees are initially recognised at fair value (which is the premium received on issuance). The premium received is amortised over the life of the financial guarantee. The guarantee liability (the notional amount) is subsequently carried at the higher of this amortised amount and the present value of any expected payment (when a payment under the guarantee has become probable). The unamortised portion of the premium on these financial guarantees is included under other liabilities. 16
19. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Financial assets and liabilities (Continued) vi. Derivative financial instruments All derivative financial instruments are initially recognised at cost, being the fair value at contract date, and are subsequently re-measured at their fair values. Fair values are obtained from quoted market prices in active markets including recent market transactions, and valuation techniques including discounted cash flow models and option pricing models as appropriate. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in same statement of profit or loss line as the hedged item. In the case of fair value hedges that meet the criteria for hedge accounting, any gain or loss arising from remeasuring the hedging instruments to fair value as well as the related changes in fair value of the item being hedged are recognised in the statement of profit or loss under other income. The Group designated certain derivatives as hedging instruments to hedge variability in fair values associated with interest rates. In the case of cash flow hedges that meet the criteria of hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion, if any, is recognised in the statement of profit or loss. All derivative financial instruments are recognised in the statement of financial position as either assets (positive fair values) or liabilities (negative fair values). vii. Repos and reverse repos Where securities are sold subject to a commitment to repurchase them at a specified future date (repo) and at a predetermined price, they are not derecognised and the consideration received is classified as borrowings under repurchase agreements. The difference between the sale and repurchase price is treated as an interest expense and accrued over the life of the repo agreement using the effective yield method. Conversely, securities purchased under a commitment to resell them at a specified future date (reverse repo) and at a predetermined price are not recognised on the statement of financial position and the consideration paid is recorded in placements with banks and other financial institutions. The difference between the purchase and resale price is treated as an interest income and accrued over the life of the reverse repo agreement using the effective interest rate method. viii. Cash and cash equivalents Cash and cash equivalents comprise cash, balances at central banks excluding mandatory cash reserves, placements with banks and other financial institutions that mature within three months of the date of placement, and short-term highly liquid investments that are readily convertible to cash and which are subject to an insignificant risk of change in value and mature within three months of the date of acquisition and are used by the Group in the management of its short term commitments. ix. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of a financial instrument using quoted market prices in an active market for that instrument. This includes listed equity and debt securities. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. For unlisted debt securities the fair value is based on brokers quotes, recent arm’s length transactions between knowledgeable, willing parties (if available) and discounted cash flow analyses with accepted economic methodologies for pricing financial instruments. For unlisted equity securities, the net asset value of the underlying entities is representative of the fair value given the nature of their balance sheet. 17
20. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Financial assets and liabilities (Continued) x. Identification and measurement of impairment The Group recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL: - Financial assets including loans and advances, debt instruments and placements; - Financial guarantee contracts issued; and - Loan commitments issued. No impairment loss is recognised on equity investments. The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: - debt investment securities that are determined to have low credit risk at the reporting date; and - other financial instruments on which credit risk has not increased significantly since their initial recognition. xi. Derecognition of financial assets and liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: - The rights to receive cash flows from the asset have expired; or - The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset; or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. If the terms of the financial assets are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised. If the cash flows of the renegotiated asset are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and the new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows: - If the expected restructuring will not result in derecognition of an existing asset, then the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original effective interest rate of the existing financial asset. - If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of derecognition. This amount is discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. 18
21. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) g. Impairment of non-financial assets At each statement of financial position date, the Group reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the statement of profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the statement of profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. h. Investment in associates Associates are those entities in which the Group has significant influence, but not control or joint control, over their financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are recognised initially at cost, which includes the transaction costs. The financial statements of the Group include its share of the income and expenses and equity movements of associates,after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. On cessation of significant influence, even if an investment in an associate becomes an investment in a joint venture, the entity does not re-measure the retained interest. When the Group’s share of losses exceeds its interest in an associate, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the associate. 19
22. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Leases At the inception of the contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for the period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether: - the contract involves the use of an identified asset, this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; - the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and - the Group has the right to direct the use of the asset. The Group has this right when it has the decisionmaking rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Group has the right to direct the use of the asset if either: - the Group has the right to operate the asset; or - the Group designed the asset in a way that predetermines how and for what purpose it will be used. At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the leases of land and buildings in which it is a lessee, the Group has elected not to separate non-lease components and to account for the lease and non-lease components as a single lease component. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The rightof-use asset is initially measured at cost, which comprises: - the amount of the initial measurement of the lease liability; - any lease payment made at or before the commencement date, less any lease incentives received; - any initial direct cost incurred by the lessee; and - estimated cost to dismantle and to remove the underlying asset, or to restore the underlying asset or the site on which it is located. The right-of-use asset is subsequently depreciated using the straight line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined based on the lease term. Lease liability is measured as the present value of the future lease payments that are not paid at the commencement date. The lease payments are discounted based on the Group’s incremental borrowing rate. Lease liability comprises the following: - fixed payments, including in-substance fixed payments; - variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; - amounts expected to be payable under residual value guarantees; - the exercise price of a purchase option if the Group is reasonably certain to exercise that option; 20
23. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Leases (Continued) - lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option; and - penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and for leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. j. Property and equipment Property and equipment are initially recorded at cost and subsequently stated at cost less accumulated depreciation and impairment losses. Land is not depreciated and is stated at cost at the date of acquisition. Where an item of property and equipment comprises major components having different useful lives, they are accounted for separately. The cost of an item of property and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be put to its intended use. Depreciation is charged to the statement of profit or loss on a straight-line basis over the estimated useful lives of the property and equipment. The estimated useful lives are as follows: Buildings Furniture and equipment 20 to 40 years 3 to 8 years The residual value and the useful life of property and equipment are reviewed periodically and, if expectations differ from previous estimates, the change is recognised prospectively in the statement of profit or loss over the remaining estimated useful life of the property and equipment. k. Goodwill and intangibles The Group accounts for business combinations using the acquisition method when control is transferred to the Bank. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Transaction costs are expensed as incurred. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, and the amount recognised for non-controlling interests and any previous interest held over the net identifiable tangible and intangible assets acquired and liabilities assumed. After initial recognition, goodwill and other intangibles are measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Further details on impairment of non-financial assets is included in note 2-g. 21
24. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Goodwill and intangibles (Continued) Where goodwill has been allocated to a cash-generating unit (“CGU”) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. Intangibles with indefinite useful lives are subject to impairment testing at least on an annual basis, while those with definite useful lives are amortised. l. Other provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. m. Off-setting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set-off the recognised amounts and the Group intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. n. Settlement date accounting All “regular way” purchases and sales of financial assets except for derivatives and assets classified as fair value through profit or loss are recognised on the settlement date i.e. the date the Group receives or delivers the asset. Regular way purchases and sales are those that require delivery of assets within the time frame generally established by regulation or convention in the market place. Derivative and assets classified as fair value through profit or loss transactions are recognised on trade date, representing the date the Group contracts to purchase or sell. o. Proposed appropriations Dividends and other proposed appropriations are recognised as a liability in the period in which they are approved by the shareholders. p. Remuneration policy Board of Directors - The remuneration of the Board of Directors is approved by the shareholders. In addition, directors are paid nominal fees for attending meetings of the sub-committees of the Board. Employees - The remuneration primarily consists of monthly salaries and allowances. The Group also has a discretionary bonus scheme based on the net income for the year and considering the employees’ performance during the year. The above is in compliance with the sound remuneration practices regulation of the Central Bank of Bahrain. q. Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenue and incur expenses, including revenues and expenses that relate to transactions with any of the other components of the Group. All operating results of the operating segments are reviewed regularly by the Chief Executive Officer to make decisions about resource allocation and assess its performance, and for which discrete financial information is available. r. Earnings per share The Group presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. 22
25. Notes to the consolidated financial statements For the year ended 31 December 2021 2 . SIGNIFICANT ACCOUNTING POLICIES (Continued) s. Income tax liability The Group’s operations in Bahrain and United Arab Emirates are not liable to income tax. The Group’s Saudi Arabia branch is subject to income tax in accordance with the Saudi Income Tax Law. Income tax, if any, is charged to the statement of profit or loss. t. Repossessed property In certain circumstances, property is repossessed following the foreclosure on loans and advances that are in default. Repossessed properties are measured at the lower of their carrying amount and their fair value less costs to sell and are reported within other assets. u. Investment property Properties held for rental or capital appreciation purposes are classified as investment properties. Investment properties are initially recorded at cost, being the fair value of the consideration given and acquisition charge. Subsequently, investment properties are measured at fair value and movements are recorded under other income in the statement of profit or loss. v. Assets under management The Group acts as a trustee / manager and in other capacities that result in holding or placing of assets on behalf of a trust or other institution. These assets and income arising thereon are not included in the Group’s financial statements as they are not assets of the Group. 3. FINANCIAL RISK MANAGEMENT The Group is exposed to the following types of risks:  credit risk  liquidity risk  market risk  operational risk Risk management framework The overall authority for risk management in the Group is vested with the Board of Directors. The Board authorises appropriate credit, liquidity, market, and operational risk policies based on the recommendation of the Board Risk Committee and Management of the Group. The Group has established various committees that review and assess all risk issues. Approval authorities are delegated to different functionaries in the hierarchy depending on the amount, type of risk and nature of operations or risk. The Risk division of the Group provides the necessary support to Senior Management and the business units in all areas of risk management. The Risk division functions independent of the business units and reports directly to the Board Risk Committee and administratively to the Chief Executive Officer. The Board Risk Committee is responsible for identifying and monitoring risks within the framework of the risk appetite established by the Board of Directors including reviewing and reporting its conclusions and recommendations to the Board on the Group’s current and future risk appetite, the Group’s risk management framework as well as the Group’s risk culture. The Group’s risk management policies are established to identify and analyse the risk faced by the Group, to set appropriate limits and controls, and to monitor risk and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. 23
26. Notes to the consolidated financial statements For the year ended 31 December 2021 3 . FINANCIAL RISK MANAGEMENT (Continued) Credit risk Credit risk represents the potential financial loss as a consequence of a customer’s inability to honour the terms and conditions of a credit facility. Such risk is measured with respect to counterparties for both onbalance sheet assets and off-balance sheet items. The Group has well laid out procedures, not only to appraise but also to regularly monitor credit risk. Credit appraisal is based on the financial position of the borrower, performance projections, market position, industry outlook, external ratings (where available), track record, account conduct, repayment sources and ability, tangible and intangible security, etc. Regular reviews are carried out for each account and risks identified are mitigated in a number of ways, which include obtention of collateral, counter-guarantees from shareholders and/or third parties. The Credit Risk Department of the Group independently analyses risks and puts forth its recommendations prior to approval by the appropriate authorities for facilities above a specified threshold. In addition to rigorous credit analysis, the terms and conditions of all credit facilities are strictly implemented by the Credit Administration Department. An internal grading system and annual review process supports the identification of any deterioration in credit risk and consequent implementation of corrective action. The Group’s internal ratings are based on a 16-point scale, which takes into account the financial strength of a borrower as well as qualitative aspects to arrive at a comprehensive snapshot of the risk of default associated with the borrower. Risk ratings assigned to each borrower are reviewed at least on an annual basis. Regular monitoring of the portfolio enables the Group to identify accounts, which witness deterioration in risk profile. Consumer credit facilities which are granted based on pre-defined criteria such as salary assignment, maximum repayment obligation as a percentage of salary etc., are excluded from this rating system. The Group also uses the ratings by established rating agencies as part of the appraisal process while considering exposures to rated entities. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Group. The asset and liability management policies of the Group define the proportion of liquid assets to total assets with the aim of minimising liquidity risk. The Group maintains adequate liquid assets such as interbank placements, treasury bills and other readily marketable securities, to support its business and operations. The Treasury Department monitors the maturity profile of assets and liabilities so that adequate liquidity is maintained at all times. The Asset Liability Committee (ALCO) chaired by the Chief Executive Officer reviews the liquidity gap profile and the liquidity scenario and addresses strategic issues concerning liquidity. Market risk Market risk is the risk of potential losses arising from movements in market prices of interest rate related instruments and equities in the trading portfolio and foreign exchange and commodities holdings throughout the Group. The Group’s trading activities are governed by policies that are clearly documented, by adherence to comprehensive limit structures set annually and by regular reviews. Quality and rating are the main criteria in selecting a trading asset. The Group uses the standardised method under Basel III for allocating market risk capital based on the risk assessed for underlying factors of interest rate risk, equity risk, foreign exchange risk, options risk and commodity risk. Operational risk Operational risk is the risk of monetary loss on account of human error, fraud, system failures or the failure to record transactions. The Group has well laid out procedures and systems that set out the methodologies for carrying out specific tasks. These systems and procedures are constantly reviewed and revised to address any potential risks. Additionally, new products and services are reviewed and assessed for operational risks prior to their implementation. 24
27. Notes to the consolidated financial statements For the year ended 31 December 2021 3 . FINANCIAL RISK MANAGEMENT (Continued) Capital management The Group’s policy is to maintain sufficient capital to sustain investor, creditor and market confidence and to support future development of the business. The impact of the level of capital on the return on shareholder’s equity is also recognised, and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. 4. COVID-19 impact The outbreak of the coronavirus disease (“COVID-19”) in 2020 has had multiple implications on the Group, from stressed market conditions to relief measures provided by the regulator and government. The Central Bank of Bahrain (“CBB”), along with the Government of Bahrain, have provided numerous reliefs to Bahraini individuals, companies and banks. In March 2020, the CBB announced a six-month loan deferral to all qualifying Bahraini individuals and companies. Subsequently, the CBB instructed banks to take the present value of the shortfall in interest income (termed the “modification loss” under IFRS) arising from this deferral directly to equity, net of any government grants received. The modification loss recorded by the Group as at 31 December 2020 amounted to BD 27.9 million. The CBB subsequently announced four additional loan deferral programmes effective September 2020 for a period of four months, January 2021 for a period of six months, July 2021 for a period of six months, and January 2022 for a period of six months. The latter four programmes permitted banks to charge interest, and as such, did not result in any additional modification losses to the Group. During 2020, the Group had received grants totaling BD 4.6 million (US$ 12.2 million) in the form of salary subsidy, electricity and water bill reductions and repo facilities at preferential rates. The cash grants were immediately redirected to COVID-19 related charitable causes within the Kingdom of Bahrain. To partially counteract the impact of the delayed loan settlements, the CBB provided banks with additional reliefs by reducing the minimum LCR and NSFR requirements from 100% to 80%, and by reducing the regulatory reserve requirements from 5% to 3%. NBB Group continued to meet the original minimum liquidity ratio requirements. Further analysis of the COVID-19 impact on the Group results is provided in the supplementary disclosures section. 25
28. Notes to the consolidated financial statements for the year ended 31 December 2021 5 CASH AND CASH EQUIVALENTS As at 31 December 2021 BD millions 2020 US $ millions BD millions US$ millions Cash and balances at central banks 123.0 326.3 125.5 332.9 Less: mandatory cash reserves (78.6) (208.5) (73.7) (195.5) 44.4 117.8 51.8 137.4 2.7 7.1 40.4 107.1 273.4 725.2 281.0 745.4 320.5 850.1 373.2 989.9 Treasury bills (less than 3 months) Placements with banks (less than 3 months) 6 TREASURY BILLS Treasury bills are short-term in nature and include treasury bills, Islamic Sukuk and certificate of deposits issued by the Government of Bahrain and the Government of Saudi Arabia. As at 31 December Government of Bahrain Government of Saudi Arabia 2021 BD millions US$ millions 215.7 572.2 2020 BD millions US$ millions 226.6 601.1 10.0 26.5 10.1 26.8 225.7 598.7 236.7 627.9 7 PLACEMENTS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS Placements with banks and other financial institutions are part of the Group’s money market activities and comprises short-term lending to banks and other financial institutions. As at 31 December BD millions Placements with banks Placements with other financial institutions 2020 BD millions US$ millions 251.0 665.8 43.4 115.1 27.7 73.5 294.4 780.9 335.4 889.7 As at 31 December BD millions Term placements 2021 US$ millions 2021 US$ millions 307.7 816.2 2020 BD millions US$ millions 141.7 375.9 241.0 639.3 Current and call accounts 91.1 241.6 42.3 112.2 Reverse repos 61.6 163.4 52.1 138.2 294.4 780.9 335.4 889.7 8 LOANS AND ADVANCES a) As at 31 December Loans and advances to non-banks Loans and advances to banks Gross loans and advances Less: provision for impairment 2021 BD millions US$ millions 2020 BD millions US$ millions 2,412.9 6,400.3 2,211.8 5,866.8 64.1 170.0 43.3 114.9 2,477.0 6,570.3 2,255.1 5,981.7 (81.2) 2,395.8 (215.4) 6,354.9 (82.0) 2,173.1 (217.5) 5,764.2 b) As at 31 December 2021, the amount of floating rate loans for which interest was being reset by the Group on agreed dates and based on an agreed fixed margin over a benchmark interest rate amounted to BD 734.8 million (US$ 1,949.1 million) [31 December 2020: BD 580.2 million (US$ 1,539.0 million)]. 26
29. Notes to the consolidated financial statements for the year ended 31 December 2021 8 LOANS AND ADVANCES (Continued) c) In accordance with the Group's policy and the Central Bank of Bahrain guidelines, loans on which payments of interest or repayments of principal are 90 days past due, are immediately defined as non-performing. Any interest accrued is reversed and future interest is only recognised on a cash basis. The ageing schedule of non-performing loans and advances based on the time period since the last repayment of principal or interest by the customer, is as follows: As at 31 December 2021 BD millions 2020 US$ millions BD millions US$ millions Up to 1 year 62.1 164.7 70.3 186.5 1 to 3 years 8.8 23.4 35.4 93.9 Over 3 years 28.7 76.1 10.3 27.3 Total 99.6 264.2 116.0 307.7 Fair market value of collateral 94.5 250.7 114.2 302.9 Stage 3 provisions 53.1 140.8 61.9 164.2 In accordance with the Central Bank of Bahrain guidelines, loans that have been classified as non-performing should remain classified as non-performing for a cooling off period of not less than 1 year from the date of becoming performing. During 2020, a COVID-19 related concessionary measure was issued by the CBB reducing the cooling-off period to three months. Loans that are past due below 90 days but not impaired are those for which contractual interest or principal payments are past due but the Group believes that specific impairment is not appropriate on the basis of the level of security or collateral available and / or the stage of collection of amounts owed to the Group. As at 31 December 2021, loans past due below 90 days but not impaired amounted to BD 42.9 million (US$ 113.8 million) [31 December 2020: BD 47.8 million (US$ 126.8 million)]. d) The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be de-recognised and the renegotiated loan recognised as a new loan. The Group renegotiates loans to customers as a result of changes in anticipated cash flows and / or in financial difficulties (referred to as 'forbearance activities') to maximise collection opportunities and minimise the risk of default. During 2021, credit facilities amounting to BD 33.9 million (US$ 89.9 million) were restructured [2020: BD 98.3 million (US$ 260.7 million)]. Restructuring concessions mainly related to deferral of loan installments to assist customers overcome temporary cash flow situations or to realign the repayment with the borrower's revised cash flow projections, and amending the terms of loan covenants. Due to the minor nature of concessions, there was no significant impact on the Group's impairment charge or the future earnings. In accordance with the Central Bank of Bahrain guidelines, loans that have been restructured should be reported as stage 2 for not less than 1 year from the date of restructuring. e) The Group holds collateral against loans and advances to customers in the form of lien over deposits, mortgage over properties and /or shares and sovereign / bank guarantees. Some of these collaterals are held through a special purpose vehicle. As at 31 December 2021, loans and advances amounting to BD 631.9 million (US$ 1,676.1 million) [31 December 2020: BD 640.7 million (US$ 1,699.5 million)] were fully collateralised and loans and advances amounting to BD 211.3 million (US$ 560.5 million) [31 December 2020: BD 180.7 million (US$ 479.3 million)] were partly collateralised with a collateral value of BD 138.4 million (US$ 367.1 million) [31 December 2020: BD 101.8 million (US$ 270.0 million)]. Therefore, fully or partially collateralised loans represented 34.0% of gross loans (31 December 2020: 36.4%). The majority of the remaining loans which are not collateralised are provided against salary deposits into the Group by their respective employers. 27
30. Notes to the consolidated financial statements for the year ended 31 December 2021 8 LOANS AND ADVANCES (Continued) f) Exposure to credit risk As at 31 December 2021 BD millions 2020 US$ millions BD millions US$ millions 1. Impaired (stage 3) Substandard 82.6 219.1 88.9 235.8 5.0 13.3 13.9 36.9 Loss 12.0 31.8 13.2 35.0 Gross amount 99.6 264.2 116.0 307.7 (53.1) (140.8) (61.9) (164.2) 46.5 123.4 54.1 143.5 Gross amount 42.9 113.8 47.8 126.8 Stage 1 or 2 provision (2.0) Past due but not impaired carrying amount 40.9 108.5 46.1 122.3 Rating grades 1 to 3 64.5 171.1 219.9 583.3 Rating grades 4 to 6 269.0 713.5 196.2 520.4 Rating grades 7 to 10 438.5 1,163.1 389.7 1,033.7 Doubtful Stage 3 provisions Impaired (stage 3) carrying amount 2. Past due below 90 days but not impaired (5.3) (1.7) (4.5) 3. Neither past due nor impaired by internal rating Stage 1 Rating grades 11 to 13 174.1 461.8 100.3 266.1 Unrated 1,205.8 3,198.4 1,056.5 2,802.4 Gross amount 2,151.9 5,707.9 1,962.6 5,205.9 Stage 1 provisions (12.7) Carrying amount of stage 1 2,139.2 (33.7) 5,674.2 (9.4) 1,953.2 (24.9) 5,181.0 Stage 2 Rating grades 1 to 3 - Rating grades 4 to 6 9.5 - - - 25.2 33.0 87.5 Rating grades 7 to 10 18.6 49.3 8.3 22.0 Rating grades 11 to 13 105.9 280.9 41.5 110.1 Unrated Gross amount 9.0 23.9 7.2 19.1 143.0 379.3 90.0 238.7 Stage 2 provisions (12.6) (33.4) (8.8) (23.4) Carrying amount of stage 2 130.4 345.9 81.2 215.3 Neither past due nor impaired carrying amount 2,269.6 6,020.1 2,034.4 5,396.3 Total carrying amount (excluding POCI) 2,357.0 6,252.0 2,134.6 5,662.1 Ratings 1 to 13 represent performing loans. Unrated includes mainly consumer loans and other facilities that are not assigned any ratings at inception. By staging As at 31 December 2021 Stage 1 BD millions Loans and advances 2,181.1 Less: impairment provision (13.3) Net loans and advances As at 31 December 2020 2,167.8 Stage 1 BD millions Loans and advances 1,984.5 Less: impairment provision (10.0) Net loans and advances 1,974.5 Stage 2 BD millions Stage 3 BD millions POCI BD millions 156.7 99.6 39.6 (14.0) (53.1) (0.8) 142.7 46.5 38.8 Stage 2 BD millions Stage 3 BD millions 115.9 (9.9) 106.0 POCI BD millions 116.0 38.7 (61.9) (0.2) 54.1 38.5 Total BD millions 2,477.0 (81.2) 2,395.8 Total BD millions 2,255.1 (82.0) 2,173.1 Total US$ millions 6,570.3 (215.4) 6,354.9 Total US$ millions 5,981.7 (217.5) 5,764.2 Purchased or originated credit impaired (“POCI”) financial assets were acquired as part of the business combination at fair value and reflect the credit losses on which a lifetime ECL is already recognised. g) Impairment provisions on loans and advances 2021 Impairment at 1 January 2021 Net transfer between stages Write off during the year Charge for the year (net) Other movement Impairment at 31 December 2021 Stage 1 BD millions 10.0 3.0 0.3 13.3 Stage 2 BD millions Stage 3 BD millions 9.9 (3.4) 6.9 0.6 14.0 61.9 0.4 (13.6) 4.3 0.1 53.1 POCI BD millions 0.2 0.6 0.8 Total BD millions Total US$ millions 82.0 (13.6) 12.1 0.7 81.2 217.5 (36.1) 32.1 1.9 215.4 Other movements relate to the recognition of provisions that have been initially netted off against gross volumes at the subsidiary acquisition date. Stage 1 BD millions Stage 2 BD millions Stage 3 BD millions Impairment at 1 January 2020 Net transfer between stages Write off during the year Charge for the year (net) ECL reserves from acquisition 7.5 2.8 (2.1) 1.8 4.3 (1.0) 5.5 1.1 36.3 (1.8) (13.6) 23.7 17.3 Impairment at 31 December 2020 10.0 9.9 61.9 2020 Acquisition of stage 3 ECL reserves relates to acquired expected credit losses (“ECL”) on the retail portfolio. 28 POCI BD millions Total BD millions Total US$ millions 0.2 - 48.1 (13.6) 27.3 20.2 127.6 (36.1) 72.4 53.6 0.2 82.0 217.5
31. Notes to the consolidated financial statements for the year ended 31 December 2021 9 INVESTMENT SECURITIES i . Composition Investment securities comprise the following: As at 31 December 2021 FVTPL BD millions FVOCI BD millions Amortised cost BD millions Total BD millions Total US$ millions Quoted investments: Debt instruments - 244.1 217.4 461.5 Equity instruments - 59.4 - 59.4 1,224.1 157.6 Total quoted investments - 303.5 217.4 520.9 1,381.7 23.5 63.4 616.8 703.7 1,866.6 3.0 31.0 - 34.0 90.2 Total unquoted investments 26.5 94.4 616.8 737.7 1,956.8 Total investment securities 26.5 397.9 834.2 1,258.6 3,338.5 Unquoted investments: Debt instruments Equity instruments As at 31 December 2020 FVTPL BD millions FVOCI BD millions Amortised cost BD millions Total BD millions Total US$ millions Quoted investments: Debt instruments - 245.7 212.0 457.7 Equity instruments - 56.3 - 56.3 1,214.0 149.4 Total quoted investments - 302.0 212.0 514.0 1,363.4 - 1,806.9 Unquoted investments: Debt instruments - 681.2 681.2 Equity instruments 1.7 34.5 - 36.2 96.0 Total unquoted investments Total investment securities 1.7 1.7 34.5 336.5 681.2 893.2 717.4 1,231.4 1,902.9 3,266.3 ii. Breakdown between repricing nature of debt instruments As at 31 December 2021 2020 BD millions US$ millions BD millions US$ millions 592.8 1,572.4 573.0 1,519.8 572.4 1,165.2 1,518.3 3,090.7 565.9 1,138.9 1,501.1 3,020.9 US$ millions BD millions Fixed rate debt instruments Floating rate debt instruments iii. Breakdown of debt instruments by rating The ratings given below are by established rating agencies. As at 31 December 2021 BD millions 2020 US$ millions AA+ 1.9 5.0 1.9 5.0 A 3.9 10.3 4.0 10.6 11.6 30.8 - 7.2 19.1 8.7 23.1 1,116.3 2,961.0 1,092.7 2,898.4 24.3 64.5 31.6 83.8 1,165.2 3,090.7 1,138.9 3,020.9 BBB BB B Unrated - The debt instruments rated B primarily represent instruments issued by sovereigns. As at 31 December 2021, all debt instruments were classified as stage 1. iv. Investments designated as fair value through profit or loss The Group holds investment in managed funds designated as fair value through profit or loss amounting to BD 3.0 million (US$ 8.0 million) [2020: BD 1.7 million (US$ 4.5 million)]. 29
32. Notes to the consolidated financial statements for the year ended 31 December 2021 10 INVESTMENT IN ASSOCIATES The Group has a 39 .7% (2020: 39.7%) interest in The Benefit Company B.S.C. (c) which is incorporated in the Kingdom of Bahrain. The Benefit Company has been granted a license for ancillary services by the Central Bank of Bahrain to provide payment systems, Bahrain cheque truncation and other related financial services for the benefit of commercial banks and their customers in the Kingdom of Bahrain. The Group has a 36.8% (2020: 37.0%) interest in LS Real Estate Company W.L.L. which was incorporated in the Kingdom of Bahrain in 2019. The company focuses on real estate activities including the development and overall management of owned or leased properties. The Group has no interest (2020: 29.4%) in Al Dur Energy Investment Company following the redemption in 2021. Al Dur Energy Investment Company is an exempt company with limited liability incorporated in the Cayman Islands on 10 June 2009 and operates under registration number 227032. The company operates in the Kingdom of Bahrain with the sole purpose of holding a 15% indirect interest in a power and water plant project company, Al Dur Power and Water Company B.S.C.(c), in the Kingdom of Bahrain. The Group has a 25.0% (2020: 25.0%) interest in Liquidity Management Centre B.S.C. (c) which was incorporated in 2002 as a bank, licensed and regulated by the Central Bank of Bahrain to facilitate the creation of an Islamic inter-bank market that allow Islamic financial services institutions to effectively manage their assets and liabilities. The Group has a 24.3% (2020: 24.3%) interest in the units issued by the Bahrain Liquidity Fund (BLF). BLF was set up in 2016 as an open ended fund registered as Private Investment Undertaking "PIU" as per Central Bank of Bahrain rulebook volume 7. The main objective of BLF is to add liquidity to Bahrain Bourse, which over a period of time should result in enhancing investor confidence in the market's listed securities. The Group has recognised the above investments as equity accounted associates in accordance with IAS 28 'Investment in associates'. 2021 BD millions Opening balance 36.7 2020 US$ millions 97.3 BD millions US$ millions 53.6 142.2 Transfer of Bahrain Islamic Bank to a subsidiary - - (37.6) (99.8) Fair value of associates from subsidiary acquisition - - 15.0 39.8 Share of profit 1.1 2.9 1.0 2.7 Dividends received (1.1) (2.9) (0.8) (2.1) Disposal of associate (9.3) (24.7) Other movements (0.2) (0.5) 5.5 14.5 At 31 December 27.2 72.1 36.7 97.3 - - During 2020, the Bank’s shareholding in BISB increased from 29.1% as reported at 31 December 2019 to 78.8% and hence has been consolidated in these financial statements. 11 INTEREST RECEIVABLE AND OTHER ASSETS 2021 As at 31 December BD millions 2020 US$ millions BD millions US$ millions Interest receivable 36.9 97.9 27.2 Accounts receivable and prepayments 13.4 35.6 11.3 72.2 30.0 Positive fair value of derivatives 11.7 31.0 46.7 123.8 Others 31.3 83.0 27.3 72.4 93.3 247.5 112.5 298.4 Others include BD 7.2 million (US$ 19.1 million) [31 December 2020: BD 8.5 million (US$ 22.5 million)] in respect of land and buildings acquired from customers and now held for disposal, and BD 14.7 million (US$ 39.0 million) [31 December 2020: BD 16.2 million (US$ 43.0 million)] of investment properties. The repossessed land and buildings are stated at lower of their carrying value and fair value less costs to sell, while the investment properties are accounted for at fair value based on independent valuations by a third party. 12 PROPERTY AND EQUIPMENT Cost Leased property right-of-use Land Buildings Furniture and equipment Total BD millions BD millions BD millions BD millions BD millions 8.5 8.0 - US$ millions 37.7 69.4 123.6 327.9 (24.6) (29.7) (59.6) (158.1) Accumulated depreciation / amortisation (5.3) Net book value at 31 December 2021 3.2 8.0 13.1 39.7 64.0 169.8 Net book value at 31 December 2020 1.9 8.0 11.8 34.0 55.7 147.7 The depreciation charge for 2021 amounted to BD 5.9 million (US$ 15.6 million) [2020: BD 4.8 million (US$ 12.7 million)]. The above includes capital work in progress at cost, amounting to BD 20.1 million (US$ 53.3 million) [2020: BD 20.5 million (US$ 54.4 million)]. The amortisation related to the right-of-use of leased property in 2021 amounted to BD 2.2 million (US$ 5.8 million) [2020: BD 1.5 million (US$ 4.0 million)]. 30
33. Notes to the consolidated financial statements for the year ended 31 December 2021 13 GOODWILL AND OTHER INTANGIBLE ASSETS On 22 January 2020 , the Bank’s stake in BISB increased from 29.1% as reported at 31 December 2019 to 78.8%, resulting in a transition from an investment in associate to an investment in a subsidiary, with the acquisition being accounted for using the acquisition method. The acquisition will enable the Group to position itself at the forefront of the regional Shariah-compliant banking sector in addition to its current leading conventional role. The two brands will continue to operate independently but asset, revenue, cost, technology and other operational synergies will provide customers and shareholders with enhanced services and returns. Goodwill of BD 41.8 million (US$ 110.9 million) and intangibles of BD 12.6 million (US$ 33.4 million) arose from the acquisition of BISB. The intangibles comprises the value assigned to the expected benefits arising from the Islamic banking license and BISB brand being the oldest and predominant Islamic bank in the Kingdom of Bahrain. BD 5.0 million (US$ 13.3 million) of the intangibles were assigned a useful life of six years, with a remaining unamortised balance of BD 4.2 million (US$ 11.1 million) as of 31 December 2021. Goodwill impairment analysis The recoverable amount of goodwill is based on value-in-use, calculated by discounting cash flow projections from Board approved financial forecasts, projected for five years to arrive at the terminal value. A growth rate of 2% (2020: 2%) and discount rate of 13% (2020: 13%) have been applied to the estimated cash flows. The Bank assesses on an annual basis whether there is an indication, based on either internal or external sources of information, that goodwill may be impaired. As at 31 December 2021, there were no indications of impairment of the cash generating unit (CGU) associated with the goodwill (2020: nil). A sensitivity analysis was conducted by increasing the discount rate by 0.5% and reducing earnings by 10% to assess the impact on the recoverable amount as compared to the carrying value of the CGU. The carrying value of goodwill is lower than the reduced recoverable amount in the sensitivity analysis, further confirming no indications of impairment. 14 DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions consists of short-term borrowings from banks and other financial institutions. As at 31 December 2021 BD millions 453.2 Term deposits Current and call accounts US$ millions 1,202.1 2020 BD millions 506.4 US$ millions 1,343.2 64.8 171.9 38.1 101.1 518.0 1,374.0 544.5 1,444.3 As at 31 December 2021 and 31 December 2020, the Group was a net contributor into the treasury bill and interbank money markets. 15 BORROWINGS UNDER REPURCHASE AGREEMENTS Borrowings under repurchase agreements amounted to BD 221.6 million (US$ 587.8 million) [31 December 2020: BD 112.9 million (US$ 299.5 million)] and the fair value of the investment securities pledged as collateral amounted to BD 274.6 million (US$ 728.4 million) [31 December 2020: BD 113.9 million (US$ 302.1 million)]. 16 CUSTOMER DEPOSITS As at 31 December 2021 BD millions US$ millions 2020 BD millions US$ millions Repayable on demand or at short notice 1,885.0 5,000.0 1,743.5 4,624.7 Term deposits and call accounts 1,299.2 3,446.2 1,340.8 3,556.5 3,184.2 8,446.2 3,084.3 8,181.2 17 INTEREST PAYABLE AND OTHER LIABILITIES As at 31 December 2021 BD millions US$ millions 2020 BD millions US$ millions Creditors and account payables 22.8 60.5 20.5 54.4 Interest payable 19.2 50.9 30.3 80.4 Negative fair value of derivatives 8.4 22.3 28.6 75.9 Employee benefits 6.9 18.3 7.0 18.6 Deferred income 5.8 15.4 2.7 7.1 Lease liability 3.1 8.2 1.9 5.0 10.3 76.5 27.3 202.9 2.4 93.4 6.3 247.7 Others Others include provisions against contingent liabilities. 31
34. Notes to the consolidated financial statements for the year ended 31 December 2021 17 INTEREST PAYABLE AND OTHER LIABILITIES (Continued) Lease liabilities relate to the right-of-use of leased property. The maturity analysis of its contractual undiscounted cash flows are as follows: 2021 BD millions 2020 US$ millions BD millions US$ millions Less than 1 year 1.7 4.5 1.3 3.4 1 to 3 years 1.8 4.8 1.5 4.0 3 to 5 years Total undiscounted lease liabilities 0.2 3.7 0.5 9.8 0.4 3.2 1.1 8.5 Lease liabilities included in the statement of financial position 3.1 8.2 1.9 5.0 18 NET IMPAIRMENT AND OTHER PROVISIONS As at 31 December 2021 Loans and advances (note 8g) Placements with banks and other financial institutions Investment securities Loan commitments and guarantees Contingent liabilities – litigation claims Associates Other assets 2020 BD millions US$ millions BD millions US$ millions 12.1 3.7 (0.3) 15.5 32.1 9.8 (0.8) 41.1 27.3 0.3 27.6 72.4 0.8 73.2 3.6 3.2 0.2 7.0 9.6 8.5 0.5 18.6 (0.5) 0.9 0.4 (1.3) 2.4 1.1 22.5 59.7 28.0 74.3 The Group’s subsidiary is defending a claim from the Official Committee of Unsecured Creditors of Arcapita Bank B.S.C. (c) against it based on a preliminary judgement. The subsidiary has filed an appeal against this judgement and a provision of BD 6.9 million (US$ 18.3 million) has been made, which consists of BD 3.7 million (US$ 9.8 million) for the principal amount and BD 3.2 million (US$ 8.5 million) towards the estimated profit that may be imposed by the court. 19 CONTINGENT LIABILITIES AND BANKING COMMITMENTS The Group issues commitments to extend credit and guarantees the performance of customers by issuing standby letters of credit and guarantees to third parties. For these instruments, the contractual amount of the financial instrument represents the maximum potential credit risk if the counterparty does not perform according to the terms of the contract. The credit exposure for the contingent liabilities is reduced by obtaining counter guarantees and collateral from third parties. A large majority of these expire without being drawn upon, and as a result, the contractual amounts are not representative of the potential future credit exposure or liquidity requirements of the Group. Based upon the level of fees currently charged, taking into account maturity and interest rates together with any changes in the credit worthiness of counterparties since origination, the Group has determined that the fair value excess or shortage of contingent liabilities and undrawn loan commitments is not material. As at 31 December 2021 2020 BD millions US$ millions Contingent liabilities Liabilities on confirmed documentary credits 101.9 270.3 BD millions US$ millions 53.6 142.2 Guarantees: Counter guaranteed by banks Others 36.4 96.5 40.2 106.6 163.8 434.5 184.5 489.4 302.1 801.3 278.3 738.2 244.1 647.5 207.6 550.7 Banking commitments Undrawn loan commitments Forward commitments: Securities purchased 32 10.1 26.8 15.0 39.8 254.2 674.3 222.6 590.5 556.3 1,475.6 500.9 1,328.7
35. Notes to the consolidated financial statements for the year ended 31 December 2021 20 DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS The Group utilises various derivative and foreign exchange financial instruments for trading , asset / liability management and hedging risks. These instruments primarily comprise futures, forwards, swaps and options. Futures and forward contracts are commitments to buy or sell financial instruments or currencies on a future date at a specified price or yield, and may be settled in cash or through delivery. Swap contracts are commitments to settle in cash on a future date or dates, interest rate commitments or currency amounts based upon differentials between specified financial indices, as applied to a notional principal amount. Option contracts give the acquirer, for a fee, the right but not the obligation, to buy or sell within a limited period a financial instrument or currency at a contracted price. In respect of the derivative and foreign exchange financial instruments, the contract / notional principal amounts do not represent balances subject to credit or market risk. Contract/notional principal amounts represent the volume of outstanding transactions and are indicators of business activity. These amounts are used to measure changes in the value of derivative products and to determine the cash flows to be exchanged. The replacement cost is the cost of replacing those financial instruments with a positive market value, together with an estimate for the potential future change in the value of the contract, and reflects the maximum credit loss for the Group had all these counterparties defaulted. For written options, there is no credit risk, as they represent obligations of the Group. The fair value represents the aggregate of the positive and negative cash flows which would have occurred if the rights and obligations arising from the instrument were extinguished by the Group in an orderly market as at the reporting date. The fair values of derivative financial instruments such as interest rate swaps and forward rate agreements were calculated using discounted cash flow models based on current market yields for similar types of instruments and the maturity of each instrument. The futures contracts, foreign exchange contracts and interest rate options were revalued using market prices and option valuation models as appropriate. a) The following table summarises for each type of derivative and foreign exchange financial instrument, the aggregate notional amounts, the replacement cost and the fair value: In BD millions As at 31 December Notional principal amount 2021 Replacement cost 2020 Fair value 2021 2020 2021 2020 Interest rate contracts Interest rate swaps 3,038.2 1,517.9 31.7 37.1 31.7 37.1 141.9 141.0 0.5 0.6 0.3 0.1 1,042.6 1,709.2 1.9 4.1 1.5 3.2 1,184.5 1,850.2 2.4 4.7 1.8 3.3 4,222.7 3,368.1 34.1 41.8 33.5 40.4 11,200.8 8,934.0 90.5 110.9 88.9 107.2 Foreign exchange contracts Outright spot and forward contracts Swap agreements Total Total in US$ millions Replacement costs by industry and geographical region are presented in note 34. b) The remaining maturity profile by each class of derivative and foreign exchange financial instrument based on contract/notional principal amounts is as follows: In BD millions As at 31 December 2021 Up to 1 year 2020 Over 1 year Total Up to 1 year Over 1 year Total Interest rate contracts Interest rate swaps 215.9 2,822.3 3,038.2 216.0 1,301.9 1,517.9 141.9 111.0 30.0 141.0 Foreign exchange contracts Outright spot and forward contracts 141.9 - Swap agreements 963.0 79.6 1,042.6 1,576.6 132.6 1,709.2 1,104.9 79.6 1,184.5 1,687.6 162.6 1,850.2 Total 1,320.8 2,901.9 4,222.7 1,903.6 1,464.5 3,368.1 Total in US$ millions 3,503.5 7,697.3 11,200.8 5,049.4 3,884.6 8,934.0 33
36. Notes to the consolidated financial statements for the year ended 31 December 2021 21 SHARE CAPITAL 2021 BD millions Authorised share capital 2 ,500,000,000 (2020: 2,500,000,000) ordinary shares of 100 fils each Issued and fully paid share capital At 1 January 2021: 1,702,535,732 ordinary shares of 100 fils each (at 1 January 2020: 1,543,292,583 shares of 100 fils each) Subsidiary purchase consideration (4,467,173 shares of 100 fils each) Bonus issue (one for ten shares held) At 31 December 2021: 1,872,789,305 ordinary shares of 100 fils each (at 31 December 2020: 1,702,535,732 shares of 100 fils each) 2020 US$ millions BD millions US$ millions 250.0 663.1 250.0 663.1 170.3 17.0 451.7 45.1 154.3 0.5 15.5 409.3 1.3 41.1 187.3 496.8 170.3 451.7 The shareholders annual general ordinary and extra ordinary meetings for the year 2020 held on 24 March 2021 approved the increase of issued and fully paid capital by the issue of bonus shares at the rate of one additional share for every ten shares held and amounted to BD 17.0 million. The Board of Directors have proposed to increase the issued and fully paid capital of the Group to BD 206.0 million by the issue of bonus shares at the rate of one additional share for every ten shares held. These shares will rank pari passu with all other shares for future dividends and distribution. The bonus issue amounting to BD 18.7 million is proposed to be made through utilisation from retained earnings. The distribution of ordinary shares, setting out the number of shares and shareholders and percentage of total outstanding shares in the following categories, is shown below: 31 December 2020 31 December 2021 Number of shares Less than 1% 1% up to less than 5% 5% up to less than 10% 10% up to less than 20% 20% up to less than 50% 594,649,426 249,848,093 203,198,733 825,093,053 1,872,789,305 Number of shareholders 1,696 7 1 1 1,705 % of total outstanding shares 31.7% 13.3% 10.9% 44.1% 100.0% Number of shares 515,774,995 251,950,021 184,726,122 750,084,594 1,702,535,732 Number of shareholders 1,599 8 1 1 1,609 % of total outstanding shares 30.2% 14.8% 10.9% 44.1% 100.0% The distribution of ordinary shares ownership based on nationality of the shareholder is shown below: 31 December 2021 Number of shares Bahraini Other GCC countries Others 1,754,051,428 115,475,261 3,262,616 1,872,789,305 Number of shareholders 1,546 105 54 1,705 31 December 2020 % of total outstanding shares 93.6% 6.2% 0.2% 100.0% Number of shares 1,609,854,153 92,402,032 279,547 1,702,535,732 Number of shareholders 1,517 81 11 1,609 % of total outstanding shares 94.6% 5.4% 100.0% 44.1% (2020: 44.1%) of the Bank's share capital is held by the Bahrain Mumtalakat Holding Co, which is 100% owned by the Government of Bahrain. 10.9% (2020: 10.9%) of shares is owned by the Social Insurance Organisation, Kingdom of Bahrain. The rest of the share capital is widely held primarily by the citizens of, and entities incorporated in, the Kingdom of Bahrain. Employee share incentive scheme The employee share incentive scheme (“scheme”) was approved at the ordinary general meeting on 11 March 2015 in pursuant to CBB’s Sound Remuneration Practices regulation. As a result, 19,104,000 ordinary shares amounting to BD 1.9 million were issued in 2015 to an independent party to hold the beneficial interest of the shares under the scheme. Shares are allocated to eligible employees under the scheme and the shares are entitled to cash and stock dividend and subject to malus and clawback provisions of the scheme. As at 31 December 2021, there are 11,361,961 (2020: 12,300,394) shares unallocated. These unallocated shares under the scheme are deducted from equity. 22 RESERVES a) Statutory reserve In accordance with the Commercial Companies Law, 10 percent of net profit is appropriated to a statutory reserve, which is not normally distributable except in accordance with Article 224 of the law. Such appropriations may cease when the reserve reaches 50 percent of paid up share capital. The Board of Directors has proposed to the shareholders to appropriate BD 9.4 million from retained earnings to the statutory reserve to achieve the 50 percent threshold. b) General reserve The reserve has been created in accordance with the Group's articles of association and underlines the shareholders' commitment to enhance the strong equity base of the Group. 34
37. Notes to the consolidated financial statements for the year ended 31 December 2021 22 RESERVES (Continued) c) Fair value reserve The fair value reserve includes the cumulative net change in fair value of instruments classified as FVOCI. The fair value reserve also includes the Group's share of other comprehensive income of associates. d) Donation and charity reserve Based on the recommendations of the Board of Directors, upon shareholders' approval, an amount is transferred from the profit for the year to this donation and charity reserve. The reserve represents the amount of donations pending utilisation. e) Share premium Under the employee share incentive scheme, the Group allocated shares at market rates which resulted in increasing the share premium by BD 0.9 million (US$ 2.4 million) [2020: BD 1.6 million (US$ 4.2 million)]. 23 APPROPRIATIONS The appropriations relating to the year 2020 were approved at the annual general meeting held on 24 March 2021. 24 INTEREST INCOME / INTEREST EXPENSE a) INTEREST INCOME For the year ended 31 December 2021 BD millions US$ millions Loans and advances to non-banks 2020 BD millions US$ millions 98.4 261.0 95.5 Loans and advances to banks 1.5 4.0 2.6 6.9 Treasury bills 5.0 13.3 8.9 23.6 Placements with banks and other financial institutions Investment securities b) INTEREST EXPENSE For the year ended 31 December Customer deposits Due to banks and other financial institutions Borrowings under repurchase agreements 25 NET FEE AND COMMISSION INCOME For the year ended 31 December Net fees and commission on loans and advances Net fees and commission on trade finance related activities Net fees and commission on cards Other fees and commission income Less: other fees and commission expenses 26 OTHER INCOME For the year ended 31 December Profit on trading securities, foreign exchange and derivatives Profit on sale of FVOCI investments Gain on fair value through profit or loss investments Other income from core activities Dividend income Other income Other income from non-core activities 3.9 10.3 3.5 9.3 44.5 153.3 118.0 406.6 53.9 164.4 143.0 436.1 2021 BD millions US$ millions 26.7 70.8 5.1 13.5 1.0 2.7 32.8 87.0 2020 BD millions US$ millions 37.0 98.2 9.5 25.2 1.9 5.0 48.4 128.4 2021 BD millions US$ millions 6.3 16.7 2.5 6.6 1.3 3.5 4.6 12.2 (0.9) (2.4) 13.8 36.6 2020 BD millions US$ millions 4.2 11.1 2.4 6.4 0.3 0.8 3.6 9.6 (0.1) (0.3) 10.4 27.6 2021 BD millions US$ millions 7.6 20.2 4.2 11.1 1.1 2.9 12.9 34.2 2020 BD millions US$ millions 6.2 16.4 3.5 9.3 9.7 25.7 2.4 1.3 3.7 16.6 35 253.3 6.4 3.5 9.9 44.1 3.2 8.6 11.8 21.5 8.5 22.8 31.3 57.0
38. Notes to the consolidated financial statements for the year ended 31 December 2021 27 STAFF EXPENSES For the year ended 31 December Salaries , allowances and bonuses Social security and gratuity Housing and other benefits Others 28 OTHER OPERATING EXPENSES For the year ended 31 December Depreciation and amortisation Equipment expenses 2021 BD millions US$ millions 28.6 75.9 2.8 7.4 6.3 16.7 0.8 2.1 38.5 102.1 2020 BD millions US$ millions 29.6 78.5 2.7 7.2 6.6 17.5 0.6 1.6 39.5 104.8 2021 BD millions US$ millions 6.7 17.8 6.0 15.9 2020 BD millions US$ millions 4.8 12.7 4.2 11.2 Depreciation, amortisation and equipment expenses 12.7 33.7 9.0 23.9 Communication expenses Professional fees Premises expenses Regulatory licenses, deposit protection and VAT expenses Advertising and public relations expenses Other expenses Other operating expenses 4.4 4.4 4.2 3.8 2.0 4.5 23.3 36.0 11.7 11.7 11.1 10.1 5.3 11.9 61.8 95.5 3.5 3.1 4.8 4.1 1.8 4.4 21.7 30.7 9.3 8.2 12.7 10.9 4.8 11.6 57.5 81.4 29 NET OPEN FOREIGN CURRENCY POSITIONS As at 31 December 2021 BD millions US$ millions 2020 BD millions US$ millions US Dollar (long position) - unhedged 91.3 242.2 362.7 UAE Dirhams (long position) - unhedged 30.3 80.4 14.9 962.0 39.6 Saudi Riyal (long position) - unhedged 15.5 41.1 (24.8) (65.8) All of the above currencies have a fixed rate of exchange against the Bahraini Dinar. The Group did not have any significant net open positions as at 31 December 2021 or 31 December 2020. 30 RELATED PARTIES Certain related parties (major shareholders, directors of the Group and families and companies of which they are principal owners, key management personnel and associates) were customers of the Group in the ordinary course of business. The transactions with these parties were made on an arm's length basis. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. Typically, key management personnel include the Chief Executive Officer and persons directly reporting to this position. Significant balances at the reporting date in regard to related parties and transactions during the year with related parties are as below. The Group qualifies as a government related entity under the definitions provided in IAS 24 as its significant shareholders are government owned. In addition to the government exposures reported below, in its normal course of business, the Group provides commercial lending, liquidity management and other banking services to, and also avails services from, various semi governmental organisations and government owned companies in the Kingdom of Bahrain. As at 31 December Major shareholder and related entities 2021 2020 BD millions BD millions Directors and key management personnel 2021 2020 BD millions BD millions Associates 2021 2020 BD millions BD millions 236.3 232.0 4.3 5.7 - - 1,370.4 1,339.0 - - 27.2 36.7 187.9 235.2 22.5 28.7 5.7 6.0 46.0 91.6 26.0 26.6 - - 2021 BD millions 2020 BD millions 2021 BD millions 2020 BD millions 2021 BD millions 2020 BD millions Loans advanced 113.3 286.4 3.4 0.9 - - Loans repaid Net increase / (decrease) in overdrafts Treasury bills, bonds and equities purchased Treasury bills, bonds and equities matured / sold 114.8 5.8 870.4 839.0 277.8 (67.2) 803.0 1,049.0 1.3 (3.5) - 0.9 (1.1) - - - - - 1.0 2.5 - 0.1 Interest income 62.1 72.4 0.3 0.4 - - Interest expense 0.9 3.0 0.2 0.4 - - - - - - 1.1 1.0 Dividend Income 1.9 0.9 - - - - Directors remuneration and sitting fees 0.2 0.2 0.4 0.3 - - Short term employee benefits Post employment retirement benefits Other operating expenses 2.2 1.9 3.5 0.3 2.3 3.8 0.3 2.4 0.6 0.3 Loans and advances Treasury bills and investment securities Customer deposits Contingent liabilities for irrevocable commitments, guarantees and other contingencies For the year ended 31 December Capital expenditures Share of profit of associates During the year, no net provision charge [2020: BD 6.9 million provision charge (US$ 18.3 million)] had been recorded against outstanding balances with related parties. Certain transactions were approved by the Board of Directors under Article 189(b) of the Commercial Companies Law in the financial year ended 31 December 2021 where the chairman, directors or managers had a direct or indirect interest in the contracts or transactions. 36
39. Notes to the consolidated financial statements for the year ended 31 December 2021 31 ASSETS UNDER MANAGEMENT Assets managed on behalf of customers to which the Group does not have legal title are not included in the statement of financial position . At 31 December 2021, assets under management amounted to BD 134.2 million (US$ 356.0 million) [31 December 2020: BD 104.4 million (US$ 276.9 million)]. 32 GEOGRAPHICAL DISTRIBUTION In BD millions Assets Liabilities 2021 As at 31 December 2020 4,367.7 133.5 7.9 26.5 4,535.6 GCC USA Europe Rest of the World Off balance sheet items 2021 4,213.8 84.2 62.9 0.5 4,361.4 2020 3,905.9 24.2 43.7 26.5 4,000.3 2021 3,681.3 27.0 73.7 53.1 3,835.1 2,841.5 58.9 1,874.3 4.3 4,779.0 2020 2,918.1 196.6 727.0 27.3 3,869.0 Off balance sheet items include contingent liabilities, banking commitments, derivatives and forward exchange contracts. 33 DISTRIBUTION BY SECTOR In BD millions Assets Liabilities 2021 As at 31 December 2020 1,667.8 376.6 579.2 220.7 1,316.6 374.7 4,535.6 Government / sovereign Manufacturing / trading Banks / financial institutions Construction Personal Others Off balance sheet items 2021 1,520.6 338.2 608.8 166.4 1,166.5 560.9 4,361.4 339.8 211.8 728.5 107.6 2,157.3 455.3 4,000.3 2020 2021 308.6 174.3 585.1 217.8 2,141.0 408.3 3,835.1 2020 366.2 188.8 3,965.0 86.6 97.7 74.7 4,779.0 110.7 167.6 3,385.6 122.1 59.3 23.7 3,869.0 Construction Personal Off balance sheet items include contingent liabilities, banking commitments, derivatives and forward exchange contracts. 34 CONCENTRATION OF CREDIT RISK The following is the concentration of credit risk by industry and geographical regions: a) By industry In BD millions Government / sovereign As at 31 December 2021 Assets Balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities - debt instruments Interest receivable and other assets Total assets Contingent liabilities and banking commitments Manufacturing/ Other countries 215.7 10.0 - 79.3 - - 229.1 1,114.6 12.0 1,571.4 12.3 50.2 23.5 0.4 96.4 363.3 1.9 365.2 282.1 97.8 17.0 4.2 480.4 197.2 0.3 197.5 1,245.0 19.6 1,264.6 213.2 10.1 38.5 261.8 294.4 2,395.8 1,165.2 76.9 4,237.3 - 175.3 - 72.1 33.4 86.6 - 40.0 - 74.7 - 556.3 34.1 Construction Personal Others Total 107.6 0.7 Derivatives (replacement cost) trading Banks/financial Bahrain institutions - Others - Total 79.3 225.7 . In BD millions Government / sovereign As at 31 December 2020 Assets Balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities - debt instruments Interest receivable and other assets Total assets Contingent liabilities and banking commitments Manufacturing/ Banks/financial trading institutions Bahrain Other countries 226.6 10.1 - 77.9 - - 159.2 1,075.4 14.4 1,475.6 34.6 0.3 45.0 329.7 1.3 331.0 335.4 73.3 17.2 3.6 507.4 165.3 0.3 165.6 1,106.5 7.3 1,113.8 339.1 11.7 68.0 418.8 335.4 2,173.1 1,138.9 95.2 4,057.2 110.9 - 136.2 67.3 122.2 40.5 23.8 500.9 2.5 - - 39.3 - - - 41.8 Derivatives (replacement cost) - - 77.9 236.7 The balances at the end of the year are representative of the position during the year and hence average balances have not been separately disclosed. The above includes certain exposures to customers / counterparties which are in excess of 15% of the Group's capital base. These have the approval of the Central Bank of Bahrain or are exempt exposures under the large exposures policy of the Central Bank of Bahrain. The table below gives details of these exposures as at 31 December 2021. In BD millions Counterparty Counterparty type Total exposure Counterparty A Sovereign Counterparty B Government related entity 1,317.1 171.1 Counterparty C Government related entity 130.2 Counterparty D Central Bank 110.8 37
40. Notes to the consolidated financial statements for the year ended 31 December 2021 34 CONCENTRATION OF CREDIT RISK (Continued) (b) By geographical regions: In BD millions As at 31 December 2021 GCC USA Europe Rest of the World Total Assets Balances at central banks Treasury bills Placements with banks and other financial institutions 79.3 - - - 79.3 225.7 - - - 225.7 224.1 65.8 4.2 0.3 294.4 Loans and advances 2,311.8 57.5 0.7 25.8 2,395.8 Investment securities 1,163.3 1.9 - - 1,165.2 65.5 8.3 2.8 0.3 76.9 4,069.7 133.5 7.7 26.4 4,237.3 543.3 2.4 - 8.7 31.7 4.3 - 556.3 34.1 GCC USA Europe Rest of the World Total Interest receivable and other assets Total assets Contingent liabilities and banking commitments Derivatives (replacement cost) In BD millions As at 31 December 2020 Assets Balances at central banks Treasury bills Placements with banks and other financial institutions 77.9 - - - 77.9 236.7 - - - 236.7 290.3 10.4 34.3 0.4 335.4 Loans and advances 2,079.5 66.9 26.6 0.1 2,173.1 Investment securities 1,133.1 5.8 - - 1,138.9 92.3 1.1 1.8 - 95.2 3,909.8 84.2 62.7 0.5 4,057.2 464.4 0.1 31.5 4.9 500.9 - 37.6 0.1 41.8 Interest receivable and other assets Total assets Contingent liabilities and banking commitments Derivatives (replacement cost) 4.1 38
41. Notes to the consolidated financial statements for the year ended 31 December 2021 35 INTEREST RATE RISK Interest rate risk is measured by the extent to which changes in the market interest rates impact margins , net interest income and the economic value of the Group’s equity. Net interest income will be affected as a result of volatility in interest rates to the extent that the re-pricing structure of interest bearing assets differs from that of liabilities. The Group’s goal is to achieve stable earnings growth through active management of the assets and liabilities mix while, selectively, positioning itself to benefit from near-term changes in interest rate levels. The Treasurer is primarily responsible for managing the interest rate risk. Reports on overall position and risks are submitted to senior management for review and positions are adjusted if deemed necessary. In addition, ALCO regularly reviews the interest rate sensitivity profile and its impact on earnings. The Group’s asset and liability management process is utilised to manage interest rate risk through the structuring of on-balance sheet and off-balance sheet portfolios. The Group uses various techniques for measuring and managing its exposure to interest rate risk. Duration analysis is used to measure the interest rate sensitivity of the fixed income portfolio. Duration of the portfolio is governed by economic forecasts, expected direction of interest rates and spreads. Modified duration gives the percentage change in value of the portfolio following a 1% change in yield. Interest rate swaps and forward rate agreements are used to manage the interest rate risk. The Group uses interest rate gap analysis to measure the interest rate sensitivity of its annual earnings due to re-pricing mismatches between rate sensitive assets, liabilities and derivative positions. Assets and liabilities are placed in maturity buckets based on the remaining period to the contractual repricing or maturity dates, whichever is earlier. Customer deposits for which no specific contractual maturity or repricing date exists are placed in ladders based on the Group's judgement concerning their most likely repricing behaviour. The repricing profile and effective interest rate of the various asset and liability categories are as follows: Effective In BD millions interest Up to As at 31 December 2021 rate % 3 months Assets Cash and balances at central banks Treasury bills 2.0% 67.1 Placements with banks and other financial institutions 0.8% 215.6 Loans and advances 4.6% 633.7 Investment securities 4.1% 27.4 Investment in associates, interest receivable and other assets Property and equipment Goodwill and other intangible assets Total assets 943.8 Liabilities and equity Due to banks and other financial institutions 1.2% 400.5 Borrowings under repurchase agreements 0.7% 64.2 Customer deposits 1.0% 1,130.3 Interest payable and other liabilities Equity Total liabilities and equity 1,595.0 On-balance sheet interest rate sensitivity gap (651.2) Off-balance sheet interest rate gap 1,206.0 Cumulative interest rate sensitivity gap 554.8 39 3 to 6 months 6 to 12 months 1 to 5 years More than 5 years 59.5 220.3 5.8 285.6 99.1 134.4 123.6 357.1 847.0 759.7 1,606.7 560.4 248.7 809.1 12.4 27.7 304.0 344.1 (58.5) (184.7) 311.6 10.9 129.7 206.9 347.5 9.6 62.3 383.5 33.7 29.3 63.0 1,543.7 (698.1) 1,229.1 809.1 (385.5) 1,652.7 Rate insensitive 123.0 78.8 93.4 120.5 64.0 53.6 533.3 60.5 1,513.7 76.5 535.3 2,186.0 (1,652.7) - Total 123.0 225.7 294.4 2,395.8 1,258.6 120.5 64.0 53.6 4,535.6 518.0 221.6 3,184.2 76.5 535.3 4,535.6 -
42. Notes to the consolidated financial statements for the year ended 31 December 2021 35 INTEREST RATE RISK (Continued) In BD millions As at 31 December 2020 Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Investment in associates, interest receivable and other assets Property and equipment Goodwill and other intangible assets Total assets Liabilities and equity Due to banks and other financial institutions Borrowings under repurchase agreements Customer deposits Interest payable and other liabilities Equity Total liabilities and equity On-balance sheet interest rate sensitivity gap Off-balance sheet interest rate gap Cumulative interest rate sensitivity gap Effective interest rate % Up to 3 months 3 to 6 months 6 to 12 months 1 to 5 years More than 5 years Rate insensitive Total 2.7% 187.7 49.0 - - - 125.5 - 125.5 236.7 1.1% 4.8% 4.5% 308.0 604.3 274.0 146.4 43.8 144.5 20.1 843.2 635.8 434.7 165.2 27.4 92.5 335.4 2,173.1 1,231.4 - 1,374.0 239.2 164.6 1,479.0 599.9 149.2 55.7 54.4 504.7 149.2 55.7 54.4 4,361.4 2.0% 1.2% 1.4% - 439.2 75.1 1,469.7 1,984.0 (610.0) 1,316.2 706.2 33.3 135.6 168.9 70.3 (14.3) 762.2 22.1 37.8 129.8 189.7 (25.1) 737.1 11.8 45.2 57.0 1,422.0 (565.9) 1,593.2 599.9 (736.0) 1,457.1 Risk type In BD millions Interest rate risk Foreign exchange risk 2021 2020 2.1 0.1 1.8 0.1 Total minimum capital required for market risk Multiplier 2.2 12.5 1.9 12.5 Market risk weighted exposure under the standardised method 27.5 23.8 38.1 1,304.0 93.4 526.3 1,961.8 (1,457.1) - 544.5 112.9 3,084.3 93.4 526.3 4,361.4 - 36 MARKET RISK a) The Group uses the standardised method for allocating market risk capital. The following table shows the capital charges as at 31 December: b) The principal risk to which the Group portfolio is exposed is the risk of loss from fluctuations in future cash flows of financial instruments because of changes in the market interest rates. The interest rate risk management process is supplemented by monitoring the sensitivity of the Group’s financial assets and liabilities to an interest rate shock of 200bps increase/ decrease. An analysis of the Group’s sensitivity to an increase or decrease in market interest rates on the Group's balance sheet (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows: 2021 In BD millions 200 bps parallel increase 2020 200 bps parallel decrease 200 bps parallel increase 200 bps parallel decrease At 31 December (0.2) 0.2 (6.6) 6.6 Average for the year (1.8) 1.8 (4.6) 4.6 Minimum for the year (0.2) 0.2 (1.9) 1.9 Maximum for the year (7.5) 7.5 (7.0) 7.0 c) The Group holds investments in quoted equities as part of investment securities. Equity risk is the potential adverse impact due to movements in individual equity prices or general market movements in stock markets. The Group manages this risk through diversification of investments in terms of geographical distribution and industrial concentration. Overall non-trading interest rate risk positions are managed by the Treasury division, which uses investment securities, placements with banks, deposits from banks and derivative instruments to manage the overall position arising from the Group’s non-trading activities. The use of derivatives to manage interest rate risk is described in note 20. 40
43. Notes to the consolidated financial statements for the year ended 31 December 2021 37 SEGMENT INFORMATION For management purposes , the Group is organised into the following main strategic business units (SBUs) - Retail Commercial and SMEs, Corporate Institutional and Investment Banking, Overseas Branches and Treasury Capital Markets and Wealth Management. These SBUs are the basis on which the Group reports its operating segment information. The consumer banking and business banking related SBUs in Bahrain provide various banking products and services to the Group's customers. The SBUs are differentiated based on their respective customer segments. Retail Commercial and SMEs caters to individuals and commercial enterprises, Corporate Institutional and Investment Banking caters to governments and corporates. The Treasury, Capital Markets, Wealth Management and Investments SBU has the overall responsibility of managing the Group's liquidity, interest rate, foreign exchange, market risk and investments and the Overseas Branches SBU provide various banking products and services to the Group's customers outside Bahrain. Financial information about the operating segments is presented in the following table: In BD millions For the year ended 31 December Retail, Commercial, and SMEs 2021 Corporate, Institutional, and Investment Banking 2020 2021 2020 Treasury, Capital Markets, Wealth Management and Investments Overseas Branches 2021 2020 2021 2020 Total 2021 2020 Interest income 79.3 75.7 19.2 20.9 1.7 1.6 53.1 66.2 153.3 164.4 Interest expense (25.0) (35.8) (3.4) (5.2) (0.6) (0.4) (3.8) (7.0) (32.8) (48.4) Inter-segment interest income / (expense) 23.1 29.0 2.5 1.2 0.2 0.1 (25.8) (30.3) - - Net interest income 77.4 68.9 18.3 16.9 1.3 1.3 23.5 28.9 120.5 116.0 Net fee and commission and other income 8.6 8.2 8.0 7.5 1.7 1.6 12.1 14.6 30.4 31.9 Operating income 86.0 77.1 26.3 24.4 3.0 2.9 35.6 43.5 150.9 147.9 Result 35.3 33.5 16.4 4.0 (5.7) (10.9) 20.0 35.6 Unallocated corporate expenses Profit for the year 66.0 62.2 (11.0) 55.0 (11.5) 50.7 Other information As at 31 December Segment assets 1,584.9 1,434.2 1,177.2 1,059.9 132.7 100.6 1,640.8 1,766.7 4,535.6 4,361.4 Segment liabilities and Equity 2,687.4 2,742.2 1,177.4 1,010.0 102.9 49.2 567.9 560.0 4,535.6 4,361.4 Depreciation and amortisation for the year 4.1 2.9 1.0 0.6 0.7 0.4 0.9 0.9 6.7 4.8 Provision for impaired assets 3.5 3.7 9.5 14.6 2.8 8.6 6.7 1.1 22.5 28.0 For the year ended 31 December Segment revenues and expenses are directly attributable to the business segments. The benefit of the Group's capital has been distributed across the segments in proportion to their total assets employed. Expenses of departments whose services are jointly utilised by more than one segment have been allocated to the relevant segments on an appropriate basis. Inter-segment interest income and expense represent the interest cost on the excess funds which are transferred by all the other business segments to Treasury, Capital Markets & Wealth Management. 41
44. Notes to the consolidated financial statements for the year ended 31 December 2021 38 MATURITY PROFILE AND LIQUIDITY RISK a ) MATURITY PROFILE The table below shows the maturity profile of total assets and liabilities based on contractual terms. In BD millions As at 31 December 2021 Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Investment in associates and other assets Total assets Liabilities and equity Due to banks and other financial institutions Borrowings under repurchase agreements Customer deposits Interest payable & other liabilities Equity Total liabilities and equity In BD millions As at 31 December 2020 Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Investment in associates and other assets Total assets Liabilities and equity Due to banks and other financial institutions Borrowings under repurchase agreements Customer deposits Interest payable & other liabilities Equity Total liabilities and equity Up to 3 months 3 to 6 months 6 months to 1 year 1 to 3 years 123.0 67.1 59.5 99.1 294.4 511.3 27.4 67.3 1,090.5 230.3 5.8 1.4 297.0 154.9 123.6 0.2 377.8 538.7 475.6 0.5 1,014.8 461.0 64.2 2,644.0 76.5 3,245.7 12.4 27.7 304.0 344.1 10.9 129.7 206.9 347.5 33.7 29.3 63.0 Up to 3 months 3 to 6 months 6 months to 1 year - 1 to 3 years 3 to 5 years 5 to 10 years 10 to 20 years Over 20 years Total - - - - 370.3 284.1 0.6 655.0 344.4 177.2 521.6 202.9 39.0 241.9 43.0 125.9 168.1 337.0 294.4 2,395.8 1,258.6 238.1 4,535.6 - - - 535.3 535.3 518.0 221.6 3,184.2 76.5 535.3 4,535.6 3 to 5 years 5 to 10 years 10 to 20 years Over 20 years 123.0 225.7 Total 125.5 187.7 36.8 12.2 - - - - - 125.5 236.7 335.4 405.5 274.0 92.4 1,420.5 149.5 43.8 0.8 230.9 164.5 20.1 0.1 196.9 566.6 367.3 0.5 934.4 429.5 268.5 0.7 698.7 300.0 124.2 424.2 130.3 4.0 134.3 27.2 129.5 164.8 321.5 335.4 2,173.1 1,231.4 259.3 4,361.4 477.3 75.1 2,773.7 93.4 3,419.5 33.3 135.6 168.9 22.1 37.8 129.8 189.7 11.8 45.2 57.0 - - - 526.3 526.3 544.5 112.9 3,084.3 93.4 526.3 4,361.4 b) LIQUIDITY RISK The table below shows the undiscounted cash flows of the Group’s financial liabilities and undrawn loan commitments on the basis of their earliest contractual liability. The Group's expected cash flows on these instruments vary significantly from this analysis; for example customers are expected to maintain stable or increased balances in demand deposits and not all undrawn loan commitments are expected to be drawn down immediately. For derivatives that have simultaneous gross settlement (e.g. forward exchange contracts and currency swaps) the gross nominal undiscounted cash inflow/(outflow) are considered while in the case of derivatives that are net settled the net amounts have been considered. In BD millions As 31 December 2021 Non derivative liabilities Due to banks and other financial institutions Borrowings under repurchase agreements Customer deposits Total non derivative liabilities Derivative liabilities Trading: outflow Trading: inflow Total derivative liabilities Banking commitments Financial guarantees Carrying amount 518.0 221.6 3,184.2 3,923.8 1.8 1.8 - Gross nominal inflow / (outflow) Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years More than 5 years 537.7 241.6 3,186.4 3,965.7 479.7 83.5 2,658.8 3,222.0 12.4 27.8 290.2 330.4 10.9 130.3 208.0 349.2 34.7 29.4 64.1 - 1,140.2 1,136.6 2,276.8 (36.4) 841.0 838.7 1,679.7 (185.6) (21.1) 89.8 89.6 179.4 (4.5) (1.9) 129.8 129.3 259.1 (6.1) (7.2) 79.6 79.0 158.6 (27.0) (6.2) 223.2 - The Group's consolidated net stable funding ratio (NSFR) as at 31 December 2021 was 136% (31 December 2020: 145%), while the average LCR for the fourth quarter of the year stood at 308% (31 December 2020: 295%). The Group continues to meet minimum required regulatory liquidity ratios and is also in compliance with the minimum required capital adequacy ratio (“CAR”). Further details on NSFR are disclosed in note 39. 42
45. Notes to the consolidated financial statements for the year ended 31 December 2021 b ) LIQUIDITY RISK (Continued) In BD millions As 31 December 2020 Non derivative liabilities Due to banks and other financial institutions Borrowings under repurchase agreements Customer deposits Total non derivative liabilities Derivative liabilities Trading: outflow Trading: inflow Total derivative liabilities Banking commitments Financial guarantees Carrying amount Gross nominal inflow / (outflow) 544.5 112.9 3,084.3 3,741.7 545.6 113.8 3,098.1 3,757.5 477.8 75.2 2,784.5 3,337.5 1,850.3 1,850.2 3,700.5 (40.2) 1,495.2 1,489.3 2,984.5 (222.6) (17.6) 3.3 3.3 - Less than 3 months 6 to 12 months 1 to 5 years 33.3 0.1 136.7 170.1 22.3 38.5 131.6 192.4 12.2 45.3 57.5 - 139.3 146.0 285.3 (5.4) 53.2 53.0 106.2 (7.3) 162.6 161.9 324.5 (9.7) 222.6 (0.2) 3 to 6 months More than 5 years 39 NET STABLE FUNDING RATIO The main objective of the NSFR is to promote resilience in the banking system by improving the funding profile of banks by ensuring sufficient level of stable funding in relation to assets and commitments. The NSFR thus promotes banks to rely on funding from stable sources and long-term borrowing in order to reduce the risks of disruptions which might impact the bank’s liquidity position. Banks are required to meet a minimum NSFR of 100% on a continuous basis. This ratio was relaxed to 80% due to the pressures within the banking sector following the COVID pandemic, However, NBB Group still seeks to maintain the original higher 100% requirement. The main drivers behind the Group’s strong available stable funding (ASF) are the healthy capital base (18% of the Group’s ASF), large deposits portfolio with strong contributions from the retail and small business sectors (67% of the Group’s ASF) and the sizable corporate and sovereign deposits (15% of the Group’s ASF). The majority of the Group’s investment security portfolio is classified as high-quality liquid assets (HQLA). The Group’s HQLA securities accounted for 28% of the Group’s required stable funding (RSF) before applying the relevant weights. Lending provided to financial institutions in the form of loans or placements was predominantly short-term in nature, which required a lower level of required funding, with 86% of total lending provided to financial institutions being in the 0-6 months maturity bucket. The NSFR ratio of 136% at 31 December 2021 is 9% lower than the 31 December 2020 ratio. A 2% increase in ASF resulting from a 10% increase in wholesale funding, was offset by a 9% increase in RSF following a 17% increase in loans and placements with financial institutions and a 8% increase in lending to corporates, SMEs, retails, and sovereigns. Further details on the calculation of the NSFR is presented in the following tables. In BD millions As of 31 December 2021 Unweighted Values (before applying factors) More than 6 No Less than 6 months and Over one Specified months less than one year Maturity year Item Available Stable Funding (ASF): Capital: Regulatory Capital Retail Deposits and deposits from small business customers: Stable deposits Less stable deposits Wholesale funding: Other wholesale funding Other liabilities: All other liabilities not included in the above categories Total ASF 563.4 Required Stable Funding (RSF): Total NSFR high-quality liquid assets (HQLA) Performing loans and securities: Performing loans to financial institutions secured by non-level 1 HQLA and unsecured performing loans to financial institutions Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs: -With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio guidelines Performing residential mortgages, of which: -With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio guidelines Securities that are not in default and do not qualify as HQLA, including exchange-traded equities Other Assets: NSFR derivative assets All other assets not included in the above categories OBS items Total RSF NSFR % 43 - Total Weighted Value - 26.3 589.7 - 588.8 1,603.7 8.1 113.9 1.7 22.2 568.8 1,568.0 - 1,305.7 228.8 29.2 473.0 - 96.8 - 7.5 7.5 3,207.0 - - - - - 287.5 4.8 41.8 87.3 - 428.3 94.0 1,493.3 1,530.6 - - - 220.3 143.2 - - - 51.0 33.1 - 6.8 146.4 37.6 110.1 319.1 - 2.2 - - - 76.2 2.2 319.1 51.5 2,353.3 136%
46. Notes to the consolidated financial statements for the year ended 31 December 2021 39 NET STABLE FUNDING RATIO (Continued) In BD millions As of 31 December 2020 Unweighted Values (before applying factors) More than 6 Less than 6 Over one months and months year less than one year No Specified Maturity Item Available Stable Funding (ASF): Capital: Regulatory Capital Retail Deposits and deposits from small business customers: Stable deposits Less stable deposits Wholesale funding: Wholesale funding Other liabilities: NSFR derivative liabilities All other liabilities not included in the above categories Total ASF 555.3 - 21.1 576.3 - 595.4 1,562.7 7.1 109.7 4.4 40.7 576.8 1,545.9 - 1,276.3 116.0 3.4 431.8 119.3 - 6.5 6.5 3,137.3 - - - - - 223.5 2.3 39.7 74.4 - 348.4 120.4 1,396.8 1,421.6 - - - 180.9 117.6 41.1 63.3 3.6 - Required Stable Funding (RSF): Total NSFR high-quality liquid assets (HQLA) Performing loans and securities: Performing loans to financial institutions secured by non-level 1 HQLA and unsecured performing loans to financial institutions Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs: -With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio guidelines Securities that are not in default and do not qualify as HQLA, including exchange-traded equities Other Assets: NSFR derivative liabilities before deduction of variation margin posted All other assets not included in the above categories OBS items Total RSF NSFR % - 360.4 - - Total Weighted Value 3.8 - 47.9 - - 81.5 0.7 360.4 45.0 2,164.5 145% 40 RETIREMENT BENEFIT COSTS The Group's obligations to defined contribution pension plans for employees who are covered by the social insurance pension scheme in Bahrain and its overseas branches are recognised as an expense in the statement of profit or loss. The Group's contribution for 2021 amounted to BD 2.2 million (US$ 5.8 million) [2020: BD 2.1 million (US$ 5.6 million)]. Other employees are entitled to leaving indemnities payable in accordance with the employment agreements or under the respective labour laws. The movement in the provision for leaving indemnities during the year was as follows: Provision for leaving indemnities Movements during the year 2021 BD millions US$ millions 2.6 6.9 0.7 1.9 (0.6) (1.6) 2.7 7.2 At 1 January Movement from subsidiary acquisition Charge for the year Paid during the year At 31 December 2020 BD millions US$ millions 2.3 6.1 0.5 1.3 0.7 1.9 (0.9) (2.4) 2.6 6.9 41 LEGAL CLAIMS As at 31 December 2021, legal claims pending against the Group aggregated to BD 20.4 million (US$ 54.1 million) [31 December 2020: BD 5.5 million (US$ 14.6 million)]. Based on the opinion of the Group’s legal advisors about final judgement on these claims, adequate provision as assessed by management is maintained. 42 EARNINGS AND DIVIDEND PER SHARE 2021 BD millions US$ millions 53.9 143.0 37.5 99.5 Profit attributable to the shareholders of the Bank Dividend proposed at 20% (2020: 20%) Weighted average number of shares issued (millions) Ordinary shares as at 1 January 2021 Effect of bonus shares issued during 2021 for 2020 Less unallocated employee shares Weighted average number of ordinary shares (millions) as at 31 December Earnings per share Dividend per share Bonus / stock dividend per share 1,702.5 170.3 (11.4) 1,861.4 1,702.5 170.3 (11.4) 1,861.4 1,702.5 170.3 (12.3) 1,860.5 1,702.5 170.3 (12.3) 1,860.5 29 fils 20 fils 10 fils 8 cents 5 cents 3 cents 29 fils 20 fils 10 fils 8 cents 5 cents 3 cents Diluted earnings per share is the same as basic earnings per share as the Group does not have any potential dilutive instruments in issue. 44 2020 BD millions US$ millions 53.3 141.4 34.1 90.5
47. Notes to the consolidated financial statements for the year ended 31 December 2021 43 ACCOUNTING CLASSIFICATION a ) The following table provides disclosure of the accounting classification for assets and liabilities: Fair value through profit or loss In BD millions As at 31 December 2021 Amortised cost Fair value through other comprehensive income Total carrying amount Cash and balances at central banks - 123.0 - 123.0 Treasury bills - 225.7 - 225.7 Placements with banks and other financial institutions - 294.4 - 294.4 Loans and advances - 2,395.8 - 2,395.8 Investment securities 26.5 834.2 397.9 1,258.6 Interest receivable & other assets 14.7 223.4 - 41.2 4,096.5 Total assets 397.9 238.1 4,535.6 Due to banks and other financial institutions - 518.0 - Borrowings under repurchase agreements - 221.6 - 221.6 Customer deposits - 3,184.2 - 3,184.2 Interest payable & other liabilities - 76.5 - 76.5 - 4,000.3 - 4,000.3 Cash and balances at central banks - 125.5 - 125.5 Treasury bills - 236.7 - 236.7 Placements with banks and other financial institutions - 335.4 - 335.4 Loans and advances - 2,173.1 - 2,173.1 1,231.4 Total liabilities 518.0 In BD millions As at 31 December 2020 Investment securities Interest receivable & other assets Total assets 1.7 893.2 336.5 16.2 243.1 - 17.9 4,007.0 Due to banks and other financial institutions - Borrowings under repurchase agreements Customer deposits Interest payable & other liabilities Total liabilities 336.5 259.3 4,361.4 544.5 - 544.5 - 112.9 - 112.9 - 3,084.3 - 3,084.3 - 93.4 - 93.4 - 3,835.1 - 3,835.1 b) Fair value hierarchy The Group measures fair values of financial instruments using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes input not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. All financial instruments other than those disclosed in the table below are classified as level 2. (i) Loans and advances: The fair value of floating rate loans which have been disbursed at market rates approximate carrying value. The fair value of fixed rate loans, estimated by discounting future cash flows expected to be received and taking into account expected credit losses based on historical trends, also approximated the carrying value. (ii) Customer deposits: The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is deemed to equal the amount repayable on demand, which is represented by the carrying value of the deposits. For interest bearing fixed maturity deposits, the Group estimates that fair value will approximate their book value as the majority of deposits are of short term nature and all deposits are at market rates. (iii) Other financial assets and liabilities: The fair value is considered to approximate their book values due to their short term nature and negligible probability of credit losses. 45
48. Notes to the consolidated financial statements for the year ended 31 December 2021 43 b ) Fair value hierarchy (Continued) The table below analyses financial assets and liabilities carried at fair value, by valuation method. In BD millions At 31 December Fair value through profit or loss: Equity instruments / managed funds Debt instruments Fair value through other comprehensive income: Debt instruments Equity instruments Derivative financial assets Other assets - investment properties Total Derivative financial liabilities 2020 2021 Level 1 Level 2 Level 3 Total Level 1 - 3.0 23.5 - Level 2 Level 3 Total - 1.7 - 1.7 - - 3.0 23.5 244.1 63.4 - 307.5 245.7 - - 245.7 59.4 - 31.0 90.4 56.3 - 34.5 90.8 303.5 - 34.1 14.7 138.7 0.6 31.0 - 34.1 14.7 473.2 0.6 302.0 - 41.8 16.2 59.7 1.4 34.5 - 41.8 16.2 396.2 1.4 The following table analyses the movement in level 3 financial assets during the year. There were no transfers between level 1, level 2 and level 3 of the fair value hierarchy. Investment securities In BD millions 2021 2020 At 1 January Acquisition of assets within the subsidiary Sale / write-off of asset Total losses in other comprehensive income At 31 December 34.5 (3.5) 31.0 11.1 27.2 (2.1) (1.7) 34.5 Total gain for the year included in the statement of profit or loss for assets / liabilities classified as level 3 at 31 December 2021 is nil (2020: nil). Level 3 comprises unquoted equity investments classified as fair value through other comprehensive income which are measured at their estimated fair value based on the latest financial information by the investee. Sensitivity analysis of the movement in fair value of the financial instruments in the level 3 category financial assets is assessed as not significant to the other comprehensive income and total equity. 44 AVERAGE BALANCES The following are average daily balances for the year : Total assets Total liabilities Total equity Contingent liabilities and undrawn loan commitments 2021 BD millions 4,472.5 3,957.8 514.7 589.5 2020 BD millions US$ millions 4,397.5 11,664.5 3,892.2 10,324.1 505.3 1,340.4 531.0 1,408.5 US$ millions 11,863.4 10,498.1 1,365.3 1,563.7 45 SHARIAH-COMPLIANT ASSETS AND LIABILITIES The Group’s interests in Shariah-compliant financial instruments are aggregated and included in the consolidated balance sheet of the Group: 2021 BD millions Assets Placement with banks and other financial institutions Loans and advances, net Investment securities Liabilities Due to banks and other financial institutions Customer deposits 2020 BD millions US$ millions US$ millions 77.6 1,092.6 318.2 205.8 2,898.1 844.0 85.2 958.9 355.1 226.0 2,543.5 941.9 245.7 965.4 651.7 2,560.7 207.3 894.9 549.9 2,373.9 Liabilities are inclusive of equity of investment accountholders. 46
49. Notes to the consolidated financial statements for the year ended 31 December 2021 46 CAPITAL ADEQUACY The Group operates as an independent banking institution with headquarters in Bahrain , subsidiary and branches in Bahrain, United Arab Emirates and Saudi Arabia. The capital adequacy ratio has been calculated in accordance with Basel III and Central Bank of Bahrain guidelines incorporating credit risk, operational risk and market risk. The Group uses the standardised approach for computing credit risk. Operational risk is computed using the basic indicator approach. Market risk is computed using the standardised method. The details of the Group's capital adequacy calculations are shown below: As at 31 December Common equity (CET1) Additional tier 1 Total common equity tier 1 (CET) Tier 2 Total capital base 2021 BD millions US$ millions 509.8 1,352.3 509.8 1,352.3 26.3 69.8 2020 BD millions US$ millions 500.8 1,328.4 500.8 1,328.4 21.1 56.0 536.1 1,422.1 521.9 1,384.4 Risk weighted exposure: Credit risk Market risk Operational risk 2,103.5 27.5 293.2 5,579.6 72.9 777.7 2,005.7 23.8 313.7 5,320.2 63.1 832.1 Total risk weighted exposure 2,424.2 6,430.2 2,343.2 6,215.4 CET 1 ratio Total capital adequacy ratio 21.0% 22.1% 21.4% 22.3% Conventional banks are required to maintain a minimum total capital adequacy ratio of 12.5%. Additionally, according to Central Bank of Bahrain rulebook, banks designated as domestic systemically important banks (DSIBs) must hold designated HLA (high loss absorbency) expressed as common equity tier 1 capital at 1.5% of the total risk weighted assets, as calculated for the purposes of capital adequacy. 47 DEPOSIT PROTECTION SCHEME Deposits held with the Group's Bahrain operations are covered by the regulation protecting deposits and unrestricted investment accounts issued by the Central Bank of Bahrain in accordance with Resolution No (34) of 2010. The scheme applies to all eligible accounts held with Bahrain offices of the Group subject to specific exclusions, maximum total amount entitled and other regulations concerning the establishment of a Deposit Protection Scheme and a Deposit Protection Board. 47
50. Supplementary disclosures (not audited) for the year ended 31 December 2021 IMPACT OF COVID-19 The outbreak of the coronavirus disease (“COVID-19”) in early 2020 has had multiple implications on the Group, from stressed market conditions to relief measures provided by the regulator and government. The Central Bank of Bahrain (“CBB”), along with the Government of Bahrain, provided numerous reliefs to Bahraini individuals, companies and banks. In March 2020, the CBB announced a six-month loan deferral to all qualifying Bahraini individuals and companies. Subsequently, the CBB instructed banks to take the present value of the shortfall in interest income (termed the “modification loss” under IFRS) arising from this deferral directly to equity, net of any government grants received. The Group had received grants during 2020 in the form of salary subsidy, electricity and water bill reductions and repo facilities at preferential rates. The Bank immediately redirected the cash grants to COVID-19 related charitable causes within the Kingdom of Bahrain and took no profit benefit from the grants. The CBB subsequently announced four additional loan deferral programmes effective September 2020 for a period of four months, January 2021 for a period of six months, July 2021 for a period of six months, and January 2022 for a period of six months. The latter four programmes permitted banks to charge interest, and as such, did not result in any additional modification losses to the Group. To partially counteract the impact of the delayed loan settlements, the CBB provided banks with additional reliefs by reducing the minimum LCR and NSFR requirements from 100% to 80%, and by reducing the regulatory reserve requirements. NBB Group continued to meet the original minimum liquidity ratio requirements, as shown in notes 38-b and 39 of the consolidated financial statements. The table below summarises the impact of the various measures and market conditions on the Group as at 31 December 2021 and is inclusive of a BD 6.3 million provision in excess of the base ECL model as a precaution toward future currently unidentified risks that the Group may face: In BD millions Net profit Closing balances as per the financial statements 55.0 CBB and Government measures Loan deferral modification loss Preferential rate repo Other government grants Market conditions Additional precautionary provisions following adjustments to base ECL model Lower dividend income as payouts reduced Negative investment properties revaluation Additional cost of funding due to scarcity of USD Reduction in market interest rates Lower credit card income Estimated balances excluding COVID-19 impact 48 Total equity 535.3 Total assets 4,535.6 - 27.9 (0.6) (4.0) - - 23.3 - 2.6 1.5 1.5 0.4 8.8 0.4 6.3 1.5 1.5 0.4 8.8 0.4 6.3 - 15.2 18.9 6.3 70.2 577.5 4,541.9