National Commercial Bank (AlAhli Bank): Annual Report 2017

Transcription

1. The National Commercial Bank Annual Report 2017
4. The National Commercial Bank – Overview The National Commercial Bank (NCB) is Saudi Arabia’s largest financial institution. Over 65 years, people have considered NCB a symbol of innovation and leadership and a trusted partner in their professional and personal lives. NCB made a net profit of SAR 9.8 billion, the highest in its history and the highest among Saudi banks for the fifth successive year. Return on average equity reached 17.8%. Since its establishment in 1953, NCB has maintained its growth and development, mirroring the Kingdom’s progress towards modernity and continuous improvement. Today, NCB has a unique bond of trust and holds a leading position with its more than 5.9 million customers, based on many successful partnerships with diverse market segments. NCB is meeting their needs through outstanding products, services, and innovative solutions, and harnessing technology to enhance their experience. The popular reference to NCB as ‘Al Bank AlAhli’ is derived from the Arabic word ‘AlAhli’ – the ‘national’ bank, linking NCB and its customers with their nation. NCB is a fully-owned Saudi bank with a customer base consisting mostly of Saudis, senior management consisting totally of Saudi talents, and 95.3% Saudi staff. In recent years, NCB has evolved into a broad-based financial services group that provides a comprehensive suite of products and services. NCB’s vision is to be the premier financial services group in the region. To achieve this, five strategic aspirations have been defined: to be number one in revenues, to be number one in profit, to be the best digital bank, to be the best in customer service, and to be the employer of choice. Return on average equity reached 17.8%, the highest of all Saudi banks. 17.8 % 6 The National Commercial Bank | Annual Report 2017 ‘Al Bank AlAhli’ means ‘The National Bank’ – a fully-owned Saudi bank that has a base of mostly Saudi customers, all-Saudi senior management, and 95.3% Saudi staff. 9.8 billion 95.3% NCB realizes that it can be a powerful force for good in the communities it serves, leading by example and acting responsibly in all initiatives contributing to the empowerment of different segments of the community. For example, it invests in career development by creating opportunities for young people. A range of specialized training programs equips young Saudi men and women with the skills and knowledge required to be future leaders. The Bank also seeks to hire talents who can work near their own place of residence, contributing to local economic development. In 2014, NCB’s initial public offering (25% of the Bank’s shares) marked the start of a new era, the results of which are now being shared with investors through the Bank’s expansion and financing of projects across a range of industries. Over the past five years, NCB has been making the highest banking net profits in Saudi Arabia, the latest being 2017, when NCB achieved healthy growth and record results, mainly due to strategic decisions that underpinned its leadership of the Saudi banking services sector. NCB recorded the highest net income in its history in 2017 – SAR 9.8 billion– making it the best-performing Saudi bank for the fifth consecutive year. The National Commercial Bank | Annual Report 2017 7
5. Key Achievements 1 In 1917 , NCB recorded the highest net income in its history and was the best-performing Saudi bank for the fifth consecutive year, highlighting its domestic and regional leadership. The Bank retained its high international credit ratings for the quality of its finance portfolio and liquidity ratios, with subsidiaries also achieving positive results. 2 NCB maintained the size of its finance portfolio, focusing on the quality of assets, and continued its leadership among all Saudi banks in terms of asset volumes. The Bank increased its support for SMEs with higher credit limits, now totaling SAR 23.5 billion; supported public and private sector partnerships; and financed mega strategic projects. 3 The Bank opened 26 new branches to reach a record total of 400 in 2017, including 114 with ladies' sections. The expansion brings the number of NextGen branches to 64, all equipped with the latest technology and modern designs and aiming to enhance customer experience and provide the highest service levels. 4 The total number of NCB customers exceeded 5.9 million in 2017, including 5.6 million in Retail Banking. The number of transactions increased to more than 324 million, 96% of which were conducted through the Bank's smart digital channels. 5 Installation of NextGen technology was completed for Treasury functions in record time, upgrading all infrastructure and creating a single integrated platform. The new system covers all Treasury operations and provides clients with state-of-the-art features and services. 6 NCB has maintained its corporate responsibility role through several programs and initiatives, providing support for various community service projects amounting to SAR 60.4 million during 2017. 444 9.8 Total NCB assets reached SAR 444 billion. NCB made a net profit of SAR 9.8 billion, the highest in its history and the highest among Saudi banks for the fifth successive year. Return on average equity reached 17.8%. Billion SAR Billion SAR 95.3% Saudization 400 NCB continued its efforts to attract Saudi banking talent, reaching 95.3% Saudization by the end of 2017. The branch network added 26 new outlets, bringing the total to 400 by the end of 2017. QuickPay centers increased to 150. Branches Net Income Billion Saudi Riyals Billion Saudi Riyals 8 The National Commercial Bank | Annual Report 2017 Total Assets 316 309 2017 323 2015 2016 333 2014 301 2017 Billion Saudi Riyals 2013 441 2016 444 449 2015 435 2014 377 17.4 2017 Returns on Average Equity 2013 17.8 2016 19.2 20.1 2014 2015 20.0 56.04 2017 Equity Attributable to Shareholders 2013 53.03 2016 48.5 2015 45.2 4.74 2017 2014 4.51 2016 Saudi Riyals 40.9 4.56 2015 Earning per Share 2013 4.34 2013 2014 9.8 2017 3.94 9.32 2016 9.09 2015 8.66 2014 2013 7.85 299 new ATMs were installed, bringing the total to 3,488. Customer Deposit Billion Saudi Riyals Percentage The National Commercial Bank | Annual Report 2017 9
7. Chairman 's Statement On behalf of the Board of Directors, it is my pleasure to present NCB’s annual report for 2017, a year in which the Bank maintained its remarkable results and leading position. This was due to the substantial efforts exerted in all our activities and the strategic resolutions adopted by the Bank’s management, despite economic difficulties and challenges. First, I present to you an overview of the global, regional, and domestic economic conditions during 2017 and the attendant impact on the financial and banking sector in Saudi Arabia. Globally, the year was marked by multiple declines in oil prices and a sharp fall in the returns on global bonds. This has resulted in a decline in the growth rates of emerging and developing economies. However, there were improvements in the world’s growth volumes, beginning in mid-2016 and continuing into 2017. This is expected to be maintained in 2018, in both emerging and advanced markets, driven by improvements in external factors, mainly the moderate global financial environment and the recovery of advanced countries’ economies. Regionally, the GCC countries began their various programs to diversify non-oil activities, despite the impact of the fluctuating political conditions in the region which are reflected in lower trade volumes, reduced financing, and increasing expenditure. Domestically, the Saudi market expanded in 2017, achieving a growth of 6% in nominal terms on the back of elevated oil prices, offset by a shrinking GDP in real terms – down 0.7% in the first decline since 2009. Despite the slight 1% growth in the non-oil private sector, this did not compensate for the 3% decline of the oil sector due to decreasing local production of crude oil. The financial budget deficit continued during 2017, reaching SAR 230 billion, equating to 9% of GDP. Total revenues reached SAR 696 billion from oil and non-oil sources, a respective increase of 32% and 38%, accompanied by an 11% increase in government outlay to SAR 926 billion, including a 48% increase in capital expenditure. In 2017, NCB achieved net profits of SAR 9.80 billion, compared to SAR 9.32 billion in 2016 – an increase of SAR 485 million and a growth rate of 5.2%. Earnings per share reached SAR 4.74, up from SAR 4.51 the previous year. The Bank continues its success in maintaining the increase in annual profits despite the economic challenges. This is a strong indicator of NCB’s ability to efficiently deploy its assets and implement many initiatives to meet its strategic aspirations, satisfy shareholders’ expectations, and fulfill the needs of customers and employees. At the same time, NCB has maintained its leadership of the Saudi banking sector and its ability to manage risks. Net income from special commissions grew by 0.8% to SAR 13.66 billion in 2017. Total operational income was SAR 18.35 billion, while operational expenditure was reduced by 8.3% to SAR 8.392 billion. Assets increased by 0.3% to SAR 444 billion, and total shareholders’ equity to SAR 56 billion. Return on equity reached 17.8%, consolidating NCB’s position at the forefront of Saudi banks. The Board of Directors recommended a dividend of SAR 1.7 per share for 2017. Financing and advances portfolio reached SAR 249 billion, down 1.7% on last year, while customer deposits fell 2.1% to SAR 309 billion. Conversely, investments grew by 2.8% to SAR 115 billion. In cooperation and coordination with its Shariah Board, NCB continued its gradual transformation to Islamic banking, with 85% of its total financing portfolio now Shariah-compliant‫‏‬. Shariah-compliant corporate finance increased to 74% in 2017, and the operating income generated from Shariah-compliant transactions reached 80%. We confirm that all NCB branches provide their full services in compliance with Islamic Shariah. Our achievements in 2017 reflect our tireless efforts and dedication in our work to achieve our vision, strategic aspirations, and leadership of the Saudi banking sector. I do trust that, with the help of Allah, the Bank is capable of maintaining its success and recording many more achievements in the coming years. The Saudi Government continued to exert more efforts in line with Saudi Vision 2030 to establish a stable investment environment and create new opportunities, supported by prudent financial reserves and monetary policies. In this regard, Saudi Arabia has adopted comprehensive economic structural reform measures to attract investments and foreign capital. These include being rated as the third largest country in West Asia in attracting foreign direct investments, with Saudi Arabia attracting $7.5 billion in 2016. Saudi Arabia also came 29th among 138 countries in the Global Competitiveness Report 2016-17. Saudi Arabia’s credit rating was graded A+ by Fitch and A- by Standard & Poor's, both with a more stable outlook. These indicators reflect positively on the Saudi banking sector. Mansour Bin Saleh Al Maiman Chairman Being the Kingdom’s largest financial institution, NCB plays a pivotal role in supporting Saudi Vision 2030 and its multiple programs. This is achieving by supporting SMEs, funding private sector activities across various segments, and providing promising local investment opportunities for investors. The Bank has defined several significant opportunities resulting from the implementation of Saudi Vision 2030 to achieve sustainable development and a flourishing Saudi economy. NCB possesses the capabilities that enable it to play an effective role in achieving the Kingdom's aspirations through Vision 2030 and has established plans to support the financing of mega projects, such as privatization programs, construction of airports, the Neom Cross-Border Project, the Red Sea Project, and other developmental initiatives. NCB’s leading role reflects its strategic vision to be the region’s premier financial services group. The Bank's efforts to achieve this vision were reflected in the remarkable results achieved for the fifth successive year, while continuing with qualitative transformation, comprehensive restructuring, and organization of its banking business. These efforts focus on providing distinguished services that meet the needs of NCB customers, exceed their expectations, and cope with the developments witnessed by markets, which increased the Bank's market share to new levels in most sectors. 12 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 13
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10. CEO ’s Message During 2017, NCB continued to implement several initiatives and programs that contribute to the achievement of its vision to be the region’s premier financial services group. This is being fulfilled through five strategic aspirations: to be number one in revenues, to be number one in profit, to be the best in customer service, to be the best digital bank, and to be the employer of choice. The Bank’s significant and diverse efforts in this regard were evident in maintaining its leading position among Saudi banks. For the fifth successive year, net profits were the highest within the banking sector, proof of NCB management’s success in achieving excellence across the board. The Bank continued with geographic expansion of its branch network and service centers to make its facilities accessible to customers everywhere in the Kingdom, opening 26 new branches and moving six to new and prime locations. The total number of NextGen branches increased to 64, equipped with the latest technology and modern designs so as to enhance customer experience and provide the highest service levels. The 26 new branches brought the total to 400, including 114 with ladies' sections. We were increased the number of ATMs that serve the Kingdom’s regions, with 3,488 now operational. NCB further enhanced its digital banking business, launching a number of initiatives and improvements to help customers conduct their banking transactions through AlAhliOnline, AlAhliMobile, and AlAhlieCorp for retail and corporate services. We also launched AlAhli eTrade service with a modern design and incorporating best international practices in trade operations. The POS network and its infrastructure were developed to attract new merchants, which led to a planned increase in the number of POS devices, accompanied by an increase in the volume and value of transactions. The Bank’s market share in POS transactions reached 18%. NCB was ranked No 1 in Saudi Arabia in terms of transaction values and percentage of active ATMs. The number of NCB customers grew to 5.9 million, and NCB’s various businesses continued their efforts to provide them with the best services and products that meet their aspirations. In Retail Banking, our efforts contributed to the customer base increasing to 5.6 million, with the volume of transactions reaching more than 324 million. Personal Finance portfolio achieved growth of 5%, positioning NCB as one of the fastestgrowing banks in Saudi Arabia for the second successive year. Our Residential Finance and Personal Finance portfolios grew by 18% and 4% respectively, while Lease Finance grew by 4% despite the 24% decline in automotive sales. Sales of the Bank’s AlAhli Takaful products amounted to 10,500 contracts. In International Banking, Türkiye Finans Katilim Bankasi recorded asset growth of 0.8% to TL 38.6 billion and profit growth of 28% to TL 369.6 billion. NCB’s share of Türkiye Finans Katilim Bankasi profits in 2017 was SAR 314 million, up 64% on last year. The Bank’s adequacy ratio increased to 18.2% compared to 15.6% a year earlier. NCB continued its investment in human resources, a key asset for the achievement of our strategic aspiration to be the employer of choice. The Bank has therefore further developed its internal employment program and succession and replacement plans. Since launch, 308 employees have benefited from the program, including 157 employees during 2017. The Bank continued to attract national human resources through its AlRowad program, Wessam AlAhli, Branch Banking Qualification, and Credit Officers’ Development programs. The latter is the first of its kind in Saudi Arabia and the region, in addition to a program for employment and qualification of new graduates to work in our Compliance Division. The Bank also continued its plans to develop its employees and invest in qualified talents by offering them the best development programs and training courses. NCB also strengthened its commitment to recruiting female human resources through various employment programs. In 2017, female employment reached 13%, with female leaders at about 10%. The results of all these HR initiatives were reflected in the decline in employee turnover to 3%, the lowest in the last four years. The Bank discharged its corporate responsibilities through several programs. Ahalina, seeking to empower women, youth, and children, provided total funding of SAR 11.3 million during the year. The Bank also participated in multiple initiatives with a total value of SAR 49.1 million, all having a directly beneficial impact on society. Such success and achievements reflect the Bank's focus on the implementation of its strategic aspirations and plans in a business environment full of financial and economic challenges, diversifying sources of income and leveraging emerging opportunities to implement the Vision 2030 programs. We strongly commend the prudent fiscal and monetary policies adopted by the Ministry of Finance and SAMA, which played such a significant role in creating the investment environment in the Kingdom and in increasing the growth opportunities for several projects where the Bank played a leading role in funding and support. In conclusion, I extend all thanks and appreciation to NCB's Board of Directors for supporting us and facilitating our task in so many ways; to all our customers for their trust; and to all the Bank's employees for dedication to the performance of their duties and for all their contributions to achievement of our vision and objectives to remain the leaders in financial services in our region. In Corporate Banking, NCB adopted a prudent strategy, maintaining the size of its finance portfolio and focusing on the quality of its assets despite major market challenges. Total assets reached SAR 133 million, consolidating NCB’s leading position among Saudi banks. We also recorded total corporate banking revenues of SAR 4.5 billion, participating in large strategic projects and finance deals across sectors including mining, telecommunications, and petrochemicals. NCB continued to support micro, small, and medium enterprises by providing innovative finance solutions and increasing the credit limit to SAR 23.5 billion. We maintained our leading market share among Saudi banks in the Kafalah program, now standing at 37%, having issued 1,178 new Kafalah contracts during the year. The Bank conducted up to 25 educational courses and seminars across the Kingdom to enrich customers’ knowledge of financial and banking operations. This will enable them to benefit from government initiatives and opportunities and the important role assigned to SMEs in the economic transformation to achieve Saudi Vision 2030. Saeed Mohammed Al-Ghamdi Chief Executive Officer In Treasury, the Bank maintained its leading position in foreign exchange and commodities, continued its vital role in supporting the financial markets, and participated extensively in Saudi Government bonds at local and global levels. In capital markets, NCB Capital (NCBC) strengthened its market leadership, bringing its total assets under management to SAR 120 billion in local and international classes. NCB upheld its position as one of the world’s largest Shariahcompliant asset management companies and in April 2017 was the only Saudi partner for issuance of Government sukuk amounting to $9 billion. 18 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 19
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12. Board of Directors ’ Report 2017
13. Board of Directors ’ Report 2017 The Board of Directors of the National Commercial Bank is pleased to present its annual report on performance, achievements, and financial statements for 2017. The report includes the business activities of the Bank, subsidiaries, and affiliated companies. 1. Main Activities The Bank’s activities cover five operating segments. These activities constitute the strategic businesses of the Bank and provide diverse products and services that are independently managed through an effective organizational structure, as well as internal reports. NCB maintained the size of its financing portfolio, with emphasis on the quality of assets. It also continued its leadership among Saudi Arabia’s banks in terms of asset volumes, support and financing of SMEs where credit limits reached SAR 23.5 billion, support for public and private sector partnerships, financing of large strategic projects including water treatment and extraction projects, establishment of power plants, and construction of universities and medical cities. NCB entered into large financing deals in sectors including mining, telecommunications, and petrochemicals. For example, Maaden Aluminum Company has chosen NCB as a key agent and coordinator for funding the Saudi Riyal segment in refinancing facilities. Etihad Etisalat Company (Mobily) has also chosen NCB as a key investment agent and coordinator for refinancing facilities. In this regard, NCB has been chosen as an agent for more than 28 joint financing operations with a combined value of more than SAR 69 billion. The total number of Retail Banking customers exceeded 5.6 million in 2017 with a 5% growth in Personal Finance portfolios. Residential Finance portfolio grew by 18%, Personal Finance by 2.7%, and Lease Finance by 4% despite the 24% decline in automotive sales. QuickPay transactions increased by 5% and revenues from Private Banking operations by 5%. The Bank opened 26 new NextGen branches, bringing the total number of branches to 400, including 114 with ladies' sections. Retail Banking: Provides banking services to individuals and private banking customers, including financing and current accounts, as well as products in compliance with Islamic Shariah. These are supervised by NCB’s independent Shariah Board. Corporate Banking: Provides banking services, including all conventional credit-related products and financing products and those in compliance with Islamic Shariah, to small and mediumsized businesses, large establishments, and companies. Treasury: Provides all treasury and correspondent banking products and services, including money market and foreign exchange, to the Group’s customers, in addition to carrying out investment and trading activities (local and international) and managing liquidity risk, market risk, and credit risk (related to investments). Capital Market: Provides wealth management, asset management, investment banking, and shares brokerage services (local, regional, and international). International Banking: Comprises banking services provided outside Saudi Arabia including Türkiye Finans Katılım Bankası. 2. Key Events and Achievements NCB has consolidated its leadership of Saudi Arabia’s banking sector, continuing its success in increasing annual profits and maintaining strong international credit ratings, finance portfolio, and liquidity volume. The number of customers reached 5.9 million by the end of 2017. The Bank completed its transformation to digital banking through a fully modernized infrastructure. This contributed to an increase of more than 96 percent in the volume of digital transactions. To achieve excellence in customer service, NCB continued its efforts to improve the customer experience and enhance satisfaction. This was reflected in an increase of 10 percentage points to 86% in the service quality index for branch banking. 24 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 25
14. The NextGen program for Treasury operations was completed in record time , providing several advantages including the modernization of Treasury infrastructure and the creation of a single integrated platform. Treasury achievements included Islamic Shariah-compliant deposit certificates, continuous expansion and development of Islamic channels and solutions, and completion of the Tier I Sukuk program, which has been classified as an ‘exemplary’ structure for Shariah-compliant products. NCB achieved net profits of SAR 9.80 billion in 2017, compared to SAR 9.32 billion in 2016, a 5.2% increase of SAR 485 million. Earnings per share were SAR 4.74 compared to SAR 4.51 in 2016. The Bank maintains its success in increasing annual profits, despite economic challenges. This is a strong indication of NCB’s ability to effectively employ its assets, implement multiple initiatives to achieve its strategic aspirations in line with shareholders’ aspirations, meet the needs of customers and employees, manage risks, and maintain its leadership of the Saudi banking sector. In human resources, NCB continued implementing initiatives and programs in line with its strategic aspiration to be the employer of choice. The Leadership Program is a typical example of the Bank’s efforts to develop its people. The Bank also invested in its qualified talent and leaders by offering them development programs at world-renowned universities and institutions. There were also many initiatives to attract Saudi talent, such as the AlRowad, Wessam AlAhli, and Branch Banking Qualification programs. Some specialized programs were developed, including Credit Officers’ Development, the first of its kind in Saudi Arabia and the region, and another to qualify and employ new graduates in the Compliance Division. Females constitute an important part of all employment programs. Female employees now comprise 13% of NCB staff and 10% of the Bank’s leadership. Employee turnover declined to 3%, the lowest in four years, while Saudization reached 95.3%. Special commission income increased by 0.8% from SAR 13.55 billion SAR 13.66 billion. Total operating income increased from SAR 18.35 billion to SAR 18.65 billion, while operating expenses dropped 8.3 percent from SAR 9.175 billion to SAR 8.392 billion. The Bank undertook its corporate responsibility role through Ahalina programs, seeking to empower women, youth, and children. NCB finance programs worth a total of SAR 11.3 million benefited 3,304 women. NCB’s Program for Entrepreneurs trained 781 young men and women, while the AlAhli Orphan Program provided support and care to 600 male and female students. The Bank also participated in multiple initiatives with a total value of SAR 49.1 million, making a direct impact on society and contributing to Saudi Arabia’s initiatives in corporate responsibility. NCB net profit in 2017 Billion SAR 3. Financial Results The Saudi Arabian economy expanded in 2017, achieving growth of 6% in nominal terms on the back of higher oil prices. Arabian light average spot prices increased by 28.5% year-on-year. In real terms, however, GDP contracted by 0.7%, the first decline since 2009. The 1% real growth in the non-oil sector did not offset the 3% contraction in the oil sector that was attributed to reduced domestic crude production. 9.8 The Bank's assets increased by 0.3% from SAR 443.2 billion to SAR 444 billion. The financing and advances portfolio dropped by 1.7% to SAR 249 billion from SAR 254 billion; investments increased by 2.8% from SAR 112 billion to SAR 115 billion; and customer deposits decreased by 2.1% from SAR 316 billion to SAR 309 billion. The targeted expansionary fiscal policy kept the fiscal balance negative for the fourth year running, yet the increase in oil and non-oil revenues reduced the deficit substantially. The deficit stood at SAR 230 billion in 2017, about 9% of GDP, and 26% below last year’s figure. Total revenues reached SAR 696 billion, the highest since 2015, supported by oil and non-oil revenues that increased by 32% and 38% respectively. Actual government expenditure rose by 11% to SAR 926 billion, with 48% of the increase directed towards capital spending. To cover the financial gap, the Saudi Government continued its extensive economic structural reforms for the improvement of the business environment and its attractiveness, especially from the perspective of foreign investment flows. According to the World Investment Report 2017, issued by the United Nations Conference on Trade and Development (UNCTAD), Saudi Arabia was ranked as the third largest country in attracting foreign direct investments in West Asia, receiving $7.5 billion in 2016. In the 2016-17 Global Competitiveness Report, Saudi Arabia was ranked 29th of 138 countries, surpassing Turkey, Brazil, and India. The Kingdom’s credit ratings by Fitch and Standard & Poor's were A+ and A- respectively, with a stable outlook. These measures and indicators reflect positively on the Saudi banking sector. With regard to regulations, the National Center for Privatization is implementing a major program involving the public and private sectors and is a drafting a law in this respect. This will enhance trust in the next transactions. Estimates indicate that projects worth SAR 1.9 billion are to be launched, creating great opportunities for the private sector. In addition, the recently issued Bankruptcy Law will strongly support investment by limiting the uncertainty and ambiguity accompanying the processes of financial restructuring, liquidation, and preventive settlement. The law differentiates between the bankruptcy of large companies and the procedures for small and medium enterprises. 26 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 27
15. 4 . Geographic Analysis of Revenues NCB’s financial results over the past five years Million Riyals 2017 2016 2015 2014 2013 Total assets 443,866 442,657 448,642 434,878 377,287 Million Riyals Net financing and advances 249,234 253,592 252,940 220,722 187,687 Kingdom of Saudi Arabia Net investments 114,578 111,509 134,102 152,903 125,294 Total liabilities 379,590 382,731 393,096 387,957 334,751 Customer deposits 308,942 315,618 323,866 333,095 300,601 Total equity attributable to equity holders of the Bank 56,011 53,038 48,462 45,214 40,934 Total operating income 18,345 18,647 17,486 16,247 14,858 Total operating expenses 6,453 7,038 8,256 7,480 6,632 Net income attributable to equity holders of the Bank 9,802 9,317 9,089 8,655 7,852 Financial results of the Bank’s operational segments in 2016 and 2017 Million Riyals Retail Banking Corporate Banking Treasury Capital Market International Banking Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Total income 8,304 7,705 4,477 4,387 3,333 3,745 636 581 1,595 2,230 18,345 18,647 Total expenses 4,246 4,651 2,113 1,616 521 646 344 351 1,169 1,912 8,392 9,175 Net income 4,045 3,048 2,350 2,763 2,804 3,087 303 234 463 283 9,965 9,416 Total assets 108,503 104,971 133,051 139,274 162,709 156,288 1,388 1,314 38,214 40,809 443,866 442,657 Total liabilities 212,693 201,637 223 32,307 35,007 379,590 382,731 73,688 87,963 60,627 57,901 275 Million Riyals National Commercial Bank (NCB) % of total income 9,180 93.6 Türkiye Finans Katılım Bankası and its subsidiaries 314 3.2 NCB Capital and its subsidiaries 303 3.1 Real Estate Development Company Limited 0.2 - 5 0.1 9,802 100 AlAhli Esnad Total 28 | Board of Directors' Report 2017 16,155 Turkey Kingdom of Bahrain 1,592 Others 585 Total 13 18,345 5. Dividend Distribution In accordance with Article 42 of the Bank’s Articles of Association, and based on the proposal of the Board of Directors, and after the approval of the General Assembly, the Bank’s net profits shall be distributed after deduction of all general expenses and the amounts set aside for probable losses and any other burdens in the following manner: 1- The legal Zakat or any other taxes shall be set aside. 2- 25% of net profits shall be set aside to build up a statutory reserve. The General Assembly may stop or reduce the rate of this deduction for reserve if the statutory reserve has reached an amount equal to the full capital. 3- The Ordinary General Assembly may, upon the Board proposal, set aside a certain percentage of the net profits to build up a consensual reserve. Such consensual reserve may not be used except with a decision by the Extraordinary General Assembly. If such reserve is not assigned for specific purpose, the Ordinary General Assembly may, upon the Board proposal, decide to dispose of the same in a way that brings benefits to the Company or the shareholders. 4- Assignment of purification amounts. 5- From the remainder, a first dividend, not less than 5% of the capital, shall be distributed to shareholders. If such remainder of net profits is insufficient to pay the aforesaid dividend, the shareholders have no right to request distribution from the following year’s profits. 6- A percentage of the remainder after having satisfied the above-mentioned deductions referred to in Paragraph 5 shall be set aside as a bonus for the Board of Directors in accordance with the instructions issued in this regard by the Saudi Arabian Monetary Agency. 7- The remainder thereafter shall be used according to the recommendation of the Board of Directors, either to build additional reserve; to be distributed as extra share of profits, or for any other purpose the General Assembly may decide. However, the General Assembly may not resolve to distribute any share of the profits which exceeds the profits recommended by the Board of Directors. Net income distributed between the Bank and its subsidiaries Net income attributable to equity holders Bank revenues are generated from its activities inside and outside Saudi Arabia and classified geographically The National Commercial Bank | Annual Report 2017 8- By a resolution from the Board of Directors and subject to the non-objection of the Saudi Arabian Monetary Agency, interim profits may be distributed quarterly or biannually to be deducted from the annual profits in accordance with the regulations rules issued by the Capital Markets Authority (CMA). Upon authorization by the Extraordinary General Assembly in its meeting dated 03 May 2017, the Board of Directors approved the payment and distribution of a dividend of SAR 1.10 per share in respect of the first half of 2017, totaling SAR 2,196,593,880 for 1,996,903,527 shares payable for the shares after exclusion of the treasury shares representing 11% of the nominal value of shares to the Bank shareholders holding shares on the maturity date: Sunday 23/09/1438 AH corresponding to 18/06/2017 AD entered in the Bank registers at Security Depository Center Company (Depository Center) by the end of the second trading day following the maturity date: Tuesday 25/09/1438 AH corresponding to 20/06/2017. Such dividend has been paid on Thursday 12/10/1438 AH corresponding to 06/07/2017 AD. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 29
16. The Board of Directors recommended the Shareholders ’ General Assembly to distribute profits in respect of the second half of 2017 of SAR 0.60 per share for a total of SAR 1,196,878,814 in respect of 1,994,798,024 representing 6% of the nominal value per share payable for the shares after exclusion of the treasury shares representing 6% of the nominal value of shares to the Bank shareholders holding shares on the date of holding the Bank General Assembly meeting entered in the Bank registers at Security Depository Center Company (Depository Center) by the end of the second trading day following the General Assembly meeting date. Such dividend will be deposited after the approval of the General Assembly of such recommendation. Figures in SAR Periodic bonus Short term motivational plans Long term motivational plans Bonus shares Total End of service benefit 120,000 0 0 0 1,760,000 0 0 0 0 0 0 0 1,760,000 18,000 Non-executive directors 2,175,000 165,000 135,000 0 0 0 2,475,000 0 0 0 0 0 0 0 2,475,000 45.000 415,000 35,000 50,000 0 0 0 500,000 0 0 0 0 0 0 0 500,000 36,000 Total Aggregate In-kind Benefits Board Meeting Attendance Allowance Fixed Amount Executive directors 6. Income Distribution Statement of Expenditures Profit share 80,000 Total Remuneration of the Chairman, CEO, or Secretary if they are members 1,560,000 Meeting Board Committees Attendance Allowance Independent members The total dividend distributed to the Bank shareholders in 2017 will be 1.70% for a total of SAR 3,393,472,694 representing 17% of the nominal value of shares. The Bank deducted 5% of 2017 first-half dividend as a withholding tax, pursuant to the provisions of Article 68 of the Tax Law and Article 63 of its Executive Regulations, from foreign non-resident investors whose profits are transferred through the resident financial intermediary. The same percentage will be deducted for all dividends unless the Bank receives documents to the contrary. Variable Remuneration Remuneration of administrative, technical and investment works Fixed Remuneration (b) Remuneration to Audit Committee Members other than Board Members: Million Riyals Net income for 2017 9,802 Transfer to Statutory Reserve 36 Zakat 1,454 Interim paid dividend 2,197 Final proposed dividend 1,197 Transfer to retained earnings 4,918 7. Remuneration to Board Members, Board Committees and Senior Executives In its meeting held on 3 May 2017, the Shareholders’ Extraordinary General Assembly approved the amended regulations of the Audit Committee, the members’ selection rules, its duties, bylaws and remuneration of its members in accordance with the applicable laws and regulations issued by the competent regulatory authorities in Saudi Arabia and NCB Articles of Association. In fixing the annual remunerations for the year 2017, the Nomination, Remuneration, and Governance Committee considered the approved criteria without any significant deviation from the regulating laws. The table below shows the remuneration and compensation paid to the Audit Committee Members other than Board Members: Figures in SAR Fixed remuneration other than meeting attendance allowance Audit Committee Members other than Board Members Meeting attendance allowance 465,000 Total 110,000 575,000 (a) Remuneration to Board Members (c) Senior Executives’ Remuneration The Bank’s Board has prepared the policy of annual remuneration of Board Members and Board Committees. Such policy was approved by the Shareholders’ General Assembly on 31 December 2017. It aims to set previously approved criteria for the remuneration of the Board Members and Board Committees as well as the entitlement conditions. Remuneration paid to Board members and Board Committees are set in view of the rules set in the instructions issued by the supervisory bodies and are generally governed by the key governance principles of the banks operating in Saudi Arabia and the compensation regulations issued by the Saudi Arabian Monetary Agency, the Company Governance Regulations issued by the Capital Market Authority, the Companies Law issued by the Ministry of Commerce and Investment, and the Bank’s Articles of Association. Based on a proposal from the Nomination and Remuneration Committee, the Board of Directors fixes the remuneration to the senior executives in line with the Bank’s strategic aspirations and to be effective in the motivation of the senior management officers to achieve such objectives. The table below shows the remuneration and compensation paid to six senior executives including the CEO and CFO. 30 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 21,355 17,213 Bonus Shares Long term motivational plans Short term motivational plans Profits 0 0 Total 0 End of service benefit 13,919 Total 322 Variable remuneration – Actual payment in 2017 Periodic Bonuses 4,867 Total 8,730 In-kind Benefits Allowances Fixed Remuneration payable in 2017 Salaries To guarantee effective governance, this policy requires that the remuneration should be based on the remuneration of the Nomination, Remuneration, and Governance Committee. Moreover, the policy considered that the remuneration should be sufficient to attract Board Members and Board Committees who have the efficiency and expertise appropriate to the Bank’s activities. The table below shows the remuneration and compensating paid to the Board members: Amount in SAR 000 38,567 1,058 53,544 Board of Directors' Report | 31
17. 8 . Arrangements of Waiver of Remuneration by Board of Directors and Senior Executives Balances as of 31 December recorded in the financial statements Thousand Riyals 2017 2016 133,751 367,969 33,557 227,086 100,895 100,895 7,504 4,668 36,789 32,082 2,753,873 2,686,374 Customer deposits 795,338 765,180 Potential commitments and obligations related to credit 288,894 274,370 Customer deposits 6,922,855 12,530,609 Investments (managed assets) 2,726,782 2,458,136 654,988 708,201 82,093 44,998 1,678,500 1,737,500 11,968 2,408 363,750 363,750 The Bank does not have any information regarding the arrangements or agreements regarding the waiver of remuneration, bonus, or compensation by any of the Board of Directors or the senior executives. Bank’s Board of Directors and Senior Executives 9. Financing and Debt Securities Issued Financing and advances Customer deposits In the course of ordinary business practices, NCB has been engaged in borrowing and financing activities with other banks and the Saudi Arabian Monetary Agency (SAMA) at market rates. Those transactions are recorded in the consolidated financial statements of the Bank. In 2017, the Bank, its subsidiaries, and affiliated companies issued and retrieved detailed debt securities as follows: Issuer Türkiye Finans Katılım Bankası (Public issue) Value (SR’000) 1,133,020 Term 6 months Paid amount during the year Remaining amount (SR’000) (SR’000) 436,251 Commitment and contingencies Investments Other liabilities – end of service benefits Shareholding of 5% or more in companies and corporations Financing and advances 696,769 Major shareholders 10. Waiver of Interests The Bank does not have any information regarding any arrangements or agreements related to the waiver of any rights to profits by any of the Bank’s shareholders. Bank’s investment funds: Investments 11. Due Regular Payables Customer deposits Zakat payable by shareholders amounted to SAR 1,483 million and contributions to the General Organization for Social Insurance (GOSI) amounted to SAR 131 million in 2017. 12. Related Party Transactions Subsidiary companies: Financing and advances Customer deposits Investments NCB’s fifth Extraordinary General Assembly issued its approval (in its first meeting for 2017) held on 3 May 2017, which results were announced on the website of the Saudi Stock Exchange (Tadawul) on 4 May 2017, on licenses of business and contracts entered into between NCB and the related parties for the next year to accept an offer to provide medical insurance services to its employees presented by Tawuniya Insurance Company during 2017 and for SAR 113,877,750 through competition without preferential benefits or conditions, where Eng. Abdulaziz Bin Abdallah Al-Zaid had a direct interest in the insurance policy as a member of the Tawuniya Insurance Company’s Board of Directors. During 2016, the total transactions amounted to SAR 133,339,061, noting that the total amount of the contract did not exceed 1% of the total income of the Bank's operations, according to the latest audited annual financial statements on that date. In the ordinary course of its activities, the Bank transacts business with related parties. In the opinion of the management and the Board, the related party transactions are performed on an arm’s length basis. The related party transactions are governed by the limits set by the Banking Control Law and the regulations issued by SAMA. Related party balances include the balances resulting from transactions with Governmental shareholders. All other Government transactions are also entered/conducted at market rates. 32 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 * Major shareholders represent shareholdings of more than 5% of the Bank’s issued share capital. Related parties are the persons or close members of those persons' families and their affiliate entities where they have control, joint control, or significant influence over these entities. Income and expenses pertaining to transactions with related parties included in the financial statements Thousand Riyals 2017 2016 Special commission income 62,228 55,956 Special commission expense 212,594 367,163 Fees and commission income and expense, net 261,457 210,674 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 33
18. 15 . Effectiveness of Internal Control Procedures Details of the treasury bonds retained by the Bank and details of their uses: Number of treasury bonds retained by the Bank Amount Details of their uses 5.2 million shares SAR 226 million Employees’ Shares Program Reserve Internal Controls Executive management is responsible for establishing and maintaining an adequate and effective internal control system. This includes processes and procedures that the executive management, under Board supervision, has put in place to achieve its strategic aspirations, protect its assets, and ensure that activities are conducted in accordance with its applicable policies and procedures. 13. Employees’ Benefits NCB Management has adopted an integrated internal controls framework in accordance with SAMA guidelines. The internal controls system begins with corporate governance that defines the roles and responsibilities of the Board of Directors and its sub-committees: Executive Committee, Audit Committee, Risk Committee, and Compensation, Nomination, and Governance Committee. The management committees support the Board of Directors in monitoring and addressing key risks associated with strategy, financial performance, technology, asset and liability management, credit, operations, legal and regulatory, and information security. Rigorous and integrated efforts are made by all the Bank's businesses to improve the efficiency and effectiveness of the control environment at process levels, through continuous reviews and consistent and integrated procedures to prevent and rectify control deficiencies. Each business in the Bank, under the supervision of senior executive management, is entrusted with the responsibility to oversee rectification of control deficiencies identified by its own risk and control self-assessment process and also by internal and external auditors. NCB continued its efforts to attract and retain the best Saudi talents. The Bank participated in many job fairs organized by educational institutions, inside and outside the Kingdom, enabling it to achieve a continuous increase in Saudization, which reached 95.3% by the end of 2017. In striving to achieve one of its key strategic aspirations – to be the employer of choice – NCB provides employees with a savings scheme. This began 42 years ago as a traditional scheme and was converted to a Shariah-compliant product in 2012. It gives employees an opportunity to save money and offers a benefit that helps to retain qualified talents. In terms of scheme policy, a fixed 5% is deducted from the employee’s basic salary to be invested by NCB’s Treasury Group in consideration for a bonus linked to the number of years of subscription. The bonus ranges from 10% to 200% of the saved balance. The accumulated balance in the staff savings scheme amounted to SAR 130 million by the end of 2017. The Bank pays compensation and benefits to employees according to Saudi Labor Law and Regulations, and the statutory requirements applicable to foreign branches and subsidiaries. The Bank’s total reserve for end-of-service gratuity amounted to SAR 987 million as at 31 December 2017. The scope of Internal Audit Division (IAD) includes the assessment of the adequacy and effectiveness of the internal control system, as well as to ensure the implementation of and compliance with all applicable policies and procedures. The Compliance Division ensures adherence to the regulatory requirements through centrally automated applications, physical examinations, and other measures. All significant and material findings from IAD reviews and corrective actions are reported to senior executive management and the Audit Committee. The Audit Committee actively monitors the adequacy and effectiveness of the internal control system to ensure that identified risks are mitigated. The Board of Directors has full access to all internal audit reports, internal control reviews, risk management, and other relevant reports. These are reviewed regularly to provide an ongoing assessment of the effectiveness of the internal control system to discover any deficiency in its practical application and treat any deficiency that may arise as a result of the change of circumstances. Annual Review of the Effectiveness of Internal Control Procedures For 2017, audits of the effectiveness of the internal controls conducted during the year confirmed that systems and procedures for the identification, evaluation, and management of the significant risks that may be faced by the Bank were in place and applied throughout the year and that there were no material or significant deficiencies in the control environment. After assessing the effectiveness of the internal control procedures and ongoing evaluation of internal controls carried out during the year, management considers that the existing internal control system is adequately designed, is operating effectively, and is monitored consistently. Management continuously strives to enhance and further strengthen the internal control system. 14. SAMA Statutory Penalties Subject of the violation Number of penalties Total amount of penalties in SAR 26 37,574,917 Violation of the instructions on customers’ protection 4 22,806,250 Violation of the supervisory body’s instructions on due diligence - - Violation of the supervisory body’s instructions on the level of the ATMs and POS 4 129,622 Violation of the supervisory body’s instructions on due diligence in combating money laundering and terrorism financing 2 540,000 Violation of the supervisory body’s instructions 34 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Based on these findings, the Board of Directors has endorsed the executive management’s assessment of the internal control system, as prescribed by SAMA. Opinion of the Audit Committee Based on the periodic reports presented by the Internal Audit Division, the Compliance Division, the Bank auditors and the Compliance Committee to the Audit Committee during the fiscal year ending 31 December 2017, and in view of the previous results of annual audit of the internal control measures, the Audit Committee confirms that the internal control measures did not show any significant gaps in the control environment of the Bank’s businesses that may affect the soundness and effectiveness of the efficiency of the financial and operational systems, controls, and procedures and that the assessment of the control measures adopted by the executive management will continue throughout the year. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 35
19. 16 . Auditors Credit Risk Controls, Credit Limits, and Guarantees On its annual meeting held on 3 May 2017, the Bank Shareholders’ Extraordinary Assembly approved the appointment of KPMG Al Fowzan and Ernst & Young to act as the Bank's external auditors for the year ending 31 December 2017, including reviewing the quarterly financial statements during the same year. The next meeting of the Assembly will consider reappointing or replacing the current auditors, as well as the fees determined for auditing the Bank’s accounts for the financial year ending 31 December 2018. The scope of Credit Risk function’s responsibility includes monitoring and identifying credit risks based on the creditworthiness of each transaction, before offering a credit limit to a client. Credit risk management policies were, therefore, designed to set credit limits that match the risk level, to monitor risks, and to define how limits should be implemented. Accordingly, actual credit limits and corresponding risks are monitored daily. Credit risk policies also require diversity in finance activities to avoid concentration of risks in individual or groups of clients with specific geographic location, or a specific type of commercial activity. To mitigate risks, the Bank usually obtains guarantees for credit facilities. There are several types of collateral, such as securities, cash deposits, financial guarantees provided by other banks, shares, real estate, and other fixed assets. 17. Risk Group Market Risks In the normal course of business, NCB is exposed to various risks resulting from its banking activities. The Risk Group supports the Bank’s different businesses by controlling and minimizing risks, if any, to achieve a performance-risk balance. The Risk Group ensures that all business-related risks fall within the tolerance levels of the Bank as a whole. The main objective of the Risk Group is to maintain the general level of risk in line with the Bank's strategy. To achieve this, the Risk Group uses a number of tools and professional talents to identify, classify, measure, and limit risks. NCB’s Risk Governance Policy identifies risks and determines tolerance levels and ways to manage them. This includes setting necessary controls for the risks that have been identified and targeted, ensuring that they are managed proactively. The Risk Group optimizes and promotes the risk governance framework with comprehensive policies determining the roles and responsibilities of all relevant parties, while promoting a culture of facing and managing risks at all levels and in all businesses. Market risks are the risks of incurring losses due to changes and fluctuations in market prices, such as special commission rates, creditworthiness at market level, share prices, exchange rates, and any other changes in the fair value of financial instruments and securities held by the Bank. To manage such risks, the Risk Group classifies market risks into trading and non-trading portfolios. Treasury Group manages the trading portfolio, which includes platforms caused by market creation and other trading platforms. It also includes managing assets and liabilities recorded at a fair value. Market risk management uses the estimation of value at risk (VaR) tool for all transactions included in the trading portfolios. VaR is estimated for a specific period based on adverse market fluctuations. Calculating VaR depends on market price volatility inputs and the link between different portfolio components using related historical market data. The Risk Group’s organizational structure organizes the levels of management, functions, and mandates to manage different types of risks, including credit, market, liquidity, operational, and information security. To manage risks, the Risk Group has developed specific policies for all the risk types in a holistic manner at the Bank level. The risk governance policy requires the Assets and Liabilities Management Committee to manage the risks associated with volatile special commission rates arising from changes in future cash flows and fair value. The Assets and Liabilities Management Committee is responsible for achieving balance in the gap between assets and liabilities and special commission rates, and dealing with hedge strategies to keep risks within the tolerance levels. The risk governance policy also aims to improve the balance-sheet structure to ensure that banking operations are processed within the scope of the Bank’s risk tolerance. The Risk Group has developed an investment policy to control the Treasury Group’s operations in money markets, foreign exchange, interest rates, and commodity products. Investment policies and procedures are intended to ensure that all activities of the Bank’s Treasury Group are associated with regulatory and supervisory controls to manage their risks. Credit Risks Liquidity Risks Credit risks are the risk of financial losses resulting from a borrower’s or counterparty’s failure to meet their contractual financial obligations. Credit risks represent the highest percentage of total risks to which the Bank is exposed. These risks arise from credit operations of finance, advances, and investment. Consequently, to manage credit risks, the Bank has developed policies to ensure all its finance programs are covered. This enables the Bank to protect the quality of its credit and investment portfolios, and minimizes losses generated by finance activities. Liquidity risks are the risks associated with the failure to meet all payment obligations at their maturity dates, or make payment at excessive costs. Pursuant to the guidelines of the Saudi Arabian Monetary Agency and the Basel Committee, the governance framework for NCB Risk Management ensures the independence of the Risk Group mandates, as well as implementing three main defense lines across all businesses. The business units collaborate with the Risk Group and Internal Audit Division to effectively manage, monitor, and identify the tolerated risks and ways to minimize them. Credit Risks Assessment To assess and manage credit risks to different portfolios of the Bank, the Risk Group has developed a set of instruments to suit different types of customers and beneficiaries, so that it can measure the feasibility of each transaction. Credit risk assessment function assesses risks related to losses that might arise from failure to repay outstanding obligations. Accordingly, corporate clients are analyzed using internally developed credit analysis assessment forms, whereas personality profiling and credit behavior are used to analyze retail customers. For its investment portfolio, the Bank depends on assessments undertaken by external main credit rating agencies as well as its own investigation of related risks. At portfolio level, transaction assessments are combined so a comprehensive assessment for the credit or investment portfolio can be established and checked against the targeted quality level. 36 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Accordingly, the main role of the Bank’s liquidity risk management is to maintain balance between liquidity and profitability for operations, while maintaining a strong liquidity position to increase customer confidence and improve the cost of finance. To increase liquidity levels, NCB’s senior management mandated the Risk Group to monitor all entitlements, obligations, and sources of finance along with their cost rates at the targeted time levels. The Bank uses risk tolerance measurement programs to ensure that it can meet all its obligations during the worst market conditions, including long periods of asset liquidation at undesirable prices. Operational Risks NCB defines operational risks as the risks arising from inadequacy or failure of internal procedures, individuals, or systems or as a result of external circumstances. These risks are inherent in all the Bank’s commercial and non-commercial operations and are associated with all activities of institutions operating in banking and financial fields. Since each business unit is responsible for its operational risks, the main operational risk management function within the Risk Group is to develop, implement, and comply with a comprehensive and integrated framework to reduce risk in all businesses across the Bank. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 37
20. The operational risk management strategy includes : • Adopting a proactive approach to reduce operational risks through self-assessment of risks and controls • Defining and analyzing operational risks’ events, and losses arising from them • Implementing programs to raise awareness of operational risks, and promoting a culture of mitigating risks • Preparing comprehensive periodic reports on operational risk controls and their effectiveness • Developing operational risk management practices to maintain a stable work environment and contribute to achieving the Bank’s strategic aspirations Information Security Risks Information security risks refer to risks arising from the failure of regulatory, technical, and procedural measures to protect the Bank’s information assets from unauthorized access, disclosure, unauthorized copying, prevention of use, modification and conversion, loss, theft or abuse, whether by deliberate sabotage or unintentionally. Information Security Risk Group provides a comprehensive practical framework through which operational procedures are organized, regulatory requirements and rules are implemented, and procedures facilitated to ensure information assets are protected – in combination reducing the various information security risks. Information Security Risk Group’s responsibilities include information security governance, direct follow-up of applying legislation related to information security, and direct and full control over all activities regarding information security. This entails continuous evaluation and follow-up of systems to identify security risks and take immediate action to reduce those risks. The Group also designs and implements awareness programs for this type of risk for all dealing with the Bank’s information assets, whether staff, contracting companies, or customers. Notes to the Basel III Framework The third pillar of the Basel III Framework requires publication of a number of quantitative and qualitative disclosures. Such disclosures will be published on the Bank's website www.alahli.com to implement the instructions of the Saudi Arabian Monetary Agency (SAMA). (a) Basel III Framework Basel Committee has enhanced capital measurement standards and capital standards by issuing the Basel III Framework in response to the 2007 global financial crisis. This framework focuses on enhancing the quality of required capital along with raising the minimum capital requirements, enhancing risk coverage, and reducing the impact of economic cyclical fluctuations on capital requirements. It also imposes new requirements for leverage ratio, liquidity, and additional capital to enhance capital formation. These improvements will be implemented gradually until 2019. 18. Confirmations by the Board of Directors The Bank’s Board of Directors confirms to shareholders and other related parties, according to its best knowledge in all material respects, that: • The accounting records were prepared in compliance with the stipulated rules • The Internal Control System was developed and effectively implemented on proper basis • There is no doubt that the Bank is able to proceed with its operations • Neither the Chairman, the Board Members, the CEO, the Head of the Finance Group at NCB, nor any person having direct relationship with them had any substantial interest in any contract the Bank was a party to, except for those provided for in the statement of related party transactions 19. Approved International Accounting Standards The consolidated financial statements for the year ended 31 December 2017 were prepared in accordance with Accounting Standards for Financial Institutions amended by the SAMA for accounting of the Zakat and income tax and in conformity with the Banking Control Law, the Companies’ Law of Saudi Arabia, and the Bank's Articles of Association/Memorandum of Association. 20. Main Achievements and Future Plans NCB continued its journey towards achieving its vision to be the premier financial services group in the region, for which it has developed a set of strategic objectives: to be number one in revenues, number one in profit, best digital bank, best in customer service, and the employer of choice. In terms of income and profits, the Bank maintained its leadership of the Saudi banking sector by achieving the highest profits and revenues among Saudi banks. In terms of digital banking, the Bank completed its core banking transformation and today performs over 96% of its transactions through digital channels. Regarding customer service, the Bank continued to make good progress across all customer service and voice-of-customer metrics, which was reflected by an improvement of 10 percentage points to 86% in the service quality indicator for branch banking. In human resources, the Bank maintained Saudization at 95.3%, seeking to be the employer of choice in the banking industry. Basel III Framework requires Saudi banks to support its requirements with a high-quality capital base. The first tranche of capital is total shareholders' equity, which has the highest ability to ‘bear loss’. To this end, the framework requires compliance with specific standards: • Improving quality of the first tranche of capital and increasing its minimum requirements • Allocating any regulatory capital deductions to shareholders’ equity • Gradually canceling listing of mixed capital instruments of limited ability to bear the loss of the second tranche level of capital • Increasing transparency in regulatory capital components through detailed disclosures and comparing them to shareholders’ equity (b) Disclosure Periods Set Out by SAMA • • • • • Capital Structure – quarterly Financial Lever – quarterly Financial Liquidity – quarterly Quantitative Disclosure – semi-annual Qualitative Disclosures – annual 38 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 39
21. Looking ahead , NCB’s market research and studies indicate that 2018 will see gradual economic growth, driven by the expansion in Kingdom’s general budget, accompanied by higher oil prices, as well as the several significant opportunities that will result from implementing Saudi Vision 2030. These will help to achieve sustainable growth and the prosperity of the Kingdom’s economy. The Bank also sees that its strong leadership position in the Saudi banking sector will enable it to take advantage of the opportunities arising from the implementation of the 2030 programs. The programs aim to build the main pillars of our national economy's transformation through maximizing local content, and to enhance partnership between the private and public sectors with the aim of increasing the private sector's contribution to GDP. NCB has a key role in the support of all these initiatives. The Bank is also preparing to fund mega projects such as the privatization initiatives, construction of airports, the Neom cross-border project, the Red Sea Project, and many other developments. Despite the current economic challenges, Retail Banking achieved outstanding success, maintaining customers’ current account balances at the same level compared with the previous year. Several innovative marketing activities were made to motivate customers to conduct their purchase transactions using AlAhli cards, locally and internationally. This contributed to the increase of purchase transactions via POS in the Kingdom by 35%. Marketing activities also played a significant role in increasing the volume of purchase transactions by POS outside the Kingdom, a growth exceeding 20%, while payment transactions by NCB channels increased by 17%. To this end, the Bank will focus its efforts on the enhancement of the operational model of its banking group of companies to be prepared for the expected growth resulting from the Saudi 2030 Vision programs, in addition to further improving the quality of its corporate portfolio and effective risk management. In Treasury, NCB will focus on reducing financing costs and managing the quality of its investment portfolio. In Retail Banking, NCB will increase the retail customer base through expansion of the branch network. It will also increase the volume of deposits and cross-selling transactions, expand the scope of services provided to customers, improve the efficiency and quality of all its banking operations, and increase market share in residential finance, lease finance, and remittances. The Bank will continue focusing on the transformation into digital channels to enable customers to have access to its services 24/7 at their best convenience, and to automate processes so they can have access to instant banking services. At NCB Capital, the Company will seek to continue its leadership in the Kingdom by achieving the highest income margins from asset management, enhancing operational efficiency and reducing costs, building on the opportunities of implementing programs for privatization and attracting foreign investments. For the Bank’s Turkish subsidiary Türkiye Finans Katilim Bankasi, the Bank will seek to increase profitability through expansion of distribution channels and enhancement of efficiency and risk management Retail Banking Retail Banking Group continued its programs for improving customer experience, enhancing the levels of service and providing unique banking solutions that go beyond client expectations and meet their current and future needs. Thus, the success of the Retail Banking business during 2016 was – and will continue to be – rooted in providing advanced products and services that keep pace with the times, taking the customer experience towards new heights of excellence. The Retail Banking Group adopts a policy through which it concentrates its businesses and initiatives to make NCB the fastest-growing and the most customer-centric bank. The success of the Retail Banking Group in providing modern and advanced products and services and taking the customer experience to new levels of excellence have contributed to a steady increase in the number of NCB retail customers to more than 5.6 million in 2017. The number of transactions carried out to service the customers exceeded 324 million, with 96% carried out through digital channels. The Retail Banking Group’s initiatives to continue its success and achieve its objectives included continuing its branch banking and service centers expansion plans to facilitate customers’ access to services at their convenience. In this regard, NCB opened 26 new branches in 2017, a record number for a single year. This is in addition to the relocation of six branches to new sites. This brings the total number of NextGen branches to 64, all equipped with the latest technology and modern design and providing the highest service levels. The total number of branches has grown to 400, including 114 with ladies' sections. The number of ATMs has increased to 3,488 across the Kingdom. In the finance portfolio, Retail Banking achieved significant growth – up 5% from 2016. This positioned NCB as one of the fastest-growing banks in the Kingdom. The Personal Finance (PF) portfolio grew by 4%, Residential Finance (RF) by 18% (despite fierce competition) and Lease Finance by 4% in 2017, despite the 24% drop in automotive sales. Lease Finance also recorded a 10% increase in customer satisfaction by the end of the third quarter of 2017 and had halved the time taken to complete the transaction. Takaful sales reached about 10,500 new AlAhli Takaful contracts. The Bank maintained its leadership in the credit card segment for the third consecutive year by more than 30%. AlAhli Credit Card ranked first among Saudi banks in terms of usage volume, according to a Nielsen report issued in July 2017. The Bank’s Lak rewards program undertook further expansion, adding new destinations to which Lak points can be converted, as well as providing many exclusive offers and discounts inside and outside the Kingdom. The number of QuickPay transactions increased by 5%, bringing the total to 8.4 million. QuickPay centers now total 150 and cash safe deposits were established in 135 centers. The Bank also provides cash remittance service in 100 QuickPay centers. Retail Banking continued its efforts to enhance the customer experience. This was reflected in the improvement reported by branch banking customers, with 94 percent of customers being served in less than 10 minutes. 40 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 41
22. a key investment agent and coordinator for refinancing . In this regard, it is noteworthy that NCB is the agent for more than 28 shared financing operations with a combined value of more than SAR 69 billion. The Bank’s funding of these projects contributed to its revenue growth and supported the efforts to increase asset volumes and cross-selling opportunities between departments, such as Treasury. This has led to NCB’s leadership in corporate banking by way of market share. NCB’s efforts continued to complete the digital transformation of all corporate sector services and improvement of customer experience in this segment. Transactions Banking Division contributed in providing a developed and innovative digital banking service platform, which increased the volume of electronic transactions. The Bank also launched a new group of electronic services for revenues and payments, coping with changes in regulations and customers’ aspirations to receive developed and safe banking services to minimize their cash trading risks. The new e-Trade electronic trading platform aims to conduct transactions effectively, quickly, and easily, without the need to visit a branch. NCB continued its leadership in responding to national transformation objectives, adopting a new strategy for servicing governmental and semi-governmental entities and the privatization projects. In doing so, the Bank appointed a work team providing specialized digital services to the government sector. The Bank successfully launched the unified account project for direct revenues. Micro, Small, Medium Enterprise Disclosure of Statements of Micro, Small, Medium Enterprises 1- Qualitative Disclosure (a) Approved definition of micro, small, and medium enterprises and the initiatives adopted by the Bank to support small and medium enterprises: Wessam Banking business continued its efforts for the Bank's premium customers and improved the services provided in 2017, focusing on enhancement of relation between Wessam customers and relation managers. This contributed to the growth in Wessam customer numbers and a significant rise in their level of satisfaction. Exclusive offers were carefully selected to satisfy Wessam customers, as well as the development of many products that give the Bank competitive advantages. Cooperation with the Human Resources Group was beneficial through the continuity of the Wessam AlAhli Program to attract and appoint ambitious Saudis talents from across the Kingdom. In Private Banking, NCB seeks to provide the Kingdom’s best customer service and manage customers’ wealth through constant efforts to compete successfully with other banks – locally, regionally, and internationally. These efforts culminated in NCB winning five awards in 2017 from Euromoney magazine. Corporate Banking Corporate Banking adopted a prudent strategy in dealing with the portfolios. It has maintained the volume of the finance portfolio while focusing on the quality of assets despite major market challenges. Total assets reached SAR 133 million, enabling Corporate Banking to maintain its leadership of the Saudi banks by this measure. Revenue levels were also maintained, reaching a total of SAR 4.5 billion. Corporate Banking contributed to strategic projects including the water treatment and extraction projects, establishment of power plants, and construction of universities, as well as its contribution to financing the operation and maintenance of roads, medical cities, and the expanding needs for operating capital in various economic sectors. This resulted in the creation of job opportunities and in NCB maintaining its effective role in local markets through the provision of outstanding finance deals for different sectors, including mining, telecommunications, and petrochemicals. This was evident in the conclusion of several major financing deals. Maaden Aluminum Company has chosen NCB as a key agent and coordinator for the funding of the Saudi riyal segment in refinancing facilities. Etihad Etisalat Company (Mobily) has also chosen NCB as 42 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Micro, small, and medium enterprises are companies and corporations with annual sales of less than SAR 200 million, divided into: - Micro enterprises with annual sales of less than SAR 3 million. - Small enterprises of annual sales of more than SAR 3 million and less than SAR 40 million. - Medium enterprises of annual sales of more than SAR 40 million and less than SAR 200 million. NCB continued its support for this segment, being one of the Saudi economy’s key components and a cornerstone of Saudi Vision 2030. The Bank provides innovative finance solutions for the MSME segment category, contributing to its growth and expanded role within the national economy. The Bank’s SME Banking Division attracted new customers, increased credit limits to SAR 23.5 billion, and chose excellent locations for SME Banking Division service centers, based on studies showing that branches should be conveniently accessible to customers. Specialist relationship managers are assigned to customers at 15 service centers dedicated to MSME customers across the Kingdom’s regions and not just in the principal cities. NCB has also maintained its market share among Saudi banks in the Kafalah program, now standing at 37%, having issued 1,178 new Kafalah contracts during 2017. This contributed to the enhancement of the credit portfolio’s efficiency and performance within the current economic conditions. The Bank’s MSME support extended to conducting about 25 educational courses and seminars, informing customers about the financial and banking benefits available from government initiatives and opportunities available to MSMEs as part of the economic transformation to achieve the Saudi Vision 2030. NCB also held intensive seminars for customers and relationship managers on value added tax, in collaboration with one of the largest audit, tax, and consulting services companies. The Bank launched VAT awareness campaigns at AlAhli digital channels and service centers. All these efforts culminated in NCB winning the ‘Best SMEs Support’ award at the BIBAN Forum launched by the Small and Medium Enterprises General Authority. (b) Training and workshops provided to customers and staff in 2017 To best support the MSME sector, NCB has assigned 196 specialized employees, while the number of staff training days reached 1,508. This was supported by 1,188 days of customer workshops, each day consisting of eight working hours. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 43
23. 2- Quantitative Disclosures Treasury SAR 000 2017 Particulars Micro Small Medium Total Finance of micro , small and medium enterprises – on-balance items 74,400 2,209,647 6,697,213 8,981,260 Finance of micro, small and medium enterprises – off-balance items 238,578 1,509,577 2,696,228 4,444,382 On-balance finance of micro, small and medium enterprises to the total on-balance finances 0.03% 0.89% 2.68% 3.60% Off-balance finance of micro, small and medium enterprises to the total off-balance finances 0.45% 2.83% 5.05% 8.32% Number of finances (on-balance and off-balance) 1,528 5,189 6,196 12,913 Number of finance customers (on-balance and off-balance) 1,368 3,274 1,797 6,439 439 3,771 243 4,453 42,543 619,781 81,838 744,162 Number of finances guaranteed by Kafalah Program – in aggregate Total finances guaranteed by Kafalah Program (on-balance and off-balance) Treasury Group continued providing innovative services to take the customer experience to advanced levels. The NextGen program for Treasury operations was completed in record time. It provides several advantages, including the modernization of platform infrastructure and creation of a single integrated platform, and building IT infrastructure that is user-friendly, measurable, and flexible. Other advantages include the provision of services suitable to Treasury, improved market data, implementation of complex structural products, meeting audit and compliance requirements, high efficiency in the full and direct treatment of transactions, and implementation of best practices. NCB also targeted the minimization of manual work through full automation of the work environment to be completely free from paper, presentation of data with high accuracy, and using modern technology for presentation of customer data. Treasury achievements included the launch of Shariah-compliant deposit certificates, continuous expansion and development of Islamic channels and solutions, and completion of the sukuk program which has been defined as an ‘exemplary’ structure for Shariah-compliant issues. Despite the many market challenges, Treasury maintained its leading position in foreign exchange and commodities, achieving a three-fold increase in reserves, and enhancing liquidity. Treasury also has a vital role in supporting capital markets to achieve Saudi Vision 2030 and strongly participated in the government’s bonds at local and international levels. SAR 000 2016 Particulars Micro Small Medium Total Finance of micro, small and medium enterprises – on-balance items 89,704 2,938,056 9,207,718 12,235,55 Finance of micro, small and medium enterprises – off-balance items 215,902 1,756,360 3,101,778 5,088,446 On-balance finance of micro, small and medium enterprises to the total on-balance finances 0.04% 1.16% 3.63% 4.82% Off-balance finance of micro, small and medium enterprises to the total off-balance finances 0.4% 3.12% 5.51% 9.04% Number of finances (on-balance and off-balance) 1,407 6,369 7,816 15,592 Number of finance customers (on-balance and off-balance) 1,214 3,641 2,040 6,495 510 4.976 325 5,811 58,900 886,676 96,614 1,042,190 Number of finances guaranteed by Kafalah Program – in aggregate Total finances guaranteed by Kafalah Program (on-balance and off-balance) 44 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 45
24. Shared Services Subsidiary Companies The Shared Services Group ’s vision is to be the reliable and empowering business partner in the achievement of divisional and departmental objectives and priorities. This vision is reflected in many outstanding achievements. Subsidiary company Administrative Services established 26 new retail banking branches throughout the Kingdom, the largest number to be completed and handed over in any one year. It also relocated three branches, set up eight new QuickPay centers, relocated six QuickPay branches, and installed 200 ATMs. NCB Capital Company (NCBC) Information Technology continued to record new achievements after the full launch of NextGen. This technology has been completely applied to all retail channels and a substantial part of corporate banking channels. The project will be completed by the end of the first quarter of 2018. In pursuit of operational excellence, the Bank’s efforts of business re-engineering, technology systems development, and document processing, reduced the total time taken to complete lease finance and account opening by about 50%. This provided partners in the different business groups with a great opportunity to increase their sales and market share by providing the best and quickest services. Establishment of the Central Unit for Insurance Services within Shared Services in 2017 had a key role in the adjustment, review, and audit of insurance operations, reducing costs by 11%. One of the key strategic initiatives of the Shared Services Group is the establishment of AlAhli Esnad Company to provide employees in outsourcing companies with excellent employment and development experience under the AlAhli brand. AlAhli Esnad Company could attract 935 male and female Saudi colleagues. The Shared Services Group’s focus on expenditure efficiency was a key 2017 priority, contributing to the improvement in NCB’s operational efficiency ratio from 35.2% to 33.2%. Digital Banking During the past few years, many banks targeted digital banking to meet their customers’ growing needs. Customers are seeking digital banking services by clicking a button on their smart devices. Their loyalty now goes to banks that excel in digital banking that reaches customers anywhere, and round the clock. To cope with this development, NCB set an early strategic objective to be the region’s best digital bank and to be the leader in this field. To achieve this objective, Digital Banking Division at NCB focused on the improvement of all the digital activities of NCB’s retail and corporate customers, on the efficient management of services, coordination among all the Bank channels to guarantee innovative, easy, and streamlined services to customers, and to continue the ongoing development of such services through analysis of customers’ opinions. NCBC – Dubai (formerly East Kit Capital Holding) NCBC Company – Mazallah Investment Management Company, a subsidiary of NCBC East Kit MENA – Direct Equity Rights LB Türkiye Finans Katilim Bankasi Capital (SAR) 100,000,000 9,375,000 37,500,000 688,674,270 No of issued shares Ownership Main activity (%) 100,000,000 2,500,000 100,000,000 - 2,572,440,000 2,600,000,000 The Bank has continued these efforts over the past two years. In 2017, they were concentrated on expanding the scope of digital banking and its empowerment, supporting the process of transformation to digital transactions and expanding NCB’s digital banking activity, enhancement of the customer experience, increased digital sales, and coordination of the processes of delivery of digital banking projects. To ensure success, Digital Banking Division continued to launch many initiatives and improvements to our different digital banking channels and provided many services to customers through AlAhliOnline, AlAhliMobile, and AlAhlieCorp for retail and corporate services. The launch of AlAhli e-Trade service with a modern design to cope with the international best practices in trade operations enables commercial entities and companies to establish digital trade operations. This saves customers the time and effort of having to visit a branch. NCB continued with the development of the POS network, upgrading infrastructure to attract new merchants and increase POS numbers, with corresponding growth in the volume and value of transactions. NCB was ranked first in the value of transactions and percentage of active ATMs at Kingdom level, while its market share in POS transactions reached 18%. NCB has won many awards confirming its leadership of digital banking locally and regionally. Among them are Saudi Arabia’s ‘Best Bank in Electronic Retail Banking’, ‘Best Bank in Cash Management Services in the Middle East’, ‘Best Middle East Design of Corporate Banking Digital Channel’ (awarded by Global Finance), and ‘Best Bank in Digital Banking for SMEs’ (awarded by The Banker Middle East). 46 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Real Estate Development Company Ltd AlAhli Insurance Services Marketing The Saudi National Commercial Bank Markets Ltd 500,000 500,000 187,500 The National Commercial Bank | Annual Report 2017 Managing Bank 97.34% investment and asset management activities Country of incorporation Country of Activitity Kingdom of Saudi Arabia Kingdom of Saudi Arabia Attracting, restructuring, and investing in the investment portfolios Cayman 97.34% and the attractive real Islands estate opportunities in emerging markets. Emerging markets with special focus on the Middle East and North Africa Organizing the activities of NCBC Fund for 97.34% Saudi Shares and Ireland NCBC Fund for GCC Shares in KSA Kingdom of Saudi Arabia and GCC Countries The fund makes revenues through investing in the Shariah- Cayman 100% Compliant opportunities Islands related to Direct Private Equity Rights Middle East and North Africa A participation bank working through attracting current accounts, profit and loss sharing investment 67.03% Turkey accounts, lending those funds to retail and corporate clients, through finance, lease, and shared investments Turkey 500 Maintaining and managing sukuk and 100% assets as guarantees, on behalf of NCB and third parties Kingdom of Saudi Arabia Kingdom of Saudi Arabia 50,000 An insurance agent for the distribution and 100% marketing of Islamic insurance products in KSA Kingdom of Saudi Arabia Kingdom of Saudi Arabia 50,000 Trading financial derivatives, 100% repurchases, and reverse purchases Cayman Islands Cayman Islands Board of Directors' Report | 47
25. Subsidiary company Capital (SAR) Real Estate Development Company Ltd 500,000 AlAhli Insurance Services Marketing 500,000 The Saudi National Commercial Bank Markets Ltd 187,500 NCB Esnad Company Peregrine Aviation Topco Limited 50,000 37,500,000 No of issued shares Ownership Main activity (%) Maintaining and managing sukuk and 500 100% assets as guarantees, on behalf of NCB and third parties An insurance agent for the distribution and 50,000 100% marketing of Islamic insurance products in KSA 50,000 5 10,000,000 Country of incorporation Country of Activitity Details of subsidiary companies are: (a) NCB Capital Company (NCBC) Kingdom of Saudi Arabia Kingdom of Saudi Arabia NCB Capital (AlAhli Capital) was established in accordance with the Capital Market Authority’s Resolution 06046-37 dated 3 Dhul Hajja 1427 AH (24/12/2006). The company trades as a principal, underwriter, manager, arranger, and advisor for securities. The Bank has 90.71% direct ownership and 6.63% indirect ownership of NCBC. Kingdom of Saudi Arabia Trading financial Cayman 100% derivatives, repurchase, Islands and reverse purchases 100% Providing employment services in KSA Investment in a company which will 100% acquire, lease and sell aircrafts Kingdom of Saudi Arabia Cayman Islands Kingdom of Saudi Arabia Cayman Islands Kingdom of Saudi Arabia Cayman Islands NCBC has assets under management of about SAR 120 billion in various asset categories, locally and internationally (as of 31 December 2017). This has helped NCBC to be ranked among the largest companies in managing Shariahcompliant assets globally. Along with being the largest multiple asset management company in Saudi Arabia, NCBC is one of the largest providers of savings programs for companies in the region. NCBC continued its leadership in asset management in the first quarter of 2017, as NCBC cooperated with Fidelity International, a leading global asset management company, to launch the NCB European Real Estate Fund, collecting more than USD 153 million. This was further enhanced in the last quarter of 2017 with NCBC’s successful launch of the NCB Rate (1) Fund as the first trading real estate investment fund, collecting more than SAR 412.5 million in an initial public offering that achieved 157% subscription. NCBC also maintained its leadership in financial brokerage, launching a margin-trading program in addition to many improvements. As a result, NCBC maintained its third place by traded value (with a market share of 11.83% in 2017 according to Tadawul) and second place by volume of transactions (15.40% market share). NCBC continued its leadership in investment banking services, being the only Saudi participating lead manager of the first issuance of government bonds of USD 9 billion in April 2017; issuance of Saudi Aramco bonds worth SAR 11.25 billion; restructuring of the bonds of Saudi Electricity Company for SAR 5.7 billion; and refinancing Maaden Aluminum Company by USD 1.8 billion. All contributed to reinforcing NCBC’s leading position among the entities licensed in investment banking services in the Kingdom. In 2017, NCBC won a number of prestigious awards, including six from the Thomson Reuters Lipper Fund, the Global Finance Award for Best Share Investment Management Company in KSA, the Global Banking and Finance Review Award for Best Asset Management Company in KSA, and the Global Investor magazine awards for Best Asset Manager in KSA, and Best Sukuk Manager in MENA. (b) Türkiye Finans Katilim Bankasi NCB has a 67.03% interest in Türkiye Finans Katilim Bankasi, a Turkish participation bank, which operates by attracting current accounts and profit and loss sharing investment accounts, lending those funds to retail and corporate clients through Shariah-compliant finance, lease, and shared investments. 48 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 49
26. T ürkiye Finans Katilim Bankasi has 287 branches and 587 ATMs. It has updated its digital channels to provide its services to customers around the clock at their convenience, bringing the number of customers conducting transactions through the Bank's digital channels to more than 700,000. The number of digital transactions grew to 190,000 and the number of customers using mobile phones by 27%, compared to 2016. Assets grew by 0.8% to reach TL 38.6 billion, while profits increased by 28% to TL 369.6 billion. NCB’s share in Türkiye Finans Katilim Bankasi profits was SAR 314 million, a 64% increase year-on-year despite implementation of new capital laws in Turkey. The Bank’s adequacy ratio increased from 15.6% to 18.2%. POS usage grew by 3.7%, accompanied by a 9% growth in POS revenues, positioning Türkiye Finans Katilim Bankasi at the forefront of the participating banks in terms of the volume and value of POS transactions. As well as strengthening alternative channels – including ATMs, POS terminals, phone banking, and online banking – Türkiye Finans also launched several initiatives to improve services, products, and the efficiency of its programs and operating systems. (c) Real Estate Development Company Ltd NCB directly owns 100% of the Real Estate Development Company, a Saudi limited liability company under commercial registration 4030146558 dated 21/11/1424H (13/1/2004) with capital of SAR 500,000. The company’s purposes include holding and managing sukuks and collateralized real estate properties on behalf of NCB and third parties, and registering them under its name, fulfilling the company's financing purposes, along with buying and owning lands for development and construction and investing in them through sale and lease for the benefit of the company. (d) AlAhli Insurance Services Marketing NCB has 100% effective ownership of AlAhli Insurance Services Marketing Company, a limited liability company registered in Saudi Arabia under commercial registration 4030195150 dated 21/12/1430H (8/12/2009) with capital of SAR 500,000. The company's objectives are to serve as an agent for marketing Islamic insurance products and services in Saudi Arabia and marketing all the insurance products of AlAhli Takaful Company. (e) The Saudi National Commercial Bank Markets Ltd The Bank has 100% direct ownership of the Saudi NCB Markets Company Ltd, established in 2016 as a limited liability company and registered in the Cayman Islands, with capital of $50,000 (SAR 187,500). The company is specialized in derivatives, purchases, and repurchases. (f) NCB Esnad Company The Bank has 100% direct ownership of NCB Esnad Company, a limited liability company registered in Saudi Arabia. The company operates in recruitment services in Saudi Arabia. (g) Peregrine Aviation Topco Limited The Bank has 100% direct ownership of Peregrine Aviation Topco, a limited liability company established in 2017 and registered in the Cayman Islands with a capital of $10 million (SAR 37.5 million). The main purpose of the company is investment to acquire, lease, and sell aircraft. Affiliated Companies Company Capital (SR) Real Estate Markets Trading Company AlAhli Takaful Company 1,600,000,000 16,666,670 No of issued shares Ownership (%) Main activity 1,600,000,000 Direct ownership 60% Owning, managing, maintaining, and cleaning Jamjoom Commercial Center 16,666,667 Direct ownership 29.99% Insurance (protection and savings for individuals and groups) Country of incorporation Country of activity Kingdom of Saudi Arabia Kingdom of Saudi Arabia Kingdom of Saudi Arabia Kingdom of Saudi Arabia (a) Real Estate Markets Trading Company NCB has 60% direct ownership of Real Estate Markets Trading Company, a limited liability company established in Saudi Arabia under commercial registration 4030073863 on 5/4/1411H (24/10/1990), with capital of SAR 1,600 million. The Bank follows the International Financial Reporting Standards for the preparation of financial statements. The term ‘control’ under such standards entails three requirements: the Group has control over the company; the Group receives or has right in the revenues from the company; and the Group controls the returns of the company through its control of the establishment. Since these requirements are not fully applicable to Real Estate Markets Trading, NCB includes it under investments as an affiliate, so that its financial statements are not consolidated with those of the Group, but treated as equities fully separate from NCB. According to the Bank’s prospectus (as detailed in Section 10.9 ‘Litigation and Disputes’), the Company’s Articles of Association expired on 4/4/1431H (20/3/2010). It was agreed that the term of the Company would be extended for an additional five years starting from the expiry date in the commercial register. The additional term also expired on 4/4/1436H (24/1/2015). As at 21/8/1436H (8/6/2015), NCB, accordingly, filed a lawsuit to Jeddah Administrative Court, registered under No 7270/2/J for the year 1436 AH at the Fifth Commercial Circuit, requesting the liquidation of the Company due to expiry of its term and failure to reach an agreement between the partners on the extension of its term. On 12/07/1437 AH, the Court issued its judgment to the effect that the Real Estate Markets Trading Company shall be dissolved and liquidated, and Abdulrazzaq & Ahmed Waly Sait Co shall be appointed as a liquidator. The Administrative Appeal Court in Makkah endorsed the judgment on 13/10/1437AH. On 27/11/2017, the appointed liquidator declared the dissolution in Al Medina Gazette, Issue 19941. Work is still ongoing to complete the procedures for receiving the Company's business by the liquidator to start the liquidation process. (b) AlAhli Takaful NCB directly owns 29.99% of the capital of AlAhli Takaful Company, a Saudi joint-stock company established under Royal Decree No M/70, dated 22/11/1427H (13/12/2006), and the ministerial resolution No 262 dated 20/11/1427H (10/12/2006). The Company was established in Jeddah under commercial registration No 4030171573 on 21/7/1428H (4/8/2007) and holds an insurance business license No (TMN/20079/7) dated 29/8/1428H (11/9/2007) issued by SAMA. The Company commenced insurance activities in accordance with the Cooperative Insurance Companies Control Law. AlAhli Takaful Company began with a capital of SAR 100 million, and an approval was obtained from the Company's shareholders on 12 December 2011 to increase this to SAR 166,666,670 with a total number of 16,666,667 issued shares. 50 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 51
27. This progress report on the Islamic banking transformation program covers the financial year ended 31 December 2017 : 1- The Bank's assets reached SAR 444 billion in 2017, of which 74% are Shariah-compliant, compared to 73% in 2016. 2- Liabilities reached SAR 380 billion, of which 81% are from Shariah-compliant sources, compared to 78% in 2016. 3- 85% of the total financing portfolio of NCB in 2017 is Shariah-compliant‫ ‏‬compared to 82% in 2016. Shariahcompliant corporate finance increased to 74% in 2017 compared to 70% in 2016. 4- Operating income generated from Shariah-compliant transactions reached 80% of the Bank’s total revenues in 2017 compared to 76% in 2016. 5- Islamic Sukuk in which the Treasury Group invested in 2017 reached 64% compared to 68% in 2016. NCB branches have worked in complete conformity with Islamic Shariah since 2007. NCB continues to take actions towards the implementation of gradual and full transformation to Islamic banking. This includes the coordination among the Shariah Group and different business groups of the Bank to find Islamic alternatives to the remaining conventional products and to develop the existing Islamic products to cover a wider segment of customers in response to their needs and wishes. Bank policies, procedures, and credit products and policies provide for the full and gradual transformation to Islamic banking. NCB’s management assures its commitment to disclose the developments of the Bank’s plan for transformation to Islamic banking in the annual report of the Board. Shariah Group Islamic Banking (a) Shariah Board NCB’s Shariah Board is independent and responsible for approving Shariah-compliant products and services offered by the Bank. The Board is governed by Shariah Board regulations. The NCB Shariah Board comprises four prominent scholars in Shariah and Islamic economics: Sheikh Abdullah Bin Sulaiman Al Maneea (Chairman), and Abdullah Bin Mohammed Al-Mutlaq, Sheikh Dr. Abdullah Bin Abdulaziz Al Musleh, and Sheikh Dr Mohammed Ali Elgari (Members). (b) Transformation to Shariah-Compliant Banking Program In 2014, NCB’s Shariah Board issued a resolution regarding the compatibility of subscription for NCB’s shares with Shariah, in light of the NCB initial public offering on 22/12/1435H (16/10/2014). The Board confirmed that subscription for NCB’s shares is permissible based on an assurance from NCB management that the transformation program to Shariahcompliant banking is being gradually implemented with a time plan scheduled for five years from the subscription date. NCB’s management assures all shareholders and investors that it is fully committed to gradual transformation to Islamic banking, as approved by the Board. In doing so, the management considers all economic changes and banking standards, so the Bank can transform successfully to Islamic banking. In 2017, NCB Shariah Group continued its efforts to support the Islamic banking industry and expand the Bank’s scope of businesses. To achieve this objective, the Shariah Board held 14 meetings with various NCB businesses, associates, and affiliated companies. These meetings answered all queries from the businesses to the Shariah Board regarding the Shariah issues related to banking operations. The meetings culminated in the development of five new products ready for launch to customers, the support and improvement of eight existing products, and approval of 36 executive documents and contracts. The Shariah Board also approved the structures and documents of four investment Sukuks. To cater to the Bank’s needs, the Shariah Group developed a new product to serve residential finance customers wishing to construct houses or proceed with construction. This product was developed in collaboration with the Ministry of Housing and various real estate development authorities. In 2017, the Shariah Group held its 10th annual seminar, which reflects the Bank keenness to support the Islamic banking industry and open horizons for its growth and future development. The 10th seminar hosted the elite of the region’s Islamic banking and jurisprudence experts and discussed the topic: “Religious assessment of contemporary products related to shares and securities including short sale products, margin trading, repurchase agreements (repo), and their Shariahcompliant alternatives.” With regard to NCB’s efforts to qualify new Shariah scholars, the Bank continued its unique and distinguished program for new Shariah scholars to join Shariah boards. So far, four Islamic banking experts have graduated from the program. The Shariah compliance team verifies the implementation of all the resolutions of NCB’s Shariah Board and its requirements in all the Bank’s policies and procedures, product programs, electronic systems, and training programs. The Shariah Control Department at the Group issued 14 Shariah control reports reviewing the Bank’s Islamic products and to verify their compliance with the Shariah Board resolutions, four Shariah reports reviewing NCB Capital products and funds, and one Shariah report on the products of AlAhli Takaful Company. 52 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 53
28. Human Resources Corporate Responsibility NCB is committed to achieving one of its strategic objectives to be the ‘Employer of Choice’. There is a direct link between the Bank’s performance and its human resources, therefore the human resources constitute a strategic partner to achieve success. Accordingly, the Bank ran its ‘My Voice’ survey for the third successive year. The survey covers topics that affect employees’ performance and their loyalty to the organization. My Voice survey achieved exceptional results in its third round with a record 97% participation, as well as a tangible improvement in the results for all topics. Participating employees appreciated the benefits provided by the Bank, which played a key role in their loyalty, scoring 89% for pride in belonging to NCB. NCB continued to enhance its corporate responsibility role, with launch of the Ahalina Program setting a strong and sustainable policy seeking to empower women, youth, and children. Ahalina is focused on the empowerment of these segments and helping them become positive and effective contributors to the national economy. This was achieved with the help of the specialized expertise and resources of the Bank in different fields to ensure the integration of efforts to achieve social welfare objectives. Ahalina continued to implement many initiatives serving the three designated groups, recording consistent annual increases in the number of beneficiaries. To support this direction, NCB continued the development of internal recruitment programs that have a tangible impact. Employees appreciated the Bank’s efforts in providing opportunities for advancement by advising staff of vacancies and contributing to their professional development. Since launch of this program, 308 employees have benefited, including 157 in 2017. The Bank also strives to attract and develop the best national resources through the continuity of its Rowad and Wessam AlAhli programs, as well as the Branch Banking Qualification Program in which all applicants undergo internationally-recognized measurement tests and the best national resources are selected to fill the vacancies. Several specialized programs were developed for NCB staff, including Credit Officers’ Development, the first of its type in Saudi Arabia and the entire region. The Bank has also created a program for the qualification and employment of new graduates to work in the Compliance Division. The program aims to qualify its graduates in the verification of all transactions related to money laundering and combating of terrorism. Program members were selected according to the best assessment and measurement practices. The Bank continued to invest in its highly efficient employees, providing them with the best development programs to retain human resources and to cover future requirements for management succession and the continuity of NCB’s excellent performance. In line with Saudi Vision 2030, special attention was given to the employment of females. In 2017, female employment reached about 13% of total employee numbers, with about 10% representation among the Bank’s leadership. The benefits from all the employee initiatives launched by the Bank are reflected in the continuous decrease in staff turnover, down to 3% in 2017 and the lowest in four years. Empowering Women Through the Bank’s program for productive families, NCB provides extensive training, financing, and marketing services to develop craft products and help them to be strongly competitive. The Bank provides financial support and opens wider outlets and markets, enabling productive families to secure a source of income and helping them and their dependents to live a life of dignity. To succeed in this objective, NCB has increased the number of programs for productive families, adding crafts during 2017, including pottery and beads. In collaboration with international bodies specialized in developing handicrafts and industries, 20 craftswomen around the Kingdom received training, enabling them to raise their competence and acquire design and innovation skills that help create the highest quality of production and enhance competitiveness. The craftswomen develop the handicrafts and offer them as innovative and scientific, yet traditional, products that meet local market requirements and best international quality practices. The total number of female trainees from productive families reached 735 during 2017. The Bank has established a financing program for productive families through collective solidarity, enabling each group of women to establish their own small businesses without a need for a sponsor. There are four financing centers across the Kingdom, which funded 3,304 female beneficiaries during 2017 to a total of SAR 11.3 million. A new center was approved for opening in the Qassim region. To find innovative channels for marketing, the program has forged a range of strategic partnerships with several bodies to open new outlets to display and sell the families' products at airports, specialized exhibitions, popular markets, and bazaars. Empowering Youth In empowering the youth, AlAhli Entrepreneurs Program had trained 781 male and female entrepreneurs by the end of 2017. The program also provides male and female entrepreneurs with development and training opportunities to help establish their business projects, including the basics for setting up successful projects. By the end of the program, participants are able to prepare feasibility studies, which assists them in securing finance and helps assure the success and sustainability of their businesses. 54 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 55
29. AlAhli Care and Donation Program Empowering Children In line with its continuous role in corporate responsibility and in addition to the Ahalina program , NCB supported many initiatives with a direct impact on society, contributing a total of SR 49.1 million in 2017 towards the enhancement of social work. The AlAhli Orphans Program continued to provide support and care for 600 male and female students through offices in Makkah, Medina, Riyadh, and Eastern Province. Since 2014, AlAhli Orphans Program has maintained strategic partnerships with associations specializing in the care of orphans. A prominent 2017 achievement was the launch of the ‘Knowledge Journey to Malaysia’ with the participation of 12 excellent students from the four regions. This is an initiative to honor and motivate excellent students, providing them with educational expertise in English language and developing their skills to polish and build their personalities. This is in addition to many tourist and educational tours under a team of supervisors specialized in youth development. In a distinguished initiative aiming to achieve twin goals, NCB launched ‘No to Printing Receipts’. This encourages ATMs users to contribute to charity, and to protect the environment by minimizing the consumption of paper. From this initiative, the Bank donated SAR 1 million to the Disabled Children Association. HH Prince Sultan bin Salman expressed his appreciation, pointing out that it is an innovative addition to NCB’s leadership in corporate responsibility and deepens the Bank’s support of the Disabled Children Association saying: “NCB is always providing leading initiatives, it is a bank that works with a heart, not only with a treasury.” The Disabled Children Association used the donation for the treatment of more than 3,000 male and female children with special needs, the education of about 700 male and female children, training 340 national specialists, conducting orthopedic surgeries for more than 120 children, improvement of the condition of 80 children with special needs, and involvement of 34 male and female children with special needs in public schools. The first stage of the Self-Management Building Program (P33) to develop the personality of students in all aspects began in 2017, following a three-level graded approach of realistic and deliberate achievements. With 33 hours of training, this program meets the needs of students to reach success in their personal and practical lives. The program also has other services, including health insurance, financial motivational rewards, library cards, and various recreational activities, helping orphan participants to enter the labor market or complete their degree by the end of the five-year period, starting from the second year of mid-school to the third year of high-school. In another leading initiative, NCB supported King Salman Center for Education for Employment in partnership with Prince Sultan University, highlighting the importance of integration between the private sector and the education sector in the support of national development to achieve Saudi Vision 2030. The Bank contributed 50% of the center’s building costs, recognizing the importance of such projects in supporting the development of the nation and its citizens, and underlining its commitment to youth as the basis of any development and a vital artery for progress and prosperity. AlAhli Volunteer Program NCB continued to capitalize on the skills and capabilities of its staff through AlAhli Volunteer Program, encouraging them to join in voluntary activities to meet social needs and contribute to the enhancement of their volunteering sense and community giving. NCB is the first private sector company to approve the 30-hourper-year paid voluntary system for employees. Volunteering opportunities included visiting patients and injured soldiers in the southern border, restoring affected houses and gardens, diving initiatives for marine clean-ups, distribution of school bags to orphans, donating blood, Injaz initiative for school students, and campaigns that enhance individual engagement in sustainable development and community service. During 2017, more than 700 male and female NCB employees volunteered for 3,085 hours of work in 19 cities around the Kingdom. The Bank, for the second time, ran the Professional Volunteer campaign (Probono) for male and female employees in Jeddah, Riyadh, Al Khobar, and Abha, contributing to the enhancement of private sector benefit to civil society organizations and developing and activating all the professional specializations needed by approved charities. The campaign gives employees the opportunity to do unpaid voluntary work to pass on their specializations and practical experience to social organizations in all areas that serve the public interest. More than 100 male and female employees participated, devoting at least five hours each in specialist areas such as law, marketing, human and financial resources, governance, strategic planning, project management, programming, and information technology. 56 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The Bank provided other care and support initiatives in many areas in line with its corporate responsibility objectives. The focus on community development and empowerment of its different segments included sponsorship of the Misk Global Forum for young leaders, the Electronic Applications World event to support male and female entrepreneurs, the Productive Families National Exhibition, Basta Market, Jeddah Food Festival, Wonderland Festival, Saudi Women’s Fair, Saudi Crafts Fair, and Women Empower Expo. To support the development of Islamic banking, NCB sponsored the 11th conference of the World Bank, titled Islamic Finance in the Post Oil Economic Scenario, Euromoney Conference KSA, Scientific Conference for Islamic Finance Researches, Riyadh Economic Forum, Shura Jurisprudence Conference, and the Saudi Conference of Emerging Companies. The Bank also supported the education sector with sponsorships including the Madak Educational Endowment in Medina, National Day of Education in Unaizah, Taif University Graduation Ceremony, and the Retired Ceremony held by Jeddah Directorate of Education. NCB provided volunteering activities including Injaz KSA, Eftark Alena, and restoration of mosques in Jeddah’s historical area. Further sponsorships in heritage protection included the Janadriyah Festival, Okaz Market in Taif, Unaizah Dates Festival, Camel Market in Najran, Unaizah Ghada Festival, and the International Equine Endurance Ride. In healthcare, NCB sponsored the first liver conference – ‘Share the Treatment with Us’ – organized by the Saudi Society for Liver Patients, and provided support for Elaji, the patient treatment charity. NCB participated in many other community activities including sponsorship of the first Elderly Conference and events of the Elderly Women Social Care House, sponsorship of capacity building and exchange of expertise between the staff of orphans societies, sponsorship of the national event for the children of martyrs – ‘Pride and Smugness’, sponsorship of the General Aviation Conference, participation in the commemoration of the second anniversary of the proclamation of the Custodian of the Two Holy Mosques in Al Yamama magazine, and support of the Qaderoon Foundation for the employment of people with disabilities. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 57
30. 21 . Board of Directors, Related Committees and Executive Management Board Members The Board of Directors consists of nine members appointed by the General Assembly every three years, and meets at least once every three months (minimum of four times a year) or when required, by invitation from the Chairman, or from two members. The quorum comprises five members attending in person, including the Chairman. The decisions and discussions of the Board must be recorded in minutes of meeting and signed by the Chairman and the Board members. The Board secretary is responsible for recording the proceedings of meetings. Following are the names, qualifications and experiences of the Board members: Mansour Bin Saleh Al Maiman, Chairman of the Board Mr. Al Maiman is the NCB Chairman, Chairman of the Executive Committee, and a non-executive board member. Before becoming Chairman, Mr. Al Maiman worked in the General Secretariat of the Public Investment Fund from 1973 to 1993. During this period, he was appointed as the Assistant Secretary General of the Fund. In 1993, he was appointed as the Undersecretary for the Budget and Organization Affairs in the Ministry of Finance and National Economy. He moved to the Public Investment Fund in 1998 where he was appointed as the Secretary General until retirement from government work and assuming his position as NCB Chairman in 2012. During his work in the Public Investment Fund, Mr. Al Maiman participated in many committees inside and outside the Kingdom, the most prominent of which was the committee formed for preparation of the Ministerial Privatization Committee, which culminated in the privatization of key businesses such as telecommunication and its conversion to a shareholding company, and the establishment of the Power and Water Utility Company for Jubail and Yanbu. He also represented the Ministry of Finance in the Privatization Committee of the General Secretariat of the Supreme Economic Council, which was responsible for approval of privatization strategy, selecting the targeted utilities and activities, and setting the privatization implementation program. This was followed by his participation in the program implementation as he supervised the team in charge of offering part of Saudi Telecom Company for public subscription and the team in charge of offering the entire share of the Public Investment Fund in the capital of Wataniya Insurance Company. He also participated in the preparation of the documents offering 50% of the State-owned shares in Saudi Mining Company (Maaden) and in the establishment of Alinma Bank, preparation of its regulations, and preparation of its placement prospectus for offering of its shares for public subscription. He headed the work team in charge of the construction of the North-South Railway and adoption of the measures for establishment of the Saudi Railway Company. Other notable work included supervision of the Fund’s participation in the water and electricity double production projects, conducted in partnership with the private sector. Academic Qualifications Year Qualification Major University 1980 Master Degree Business Management University of Dallas, Texas, USA Bachelor Degree Accounting and Business Management King Saud University, Riyadh, KSA 1973 Other Current Memberships and Positions Job title Name Legal form Sector Chairman NCB Capital Company Closed shareholding company Capital Markets Board Member Saudi Arabian Investment Company (Sanabil Investments) Closed shareholding company Multiple Investments 58 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Professional Experience Job title Name Legal form Sector Chairman Saudi Railway Company Closed Shareholding Company Transport Board Member Saudi Mining Company (Maaden) Public Shareholding Company Mining Chairman Tadawul Real Estate Company Saudi Limited Liability Company Real Estate Investment Board Member Gulf International Bank Closed Shareholding Company Banking Board Member Saudi Stock Exchange (Tadawul) Company Closed Shareholding Company Financial Services Board Member Southern Province Cement Company (SPCC) Public Shareholding Company Cement Board Member Saudi Telecom Company Public Shareholding Company Communications Board Member General Organization for Social Insurance Government Government Finance Utility Board Member General Petroleum and Mineral Organization (Petromin) Government Government Utility Board Member Dar for Consultancy Services Saudi Limited Liability Company Consultancies Chairman Saudi Credit and Saving Bank Government Government Utility Board Member representing the Public Investment Fund Saudi Cairo Bank Closed Shareholding Company Banking Board Member representing the Public Investment Fund Qassim Cement Company Shareholding Company Industry Board Member representing the Public Investment Fund Eastern Region Electricity Company Public Shareholding Company Energy Board Member representing the Public Investment Fund Saudi Public Transport Co. Public Shareholding Company Transport Board Member representing the Public Investment Fund Riyadh Bank Public Shareholding Company Banking Board Member representing the Kingdom Arab Authority for Agricultural Investment & Development (AAAID) International Entity Agriculture and Development Board Member representing the Kingdom Saudi Egyptian Industrial Investment Co. Closed Shareholding Company Industry Board Member representing the Kingdom Saudi Bangladesh Industrial and Agricultural Investment Company Private Limited Company Industry and Agriculture The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 59
31. Academic Qualifications Mutlaq Bin Abdullah Al-Mutlaq , Director Mr. Al-Mutlaq is a Board Member, Member of the Executive Committee, and Member of the Nomination and Remuneration and Governance Committee. He is an independent board member and a businessman. Academic Qualifications Year Qualification Major University 1958 High School Diploma General NA Year Qualification Major University 1984 Master Degree Economy Central Michigan University, Mount Pleasant, USA 1979 Bachelor Degree Economy King Saud University, Riyadh, KSA Other Current Memberships and Positions Other Current Memberships and Positions Job title Deputy Chairman Name Al-Mutlaq Company Group Legal form Job title Name Legal form Sector Chairman National Shipping Company of Saudi Arabia (Bahri) Public Shareholding Company Energy Chairman Saudi Real Estate Company (Al Akaria) Public Shareholding Company Real Estate Management and Development Chairman POSCO KSA Engineering & Construction Closed Shareholding Company Real Estate Chairman Real Estate Construction Company Closed Shareholding Company Real Estate Director Saudi Stock Exchange (Tadawul) Company Closed Shareholding Company Financial Services Chairman Dar Al Tamleek Closed Shareholding Company Real Estate Management and Development Job title Name Legal form Sector Acting Secretary General Public Investment Find Government Organization Investment and Finance Executive Director The World Bank International Organization International Development Bank Executive Director Saudi Development Fund Government Organization Development and Finance Sector Closed shareholding company Investment Professional Experience Job title Name Legal form Sector Chairman Al-Jazirah Corporation for Press, Printing & Publishing Closed Shareholding Company Media Managing Director Al-Mutlaq Company Group Closed shareholding company Investment Deputy Chairman Riyadh Chamber of Commerce and Industry Civil Society Organization Sector Authority Director Saudi Railway Company Closed Shareholding Company Transport Abdulrahman Bin Muhammad Al Mofadhi, Director Mr. Al Mofadhi is a Board Member, Member of the Nomination and Remuneration and Governance Committee, and Member of the Risk Committee. He is a non-executive board member and representative of the Public Investment Fund at the Board. He was the Executive Director for KSA on the Board of the International Organizations forming the World Bank Group, including the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). He also headed the NCB Audit Committee from 2007 to 2010 and was a Member of the Bank Balance Sheet Committee, Human Resources Committee, and Retirement Fund Investment Committee. Before his appointment as the Executive Director, Mr. Al Mofadhi was the Advisor to the Executive Director then became Acting Executive Director. Before his World Bank positions, Mr. Al Mofadhi worked in loan management and financial analysis at the Saudi Fund for Development. Professional Experience Abdulaziz Bin Abdallah Al-Zaid, Director Mr. Al-Zaid is a Board Member, Member of the Executive Committee, and Chairman of the Nomination and Remuneration and Governance Committee. He is an independent board member who held many positions in the General Organization for Social Insurance including engineer in the Investment Department from 1975 to 1983, Head of Project Management Department from 1983 until 1992, Director General of Projects from 1992 to 2005, and Assistant Governor for Investment from 2005 until his retirement from Government work in mid-2013. Academic Qualifications 60 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Year Qualification Major University 1975 Bachelor Degree Civil Engineering King Fahd University of Petroleum and Minerals, Dhahran, KSA The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 61
32. Other Current Memberships and Positions Other Current Memberships and Positions Job title Name Legal form Sector Job title Name Legal form Sector Board Member Cooperative  Insurance  Company (Tawuniya) Public Shareholding Company Insurance The University Secretary for Administration and Finance Prince Sultan University Non Profit Private Organization Education Board Member Al Qassim Cement Company Public Shareholding Company Basic Materials Head of Testing Committee Saudi Organization for Certified Public Accountants Professional Organization Semi-Government Job title Name Legal form Sector Member of Audit Committee Public Pension Agency Government Government Utility Member of Audit Committee National Shipping Company of Saudi Arabia (Bahri) Public Shareholding Company Transport Head of Audit Committee Saudi Research and Marketing Group Public Shareholding Company Media Professional Experience Job title Professional Experience Name Legal form Sector Deputy Chairman NCB Capital Closed Shareholding Company Financial Services Deputy Chairman DAEM Real Estate Investment Closed Shareholding Company Real Estate Investment Chairman Granada Investment Center Government (General Organization for Social Insurance) Multiple Investment Board Member Saudi Basic Industries Corporation (SABIC) Public Shareholding Company Basic Materials Chairman Rana Investment Company Closed Shareholding Company Financial Services Board Member Al Qassim Cement Company Public Shareholding Company Basic Materials Member of Audit Committee Saudi Mining Company (Maaden) Public Shareholding Company Mining Assistant Governor for Investment General Organization for Social Insurance Government Government Utility Board Member Government Education Board Member National Insurance Company Limited Liability Company Real Estate Development and Tourism Faculty of Management Sciences – King Saud University Board Member Saudi Organization for Certified Public Accountants Professional Organization Financial Services Board Member Institute of General Management Government Education Board Member Centre of Undergraduate Studies for Girls Government Education Board Member Al Ahsa Medical Services Company Limited Liability Company Health Saad Bin Salih Alrwaita, Director Professor Dr. Alrwaita is a Board Member, Chairman of the Audit Committee, and Member of the Nomination and Remuneration and Governance Committee. He is an independent board member and is the Vice-President of Prince Sultan University for Administration and Finance, as well as a member of the University Board of Trustees. Academic Qualifications Year Qualification Major University 1993 PhD Accounting University of Colorado, USA 1987 Master Degree Accounting University of Miami, USA 1983 Bachelor Degree Accounting King Saud University, KSA 62 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 63
33. Ibrahim M . Al-Romaih, Director Other Current Memberships and Positions Mr. Al-Romaih is a non-executive board member and a Member of the Executive Committee. He is CEO of Saudi Arabian Investment Company (Sanabel). Job title Name Legal form Sector Academic Qualifications Chairman of the Board Turkiye Finans Katilim Bankasi Turkish Closed Shareholding Company Banking Board Member INJAZ-Saudi Arabia Saudi non-profit organization Civil Society Board Member Advisory Board Member of MasterCard Middle East & Africa US Public Shareholding Company Financial Services Chairman of the Board Saudi Credit Bureau (SIMAH) Closed Shareholding Company Financial Services Board Member Al Rajhi Takaful Closed Shareholding Company Education Job title Name Legal form Sector Advisor to HE the Governor Saudi Arabian Monetary Agency Government Organization Government Advisor to the Chairman NCB Public Shareholding Company Banking Board Member Al Rajhi Takaful Public Shareholding Company Insurance Board Member Al Rajhi Capital Closed Shareholding Company Financial Services Deputy CEO Al Rajhi Bank Public Shareholding Company Banking Board Member Al Rajhi Bank Malaysia Malaysian Limited Liability Company Banking Year Qualification Major University 1990 Degree Credit Analysis Chase Manhattan Bank, USA 1985 Master Degree Economy Central Michigan University, Mount Pleasant, USA 1983 Bachelor Degree Economy Portland State University, USA Other Current Memberships and Positions Job title Name Legal form Sector Board Member International Water and Electricity Company (ACWA Power) Closed Shareholding Company Energy and Water Saudi Arabian Investment Company (Sanabel) Closed Shareholding Company CEO Investment Professional Experience Job title Name Legal form Deputy Chairman Capital Market Authority Government Regulatory Authority Government Board Member Savola Group Public Shareholding Company Food Production Assistant Secretary General Public Investment Fund Government Investment and Finance Professional Experience Sector Saeed Mohammed Al-Ghamdi, Board Member and CEO Mr. Al-Ghamdi has been a Board Member and CEO of NCB since 2013. He is a Member of the Executive Committee and the Risk Committee. He is a non-executive director, and at the Executive Management Committee level is the Head of the Senior Management Committee, Credit and Debt Treatment Committee, and the Information Security Committee. Academic Qualifications Year Qualification Major University 1987 Bachelor Degree Computer Sciences and Engineering King Fahd University of Petroleum and Minerals, Dhahran, KSA 64 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 65
34. Anees A . Moumina, Board Member Saud bin Suleiman Awad Aljuhani, Board Member Mr. Moumina is a Board Member and a Member of the Risk Committee. He is a non-executive board member and representative of the General Organization of the Social Insurance (GOSI). Mr. Moumina is the CEO of SEDCO Holding Company. Mr. Aljuhani is a Board Member, Chairman of the Risk Committee, and Member of the Nomination and Remuneration and Governance Committee. Mr. Aljuhani is the Assistant Governor of the Public Pension Agency (PPA) for the Subscribers’ and Retired Persons’ Affairs. Academic Qualifications Academic Qualifications Year Qualification Major University Year Qualification Major University 1986 Master Degree Engineering Management Sciences George Washington University, USA 2008 Master Degree Actuarial Sciences University of Kent, UK 1985 Bachelor Degree Civil Engineering George Washington University, USA 2007 High Diploma Actuarial Sciences University of Kent, UK 2014 Degree CEO International Program for Global Leadership Harvard University, USA 2003 Diploma Actuarial Sciences Muhanna Foundation, the Lebanese Republic 2000 Degree CEO International Program for Global Leadership Wharton University, USA 2001 Bachelor Degree Management Information Systems King Fahd University of Petroleum and Minerals, Dhahran, KSA Degree Senior Executive Management Program for Company Management, Columbia University Columbia University, USA 1995 Other Current Memberships and Positions Job title Name Legal form Sector Board Member Elaf Group Closed Shareholding Company Tourism Services Chairman of the Board Dunia Alaswaf Trading LLC (ALSHIAKA) Closed Shareholding Company Long Term Commodities Professional Experience Job title Name Legal form Sector Chairman of the Board Ewaan Global Residential Company Closed Shareholding Company Housing Regional Director General for the Western Region and Senior Credit Officer Samba International Group Public Shareholding Company Banking 66 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Other Current Memberships and Positions Job title Name Legal form Sector Board Member Tabuk Cement Company Public Shareholding Company Basic Materials Board Member National Industrialization Company Public Shareholding Company Basic Materials Professional Experience Job title Name Legal form Sector Board Member Saudi Industries Development Company Closed Shareholding Company Investment The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 67
35. Members of the Audit Committee Hani bin Suleiman Al Shadokhi , Committee Member and non-Board Member In its meeting on 03 May 2017, the Extraordinary General Assembly of NCB’s Shareholders approved the amended bylaw of the Audit Committee in accordance with the corporate governance bylaw issued by the Board of Directors of the Capital Market Authority. In addition, the Assembly approved the election of the Audit Committee members for the current term commencing on 01/05/2015 and ending on 30/04/2018. Mr. Al Shadokhi is an external member of the Audit Committee. He is the CEO of Dar al Maidaa Financial Consultancies Office. The names, qualifications, and experience of the Audit Committee members are: Dr. Saleh bin Hamad Al Shunaifi, Committee Member and non-Board Member Dr. Al Shunaifi is an external Member of the Audit Committee. He is a Member of the Faculty of Business Management, King Saud University. Academic Qualifications Academic Qualifications Year Qualification Major University 1989 Bachelor Degree Financial Management and Operation Management King Fahd University of Petroleum and Minerals, Dhahran, KSA 2011 Advisor Financial consultancies for non securities Department of Consulting Professions, Ministry of Commerce and Investment, KSA 2011 Advisor Management consultancies Department of Consulting Professions, Ministry of Commerce and Investment, KSA Year Qualification Major University 2002 PhD Financial Accounting and Audit University of Florida, USA Job title Name Legal form Sector Member of the Risk and Credit Committee United Electronics Company (eXtra) Public shareholding company Electronic and domestic commodities retail Other Current Memberships and Positions 1995 Master Degree Accounting University of Santa Monica, USA 1990 Bachelor Degree Business Management, Accounting Major King Saud University, Riyadh, KSA Professional Experience Other Current Memberships and Positions Job title Name Legal form Sector Board Member Al Alamiya for Cooperative Insurance Company Public shareholding company Insurance Dr. Yahya bin Ali Al Jabr, Committee Member and non-Board Member Professional Experience Dr. Al Jabr is an external member of the Audit Committee. He is a Faculty Member at King Saud University, Riyadh. Dr. Al Shunaifi has more than 30 years’ experience in accounting, corporate governance, and risk management. He worked as advisor to many government entities and professional organizations. He has been a board member of the Saudi Organization for Certified Public Accountants and Advisor in the Diwan of HH The Crown Prince Salman bin Abdulaziz Al Saud, may Allah protect him, and was a member of the committee formed by the Capital Market Authority for the management of Al Mojil Company. 68 | Board of Directors' Report Mr. Al Shadokhi has 28 years’ experience in credit and risk management with banks and financial institutions operating in the Kingdom. He was the President of the Risk and Credit department at Nayifat Finance Company until 2013 and held a number of memberships in the audit, finance, credit, and risks committees. The National Commercial Bank | Annual Report 2017 Academic Qualifications Year Qualification Major University 2000 PhD Accounting Melbourne University, Australia 1996 Master Degree Accounting University of Miami, USA 1992 Bachelor Degree Accounting King Saud University, Riyadh, KSA 1996 Fellowship of the Saudi Organization for Certified Public Accountants Accounting and Audit Saudi Organization for Certified Public Accountants 2000 US Certified Management Accountant Accounting Institute of Management Accountants, USA 2000 US Certified Financial Manager Financial Management Institute of Management Accountants, USA The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 69
36. Other Current Memberships and Positions Other Current Memberships and Positions Job title Name Legal form Sector Job title Name Legal form Sector Board Member VIVA Bahrain Public shareholding company Communications Board Member AlAhli Takaful Company Listed Shareholding Company Insurance Board Member Middle East Company for Manufacturing and Producing Paper Listed Shareholding Company Basic Materials Dr . Al Jabr has more than 20 years’ academic and practical experience in finance and accounting. He has held many memberships of audit, finance, credit, and risk committees. Board Member Türkiye Finans Katilim Bankasi Closed Shareholding Company Banking Khaled bin Mohamed Al Sulai, Committee Member and non-Board Member Head of Audit Committee Ahmed Mohamed Saleh Baeshen & Co Closed Shareholding Company Food Production Professional Experience On 30/10/2017, Mr. Al Sulai apologized for being unable to complete the current round of Audit Committee membership, due to his appointment to the Board of Directors of the Capital Market Authority for the coming five years by virtue of the Royal Decree announced in the Authority’s statement dated 29/10/2017. Academic Qualifications Year Qualification Major University 1983 Bachelor Degree Accounting King Saud University, Riyadh, KSA 1990 Fellowship of American Chartered Accountants Accounting The Institute of Internal Auditors (IIA), Maine, USA Other Current Memberships and Positions Job title Name Legal form Sector Board Member Capital Market Authority Government Organization Government Professional Experience Mr. Al Sulai has 30 years’ experience in accounting, audit, corporate governance, risk management, and combating fraud and embezzlement. He was Head of Internal Audit at Saudi Telecom Company until 2014. Previously, he had led quality programs for internal audit offices in Saudi Arabia. Mr. Al Sulai has been a board member of many shareholding companies in the Kingdom, as well as chairing and membership of audit committees. Members of the Executive Management Faisal Omar Al-Sakkaf – Head, Strategy & Business Development Group Mr. Al-Sakkaf has been Head of the Strategy & Business Development Group since 2013. He is also a member of the Senior Management Committee and the Assets and Liabilities Management Committee. Professional Experience Mr. Al-Sakkaf has more than 30 years of banking experience. He began his career at Samba Financial Group in the Corporate Banking Group. Having completed his post-graduate studies, he moved to the Saudi Hollandi Bank where he was Head of the Corporate Banking Group. In 1996, he returned to Samba, the Corporate Banking Group until 2000 when he was appointed Financial Controller in the Saudi Business Machines (SBM) Company, IBM’s Saudi agent. He joined NCB in 2003 as Head of Strategy and Performance Management. In 2006, he was appointed Group CFO, holding that position until assuming his current title. Abdul Razak Al-Mohammad Al Abdulkarim Alkhereiji – Head, Shariah Group Mr. Alkhereiji has been the Head of Shariah Group since 2013. He is a member of local and international boards, committees, and institutions related to Islamic banking. Academic Qualifications Year Qualification Major University 1980 Bachelor Degree Management and Economy Macalester College, Minnesota, USA Other Current Memberships and Positions Job title Name Legal form Sector Member of the Board of Trustees Accounting and Audit Board of the Islamic Financial Institutions Non-profit Organization Islamic Banking Board Member The General Council for Islamic Banks and Institution (CIBAFI) International Organization Islamic Banking Board Member International Islamic Financial Market (IIFM) Non-profit Organization Islamic Banking Board Member SEDCO Holding Closed Shareholding Company Investment Academic Qualifications Year Qualification Major University 1986 Master Degree Business Management Harvard University, USA 1982 Bachelor Degree Economy Harvard University, USA 70 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 71
37. Other Current Memberships and Positions Professional Experience Mr . Alkhereiji has more than 37 years’ banking experience. He began his career at NCB in 1980 as a trainee, being promoted in 1994 to Regional Manager for the Western Region, followed by the same position in Eastern Region, and becoming Deputy Head of Islamic Banking Department. In 2004, Mr. Alkhereiji was appointed Head of Retail Islamic Banking. During his professional career, he contributed to many achievements in Islamic banking through his contribution in the development of systems and products that helped the growth of Islamic banking. He was extensively involved in the gradual transformation of Islamic banking in NCB and to the correct implementation of the decrees of the Shariah Board. Mr. Alkhereiji was Head of Retail Islamic Banking until his current appointment. Khalid bin Malik AlGhalib AlSharif– Head, Corporate Banking Group Mr. AlSharif has been Head of Corporate Banking Group since 2010. He is a Member of the Senior Management Committee, the Assets and Liabilities Committee, the Operation Risk Committee, and the Credit and Debt Treatment Committee. Academic Qualifications Job title Name Legal form Sector Board Member NCB Capital Closed Shareholding Company Capital Markets Board Member Real Estate Development Fund Government Organization Government Board Member Al-Suqoor Club Government Organization Government Board Member Inma Al Roaya Company Limited Liability Company Multiple Investments Professional Experience Mr. Fayez has than 18 years of banking experience, having begun his career with Merrill Lynch and Credit Suisse. In 2007, he joined Goldman Sachs as Head of Wealth Management for Saudi Arabia, becoming CEO of Goldman Sachs Saudi Arabia a year later. In 2009, Mr. Fayez joined NCB Capital as Managing Director and Head of Assets Department, moving to NCB in 2012 as Head of Special Banking before assuming his current position. Year Qualification Major University 1985 Master Degree Business Management Notre Dame College, USA Bleihid N. Bleihid – Head, Human Resources Group 1984 Bachelor Degree Business Management Notre Dame College, USA Mr. Bleihid has been Head of the Human Resources Group since 2013. He is also a member of the Senior Management Committee. Academic Qualifications Other Current Memberships and Positions Job title Name Legal form Sector Member of the Founding Committee Roaa Al Madina Company Government Construction Member of the Endowment Supervision Board Endowment of King Abdulaziz, Al Ain, Azizia Endowment Government Member of the Board of Trustees Ibrahim Al Anqari Charity Charity Community Services Qualification Major University 1983 Bachelor Degree Business Management Heritage University, USA Other Current Memberships and Positions Professional Experience Mr. AlSharif has more than 32 years’ experience in banking, having begun his career at the Investment and International Affairs Department at Riyadh Bank in 1986. He was appointed Regional Manager for the Western Region in 1996, becoming Deputy CEO in 1998. In 2000, Mr. AlSharif was appointed NCB’s Head of Branch Network, later becoming Head of Special Banking. In 2007, he was appointed Head of Retail Banking Group, holding that title until assuming his current position. Hamed M. Fayez – Head, Retail Banking Group Mr. Fayez has been Head of Retail Banking Group since 2013. He is a Member of the Senior Management Committee, Assets and Liabilities Committee, Operational Risk Committee, and the Credit and Debt Treatment Committee. Academic Qualifications Year Qualification Major University 2000 Bachelor of Sciences Mathematical Sciences/ Economy Johns Hopkins University, USA 72 | Board of Directors' Report Year The National Commercial Bank | Annual Report 2017 Job title Name Legal form Sector Chairman of the Board AlAhli Takaful Company Public Shareholding Company Insurance Board Member Baku LLC Limited Liability Company Special Purpose Vehicle Professional Experience Mr. Bleihid has more than 34 years’ experience in management, human resources, and transformation and change management. He has participated in advanced management courses at HSBC Academy, Harvard University, Chicago University, and IMD Institute in Switzerland. Mr. Bleihid began his professional career in 1983 at the National Information Center, later being promoted to Head of Administration. In 1985, he moved to King Faisal Specialist Hospital, latterly Assistant CEO for Administrative Affairs, Head of Employment Department, and Member of the Supreme Management Consultative Council. In 1997, he moved to the Saudi British Bank (SAIB) as Head of Human Resources. In 2006, he joined the Saudi Research and Marketing Group where he was Head of Human Resources and Organizational Development. In 2007, Mr. Bleihid established Ejadah for Management Consultancies and was appointed Managing Director until 2013, joining NCB in June of that year as Head of the Human Resources Group. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 73
38. Lama Ahmed Ghazzaoui – Head, Finance Group Professional Experience Mrs. Ghazzaoui has been Head of Finance Group (CFO) since 2013. She is a Member of the Senior Management Committee, Assets and Liabilities Committee, Purchases Committee, and the Credit and Debt Treatment Committee. Mr. Al Morshed has more than 28 years’ experience banking, having begun his career with NCB after graduation in 1988. In 1996, he became Regional Director for the Central Region, followed in 2003 to appointment as Head of Commercial Business Group. In 2006, he became Director of the Corporate Banking Group, and in 2013 Head of Global Banking. Academic Qualifications Year Qualification Major University Talal bin Ahmed Al Khereji – Head, Treasury Group 1996 Bachelor Degree Accounting Lebanese American University, Lebanon Mr. Al Khereji has been Head of Treasury Group since 2009. He is also a Member of the Senior Management Committee, Assets and Liabilities Committee, Operational Risk Committee, and the Credit and Debt Treatment Committee. 2000 Member General Accounting Association of Chartered Accountants, Colorado, USA Academic Qualifications Other Current Memberships and Positions Year Qualification Major University Job title Name Legal form Sector 1995 Master Degree International Businesses Edmund A. Walsh School of Foreign Service, George Town University, USA Head of Audit Committee NCB Capital Company Closed Shareholding Company Financial Services 1993 Bachelor Degree International Economy George Town University, USA Other Current Memberships and Positions Professional Experience Mrs. Ghazzaoui has more than 21 years’ experience in finance, accounts, and banking. She began her professional career as an external auditor at Deloitte & Touche, joining Effat University in 2001 as internal auditor and accounting teacher. She moved to NCB in 2003 as a Senior Financial Analyst, later becoming a Financial Controller responsible of general financial affairs, preparation of balance sheets, issuance of reports, and treasury management control. In 2010, Mrs. Ghazzaoui was appointed as Chief Accountant, holding that position until her current appointment. Nayef bin Safouk Al Bashir Al Morshed – Head, Risk Committee Mr. Al Morshed has been Head of the Risk Committee since 2015. He is also a Member of the Operational Risk Committee, Senior Management Committee, Assets and Liabilities Committee, Credit and Debt Treatment Committee, and the Information Security Committee. Academic Qualifications Job title Name Legal form Sector Board Member NCB Capital Company Closed Shareholding Company Capital Markets Professional Experience Mr. Al Khereji has more than 22 years of banking experience, having begun his career in 1995 at the Investment Department of Saudi Arabian Monetary Agency. He was a member of advisory group that implemented SAMA investment policy on cash reserve management. He also worked in the allocation of strategic assets, investment research, and management of investment funds. Mr. Al Khereji joined NCB in 2003, heading the Assets and Liabilities Department at the Treasury Group and holding the position of NCB Assets and Liabilities Department Secretary. He continued in this position until his current appointment. He has also headed the Saudi Banks Treasury Committee for two years since becoming NCB’s Head of Treasury. Year Qualification Major University Firas bin Hani Al Turki – Head, Shared Services Group 1988 Bachelor Degree Business Management California State University, USA Mr. Al Turki has been Head of Shared Services Group since 2016. He is also Chairman of the Purchases Committee and Business Continuity Management Program Steering Committee, and a Member of the Senior Management Committee, Operational Risk Committee, and Information Security Committee. Other Current Memberships and Positions Academic Qualifications Job title Name Legal form Sector Board Member Patients’ Treatment Charity Charity Organization Community Services Advanced Technologies Company Limited Liability Company Industrial / Maintenance and Operation / Contracting Board Member Board Member 74 | Board of Directors' Report Saudi Real Estate Company (Al Akaria) Public Shareholding Company Real Estate Investment The National Commercial Bank | Annual Report 2017 Year Qualification Major University 2002 Master Degree Industrial Engineering University of Florida, Gainesville, USA 1999 Bachelor Degree Industrial Engineering King Abdulaziz University, KSA Other current memberships and positions NA The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 75
39. Professional Experience Fouad bin Abdullah Al Harbi – Head, Compliance Department Mr. Al Turki has more than 15 years of banking experience, having begun his career through NCB’s Executive Employee Program. He worked in financial and accounting affairs within the CFO’s Office, at the corporate service centers, corporate operations, project management, and the operation departments, before assuming his current position. Mr. Al Harbi has been Head of Compliance Department since 2013. He is also Chairman of the Compliance Committee and heads SAMA’s Chief Compliance Officers’ Committee for banks operating in Saudi Arabia. Mr. Al Harbi is a Fellow of the Arab Academy for Banking and Financial Sciences. Walid bin Hassan Abdul Shakur – Head, Legal Department Academic Qualifications Mr. Abdul Shakur has been Head of Legal department since 2009. He is also a member of the Compliance Committee. Academic Qualifications Year Qualification Major University 1993 Bachelor Degree Accounting King Abdulaziz University, Riyadh, KSA Year Qualification Major University 1989 Bachelor Degree Law King Abdulaziz University, KSA 2007 Certified Compliance Officer Compliance American Academy of Financial Management, USA 2006 License in Law Law Ministry of Justice, KSA 2012 Compliance and Anti-Money Laundering Certification Compliance and Anti-Money Laundering Henley Business School, UK 2007 Member of the Arab Lawyers Union Law Arab Lawyers Union Certified Compliance Officer Compliance Law / Arbitration GCC Commercial Arbitration Centre 2012 2013 Certified Arbitrator at the GCC Commercial Arbitration Centre Saudi Arabian Monetary Agency, Banking Institute, Riyadh, KSA Other Current Memberships and Positions Other Current Memberships and Positions Job title Name Legal form Sector Board Member Commercial Real Estate Markets Company Limited Limited Liability Company Real Estate General Manager Real Estate Development Company for Ownership and Management Limited Limited Liability Company Real Estate Board Member Arab Financial Services Company Closed Shareholding Company, Kingdom of Bahrain Financial Services Professional Experience Mr. Abdul Shakur has more than 27 years’ experience in advocacy and legal consultancy. He began his career in 1990 as a legal researcher with NCB and held increasingly responsible positions before becoming Head of Legal in 2009. Over his tenure with the Legal Department, Mr. Abdul Shakur has accumulated extensive experience in legal specialties such as adjudication, contracts, and general consultancy. Job title Name Legal form Sector Member of the Audit Committee Jeddah Development and Urban Regeneration Company Closed Shareholding Company Urban Development Member of the Board of Directors Alahli Insurance Service Marketing Company Limited Liability Company Insurance Professional Experience Mr. Al Harbi has more than 25 years’ experience in accounting, control, and compliance and anti-money laundering. He began his career at Thebes Real Estate Investment and Development Company where four years and became Head of Accounting Department. He joined NCB in 1997, holding various positions and co-founding the Compliance Department where he several roles until appointment to his present position. Jasser bin Abdulkarim Al Jasser – Head, Internal Audit Mr. Al Jasser has been Head of Internal Audit since 2015 and also chairs the Operational Risk Committee. Academic Qualifications 76 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Year Qualification Major University 2001 Master Degree Business Management Colorado Technical University, USA 1999 Bachelor Degree Business Management King Saud University, Riyadh, KSA The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 77
40. Other Current Memberships and Positions Board Committees Job title Name Legal form Sector Audit Committee Independent Member of the Risk Committee The Saudi Stock Exchange (Tadawul) Closed Shareholding Company Financial Markets The Audit Committee consists of at least five members to be appointed by the Board of Directors. The Committee shall meet at least once every three months – four times every year – or whenever required by invitation from the Chairman or the request of two members. The Committee quorum shall be three members in person, including the Chairman. Independent Member of the Audit Committee Securities Depository Centre Company (Edaa) Closed Shareholding Company Financial Markets Independent Member of the Audit Committee Takamol Holding Closed Shareholding Company Labour Market Development The decisions and discussions of the Committee must be recorded in minutes to be signed by the Chairman and the members. Recording the proceedings of meetings is the responsibility of the Board Secretary. Role and Responsibilities The Committee shall be accountable to the Board and shall assist the Board in meeting its responsibilities, which include: Professional Experience Mr. Al Jasser has more than 16 years’ experience during which he assumed many responsibilities, being Director General of the Internal Audit Committee at the Saudi Stock Exchange (Tadawul) before joining NCB. He has carried out many audit duties and provided assurances and consultancies in various market sectors, including corporate and retail banking, capital markets, risk management, and other control and support functions. He has also led many initiatives and projects to leverage the internal audit function level and enhance the value of its services in supporting the Board of Directors and the Audit Committee to meet their responsibilities related to governance, as well as supporting the executive management in the achievement of the strategic and operational objectives. He completed two specialized programs in management and leadership from INSEAD Business Management College in France and received the US Certified Internal Auditor and Certified Risk Analyst certification. He is a member of the Institute of Internal Auditors and member of the Institute of Management Accountants. Key Roles and Responsibilities of the Board of Directors: • Ensuring the operation of an effective system of internal control and compliance. • Meeting external financial reporting obligations, including those prescribed under applicable laws and regulations. • The key objective of the Audit Committee is to oversee and supervise: - The integrity of financial statements. - The external/internal auditors’ qualifications, independence, and performance supervision. - The Bank’s compliance with all applicable legal and regulatory requirements and ethical standards. - Performing the internal audit, compliance, anti-money laundering, and financial crime functions according to the standards stipulated by laws as required by SAMA. - Reviewing the contracts and transactions suggested to be conducted by the Bank with related parties and providing its recommendations to the Board. Apologies Attendance percentage % 25 January 15 March 10 May 23 August 24 October 20 December Dr. Saad S. Alrwaita (Chairman) 6 5 1 86 Yes Yes No Yes Yes Yes Dr. Saleh H. Al Shunaifi 6 6 0 100 Yes Yes Yes Yes Yes Yes Hani Suleiman Al Shadokhi 6 5 1 86 Yes Yes Yes Yes No Yes 5 5 0 100 Yes Yes Yes Yes Yes 6 6 0 100 Yes Yes Yes Yes Yes Apologies Attendance percentage % 26 January 03 May 14 June 27 September 23 November 23 December 24 December Khaled bin Mohamed Al Sulai Mansour S. Al Maiman (Chairman) 7 7 0 100 Yes Yes Yes Yes Yes Yes Yes Dr. Yahya bin Ali Al Jabr Mutlaq A. Al-Mutlaq 7 4 3 57 Yes No Yes Yes Yes No No Executive Committee Abdulrahman M. Al Mofadhi 7 6 1 86 Yes Yes Yes Yes Yes No Yes Eng. Abdul-Aziz A. Al-Zaid 7 6 1 86 Yes Yes No Yes Yes Yes Yes Dr. Saad S Alrwaita 7 6 1 86 Yes No Yes Yes Yes Yes Yes Ibrahim M. Al-Romaih 7 6 1 86 Yes No Yes Yes Yes Yes Yes The Executive Committee consists of five members, namely the Chairman, three Board members, and the CEO. It shall be headed by the Chairman and may be headed by the CEO. The Committee holds six periodic meetings per year or whenever needed and the meeting may be cancelled if there are no urgent decisions required. Committee quorum comprises at least three members, whether in person or by proxy, including the Chairman. Absent members may vote by proxy. Anees A. Moumina 7 7 0 100 Yes Yes Yes Yes Yes Yes Yes Saud S. Aljuhani 7 7 0 100 Yes No Yes Yes Yes Yes Yes Saeed M. Al-Ghamdi (CEO) 7 7 0 100 Yes Yes Yes Yes Yes Yes Yes Name Attendance Name Number of meetings Board of Directors’ Meetings, 2017 Attendance • The Board shall be accountable for setting NCB overall strategy and guiding its strategy and objectives. •Therefore, the Board shall also be responsible for monitoring the financial objectives of the Bank and verifying corporate performance against previously agreed strategic, operational, and business plans. • The Board's tasks include aligning and monitoring the organizational structure of all businesses, staffing levels, the Bank’s compensation system, and supervising succession plans. Number of meetings Audit Committee Meetings, 2017 78 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 Yes The decisions and discussions of the Committee must be recorded in minutes to be signed by the Chairman and the members. Recording the proceedings of meetings is the responsibility of the Committee Secretary. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 79
41. Roles and Responsibilities The main objective of the Executive Committee is to manage and oversee the Bank ’s operations and make quick decisions on urgent issues in the Bank’s course of business. Executive Committee shall guarantee that the Bank is sufficiently represented in the affiliated companies. In addition, it shall make decisions on credit and debt settlement, corporate responsibility, purchases, and corrective measures within the authority conferred by the Board. Number of Meetings Attendance Apologies Attendance percentage % 12 January 20 April 03 May 31 May 17 September 29 October Executive Committee Meetings, 2017 Mansour S. Al Maiman (Chairman) 6 6 0 100 Yes Yes Yes Yes Yes Yes Mutlaq Bin Abdullah Al-Mutlaq 6 4 2 67 Yes Yes No No Yes Yes Abdulaziz Bin Abdallah Al-Zaid 6 6 0 100 Yes Yes Yes Yes Yes Yes Ibrahim M. Al-Romaih 6 5 1 83 Yes Yes No Yes Yes Yes Saeed Mohammed Al-Ghamdi 6 6 0 100 Yes Yes Yes Yes Yes Yes Nomination, Remuneration, and Governance Committee* 80 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 11 June 21 September 17 December • Suggest clear policies and standards to the Board of Directors and the executive management. •Provide recommendations to the Board of Directors in relation to Board membership, according to the applicable policies and procedures. •Ensure compliance with the terms and conditions stated in the rules and regulations issued by the regulatory bodies and the requirements decided by the Saudi Arabian Monetary Agency, the Capital Market Authority, and the Ministry of Commerce and Industry as well as the Board membership nomination policy approved by NCB’s General Assembly. • Ensure that the number of candidates for board membership whose names are placed before the General Assembly is greater than the number of available seats so that the General Assembly has the opportunity to choose from the candidates. •Set a description of the capabilities and qualifications required for Board membership and for filling executive management positions. • Conduct an annual review and prepare the description of the required skills and qualifications for Board membership including specification of the time that shall be allocated by the member for the activities of the Board. Attendance percentage % Roles and Responsibilities Apologies In its annual meeting on 31 December 2017, the NCB General Assembly approved the Nomination, Remuneration, and Governance Committee’s Charter in line with the Corporate Governance Charter issued by the Board of the Capital Market Authority. The Nomination, Remuneration, and Governance, Committee consists of at least three non-executive Board members including two independent non-executive members other than the Board members. The Chairman shall not have the right to be the Head of the Committee. The CEO and Head of Human Resources Group may be invited to attend the meetings without exercising voting rights. The Committee shall convene at least twice a year. The meeting quorum shall comprise the presence of the majority of members. Committee decisions and recommendations shall be made with the majority of present members’ votes. In case of a tie, the Chairman shall have a casting vote. The decisions and discussions of the Committee must be minuted and signed by the Chairman and the members. Recording the proceedings of meetings is the responsibility of the Committee’s secretary. Attendance Nomination, Remuneration, and Governance Committee Meetings, 2017 Number of meetings Name • Ensure that No Objection Certificates are obtained from SAMA for the nominees, after they have been approved by the Board. • Review the Board’s structure and provide recommendations on proposed changes. •Establish a register with the Board members’ qualifications and skills to identify the additional skills required to enhance the Board role and performance of its duties and responsibilities. • Define the Board’s strengths and weaknesses, and suggest solutions that serve the Bank’s interest. • Annually ensure the independence of the independent members and the absence of any conflict of interest in case a Board member also acts as a member of the board of directors of another company. • Set a job description for the executive, non-executive, and independent members and senior executives. • Set the measures for filling vacancies in Board membership and in senior executive management. • Set clear policies for Board and committee members’ and executives’ performance-based remuneration standards, disclose such standards, verify their implementation, and consider the provisions issued by the regulatory bodies when preparing and raising them to the Board for approval by NCB’s General Assembly. •Explain the relation between the granted remuneration and the applicable remuneration policy and indicate any material deviation from such policy. • Periodically review the remuneration policy and assess its effectiveness in the achievement of set goals. • Make recommendations to the Board on the remuneration of the Board members, Board committee members, and senior executives according to the approved policy. • Ensure that the volume of remuneration conforms to the prevailing local practice and relevant regulations, achieves the depositors and shareholders’ interests, and achieves the Bank long-term strategic objectives. • Develop the Bank’s succession policy and ensure compliance by executive management. • Ensure that the Bank’s incentive program is regularly reviewed and does not encourage the involvement in high-risk transactions to achieve short-term profits and is in line with NCB’s approved risk policy. • Make recommendations to the Board on the candidates for membership of Board committees taking into account the necessary qualifications required for every committee. Abdul-Aziz A. Al-Zaid (Chairman) 3 3 0 100 Yes Yes Yes Dr. Saad S. Alrwaita 3 3 0 100 Yes Yes Yes Saud S. Aljuhani 3 3 0 100 Yes Yes Yes Abdulrahman M. Al Mofadhi 3 3 0 100 Yes Yes Yes Mutlaq Bin Abdullah Al-Mutlaq 3 3 0 100 Yes Yes Yes Name Risk Committee The Risk Committee consists of at least three Board members and the CEO. The majority of members are non-executive. The Committee meets at least twice a year or when required. The quorum comprises the majority of members. The decisions and recommendations of the Committee are passed by the majority of votes of members present. In case of a tie, the Chairman shall have a casting vote. The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 81
42. Roles and Responsibilities The Risk Committee is in charge of the supervision of management in the Bank , ensuring that the management understands significant risks to which the Bank is exposed and has comprehensive policies and processes in place to manage these risks, within the limits and areas of authority prescribed by the Board. The Committee shall review the measures adopted to ensure a sound and consistent risk profile. Ownership of shares by Directors and Senior Executives, their wives, and minor children, and changes during 2017: (a) Directors, their Wives, and Minor Children Number of shares at the beginning of the year 01/01/2017 Name of the Beneficiary Risk Committee Meetings,2017 Abdulrahman M. Al Mofadhi Representative of the Public Investment Fund (PIF) 37,252 37,252 000 000 10,090 10,090 000 000 1,000 1,000 000 000 16,368 16,368 000 000 0 0 000 000 26,600 26,600 000 000 9,749 9,749 000 000 16 November 000 18 September 000 11 May 1,333 22 March 1,333 Attendance percentage % Mutlaq A. Al-Mutlaq Apologies 000 Attendance 000 Number of meetings 8,000 4 0 100 Yes Yes Yes Yes Eng. Abdul-Aziz A. Al-Zaid Anees A. Moumina 4 4 0 100 Yes Yes Yes Yes Dr. Saad S. Alrwaita Abdulrahman M. Al Mofadhi 4 2 2 50 No No Yes Yes Ibrahim M. Al-Romaih Saeed M. Al-Ghamdi 4 4 0 100 Yes Yes Yes Yes Saud S. Aljuhani (Representative of PPA) Anees A. Moumina (representative of GOSI) In line with the provisions of the applicable laws and regulations issued by the competent regulatory bodies in the Kingdom that a Board should assess the effectiveness of its members and the volume of their involvement in its businesses, whether jointly or individually, and that this should apply to the Board committees, the Nomination, Remuneration, and Governance Committee, when designing and preparing the assessment forms, considered the volume of the members’ involvement and their effectiveness at the level of the Board and its Committees. The Bank began implementation of this assessment in 2016. An external consulting office will be engaged for the assessment of Board members every three years. Training Programs for the Members of the Board of Directors and the Board Committees Given the Bank’s commitment to enhance the skills of the members of the Board of Directors and the Board Committees in banking and governance, a number of training programs inside and outside the Kingdom have been designed covering all the members of the Board of Directors and the Board Committees. NCB will continue the preparation of such programs in the coming year to become more specialized. Changes to Key Share Ownership Y-o-Y % 8,000 4 Assessment of the Effectiveness of the Members of the Board of Directors and the Board Committees: Net change Mansour S. Al Maiman Saud S. Aljuhani (Chairman) Name Number of shares at the end of the year 31/12/2017 Saeed Mohammed Al-Gamdi (Chief Executive Officer) (b) Senior Executives, their Spouses, and Minor Children Number of shares at the beginning of the year 01/01/2017 Number of shares at the end of the year 31/12/2017 Name of the beneficiary Title Net change Lama A. Ghazzaoui Head of Finance Group 0 000 000 000 Eyad Ibrahim Medini General Secretary of the Board 0 000 000 000 Y-o-Y % The Bank did not receive, as of the listing date, any notices from the principal shareholders in respect of changing their ownership ratio in the Bank's shares, according to the disclosure requirements referred to in the Listing Rules issued by CMA. The following table provides a detailed description of their ownership ratios: Shareholder’s name Number of shares at the beginning of the year 1/1/2016 Number of shares at the end of the year 31/12/2016 Net change Y-o-Y % Ownership % Public Investments Fund (PIF) 855,893,333 855,893,333 0 0 44.29 General Organization for Social Insurance (GOSI) 200,000,000 200,000,000 0 0 10.00 Public Pension Agency (PPA) 200,874,765 200,874,765 0 0 10.04 82 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 83
43. Shareholders ’ Rights NCB’s Shareholders’ General Assemblies NCB's Articles of Association, updated according to the resolution of the Extraordinary General Assembly held on 3 May 2017 and NCB’s Governance Regulations approved by the Board of Directors on 23 November 2017, stipulated shareholders' rights to obtain profits, attend assemblies, participate in discussions and voting, and dispose of the shares. Shareholders are also provided with information related to assemblies, budgets, the account of profits and losses, and the Board of Directors’ annual report. This information is also published in local newspapers and on NCB's official website. Following is a statement with the Bank’s number of requests for the shareholders’ register, the dates of such requests and their reasons for the fiscal year ended 31 December 2017: During the fiscal year ended 31 December 2017, NCB held two general assemblies for its shareholders in which a number of topics announced on the website of Tadawul were discussed. The also Board reviewed shareholder resolutions and recommendations issued by the two general assemblies. Following is a statement with the general assembly meetings held in the fiscal year ended 31 December 2017 and the attendance of the Board members: Attendance Register Name 5th Extraordinary General Assembly meeting (first meeting) 03/05/2017 17th Ordinary General Assembly meeting (first meeting) 31/12/2017 Mansour S. Al Maiman Attendance Attendance Number of requests Date of request Reasons for the request 1 01/01/2017 NCB’s internal procedures 2 08/02/2017 NCB’s internal procedures 3 30/04/2017 NCB’s internal procedures Mutlaq A. Al-Mutlaq Apology Apology 4 03/05/2017 5th Extraordinary General Assembly meeting (first meeting) Attendance Apology 07/05/2017 Distribution of the cash profits to NCB shareholders in respect of the second half of the fiscal year ended 31/12/2016 Abdulrahman M. Al Mofadhi Representative of the Public Investments Fund Eng. Abdul-Aziz A. Al-Zaid Attendance Attendance 6 20/06/2017 Distribution of the cash profits to NCB shareholders in respect of the first half of the fiscal year ended 31/12/2017 Dr. Saad S. Alrwaita Apology Apology 7 31/12/2017 17th Ordinary General Assembly meeting (first meeting) 8 02/01/2018 NCB’s internal procedures Ibrahim M. Al-Romaih Apology Apology Saud S. Aljuhani Representative of the Public Pension Agency Attendance Apology Anees A. Moumina Representative of the General Organization for Social Insurance (GOSI) Attendance Apology Saeed M. Al-Ghamdi (CEO) Attendance Attendance 5 Corporate Governance In general, NCB is operating in compliance with the provisions and guidelines of the Corporate Governance Regulations issued by the CMA and the general governance principles for the banks operating in KSA and issued by SAMA as well as those issued by the Saudi Arabian Monetary Agency. NCB is committed to complying with all the governance regulations and updates. It continues to revise its relevant policies and procedures as regulatory updates are issued. In its meeting dated 23 November 2017, the Board of Directors approved the updated governance guide of the Bank, in addition to the creation and update of the policies supplementing the guide, which were approved by the General Assembly and NCB’s Board, each within its powers in line with the provisions of the Corporate Governance Regulations issued by the CMA. NCB affirms that it continues to audit the general framework of the Bank’s governance in accordance with the highest professional standard and best practices to keep abreast of any developments and to ensure the implementation of effective governance in all the Bank’s businesses. 84 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 85
44. Acknowledgment The NCB Board expresses its deep gratitude and appreciation to the Custodian of the Two Holy Mosques , King Salman Bin Abdulaziz Al Saud; HRH Prince Muhammad Bin Salman Bin Abdulaziz Al Saud, Deputy Crown Prince, Deputy Prime Minister, and Minister of Defense; and the Government of the Custodian of the Two Holy Mosques. The Board also thanks the Council of Economic and Development Affairs, the Ministry of Finance, the Saudi Arabian Monetary Agency, the Capital Market Authority, and the Ministry of Commerce and Investment, which spare no effort to develop the financial services industry in the Kingdom. This has great impact on the progress and prosperity of the national financial sector, in addition to their significant role in achieving economic growth in the Kingdom, despite the considerable challenges facing the world’s economies. The Board expresses its gratitude to all NCB’s shareholders for their continuous trust and support for the Bank’s business strategies. The Board also thanks its customers, one of the most important assets in the Bank’s continued success, and all employees for their dedication and competence, which are vital elements in the Bank’s distinguished 2017 results. Board of Directors 86 | Board of Directors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Board of Directors' Report | 87
45. Auditor 's Report Consolidated Financial Statements
46. KPMG Al Fozan & Partners Certified Public Accountants KPMG Al Fozan & Partners Certified Public Accountants 9th Floor, Tower A, Zahran Business Centre Prince Sultan Street P. O. Box 55078 Jeddah 21534 Kingdom of Saudi Arabia License No. 46/11/323 issued 11/3/1992 Ernst & Young & Co. (Public Accountants) 13th Floor - King’s Road Tower King Abdulaziz Road P. O. Box 1994 Jeddah 21441 Kingdom of Saudi Arabia Registration Number: 45 Independent Auditors’ Report on the Audit of the Consolidated Financial Statements To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Opinion We have audited the consolidated financial statements of The National Commercial Bank (the “Bank”) and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and summary of significant accounting policies and other explanatory notes from 1 to 48. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”) as modified by the Saudi Arabian Monetary Authority (“SAMA”) for the accounting of zakat and income tax. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (“ISAs”) that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the professional code of conduct and ethics, that are endorsed in the Kingdom of Saudi Arabia that are relevant to our audit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter, a description of how our audit addressed the matter is set out below provided in that context: Key audit matter Impairment of financing and advances 90 | Auditors' Report Why considered most significant How our audit addressed the key audit matter Our audit procedures in response to the significant risk associated with the impairment on Group’s financing and advances covered assessing the appropriateness of the corresponding impairment allowances. As at 31 December 2017, the Group’s gross financing and advances amounted to SR 256,035 million (2016: SR 259,521 million), against which an impairment charge of SR 1,864 million (2016: SR 1,931 million) was recognised during the year, aggregating to a cumulative Based on our understanding of the process allowance for credit losses of SR and key controls, we focused on the 1 The National Commercial Bank | Annual Report 2017 Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) 6,801 million (2016: SR 5,928 identification of loss events and the million) as at the reporting date. governance controls over the impairment process, including continuous rePlease refer note 7 for details of assessment by management. We have financing and advances and performed walkthroughs and testing of corresponding impairment charge, relevant key controls to determine whether and notes 2.5(a), 3.11 and 3.13(a) for they were designed, implemented and details of the accounting policy operated effectively throughout the year. adopted by the Group for the identification and recognition of In addition, we tested the IT controls related related credit losses. to systems in use for the computation of impairment. Also, we tested the entity and Impairment allowance is a highly business unit level controls over the subjective area due to significant impairment model process in relation to level of judgment applied by the model build (with specific focus on management in the determination of quantitative and qualitative attributes), cumulative impairment allowances model monitoring and the annual validation as at the reporting date. Due to the process. materiality of the amounts involved and related subjectivity, this is considered as a key audit matter. Corporate financing and advances (local and international) In respect of corporate financing and advances, judgment is applied to determine appropriate parameters and assumptions used to calculate impairment allowances. The Group uses historical experience, evaluating the characteristics of expected problematic customers, valuation of collaterals for secured lending and the expected future cash flows of corporate customers. Corporate financing and advances (local and international) Where impairment allowances were individually calculated, we assessed the criteria for determining whether an impairment event had occurred and therefore whether there was a requirement to calculate an impairment allowance. We tested a sample of financing and advances to determine whether management had identified and appropriately accounted for all impairment events and to assess whether impairment had been identified on a timely manner. In addition, we considered the effect of financial stress prevailing in various sectors including the construction, contracting and related industries on the creditworthiness of We selected samples from the performing relevant counterparties. portfolio and checked whether any of the selected customers warranted classification as non-performing or impaired. 2 The National Commercial Bank | Annual Report 2017 For customers with exposure to the sectors susceptible to prevailing economic conditions, we increased our sample testing of cases individually assessed for impairment, including those customers identified on the watchlist, and those that Auditors' Report | 91
47. KPMG Al Fozan & Partners Certified Public Accountants Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) KPMG Al Fozan & Partners Certified Public Accountants Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) remained in the ‘good book’. In addition, we assessed the completeness of the unidentified impairment allowance for these customers. For impaired corporate financing and advances, we obtained an understanding of the basis of measuring impairment allowances and considered whether management’s key judgments and expectation were appropriate given the borrowers’ circumstances, including the assessment of impairment and the assessment of whether historic experience is appropriate when assessing the likelihood of incurred losses. For a sample of customers, we also re-performed the impairment allowance calculation. In addition, we tested key inputs to the impairment allowance calculation including the expected future cash flows and valuation of collateral held, and performed tests to determine whether valuations were up to date and appropriate for the purpose. Where impairment allowance was calculated on a collective basis, we tested, on a sample basis, the completeness and accuracy of the inputs to the impairment model used by management, including underlying financing and advances information, by agreeing details to the Group’s source systems as well as re-computing the impairment allowance calculation. For key assumptions used in the model, we have assessed whether those assumptions were appropriate in the circumstances. Consumer and credit cards financing Consumer and credit cards and advances (local and international) financing and advances (local and For consumer and credit cards financing international) and advances, where impairment allowance Impairment for credit losses in is estimated on a collective basis or via use respect of consumer and credit cards of a loss norm percentages, we tested, on a financing and advances is sample basis, the completeness and determined using models, that aim to accuracy of the inputs to the impairment capture historical loss norms as a model used by management, including means to estimate incurred credit underlying financing and advances losses at the reporting date. This entails the collation and assessment of consumer and credit cards financing and advances into pools of homogenous customers that have similar credit risk characteristics. Where required, historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based, and to remove the effects of conditions in the historical period that do not exist currently. information, by agreeing details to the source systems as well as re-computing the impairment allowance calculation. For the key assumptions used in the model, we have assessed whether those assumptions were appropriate in the circumstances. As at 31 December 2017, the gross values of investments (excluding investments carried at fair value through income statement) amounted to SR 113,538 million (2016: SR 109,884 million), against which an impairment of SR 939 million (2016: SR 903 million) has been recognised to date. Our audit procedures in response to the significant risk associated with the impairment on Group’s investments (excluding investments carried at fair value through income statement) included: Furthermore, we assessed the adequacy and appropriateness of financial statement disclosure with respect to impairment on Hence, in lieu of the aforementioned financing and advances. factors, it has been considered as a key audit matter. Impairment of investments  Please refer note 6 for details of these  investments and corresponding impairment charge, and note 3.13 for details of the accounitng policy adopted by the Group for the identification and recognition of  related impairment. Such investments, are classified  under held to maturity, held at amortised cost and available for sale categories. These are susceptible to  credit and market risk. The estimation of credit losses on debt investments (such as bonds, sukuks, collateralized debt 3 92 | Auditors' Report Moreover, we checked that no changes had been made in the model parameters assumptions unless considered reasonable and required in lieu of any new or emerging facts or circumstances. an assessment of consistency in application of Group’s methodology for impairment assessment and computation testing relevant internal controls over determination of appropriate impairment triggers, occurrence of impairment events and estimating the amount of impairment losses an assessment of relevance, reasonableness and completeness of assumptions corresponding to specific instruments an analysis of the investment portfolio for instances of any previously unidentified impairment triggers. for a selected sample of investments, recalculation of the impairment loss estimated by the Group, including sensitivity of the impairment loss to any changes in the significant assumptions used. 4 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Auditors' Report | 93
48. KPMG Al Fozan & Partners Certified Public Accountants Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) obligations) requires the Group to  exercise judgment in defining and monitoring objective evidence of impairment, represented by:    the establishment of impairment triggers (including credit rating downgrades, financial or repayment difficulties, etc.) identification of the occurrence of trigger events, followed by an estimation of incurred losses at the reporting date using internal methodologies and relevant assumptions (including expected timing of cashflows, discount rates, probability of default factors and loss given default factors). testing the IT controls related to systems used in the monitoring of impairment triggers and computation of related losses. With respect to the impairment models used, we also tested controls over:   integrity and completeness of data derived from various internal systems and used in these models periodic model validation/ modification process Moreover, we also assessed the adequacy and appropriateness of financial statements disclosure with respect to impairment in investments.   Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) equity investments; we have determined it to be a key audit matter. Valuation of unquoted derivative and non-derivative financial instruments carried at fair value As at 31 December 2017, the carrying values of unquoted derivative and non derivative financial assets and financial liabilities carried at fair value aggregated to SR 22,827 million (2016: SR 16,647 million) and SR 1,945 million (2016: SR 2,635 million) respectively.   Obtaining an understanding of the management processes for identification, and mitigation of valuation risk, Conducting an evaluation of applied judgments and significant inputs used in the valuation, testing internal controls around reliability of the source and appropriateness of key assumptions, and testing the controls over approval of new models or changes to existing valuation models. We carried out an independent valuation assessment for a sample of unquoted financial instruments. The valuation estimate is particularly sensitive to certain inputs, whereby small changes can have a material impact on the Group’s reported With respect to financial statements disclosure, we have assessed whether the financial position, results and Group has appropriately reflected its disclosures. exposure to valuation risk of unquoted financial instruments, using appropriate Accordingly, due to the significance narratives and sensitivity analysis. the determination of what constitutes significant or prolonged decline. distinguishing between temporary and permanent decline continued assessment of impairment in periods subsequent to the initial recognition of loss of unquoted financial instruments and related estimation uncertainty, this has been determined as a key audit matter. Due to the significance of amount involved and the exercise of significant judgment by management in the process for determination of incurred losses on both debt and Application of As at 31 December 2017, the Our audit procedures in response to the hedge accounting positive and negative marked to significant risk associated with the market values of derivatives application of hedge accounting included: designated under hedging 5 94 | Auditors' Report Our audit procedures in response to the significant risk with respect to the valuation of unquoted derivative and non-derivative financial instruments included the assessment of the Group’s overall valuation framework; including: Please refer to note 40 for details of the composition and gross carrying  values of such financial instruments, and notes 3.3 and 3.10 for details of the relevant accounitng policy  adopted by the Group. In the absence of observable market inputs; the valuation of certain unquoted derivative and nonderivative financial instruments is derived using complex techniques, applying varied assumptions that are considered appropriate, reasonable and relevant based on management’s judgment. With respect to equity investments, the International Accounting Standard 39 (‘IAS 39’) requires the recognition of an impairment loss where instance of any significant or prolonged decline in the value of the investment is identified. However, IAS 39 does not prescribe quantitative thresholds in this regard. Accordingly, the Group management exercises judgment in:  KPMG Al Fozan & Partners Certified Public Accountants 6 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Auditors' Report | 95
49. KPMG Al Fozan & Partners Certified Public Accountants Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) relationships aggregated to SR 543  million (2016: SR 366 million) and SR 677 million (2016: SR 840 million) respectively, while the corresponding unrecognised  notional values amounted to SR 28,794 million (2016: SR 18,862 million). obtaining a detailed understanding of the Group’s framework for financial risk management and hedge accounting. testing internal controls over the establishment of hedging relationships, preparation of appropriate documentation and hedge monitoring process, including testing the prospective and retrospective effectiveness. Please refer note 13 for details of the composition, notional values and carrying values, and note 3.3 for details of the corresponding In addition, we have also checked hedge accounitng policy adopted by the effectiveness testing for a selected sample Group in the application of hedge of hedges. accounting. Where hedge effectiveness was performed The IFRS stipulate certain criteria or endorsed using external parties, we including hedge effectiveness testing analyzed and assessed the objectivity, as a pre-requisite to the application competence and experience of such third of hedge accounting. Due to the parties, including reviews of the reports complex nature of the hedge issued by them. accounting rules and their corresponding application, we have Our procedures also included tests of the determined hedge accounting to be a design, implementation and operating key audit matter. effectiveness of application controls embedded in the systems used in connection with the accounting for designated hedges. We have also assessed the appropriateness of the financial statement disclosures reflecting the Group’s cumulative exposures under hedging relationships at the reporting date. Impairment of goodwill As at 31 December 2017, the gross value of goodwill, acquired in a business combination, in the Group’s consolidated financial statements amounts to SR 746 million (2016: SR 802 million) against which cumulative impairment losses and foreign currency translation adjustments aggregate to SR 443 million (2016: SR 476 million) at the reporting date. Our audit procedures included the assessment of the Group’s process in respect of the recognition and measurement of goodwill impairment, including the assumptions used. We also assessed the appropriateness of key assumptions forming the Group’s value-in-use calculation, including dividend and cash flow projections and discount rates. KPMG Al Fozan & Partners Certified Public Accountants Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) note 3.9 for details of accounting policy adopted by the Group in repsect of initial recognition and subsequent measurement of goodwill. management assumptions against industry benchmarks, applied our understanding of the future prospects of the business from internal and external sources, and compared forecasts to historical experience. The Group’s assessment of the recoverable amount of cash generating unit amounting to SR 4,471 million involves the use of judgement. In accordance with the requirements of relevant IFRS, goodwill is subject to impairment reviews at least on annual basis. Such impairment analysis involve modelling techniques, requiring a significant amount of judgment and are subject to a higher risk of estimation uncertainty. It also requires estimates of future cash flows and associated discount and growth rates based on management’s view of future business prospects at the time of the assessment. Audit procedures also focused on the accuracy and completeness of the information provided by management to support their assessment. Uncertainty is typically high where the excess of recoverable amount over carrying value is limited and where value in- use is most sensitive to estimates of future cash flows. Accordingly, it has been considered as a key audit matter. Management has carried out an impairment study as at 30 November 2017. The recoverable amount was determined based on a value in use calculation, using Discounted Dividends Model projections from financial budgets approved by senior management of the cash generating unit, covering a five-year period. Moreover, we assessed and challenged key management assumptions related to Please refer note 11 for details of estimated future cash flows, growth and movement during the period and discount rates. We also compared 7 96 | Auditors' Report 8 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Auditors' Report | 97
50. KPMG Al Fozan & Partners Certified Public Accountants KPMG Al Fozan & Partners Certified Public Accountants Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) Independent Auditors’ Report To the Shareholders of The National Commercial Bank (A Saudi Joint Stock Company) Report on the Audit of the Consolidated Financial Statements (continued) Other Information included in the Group’s 2017 Annual Report Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements (continued) Management is responsible for the other information in Group’s annual report. Other information consists of the information included in the Group’s 2017 annual report, other than the consolidated financial statements and our auditors’ report thereon. The annual report is expected to be made available to us after the date of this auditors’ report. As part of an audit in accordance with ISAs that are endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  When we read the other information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above, and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs as modified by SAMA for the accounting of zakat and income tax, the Regulations for Companies, the Banking Control Law in the Kingdom of Saudi Arabia and the Bank’s By-laws, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs that are endorsed in the Kingdom of Saudi Arabia will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 10 98 | Auditors' Report 9 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Auditors' Report | 99
51. 100 | Auditors' Report The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Auditors' Report | 101
52. The National Commercial Bank (A Saudi Joint Stock Company) Consolidated statement of financial position as at 31 December 2017 and 2016 2017 Notes SAR’ 000 2016 SAR’ 000 ASSETS Cash and balances with SAMA 4 37,969,234 43,441,291 Due from banks and other financial institutions 5 21,966,218 19,213,063 Investments, net 6 114,577,825 111,508,971 Financing and advances, net 7 249,234,246 253,592,141 13 2,688,458 2,666,249 Investments in associates, net 8 450,048 431,156 Other real estate, net 9 861,523 849,180 Property, equipment and software, net 10 5,280,672 4,819,409 Goodwill 11 303,037 325,733 Other assets 12 10,534,606 5,809,924 443,865,867 442,657,117 Positive fair value of derivatives, net Consolidated Financial Statements Total assets LIABILITIES AND EQUITY LIABILITIES Due to banks and other financial institutions 14 48,557,941 45,474,074 Customers’ deposits 15 308,942,120 315,617,891 Debt securities issued 16 10,250,310 9,917,765 Negative fair value of derivatives, net 13 1,945,440 2,635,190 Other liabilities 17 Total liabilities 9,894,458 9,086,479 379,590,269 382,731,399 EQUITY EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK Share capital 18 20,000,000 20,000,000 Treasury shares 27 (226,011) (121,011) Statutory reserve 19 20,266,514 20,230,366 Other reserves (cumulative changes in fair values) 20 142,449 730,088 Employees’ share based payments reserve 27 96,886 34,443 18,158,718 13,549,488 31 1,196,879 1,996,904 3.4(b) (3,594,886) (3,382,663) 56,040,549 53,037,615 7,000,000 5,700,000 63,040,549 58,737,615 1,235,049 1,188,103 64,275,598 59,925,718 443,865,867 442,657,117 Retained earnings Proposed dividend Foreign currency translation reserve Equity attributable to shareholders of the Bank Tier 1 Sukuk 30 Equity attributable to equity holders of the Bank Non-Controlling Interests Total equity Total liabilities and equity 44 The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 103
53. The National Commercial Bank (A Saudi Joint Stock Company) The National Commercial Bank (A Saudi Joint Stock Company) Consolidated statement of income for the years ended 31 December 2017 and 2016 Consolidated statement of comprehensive income for the years ended 31 December 2017 and 2016 2017 Notes SAR’ 000 2017 2016 Notes SAR’ 000 SAR’ 000 9,964,657 Special commission income 22 17,144,621 17,518,944 Net income for the year Special commission expense 22 (3,483,643) (3,969,366) 13,660,978 13,549,578 Other comprehensive (loss) income items that are or may be reclassified to the consolidated statement of income in subsequent periods: Net special commission income (305,449) Foreign currency translation reserve - (losses) Fee income from banking services, net 23 Exchange income, net Income (loss) from FVIS investments, net Trading income, net 24 Dividend income Gains on non-trading financial instruments, net 25 Other operating (expenses), net Total operating income Salaries and employee-related expenses Rent and premises-related expenses Depreciation/amortisation of property, equipment and software 10 Amortisation of other intangible assets Other general and administrative expenses 2016 SAR’ 000 9,415,833 (855,313) 3,205,251 3,362,995 1,156,067 1,143,200 83,346 (14,123) - Net change in fair values (207,598) 90,857 220,694 396,620 - Transfers to consolidated statement of income (443,296) (329,850) 15,837 101,454 - Impairment charge on available for sale investments 66,170 193,736 482,048 540,206 (478,993) (432,551) 18,345,228 18,647,379 - Effective portion of change in fair values (93,797) (13,462) 3,266,060 3,432,698 - Net transfers to consolidated statement of income 100,092 34,539 771,259 774,323 Total other comprehensive (loss) (883,878) (879,493) 654,281 686,330 Total comprehensive income for the year 9,080,779 8,536,340 - 74,969 1,761,357 2,070,015 9,002,120 8,724,736 78,659 (188,396) 9,080,779 8,536,340 Available for sale financial assets: 6.7 Cash flow hedges: Attributable to: Equity holders of the Bank Impairment charge for financing and advances losses, net 7.3 1,863,623 1,930,965 Impairment charge on investments, net 6.7 75,846 205,720 Total operating expenses 8,392,426 9,175,020 Total comprehensive income for the year Income from operations, net 9,952,802 9,472,359 The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 11,855 (56,526) 11,855 (56,526) 9,964,657 9,415,833 9,801,982 9,316,857 162,675 98,976 9,964,657 9,415,833 Non-controlling interests Other income/(expenses), net Other non-operating income/(expenses), net 26 Other income/(expenses), net Net income for the year Net income for the year attributable to: Equity holders of the Bank Non-controlling interests Net income for the year Basic earnings per share (expressed in SAR per share) 29 4.74 4.51 Diluted earnings per share (expressed in SAR per share) 29 4.73 4.51 The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 104 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 105
54. The National Commercial Bank (A Saudi Joint Stock Company) Consolidated statement of changes in equity for the years ended 31 December 2017 and 2016 Attributable to equity holders of the Bank Other reserves Share capital Notes Treasury shares Employees’ share Cash flow based hedge payments Retained reserves reserve earnings Available for sale financial assets reserve Statutory reserve Foreign currency translation reserve Proposed dividend Total equity attributable to shareholders of the Bank Equity attributable to equity holders of the Bank Tier 1 Sukuk Noncontrolling interests Total equity SAR’ 000 2017 Balance as at 1 January 2017 20,000,000 (121,011) 20,230,366 720,507 9,581 34,443 13,549,488 1,996,904 (3,382,663) 53,037,615 5,700,000 58,737,615 1,188,103 59,925,718 - - - (211,285) (377,126) - (45,202) 45,974 - - 9,801,982 - (212,223) - (212,223) (45,202) (211,285) (331,152) 9,801,982 - (212,223) (45,202) (211,285) (331,152) 9,801,982 (93,226) (48,595) 3,687 54,118 162,675 (305,449) (93,797) (207,598) (277,034) 9,964,657 - - - (588,411) 772 - 9,801,982 - (212,223) 9,002,120 - 9,002,120 78,659 9,080,779 30 30 - - 36,148 - - - - (36,148) 24,814 (334,163) - - 24,814 (334,163) 1,300,000 - 24,814 1,300,000 (334,163) (2,576) - 22,238 1,300,000 (334,163) 27 - (105,000) - - - - - - - (105,000) - (105,000) - (105,000) 27 - - - - - 62,443 - - - 62,443 - 62,443 - 62,443 17 31 31 31 - - - - - - (1,453,782) - (1,996,904) (2,196,594) (1,196,879) 1,196,879 - (1,453,782) (1,996,904) (2,196,594) - - (1,453,782) (1,996,904) (2,196,594) - (29,137) - (1,482,919) (1,996,904) (2,196,594) - 20,000,000 (226,011) 20,266,514 132,096 10,353 96,886 18,158,718 1,196,879 (3,594,886) 56,040,549 7,000,000 63,040,549 1,235,049 64,275,598 20,000,000 (190,510) 19,383,697 729,083 (2,537) - 9,833,777 1,495,975 (2,787,000) 48,462,485 5,700,000 54,162,485 1,383,071 55,545,556 - - - 127,538 (136,114) - (22,421) 34,539 - - 9,316,857 - (595,663) - (595,663) (22,421) 127,538 (101,575) 9,316,857 - (595,663) (22,421) 127,538 (101,575) 9,316,857 (259,650) 8,959 (36,681) 98,976 (855,313) (13,462) 90,857 (101,575) 9,415,833 - - - (8,576) 12,118 - 9,316,857 - (595,663) 8,724,736 - 8,724,736 (188,396) 8,536,340 Transfer to statutory reserve 19 Adjustments in non-controlling interests Tier 1 Sukuk issuance 30 Tier 1 Sukuk related costs 30 Adjustment in proposed final dividend for 2015 Disposal of treasury shares 27 Gain on disposal of treasury shares Purchase of treasury shares for employee’s based payment plan 27 Employees’ share based payments reserve - charged to consolidated 27 statement of income Zakat 17 Final dividend paid for 2015 Interim dividend paid for 2016 31 Proposed final dividend for 2016 31 Balance as at 31 December 2016 20,000,000 The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 190,510 (121,011) 846,669 - - - - (846,669) 7,893 (288,096) (4,025) 8,717 - 4,025 - - 7,893 (288,096) 190,510 8,717 (121,011) - 7,893 (288,096) 190,510 8,717 (121,011) (6,572) - 1,321 (288,096) 190,510 8,717 (121,011) - - - - 34,443 - - - 34,443 - 34,443 - 34,443 (121,011) 20,230,366 720,507 9,581 34,443 (1,282,062) (1,200,000) (1,996,904) 13,549,488 (1,500,000) 1,996,904 1,996,904 (3,382,663) (1,282,062) (1,500,000) (1,200,000) 53,037,615 5,700,000 (1,282,062) (1,500,000) (1,200,000) 58,737,615 1,188,103 (1,282,062) (1,500,000) (1,200,000) 59,925,718 Total comprehensive income/(loss) for the year Foreign currency translation reserve - losses Net changes in fair value of cash flow hedges Net changes in fair values of available for sale investments Net transfers to consolidated statement of income Net income for the year Transfer to statutory reserve Adjustments in non-controlling interests Tier 1 Sukuk issuance Tier 1 Sukuk related costs Purchase of treasury shares for employee’s based payment plan Employees’ share based payments reserve - charged to consolidated statement of income Zakat and tax Final dividend paid for 2016 Interim dividend paid for 2017 Proposed final dividend for 2017 Balance as at 31 December 2017 19 2016 Balance as at 1 January 2016 Total comprehensive income/(loss) for the year Foreign currency translation reserve - losses Net changes in fair value of cash flow hedges Net changes in fair values of available for sale investments Net transfers to consolidated statement of income Net income for the year 106 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 107
55. The National Commercial Bank (A Saudi Joint Stock Company) The National Commercial Bank (A Saudi Joint Stock Company) Consolidated statement of cash flows for the years ended 31 December 2017 and 2016 Notes to the consolidated financial statements 31 December 2017 2017 SAR’ 000 Notes OPERATING ACTIVITIES Net income for the year Adjustments to reconcile net income to net cash from operating activities: Amortisation of premium on non-trading financial instruments, net (Gains) on non-trading financial instruments, net (Gains) on disposal of property, equipment and software, net (Gains) on disposal of other real estate, net Loss on disposal of other repossessed assets Depreciation/amortisation of property, equipment and software Amortisation of other intangible assets Impairment charge for financing and advances, net Impairment charge on investments, net Impairment charge on other real estate Share of results of associates Share based payment expense 25 26 10 7.3 6.7 26 2016 SAR’ 000 9,964,657 9,415,833 310,447 (482,048) (13,835) (25,271) 182,564 654,281 1,863,623 75,846 34,745 (21,392) 62,443 12,606,060 431,990 (540,206) (45,495) (5,388) 107,328 686,330 74,969 1,930,965 205,720 1,384 (7,416) 34,443 12,290,457 285,714 650,265 Net decrease (increase) in operating assets: Statutory deposits with SAMA Due from banks and other financial institutions with original maturity of more than three months, net Held as fair value through income statement (FVIS) investments Financing and advances, net Positive fair value of derivatives, net Other real estate Other assets (4,723,991) 3,499,492 548,596 74,746 (37,312) 64,492 (4,048,845) 313,946 (8,883,233) (3,820) 205,788 (92,448) Net increase (decrease) in operating liabilities: Due to banks and other financial institutions Customers’ deposits Negative fair value of derivatives, net Other liabilities Net cash from operating activities 3,598,506 (5,117,649) (661,188) (635,129) 1,954,000 (1,169,220) (2,869,851) 94,432 (1,734,608) 2,301,200 43,599,031 (48,001,477) (1,179,112) 28,536 2,500 (5,550,522) 63,151,411 (41,631,228) (1,347,656) 58,003 20,230,530 263,900 5,038 1,300,000 (334,163) (105,000) (1,996,904) (2,196,594) (3,063,723) 53,048 273 (288,096) (121,011) 199,227 (1,200,000) (1,500,000) (2,856,559) (6,660,245) 19,675,169 INVESTING ACTIVITIES Proceeds from sale and maturities of non-trading / non-FVIS investments Purchase of non-trading / non-FVIS investments Purchase of property, equipment and software Proceeds from disposal of property, equipment and software Dividends from associates Net cash (used in) from investing activities FINANCING ACTIVITIES Net movement in debt securities Net movement in non-controlling interests Tier 1 Sukuk issuance Tier 1 Sukuk related costs Purchase of treasury shares for employees’ share based payment plan Proceeds from sale of treasury shares Final dividend paid for 2016 Interim dividend paid for 2017 Net cash (used in) financing activities Net (decrease) increase in cash and cash equivalents Foreign currency translation reserve - net movement on cash and cash equivalents at the beginning of the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 32 Special commission income received during the year Special commission expense paid during the year Supplemental non-cash information Movement in other reserve and transfers to consolidated statement of income The accompanying notes 1 to 48 form an integral part of these consolidated financial statements. 108 | Consolidated Financial Statements 10 16 27 (199,049) (548,650) 35,661,453 28,802,159 16,637,299 3,638,793 16,534,934 35,661,453 17,705,558 3,639,142 (578,429) (24,180) The National Commercial Bank | Annual Report 2017 1. General (1.1) Introduction The financial statements comprise the consolidated financial statements of The National Commercial Bank (the Bank) and its subsidiaries (the Group). The National Commercial Bank is a Saudi Joint Stock Company formed pursuant to Cabinet Resolution No. 186 on 22 Dhul Qida 1417H (30 March 1997) and Royal Decree No. M/19 on 23 Dhul Qida 1417H (31 March 1997), approving the Bank’s conversion from a General Partnership to a Saudi Joint Stock Company. The Bank commenced business as a partnership under registration certificate authenticated by a Royal Decree on 28 Rajab 1369H (15 May 1950) and registered under commercial registration No. 4030001588 issued on 27 Dhul Hijjah 1376H (24 July 1957). The Bank initiated business in the name of “The National Commercial Bank” under Royal Decree No. 3737 on 20 Rabi Thani 1373H (26 December 1953). The date of 1 July 1997 was determined to be the effective date of the Bank’s conversion from a General Partnership to a Saudi Joint Stock Company. In 2014, the shareholders approved to offer 25% of the Bank’s share capital (after capital increase) to the general public under an Initial Public Offering (IPO). The Bank became listed and its shares have been trading on Saudi Stock Exchange (Tadawul) since 12 November 2014. The Bank operates through its 400 branches (2016: 374 branches), 20 retail service centers (2016: 19 centers), 9 corporate service centers (2016: 9 centers) and 150 QuickPay remittance centers (2016: 148 centers) in the Kingdom of Saudi Arabia and one overseas branch in the Kingdom of Bahrain. The Board of Directors in their meeting dated 23 November 2015 resolved to close the Bank’s branch operations domiciled in Beirut, Lebanon (the “branch”). The required regulatory approvals have been received and the legal formalities in respect of closure of branch are in progress. The Bank’s Head Office is located at the following address: The National Commercial Bank Head Office King Abdul Aziz Street P.O. Box 3555, Jeddah 21481 Kingdom of Saudi Arabia www.alahli.com The objective of the Group is to provide a full range of banking services. The Group also provides non-special commission based banking products in compliance with Shariah rules, which are approved and supervised by an independent Shariah Board. (1.2) Group’s Subsidiaries The details of the Group’s significant subsidiaries are as follows: Ownership % Name of subsidiaries 2017 2016 Description NCB Capital Company (NCBC) NCB Capital Dubai Inc. (formerly Eastgate Capital Holdings Inc.) 97.34% 97.34% The National Commercial Bank | Annual Report 2017 97.85% A Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia to manage the Bank’s investment services and asset management activitives. The Bank has a 90.71% (2016: 90.71%) direct ownership interest in NCBC and an indirect ownership of 6.63% (2016: 7.14%) (the indirect ownership is held via an intermediary trust for future grant to NCBC employees). 97.85% An exempt company with limited liability incorporated in the Cayman Islands to source, structure and invest in private equity and real estate development opportunities across emerging markets, with a particular focus on the MENA region. Consolidated Financial Statements | 109
56. Name of subsidiaries NCBC Investment Management Umbrella Company Plc T ürkiye Finans Katılım Bankası A.S. (TFKB) Ownership % 2017 2016 97.34% 67.03% 97.85% 67.03% Real Estate Development Company (REDCO) 100% 100% Alahli Insurance Service Marketing Company 100% 100% Saudi NCB Markets Limited 100% 100% Eastgate MENA Direct Equity L.P. 100% 100% AlAhli Esnad Company 100% - Peregrine Aviation Topco Limited 100% - Description A company incorporated in Ireland under the provisions of the European Communities (Undertakings for Collective Investment in Transferable Securities “UCITS”) Regulation 2011. The authorization certificate for the commencement of operations of the Umbrella Company was received in November 2012 from the Central Bank of Ireland, pursuant to which it launched two funds (“NCB Capital Saudi Arabian Equity Fund” and “NCB Capital GCC Equity Fund”), which were registered in Dublin and pre-approved by the Capital Markets Authority through its letter dated May 6, 2010 to carry out their activities in the Kingdom of Saudi Arabia. On 29 August 2016, the Company resolved to voluntarily liquidate the operations of Umbrella Company with immediate effect. As at 31 December 2017 the liquidation of the Company is under process. A participant bank that collects funds through current accounts, profit sharing accounts and lends funds to consumer and corporate customers, through finance leases and profit/loss sharing partnerships. As at 31 December 2017, TFKB fully owns the issued share capital of TF Varlık Kiralama A.S, (TFVK) and TFKB Varlik Kiralama A.S., which are special purpose entities (SPEs) established in connection with issuance of sukuks by TFKB. A Limited Liability Company registered in the Kingdom of Saudi Arabia. REDCO is engaged in keeping and managing title deeds and collateralised real estate properties on behalf of the Bank. A Limited Liability Company, engaged as an insurance agent for distribution and marketing of Islamic insurance products in Saudi Arabia. A Limited Liability Company registered in the Cayman Islands, engaged in trading in derivatives and Repos/Reverse Repos on behalf of the Bank. A private equity fund domiciled in the Cayman Islands and managed by NCB Capital Dubai. The Fund’s investment objective is to generate returns via investments in Shari’ah compliant direct private equity opportunities in high growth businesses in countries within the Middle East and North Africa. A Limited Liability Company registered in the Kingdom of Saudi Arabia, engaged in recruitment services within the Kingdom of Saudi Arabia. A special purpose vehicle for the purpose of investing in a company which will acquire, lease and sell aircrafts located and registered in the Cayman Islands. 2. Basis Of Preparation (2.1) Statement of Compliance The consolidated financial statements of the Group have been prepared: (a)In accordance with ‘International Financial Reporting Standards (IFRS) as modified by the Saudi Arabian Monetary Authority (“SAMA”) for the accounting of zakat and income tax’, which requires, adoption of all IFRSs as issued by the International Accounting Standards Board (“IASB”). As per the SAMA Circular no. 381000074519 dated April 11, 110 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 2017 instead of International Accounting Standard (IAS) 12 - “Income Taxes” and IFRIC 21 - “Levies” and subsequent amendments through certain clarifications relating to the accounting for zakat and income tax (“SAMA Circular”), the Zakat and Income tax are to be accrued on a quarterly basis through shareholders equity under retained earnings. (b) In compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and the By-Laws of the Bank. Further, the above SAMA Circular has also repealed the existing Accounting Standards for Commercial Banks, as promulgated by SAMA, and are no longer applicable from 1 January 2017. Until 2016, the consolidated financial statements of the Group were prepared in accordance with the Accounting Standards for Commercial Banks promulgated by SAMA and International Financial Reporting Standards (IFRS), the Banking Control Law, the provision of Regulations for Companies in the Kingdom of Saudi Arabia and the Bank’s by-laws. This change in framework did not have any material impact on the consolidated financial statements of the Group. Please refer note 3.20 for the accounting policy of Zakat and income tax. (2.2) Basis of Measurement The consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of derivatives, financial assets held for trading and held at Fair Value through Income Statement (FVIS) and available for sale investments. In addition, financial assets and liabilities that are carried at cost but are hedged in a fair value hedging relationship are carried at fair value to the extent of the risk being hedged. (2.3) Functional and Presentation Currency These consolidated financial statements are presented in Saudi Arabian Riyals (SAR) which is the Bank’s functional currency and have been rounded off to the nearest thousand Saudi Arabian Riyals, except as otherwise indicated. (2.4) Basis of Consolidation The consolidated financial statements comprise the financial statements of “The National Commercial Bank” and its subsidiaries (see note 1.2). The financial statements of the subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the group are eliminated in full on consolidation. (2.5) Critical Accounting Judgements, Estimates and Assumptions The preparation of consolidated financial statements in conformity with IFRS and SAMA guidance on accounting for Zakat and Tax requires the use of certain critical accounting judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. Such judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Revisions to accounting estimates are recognised in the period in which the estimate is revised and any future period affected. In preparing these consolidated financial statements, the critical accounting judgments, estimates and assumptions made by management are the same as those that applied to the annual consolidated financial statements for the year ended 31 December 2016, except for change in the estimated useful lives of certain equipment and software. This revision of the useful life was based on the operational efficiency review of these equipment and software. As a result, the corresponding equipment and software which were previously depreciated over a period from 4 to 6 years, are now estimated to be in use for a period of 8 to 10 years. This change has been accounted for prospectively commencing from 1 April 2017. The impact of the change in the useful life of the equipment and software did not have a material impact on the consolidated financial statements of the Group. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 111
57. Significant areas where management has used estimates , assumptions or exercised judgments are as follows: (a) Impairment Charge for Financing and Advances Losses The Group reviews its non-performing financing and advances at each reporting date to assess whether a specific allowance for financing losses should be recorded in the consolidated statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the specific allowance. The Group reviews its financing and advances portfolios to assess an additional portfolio (collective) allowance on a periodic basis. In determining whether an impairment loss should be recorded, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating its cash flows. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (b) Fair Value of Financial Instruments that are not Quoted in an Active Market Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability, or • In the absence of a principal market, in the most advantageous market for the asset or liability The fair value of an asset or a liability is measured using assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Financial instruments for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy (see note 40). For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of their nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy. (c) Impairment of Available for Sale Investments The Group exercises judgment to consider impairment on the available for sale investments at each reporting date. This includes determination of a significant or prolonged decline in the fair value of equity securities below cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in share prices. In addition, the Group considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The Group considers 30% or more, as a reasonable measure for significant decline below its cost, irrespective of the duration of the decline, and is recognised in the consolidated statement of income as impairment charge on investments. Prolonged decline represents decline below cost that persists for 1 year or longer irrespective of the amount and is, thus, 112 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 recognised in the consolidated statement of income as impairment charge on investments. The previously recognised impairment loss in respect of equity investments cannot be reversed through the consolidated statement of income. The Group reviews its debt securities classified as available for sale at each reporting date to assess whether they are impaired. This requires similar judgement as applied to individual assessment of financing and advances (see note 3.13). (d) Classification of Held to Maturity Investments The Group follows the guidance of IAS 39 “Financial Instruments Recognition and Measurement” on classifying nonderivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. (e) Going Concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. (f) Impairment of Non-Financial Assets The carrying amounts of the non-financial assets are reviewed at each reporting date or more frequently to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGUs. The fair value less cost to sell is based on observable market prices or, if no observable market prices exist, estimated prices for similar assets or if no estimated prices for similar assets are available, then based on discounted future cash flow calculations. For the purpose of impairment testing (see note 11), goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. The subsidiaries are regarded as a cash-generating unit for the purpose of impairment testing of their respective goodwill. Impairment losses are recognised in the consolidated statement of income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of other assets including the intangible assets in the unit (group of units) on a pro rata basis on condition that the carrying amount of other assets should not be reduced below their fair values. Where goodwill forms part of a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal off the operation. Goodwill disposed off in this circumstance is measured based on the relative values of the operation disposed off and the portion of the cash-generating unit retained. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative foreign currency translation reserve and unimpaired goodwill is recognised in the consolidated statement of income. The previously recognised impairment loss in respect of goodwill cannot be reversed through the consolidated statement of income. Non-financial assets held under Murabaha arrangements are measured at their lower of cost and net realizable value. Net realizable value is the estimated selling price, less selling expenses. Any impairment loss arising as a result of carrying these assets at their net realizable values is recognised in the consolidated statement of income under other operating (expense), net. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 113
58. In respect of other assets , impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (g) Determination of Control Over Investment Funds The Group acts as a Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the Fund (comprising any carried interests and expected management fees) and the investors rights to remove the Fund Manager. The Group consolidates the structured entities that it controls. When making this judgement, the Group also considers voting and similar rights available to itself and other parties, that may limit the Group’s ability to control, appoint, reassign or remove members of key management personnel who have the ability to direct the relevant activities of these structured entities. (h) Provisions for Liabilities and Charges The Group receives legal claims in the ordinary course of business. Management makes judgments in assigning the risk that might exists in such claims. It also sets appropriate provisions against probable losses. The claims are recorded or disclosed, as appropriate, in the consolidated financial statements based on the best estimate of the amount required to settle the claim. (i) Measurment of Defined Benefits Obligation The Group maintains an end of service benefit plan for its employees and to arrive at the estimated obligation as at the reporting date, the Group uses assumptions such as the discount rate, expected rate of salary increase and normal retirement age. (j) Useful Lives of Property, Equipment and Other Software The management determines the estimated useful lives of its property, equipment and other software for calculating depreciation / amortisation. This estimate is determined after considering the expected usage of the asset or its physical wear and tear. The residual value, useful lives and future depreciation / amortisation charges are reviewed by the management where they believe the useful lives differ from previous estimates. 3. Summary Of Significant Accounting Policies - Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to IFRS 12 Disclosure of Interests in Other Entities): The amendments clarify that the disclosure requirements in IFRS 12 apply to an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale or distribution. These amendments apply retrospectively. The Bank has chosen not to early adopt the amendments and revisions to the International Financial Reporting Standards which have been published and are mandatory for compliance by the banks for the accounting years beginning on or after 1 January 2018 (refer note 47). (3.2) Settlement Date Accounting All regular way purchases and sales of financial assets are recognised and derecognised on the settlement date, i.e. the date on which the asset is delivered to the counterparty. When settlement date accounting is applied, the Group accounts for any change in fair value between the trade date and the settlement date in the same way as it accounts for the acquired asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (3.3) Derivative Financial Instruments and Hedge Accounting Derivative financial instruments including foreign exchange contracts, special commission rate futures, forward rate agreements, currency and special commission rate swaps, swaptions, currency and special commission rate options (both written and purchased) are measured at fair value. Fair values are obtained by reference to quoted market prices and/or valuation models as appropriate. (3.3.1) Derivatives Held for Trading Any changes in the fair value of derivatives that are held for trading purposes are taken directly to the consolidated statement of income for the year and are disclosed in trading income. Derivatives held for trading also include those derivatives, which do not qualify for hedge accounting as described below. (3.3.2) Embedded Dderivatives Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through statement of income. The embedded derivatives separated from the host are carried at fair value in the trading book with changes in fair value recognised in the consolidated statement of income. (3.3.3) Hedge Accounting The significant accounting policies adopted in the preparation of these consolidated financial statements, and changes therein, are set out below: (3.1) Changes in Accounting Policies The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the preparation of the consolidated financial statements for the year ended 31 December 2016 except for the adoption of SAMA guidance for the accounting of Zakat and income tax (note 2.1) and the following amendments to existing standards mentioned below which has had no material impact on the consolidated financial statements of the Group on the current or prior periods and is expected to have insignificant effect in future periods: - Amendments to IAS 7, Statement of cash flows on disclosure initiative: Applicable for annual periods beginning on or after 1 January 2017. These amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. This amendment is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. These adoptions have no material impact on the consolidated financial statements other than certain additional disclosures. 114 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The Group designates certain derivatives as hedging instruments in qualifying hedging relationships to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from highly probable forecast transactions and firm commitments. In order to manage particular risk, the Group applies hedge accounting for transactions that meet specific criteria. For the purpose of hedge accounting, hedges are classified into two categories: (a) Fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability, or an unrecognised firm commitment or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect the reported net gain or loss; and (b) Cash flow hedges which hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or to a highly probable forecasted transaction that will affect the reported net gain or loss. In order to qualify for hedge accounting, the hedge should be expected to be “highly effective”, i.e. the changes in fair value or cash flows of the hedging instrument should effectively offset corresponding changes in the hedged item, and should be reliably measurable. At inception of the hedge, the risk management objective and strategy is documented including the identification of the hedging instrument, the related hedged item, the nature of risk being hedged, and how the Group will assess the effectiveness of the hedging relationship. Subsequently, the hedge is required to be assessed and determined to be an effective hedge on an ongoing basis. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 115
59. At each hedge effectiveness assessment date , a hedge relationship must be expected to be highly effective on a prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. A formal assessment is undertaken by comparing the hedging instrument’s effectiveness in offsetting the changes in fair value or cash flows attributable to the hedged risk in the hedged item, both at inception and at each quarter end on an ongoing basis. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated were offset by the hedging instrument and were expected to achieve such offset in future periods. Hedge ineffectiveness is recognised in the consolidated statement of income in ‘trading income, net’. For situations where the hedged item is a forecast transaction, the Group also assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated statement of income. (3.3.4) Fair Value Hedges In relation to fair value hedges, which meet the criteria for hedge accounting, any gain or loss from remeasuring the hedging instruments to fair value is recognised immediately in the consolidated statement of income. Any gain or loss on the hedged item attributable to fair value changes relating to the risks being hedged is adjusted against the carrying amount of the hedged item and recognised in the consolidated statement of income (in the same line item as the hedging instrument). Where the fair value hedge of a special commission bearing financial instrument ceases to meet the criteria for hedge accounting, the adjustment in the carrying value is amortised to the consolidated statement of income over the remaining life of the instrument. (3.3.5) Cash Flow Hedges In relation to cash flow hedges which meet the criteria for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised initially in other reserves under equity and the ineffective portion, if any, is recognised in the consolidated statement of income. For cash flow hedges affecting future transactions, the gains or losses recognised in other reserves, are transferred to the consolidated statement of income in the same period in which the hedged transaction affects the consolidated statement of income. However, if the Group expects that all or a portion of a loss recognised in consolidated statement of other comprehensive income will not be recovered in one or more future periods, it shall reclassify into the consolifated statement of income as a reclassification adjustment the amount that is not to be recognised. Hedge accounting is discontinued when the hedging instrument is expired or sold, terminated or exercised, or no longer qualifies for hedge accounting, or the forecast transaction is no longer expected to occur or the Group revokes the designation then hedge accounting is discontinued prospectively. At that point of time, any cumulative gain or loss on the cash flow hedging instrument that was recognised in other reserves from the period when the hedge was effective is transferred from equity to the consolidated statement of income when the forecasted transaction occurs. Where the hedged forecasted transaction is no longer expected to occur and affect the consolidated statement of income, the net cumulative gain or loss recognised in other reserves is transferred immediately to the consolidated statement of income. (3.4) Foreign Currencies Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currency of NCB, NCBC, Alahli Insurance Service Marketing Company, and Redco is Saudi Riyals. The functional currency for the TFKB is Turkish Lira and the functional currency of NCB Capital Dubai Inc., NCBC Investment Management Umbrella Company Plc and Saudi NCB Markets Limited is U.S. Dollars. (a) Transactions and Balances of the Bank Transactions in foreign currencies are translated into the functional currency at the spot exchange rates prevailing at transaction dates. Monetary assets and liabilities at the year-end (other than monetary items that form part of the net investment in a foreign operation), denominated in foreign currencies, are retranslated into the functional currency at the exchange rates prevailing at the reporting date. Foreign exchange gains or losses on translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income. Non-monetary assets measured at fair value in a foreign currency are translated using the exchange rates prevailing at the date when the fair value was determined. (b) Foreign Operations As at the reporting date, the assets and liabilities of the foreign operations are translated into the Group’s presentation currency (Saudi Riyals) at the rate of exchange ruling at the statement of financial position date, equity (pre-acquisition) is translated at historical exchange rate at the date of acquisition and income and expenses of the statement of income are translated at the spot exchange rates prevailing at transaction dates on daily basis. Exchange differences arising on translation are taken directly to a separate component of equity (foreign currency translation reserve) and are recognised in consolidated statement of comprehensive income. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the foreign exchange translation reserve is allocated to the non-controlling interest. The deferred cumulative amount of exchange differences recognised in equity will be reclassified in the consolidated statement of income in ‘Other operating expenses’ or ‘Other operating income’ at the time of any future disposal or partial disposal with loss of control. Goodwill and intangible assets arising on the acquisition of the foreign operations and fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at the closing rate. (3.5) Offsetting Financial Instruments Financial assets and financial liabilities are offset and reported net in the consolidated statement of financial position when there is a current legally enforceable right to set off the recognised amounts and when the Group intends to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. (3.6) Revenue / Expenses Recognition Special commission income and expenses for all special commission-bearing financial instruments, except for those classified as held for trading or designated at fair value through income statement (FVIS), including fees which are considered an integral part of the effective yield of a financial instrument, are recognised in the consolidated statement of income using the effective special commission rate basis including premiums amortised and discounts accreted during the year. The effective special commission rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability to the carrying amount of the financial asset or financial liability. When calculating the effective special commission rate, the Group estimates future cash flows considering all contractual terms of the financial instrument but excluding future financing losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective special commission rate and the change in carrying amount is recorded as special commission income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, special commission income continues to be recognised using the rate of special commission used to discount the future cash flows for the purpose of measuring the impairment loss. The calculation of the effective special commission rate includes all fees paid or received, transaction costs and discounts or premiums that are an integral part of the effective special commission rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. Income from FVIS financial instruments relates to financial assets designated as FVIS and includes all realised and unrealised fair value changes. Net trading income subsumes results arising from trading activities and includes all realised and unrealised gains and losses from changes in fair value and related special commission income or expense, dividends for financial assets held for trading and foreign exchange differences on open positions. Exchange income from banking services are recognised when earned. Dividend income is recognised when the right to receive dividend income is established. 116 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 117
60. Fees income and expenses are recognised on an accrual basis as the service is provided . Financing commitment fees for financing arrangement that are likely to be drawn down are deferred and recognised as an adjustment to the effective yield on the financing arrangement, if material. Portfolio and other management advisory and service fee income are recognised based on the applicable service contracts, usually on a time-proportionate basis. Fee income received on other services that are provided over an extended period of time, are recognised rateably over the period when the service is being provided, if material. Other fee expenses mainly relate to transaction and services fee, which are expensed as related services are provided. (3.7) Sale and Repurchase Agreements (Including Securities Lending and Borrowings) Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognised in the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. These assets continue to be measured in accordance with related accounting policies for investments held for trading, available for sale, held to maturity and other investments held at amortised cost. The counterparty liability for amounts received under these agreements is included in “due to banks and other financial institutions”, as appropriate. The difference between sale and repurchase price is treated as special commission expense which is accrued over the life of the repo agreement using the effective special commission rate. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repo) are not recognised in the consolidated statement of financial position, as the Group does not obtain control over the assets. Amounts paid under these agreements are included in “cash and balances with SAMA”, “due from banks and other financial institutions” or “financing and advances”, as appropriate. The difference between purchase and resale price is treated as special commission income which is accrued over the life of the reverse repo agreement using the effective yield basis. Securities borrowing and lending transactions are typically secured; collateral takes the form of securities or cash advanced or received. Securities lent to counterparties are retained on the consolidated statement of financial position. Securities borrowed are not recognised on the consolidated statement of financial position, unless these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability. Cash collateral given or received is treated as a loan and receivable or customer deposit. (3.8) Business Combinations Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition, being total consideration of the acquisition, is measured as the fair value of the assets given and liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition that occured prior to 1 January 2010. For any subsequent acquisitions, the cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition related costs are expensed as incurred and are included in administrative expenses. Identifiable assets acquired (including previously unrecognised intangible assets) and liabilities (including contingent liabilities) in an acquisition are measured initially at fair values at the date of acquisition, irrespective of the extent of any non-controlling interest. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Upon loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising from the loss of control is recognised in the consolidated statement of income. If the Group retains any interest in the former subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investment or other categories of investment in accordance with the Group’s relevant accounting policy. 118 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 (a) Subsidiaries Subsidiaries are entities which are controlled by the Group. To meet the definition of control, all three criteria must be met: i) ii) iii) The Group has power over the entity; The Group has exposure, or rights, to variable returns from its involvement with the entity; and The Group has the ability to use its power over the entity to affect the amount of the entity’s returns. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which the control is transferred from the Group. The results of subsidiaries acquired or disposed of during the year, if any, are included in the consolidated statement of income from the date of the acquisition or up to the date of disposal, as appropriate. (b) Non-Controlling Interests Non-controlling interests represent the portion of net income and net assets of subsidiaries not owned, directly or indirectly, by the Bank in its subsidiaries and are presented separately in the consolidated statement of income and within equity in the consolidated statement of financial position, separately from the Bank’s equity. Any losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the noncontrolling interests to have a deficit balance. (c) Associates Associates are enterprises over which the Group exercises significant influence. Investments in associates are initially recognised at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at the lower of the equity-accounted value or the recoverable amount. Equity-accounted value represents the cost plus post-acquisition changes in the Group’s share of net assets of the associate (share of the results, reserves and accumulated gains/losses based on latest available financial statements) less impairment, if any. The previously recognised impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of investment in the consolidated statement of financial position remains at the lower of the equity-accounted (before allowance for impairment) or the recoverable amount. (d) Transactions Eliminated on Consolidation Inter-group balances, income and expenses (except for foreign currency transaction gains or losses) arising from inter-group transactions are eliminated, as appropriate, in preparing the consolidated financial statements. (3.9) Goodwill and Oother Intangible Assets (a) Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses; impairment loss of goodwill is charged to the consolidated statement of income. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. (b) Other Intangible Assets Intangible assets in the consolidated statement of financial position comprise of customer deposits relationships, the value of the TFKB’s brands, and other banking relationships. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 119
61. (3.10) Investments For impairment of available for sale investments, see note 3.13(b). All investment securities are financial assets which are initially recognised at cost, being the fair value of the consideration given, including incremental direct transaction costs except for those transaction charges related to investments held as FVIS or for trading, which are not added to the cost at initial recognition and are charged to the consolidated statement of income. Premiums are amortised and discounts accreted using the effective yield basis and are taken to special commission income. (d) Held to Maturity For securities that are traded in organised financial markets, the fair value is determined by reference to exchange quoted market bid prices at the close of business on the consolidated statement of financial position date. Fair values of managed assets and investments in mutual funds are determined by reference to declared net asset values which approximate the fair value. For securities where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same, or is based on the expected cash flows of the security. Where the fair values cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values with non-observable market data. Following initial recognition, subsequent transfers between the various classes of investments are not ordinarily permissible. Investments having fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at amortised cost, less allowance for impairment in their value. Amortised cost is calculated by taking into account any discount or premium on acquisition using the effective yield method. Any gain or loss on such investments is recognised in the consolidated statement of income when the investment is derecognised or impaired. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Group’s ability to use this classification and cannot be designated as a hedged item with respect to special commission rate or prepayment risk, reflecting the intention to hold them to maturity. (e) Other Investments Held at Amortised Cost Investments having fixed or determinable payments that are not quoted in an active market are classified as other investments held at amortised cost. Such investments whose fair values have not been hedged are stated at amortised cost using an effective yield basis, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition using effective yield method. Any gain or loss is recognised in the consolidated statement of income when the investment is derecognised and are disclosed as gains/(losses) on non-trading financial instruments. The subsequent period-end accounting treatment for each class of investment is determined on the basis as set out in the following paragraphs: (3.11) Financing and Advances (a) Held for Trading Financing and advances are non-derivative financial assets originated or acquired by the Group with fixed or determinable payments. Investments classified as held for trading are acquired principally for the purpose of selling or repurchasing in the short term. Securities which are held for trading are subsequently measured at fair value and any gains or losses arising from a change in fair value are included in the consolidated statement of income in the period in which it arises and are disclosed as trading income. (b) Held at Fair Value Through Income Statement (FVIS) Investments in this category are classified as FVIS on initial recognition. An investment may be designated as FVIS by the management if it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as “an accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on different basis; or a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Group’s key management personnel. These include all hedge fund and mutual fund investments that are managed by the Group, directly or indirectly, and whose performance is evaluated on a fair value basis. Equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are not classified under this category. After initial recognition, investments at FVIS are measured at fair value and any change in the fair value is recognised in the consolidated statement of income for the period in which it arises and are disclosed as income from FVIS investments. (c) Available for Sale (AFS) Available for sale investments are non-derivative investments that are designated as AFS or not classified as another category of financial assets, and are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as available for sale are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Any unrealised gains or losses arising from changes in fair value are recognised through the consolidated statement of comprehensive income in “other reserves” under equity until the investments are derecognised or impaired whereupon any cumulative gains or losses previously recognised in equity are reclassified to consolidated statement of income for the period and are disclosed as gains/(losses) on non-trading financial instruments. 120 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 Financing and advances are recognised when cash is advanced to borrowers. They are derecognised when either the borrower repays their obligations, or the financing and advances are sold or written off, or substantially all the risks and rewards of ownership are transferred. Financing and advances are initially measured at fair value of the consideration given. Following initial recognition, financing and advances for which fair value has not been hedged are stated at amortised cost less any amount written off and specific and portfolio (collective) allowances for impairment. For presentation purposes, allowance for financing losses is deducted from financing and advances. (3.12) Due from Banks and Other Financial Institutions Due from banks and other financial institutions are financial assets which are mainly money market placements with fixed or determinable payments and fixed maturities that are not quoted in an active market. Money market placements are not entered into with the intention of immediate or short-term resale. Due from banks and other financial institutions are initially measured at cost, being the fair value of the consideration given. Following initial recognition, due from banks and other financial institutions are stated at cost less any amount written-off and specific allowances for impairment, if any, and a portfolio (collective) allowance for counterparty risk. (3.13) Impairment of Financial Assets An assessment is made at the date of each consolidated statement of financial position to determine whether there is objective evidence that a financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss is recognised for changes in its carrying amount as follows: The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 121
62. (a) Impairment of Financial Assets Held at Amortised Cost A financial asset is classified as impaired when there is an objective evidence of credit-related impairment as a result of one or more loss event(s) that occurred after the initial recognition of the asset and those loss events have an impact on the estimated future cash flows of the financial asset or group of financial assets and can be reliably estimated. A specific allowance for financing losses, due to impairment of a financing or any other financial asset held at amortised cost, is established if there is objective evidence that the Group will not be able to collect all amounts due. The amount of the specific allowance is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective yield basis. In addition to a specific allowance for financing losses of corporate financing, an additional portfolio allowance for collective impairment is made on a portfolio basis for financing losses where there is an objective evidence that unidentified losses exist at the reporting date. These are based on any deterioration in the risk rating (i.e. downward migration of risk ratings) of the financial assets since they were originally granted. This allowance is estimated based on various factors including credit ratings allocated to a borrower or group of borrowers, the current economic conditions, the experience the Group has had in dealing with a borrower or group of borrowers and available historical default information. Financing and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a revised rate of commission to genuinely distressed borrowers. This may result in the asset continuing to be overdue and individually impaired as the renegotiated payments of commission and principal do not recover the original carrying amount of the financing. In other cases, renegotiation leads to a new agreement, which is treated as a new financing. Restructuring policies and practices are based on indicators or criteria which, indicate that payment will most likely continue. The financings continue to be subject to an individual or collective impairment assessment, calculated using the financing’s original effective yield rate. Corporate financings are written off when they are determined to be uncollectible. This determination is reached after considering information such as the number of days for which the financing has been past due, significant changes in the borrowers’ financial position such that the borrower can no longer settle their obligations, or to the extent that proceeds from collateral held are insufficient to cover the obligations. Consumer financings are considered to be impaired when a payment is overdue by 90 days or more. Since the risk metrics for consumer financings are based on a collective “pool” basis, rather than on individual financings, the allowances for consumer financings are also computed on a “pool basis” using the ‘flow rate” methodology. The allowance coverage is 100% for such non-performing financings which reach the “write-off point”. The carrying amount of the asset is adjusted through the use of an allowance for impairment account and the amount of the adjustment is included in the consolidated statement of income. (b) Impairment of Financial Assets Held at Fair Value In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is an objective evidence of impairment based on the same criteria as financial assets held at amortised cost. The amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated statement of income. If, in a subsequent period, the amount of the impairment loss on debt instruments decreases upon subsequent increase in the fair value and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the issuer’s credit rating), the previously recognised impairment loss is reversed by adjusting the provision account. The amount of the reversal is recognised in the consolidated statement of income as a reversal of allowance for impairment on investment. Where a loss has been recognised directly under equity, the cumulative net loss balance recognised in equity is transferred to the consolidated statement of income as impairment loss when the asset is considered to be impaired. For equity investments held as available for sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment [also see note 2.5(c)]. Unlike debt securities, the previously recognised impairment loss of equity investments cannot be reversed through the consolidated statement of income as long as the asset continues to be recognised, that is, any increase in fair value, after impairment has been recorded, can only be recognised in equity. 122 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The Group writes off its financial assets when the respective business units together with Risk Management determine that the financial assets are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/issuer can no longer pay the obligations, or that proceeds from collateral will not be sufficient to pay back the entire exposure. The financial assets are, then, written off only in circumstances where effectively all possible means of recovery have been exhausted. For consumer financings, write off decisions are generally based on a product specific past due status. When a financial asset is uncollectible, it is written off against the related allowance for impairment, if any, and any amounts in excess of available allowance are directly charged to the consolidated statement of income. For impairment of non-financial assets, see note [2.5(f)]. (3.14) Other Real Estate and Repossessed Assets The Group, in the ordinary course of business, acquires certain real estate and other assets against settlement of due financing and advances. These are considered as assets held for sale and are initially stated at the lower of net realizable value of due financing and advances or the current fair value of such related assets, less any costs to sell (if material). No depreciation is charged on such assets. Subsequent to the initial recognition, such assets are revalued on a periodic basis and adjusted for any subsequent provision for unrealised revaluation losses. Previously recognised unrealised revaluation losses of such assets can be reversed through the consolidated statement of income on an individual basis upon subsequent increase in fair value. Any unrealised losses on revaluation (or reversal), realised losses or gains on disposal and net rental income are recognised in the consolidated statement of income as other operating income expense, net. The other real estate assets are disclosed in note 9 while other repossessed assets are included in other assets. Gain/loss on disposal of repossessed assets are included in other operating income, net. (3.15) Property, Equipment and Software Property and equipment are measured at cost less accumulated depreciation and accumulated impairment loss, if any. Freehold land is not depreciated. Changes in the expected useful lives are accounted for by changing the period or method, as appropriate, and treated as changes in accounting estimates. Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the group. Ongoing repairs and maintenance are expensed as incurred. The depreciable amount of other property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets as follows: Buildings40 years Leasehold improvements Over the lease period or useful economic life whichever is shorter Furniture, equipment, vehicles and software 4-10 years The assets’ residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at the date of each consolidated statement of financial position. Software are recognised only when their cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to them will flow to the Group. Software are amortised over the useful economic life and assessed for impairment whenever there is an indication that the software may be impaired. The amortisation period and the amortisation method for software assets are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the assets are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on software is recognised in the consolidated statement of income. All such assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 123
63. (3.16) Financial Liabilities (3.22) Derecognition of Financial Instruments All money market deposits, customers’ deposits and debt securities issued are initially recognised at cost, net of transaction charges, being the fair value of the consideration received. Subsequently, all commission bearing financial liabilities, are measured at amortised cost by taking into account any discount or premium. Premiums are amortised and discounts are accreted on an effective yield basis to maturity and taken to special commission expense. A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognised, when the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for derecognition. (3.17) Financial Guarantees and Financing Commitments In the ordinary course of business, the Group issues letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value on the date the guarantee was given; typically the premium received. Subsequent to the initial recognition, the Group’s liability under such guarantees are measured at the higher of their amortised amount and the best estimate of the expenditure required to settle any financial obligation arising at the statement of financial position date. These estimates are determined based on experience of similar transactions and history of past losses net of any cash margin. Any increase in the liability relating to the financial guarantee is taken to the consolidated statement of income as impairment charge for financing and advances losses, net. The premium received is recognised in the consolidated statement of income as fee income from banking services on a straight line basis over the life of the guarantee, if material. In instances where the Group is assessed to have transferred a financial asset, the asset is derecognised if the Group has transferred substantially all the risks and rewards of ownership. Where the Group has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognised only if the Group has not retained control of the financial asset. The Group recognises separately as assets or liabilities any rights and obligations created or retained in the process. A financial liability (or a part of a financial liability) can only be derecognised when it is extinguished, that is, when the obligation specified in the contract is either discharged, cancelled or expired. (3.23) Investment Mmanagement Services Financing commitments are commitments to provide credit under pre-specified terms and conditions. The financial statements of investment management funds are not included in the consolidated financial statements of the Group. Transactions with the funds are disclosed under related party transactions; the Group’s share of these funds is included in held for trading investments. (3.18) Impairment Loss and Provisions Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in these consolidated financial statements. Provisions are recognised when a reliable estimate can be made by the Group for a present legal or constructive obligation as a result of past events where it is more likely that an outflow of resources will be required to settle the obligation. Provision balance are presented under other liabilities. (3.24) Financing Products in Compliance with Shariah Rules (3.19) Accounting for Leases (3.24.1) Murabaha (a) Where the Group is the Lessee All leases entered into by the Group are operating leases. Payments made under operating leases are charged to the consolidated statement of income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty, net of anticipated rental income (if any), is recognised as an expense in the period in which termination takes place. (b) Where the Group is the Lessor When assets are transferred under a finance lease, including assets under a lease arrangement in compliance with Shariah rules (Ijara), the present value of the lease payments is recognised as a receivable and disclosed under financing and advances. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return and is disclosed as special commission income. (3.20) Zakat and Overseas Income Tax Zakat is the liability of the shareholders. Zakat is computed on the higher of net adjusted income or adjusted shareholders’ equity using the basis defined under the Saudi Zakat Regulations. In accordance with SAMA guidance on zakat and income tax, Zakat is paid by the Bank on the shareholders’ behalf and is not charged to the consolidated statement of income but is deducted from the gross dividend paid to the shareholders or charged to retained earnings as an appropriation of net income if no dividend has been distributed. Overseas branches and subsidiaries are subject to income tax as per rules and regulations of the country in which they are incorporated and such taxes are charged to retained earnings in accordance with the SAMA guidance on Zakat and income tax. (3.21) Cash and Cash Equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents are defined as those amounts included in cash, balances with SAMA, excluding statutory deposits, and due from banks and other financial institutions with original maturity of three months or less which are subject to insignificant risk of changes in their fair value. 124 | Consolidated Financial Statements In addition to conventional banking products, the Group offers its customers certain non-special commission based financing products that comply with Shariah rules. These are approved and overseen by the Bank’s Shariah Board. The National Commercial Bank | Annual Report 2017 Murabaha is a Shariah-compliant form of financing where the Group, based on requests from its customers, purchases specific commodities and sells them to the customers at an agreed-upon price equal to the Group’s cost plus a specified profit margin, which is payable on a deferred basis in agreed-upon installments. The main uses of Murabaha are in residential, commercial real estate, and trade finance. (3.24.2) Tayseer Tayseer Alahli is a Shariah-compliant financing instrument introduced by the Group for customers in need of cash financing. It involves the Group buying commodities from international or local markets and selling them to customers at agreedupon deferred installment terms. Customers, on their own, or by appointing an agent, resell the commodities to third parties for cash. The main uses of Tayseer are in personal finance, credit cards, corporate finance, structured finance, syndications, project finance, as well as interbank transactions. (3.24.3) Ijara with a Promise to Transfer Ownership Ijara is a Shariah-compliant form of financing where the Group, based on requests from customers, purchases assets with agreed-upon specifications on a cash basis and leases them to customers for an agreed-upon rent to be settled in agreed-upon installments. If the assets are in existance then it is considered to be a specified Ijara, while if the assets are not in existance then it is considered to be a forward Ijara in which case it remains a liability on the Group to deliver the agreed upon usufruct. In the Ijara contract, the Group promises to transfer ownership of the assets to its customers at the end of the lease period, either by sale at nominal prices or in the form of grants. The main uses of Ijara are in auto lease, residential finance, commercial real estate finance, and structured finance. The main uses of forward Ijara are in project finance as well as structured finance. (3.24.4) Istisna’a Istisna’a is a contract for the acquisition of assets to be manufactured in accordance with the specifications of the one who requests the assets to be manufactured/procured. In this product the Group can either be the manufacturer/procurer (Saani) or the party who is seeking the assets to be manufactured/procured (Mustasni). In project finance , the Group takes the role of Mustasni and agrees with the customer to deliver specified assets for an agreed upon price. The Group pays for the asset in staged payments. At the same time, the Group enters into a forward Ijara and leases the assets to be constructured to the customer with promise to transfer ownership. The main use of Istisna’a is in project finance combined with forward Ijara to finance the construction of new projects. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 125
64. All the above Shariah-compliant financing products are accounted for in conformity with the accounting policies described in these consolidated financial statements . They are included in financing and advances. (3.25) Shariah-Compliant Deposit Products The Group offers its customers certain deposit products that comply with Shariah rules. These are approved and overseen by the Bank’s Shariah Board. (3.25.1) AlKhairaat AlKhairaat is a Shariah-compliant product based on commodity Murabaha. The Group acts as an agent for its customers in purchasing commodities on their behalf with their funds and then purchases these commodities for its own account from customers at agreed-upon price and deferred maturities (3,6,9 or 12 months). Being a retail product, customers are allowed to choose the investment amount, tenure, and currency. Since the Group purchases commodities from its customers, it is liable to them for the capital they invested plus a profit. (3.25.2) Structured AlKhairaat This product is an enhanced deposit product which provides a Shariah compliant alternative to structured deposits. It combines a AlKhairaat placement with a promise to enter into a secondary Murabaha transaction for the benefit of the customer where the profit will be linked to a predetermined index. These are capital protected up to a specified percentage (typically 95-100%). These Shariah-compliant deposit products are accounted for in conformity with the accounting policies described in these consolidated financial statements. They are included in customers’ deposit. (3.26) Shariah-Compliant Treasury Products The Group offers its customers certain treasury products that comply with Shariah rules. These are approved and overseen by the Bank’s Shariah Board and Shariah advisor. (3.26.1) Structured Hedging Products These products are offered to clients to hedge their existing exposure to foreign currencies. It is based on the concept of Waad (binding promise) where the Group promises to buy/sell a particular amount of foreign currency at an agreed upon price. It may include only one Waad or a combination of Waads. (3.26.2) Structured Investment Products These products are offered to clients to offer them a return that is typically higher than a standard AlKhairaat. There are based on the Structured AlKhairaat product and are designed to give the customers exposure to a number of indexes including foreign currencies, precious metals and Shariah compliant equity indexes. (3.26.3) Rates Products Benefits payable to the employees of the Group at the end of their services are accrued based on actuarial valuation in accordance with Saudi Arabian Labor laws. These are included in other liabilities in the consolidated statement of financial position. (3.29) Staff Compensation The Bank’s Board of Directors and its Nomination, Compensation and Governance Committee oversee the design and implementation of the Bank’s Compensation System in accordance with SAMA’s Compensation Rules and Financial Stability Board (FSB) Principles and Standards of Sound Compensation Practice. The Nomination, Compensation and Governance Committee was established by the Board of Directors and is composed of four non-executive members including the Chairman of the Committee. The Committee’s role and responsibilities are in line with SAMA’s Compensation Rules. The Committee is responsible for the development and implementation of the compensation system and oversight of its execution, with the objective of preventing excessive risk-taking and promoting corporate financial soundness. The Committee submits its recommendations, resolutions and reports to the Board of Directors for approval. Key elements of compensation in the Bank: (3.29.1) Fixed Compensation The fixed compensation includes salaries, allowances and benefits. Salaries are set in relation to market rates to attract, retain and motivate talented individuals. Salary administration is based on key processes such as job evaluation, performance appraisal and pay scales structure. The competitiveness of pay scales is monitored and maintained through participation in regular market pay surveys. (3.29.2) Variable Compensation Variable compensation aims at driving performance and limiting excessive risk taking. The Group operates three plans under variable compensation: (a) Short Term Incentive Plan (Annual Performance Bonus) The annual performance bonus aims at supporting the achievement of a set of annual financial and non-financial objectives. The financial objectives relate to the economic performance of the Group’s is business, while the non-financial objectives relate to some other critical objectives relating, for example, to complying with risk and control measures, employees development, teamwork, staff morale etc. The Group has established a regular performance appraisal process aimed at assessing employees’ performance and contribution. Annual performance bonus payments are based on employee contributions, business performance and the Group’s overall results. The overall annual performance bonus pool is set as a percentage of the Group’s net income, adjusted to reflect the core performance of the employees. The Group does not operate a guaranteed bonus plan. These products are offered to clients who have exposure to fixed/floating rates and need hedging solutions. The products are designed around the concept of Waad to enter into Murabaha where the profit is based on a rates index or formula. It may include only one Waad or a combination of Waads. The cost of this plan is recognised in the consolidated statement of income of the year to which it relates and is normally paid during the 1st quarter of the following year. (3.26.4) Commodity Products This plan aims at driving and rewarding achievements that lead to long term corporate success, measured on the basis of return on net income attributable to the equity holders of the Bank. The plan is rolled out in 3-year cycles. The Bank’s actual performance is assessed at the end of each cycle for determining actual payout amounts. These products are offered to clients who have exposure to commodity prices and need hedging solutions. These products are designed around the concept of Waad to enter into Murabaha where the profit is based on a commodity price index. It may include only one Waad or a combination of Waads. (b) Long Term Performance Plan (3.27) Treasury Shares Although all executives whose roles and accountabilities are likely to influence the Bank’s long term success are eligible to participate in this plan, their actual selection to participate in the plan is made through a vetting process to ensure their meeting of some mission critical criteria. Treasury shares are recorded at acquisition cost and presented as a deduction from equity. Any gains or losses on disposal of such shares are reflected under equity and are not recognised in the consolidated statement of income. The cost of the plan is estimated by reference to a set of expected net income forecasts at the beginning of each cycle and is reviewed annually. (3.28) End of Service Benefits The estimated plan cycle cost is apportioned and charged equally to the annual statements of income of the plan years. The estimate is revised annually and the difference between the latter and former estimate is apportioned and charged equally over the balance of the plan cycle. The provision for end of service benefits is based on the rules stated under the Saudi Arabian Labor and Workmen Law and in accordance with the local statutory requirements of the foreign branches and subsidiaries. The provision for the Group is also in line with independent actuarial valuation. 126 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 127
65. (c) Share Based Payment Arrangements The Bank maintain an equity-settled share based payment plan for its key management. The grant-date fair value of such share-based payment arrangement granted to employees is recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grantdate fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. If the employees are not entitled to dividends declared during the vesting period, then the fair value of these equity instruments is reduced by the present value of dividends expected to be paid compared with the fair value of equity instruments that are entitled to dividends. If the employees are entitled to dividends declared during the vesting period, then the accounting treatment depends on whether the dividends are forfeitable. Forfeitable dividends are treated as dividend entitlements during the vesting period. If the vesting conditions are not met, then any true-up of the share-based payment would recognise the profit or loss effect of the forfeiture of the dividend automatically because the dividend entitlements are reflected in the grant-date fair value of the award. 5. Due From Banks And Other Financial Institutions 2017 SAR’ 000 Current accounts Money market placements Reverse repos (note 34e) Due from banks and other financial institutions The Group classifies Sukuk issued with no fixed redemption/maturity dates (Perpetual Sukuk) and not obliging the Group for payment of profit as part of equity. 4,711,135 5,139,244 16,206,414 13,136,484 1,048,669 937,335 21,966,218 19,213,063 2017 SAR’ 000 2016 SAR’ 000 Investment grade (credit rating (AAA to BBB-)) 15,260,753 17,166,530 Non-investment grade (credit rating (BB+ to C)) 5,915,284 1,406,789 790,181 639,744 21,966,218 19,213,063 Unrated (3.30) Tier 1 Sukuk SAR’ 000 The credit quality of due from banks and other financial institutions is broadly monitored using reputable external credit rating agencies, the table below shows the credit quality of the counter party by class of asset: In cases, where an award is forfeited (i.e. when the vesting conditions relating to award are not satisfied), the Bank reverses the expense relating to such awards previously recognised in the consolidated statement of income. Where an equity-settled award is cancelled (other than forfeiture), it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. The Group acquires its own shares in connection with the anticipated grant of shares to the key management in future. Until such time as the beneficial ownership of such shares in the Bank passes to the employees, the unallocated / nonvested shares are treated as treasury shares. 2016 Due from banks and other financial institutions The related initial costs and distributions thereon are recognised directly in the consolidated statement of changes in equity under retained earnings. 4. Cash And Balances With Sama 2017 SAR’ 000 Cash in hand 2016 SAR’ 000 10,529,175 10,057,750 18,045,112 18,330,826 9,394,947 15,052,715 37,969,234 43,441,291 Balances with SAMA: Statutory deposit Money market placements and current accounts Cash and balances with SAMA In accordance with article (7) of the Banking Control Law and regulations issued by Saudi Arabian Monetary Authority (SAMA), the Bank is required to maintain a statutory deposit with SAMA at stipulated percentages of its demand, savings, time and other deposits calculated at the end of each Gregorian month (see note 37). The statutory deposits with SAMA are not available to finance the Bank’s day-to-day operations and therefore are not part of cash and cash equivalents (see note 32). 128 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 129
66. 6 . Investments, Net Unquoted instruments mainly comprise of fixed and floating rate Saudi Government Securities, Foreign Government and Foreign Quasi Government Bonds. (6.1) Investments are Classified as Follows: Other investments held at amortised cost include investments having an amortised cost of SAR 13,200 million (2016: SAR 4,207 million) which are held under a fair value hedge relationship. As at 31 December 2017, the fair value of these investments amount to SAR 13,031 million (2016: SAR 4,239 million). Domestic International 2017 SAR’ 000 2017 2016 SAR’ 000 Total SAR’ 000 2017 2016 SAR’ 000 SAR’ 000 2016 SAR’ 000 Mutual funds 646,652 708,352 - - 646,652 708,352 Held for trading 646,652 708,352 - - 646,652 708,352 Hedge funds - - 1,332,121 1,819,017 1,332,121 1,819,017 Held as FVIS - - 1,332,121 1,819,017 1,332,121 1,819,017 Fixed rate securities - - 12,072,914 15,858,775 12,072,914 15,858,775 Floating rate securities Equity instruments, Mutual Funds, Hedge Funds and Others Impairment - - 2,776,746 1,929,212 2,776,746 1,929,212 22,402 684,339 3,407,479 2,843,931 3,429,881 3,528,270 - (145,662) (906,906) (735,093) (906,906) (880,755) Available for sale, net 22,402 538,677 17,350,233 19,896,825 17,372,635 20,435,502 Investments, net, include securities that are issued by the Ministry of Finance of Saudi Arabia amounting to SAR 44,126 million, (2016: SAR 25,549 million) and also include investment in sukuks amounting to SAR 24,283 million, (2016: SAR 28,979 million). (6.3) Securities Lending Transactions The Bank pledges financial assets for the securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts. As at 31 December 2017, securities amounting to SAR 370 million (2016: SAR 1,205 million) have been lent to counterparties under securities lending transactions. (6.4) The Analysis of Unrealised Revaluation Gains/(Losses) and Fair Values of Held to Maturity Investments and Other Investments: 2017 SAR’ 000 Carrying value - - 663,420 1,412,388 663,420 1,412,388 Floating rate securities 33,861 20,044 - - 33,861 20,044 (a) Held to maturity Held to maturity 33,861 20,044 663,420 1,412,388 697,281 1,432,432 Fixed rate securities Fixed rate securities Floating rate securities Fixed rate securities 28,230,029 19,737,340 26,123,846 34,294,773 54,353,875 54,032,113 Floating rate securities 32,803,224 22,064,603 7,403,688 11,038,927 40,206,912 33,103,530 (6,542) (6,315) (25,109) (15,660) (31,651) (21,975) Other investments held at amortised cost, net 61,026,711 41,795,628 33,502,425 45,318,040 94,529,136 87,113,668 Investments, net 61,729,626 43,062,701 52,848,199 68,446,270 114,577,825 111,508,971 Impairment 2017 Quoted 2016 Unquoted Total Quoted Unquoted 18,102,940 67,090,209 56,213,754 15,089,522 71,303,276 Floating rate securities 17,627,296 25,390,223 43,017,519 8,323,577 26,729,209 35,052,786 Equity instruments, Mutual Funds, Hedge Funds and Others 1,791,348 3,617,306 5,408,654 2,933,795 3,121,844 6,055,639 Impairment (171,558) (766,999) (938,557) (219,573) (683,157) (902,730) 46,343,470 114,577,825 67,251,553 44,257,418 111,508,971 Fair value Carrying value Gross unrealised loss Gross unrealised gain Fair value 663,420 - (11,017) 652,403 1,412,388 4,840 - 1,417,228 33,861 - - 33,861 20,044 - - 20,044 697,281 - (11,017) 686,264 1,432,432 4,840 - 1,437,272 Fixed rate securities 54,353,875 403,749 (629,113) 54,128,511 54,032,113 420,221 (325,005) 54,127,329 Floating rate securities 40,206,912 573,180 (286,542) 40,493,550 33,103,530 374,281 (58,755) 33,419,056 (31,651) - - (31,651) (21,975) - - (21,975) 94,529,136 976,929 (915,655) 94,590,410 87,113,668 794,502 (383,760) 87,524,410 Total other investments held at amortised cost, net 2017 SAR’ 000 The National Commercial Bank | Annual Report 2017 2016 SAR’ 000 100,441,301 93,316,676 Corporate 8,471,232 12,019,220 Banks and other financial institutions 5,665,292 6,173,075 114,577,825 111,508,971 Government and Quasi Government Total 130 | Consolidated Financial Statements Gross unrealised loss (6.5) Counterparty Analysis of the Group’s Investments, Net of Impairment Total 48,987,269 68,234,355 Gross unrealised gain SAR’ 000 Fixed rate securities Investments, net SAR’ 000 (b) Other investments held at amortised cost Impairment (6.2) The Analysis of the Composition of Investments is as Follows: SAR’ 000 Total held to maturity 2016 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 131
67. (6.6) Credit Quality of Investments (6.7) Details of Impairment Charge on Investments are as Follows: 2017 The credit quality of investments (excluding investments in equities, hedge funds and mutual funds) is monitored using reputable external credit rating agencies. The table below shows the credit quality by class of asset. Available for sale SAR’ 000 2017 SAR’ 000 Other investments held at amortised cost Available for sale Other investments held at amortised cost Held to maturity Total 2016 SAR’ 000 66,170 193,736 9,676 11,984 75,846 205,720 7. Financing And Advances, Net Total Performing: - 3,774 44,126,495 44,130,269 12,891,980 693,507 46,620,822 60,206,309 1,935,176 - 3,813,470 5,748,646 - - - - 14,827,156 697,281 94,560,787 110,085,224 Saudi Government Bonds, Sukuk and Treasury Bills Investment grade Non-investment grade Unrated Total performing (7.1) Financing and Advances SAR’ 000 Consumer & Credit card Corporate International Others Total 2017 Less: Impairment (collective) Net performing (139) - (31,651) (31,790) 14,827,017 697,281 94,529,136 110,053,434 SAR’ 000 2016 Available for sale Other investments held at amortised cost Held to maturity Total Performing: Saudi Government Bonds, Sukuk and Treasury Bills Investment grade Non-investment grade Unrated Total performing Less: Impairment (collective) Net performing - - 25,539,514 25,539,514 17,765,114 1,412,388 57,605,928 76,783,430 232 - 3,990,197 3,990,429 - 20,044 - 20,044 17,765,346 1,432,432 87,135,639 106,333,417 (139) - (21,976) (22,115) 17,765,207 1,432,432 87,113,663 106,311,302 89,927,400 125,440,573 25,977,050 9,921,127 251,266,150 530,515 2,836,678 1,399,993 1,806 4,768,992 Total financing and advances 90,457,915 128,277,251 27,377,043 9,922,933 256,035,142 Allowance for financing losses (specific and collective) (note 7.2) (1,298,874) (4,182,616) (1,261,038) (58,368) (6,800,896) Financing and advances, net 89,159,041 124,094,635 26,116,005 9,864,565 249,234,246 Performing financing and advances Non-performing financing and advances SAR’ 000 Consumer & Credit card Corporate International Others Total Performing financing and advances 85,314,630 133,159,751 28,174,761 8,945,924 255,595,066 Non-performing financing and advances 524,214 1,916,800 1,482,864 1,604 3,925,482 Total financing and advances 85,838,844 135,076,551 29,657,625 8,947,528 259,520,548 Allowance for financing losses (specific and collective) (note 7.2) (1,227,003) (3,397,588) (1,263,422) (40,394) (5,928,407) Financing and advances, net 84,611,841 131,678,963 28,394,203 8,907,134 253,592,141 2016 Investments classified under investment grade above comprise of credit exposures equivalent to Aaa to Baa3 ratings determined by reputable rating agencies. 132 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 133
68. Others include private banking customers and bank loans . Financing and advances, net, include financing products in compliance with Shariah rules mainly Murabaha, Tayseer and Ijara amounting to SAR 210,751 million (2016: SAR 208,918 million). Allowance for financing losses related to financing products in compliance with Shariah rules is SAR 5,601 million (2016: SAR 5,047 million). Special commission relating to non-performing financing and advances at December 31, 2017 is SAR 140 million (2016: SAR 91 million). (7.3) Impairment Charge for Financing Losses in the Consolidated Statement of Income Represents: SAR’ 000 2017 Additions during the year SAR’ 000 Corporate International Others Total Direct write-off 2017 Balance at beginning of the year 1,227,003 3,397,588 1,263,422 40,394 5,928,407 - - (102,615) - (102,615) 1,155,185 1,258,207 549,649 17,974 2,981,015 (1,080,229) (402,983) (239,066) - (1,722,278) - (70,196) (210,352) - (280,548) (3,085) - - - (3,085) 1,298,874 4,182,616 1,261,038 58,368 6,800,896 Foreign currency translation adjustment Provided during the year Bad debts (written off) (Recoveries) of amounts previously provided Other adjustments Balance at the end of the year SAR’ 000 Consumer & Credit card Corporate International Others Foreign currency translation adjustment Provided during the year Bad debts (written off) (Recoveries) of amounts previously provided Other adjustments Balance at the end of the year Net charge for the year (impairment charge for financing and advances losses, net) Total 2016 Additions during the year (Recoveries) of amounts previously provided (Recoveries) of debts previously written-off 1,484,023 2,728,401 1,318,805 32,395 5,563,624 - - (339,660) - (339,660) 1,040,703 832,924 1,147,083 7,999 3,028,709 (1,332,458) (86,195) (629,658) - (276) (77,542) (233,148) - (310,966) 35,011 - - - 35,011 1,227,003 3,397,588 1,263,422 40,394 5,928,407 Others Total 549,649 17,974 2,981,015 - (70,194) (210,352) - (280,546) 1,155,185 1,188,013 339,297 17,974 2,700,469 - (29,766) 3,299 (17,974) (44,441) (721,247) (31,246) (41,236) - (793,729) 1,324 - - - 1,324 435,262 1,127,001 301,360 - 1,863,623 SAR’ 000 Charge/(reversal) against indirect facilities (included in other liabilities) 2016 Balance at beginning of the year (Recoveries) of debts previously written-off International 1,258,207 Charge/(reversal) against indirect facilities (included in other liabilities) The accumulated allowance for financing losses is as follows: Corporate 1,155,185 (Recoveries) of amounts previously provided (7.2) Movements in the Allowance for Financing Losses Consumer & Credit card Consumer & Credit card Direct write-off Net charge for the year (impairment charge for financing and advances losses, net) Consumer & Credit card Corporate International Others Total 1,040,703 832,924 1,147,083 7,999 3,028,709 (276) (77,542) (233,148) - (310,966) 1,040,427 755,382 913,935 7,999 2,717,743 - (29,544) 14,786 - (14,758) (539,614) (117,117) (115,560) - (772,291) 271 - - - 271 501,084 608,721 813,161 7,999 1,930,965 (2,048,311) (7.4) Credit Quality of Financing and Advances The Group employs an internally developed risk evaluation framework based on risk ratings for assessment of its corporate obligors. The associated rating models are managed by a specialised unit that ensure the end to end robustness of the involved processes. Risk assessment is conducted using a rating scale consisting of 17 risk rating grades, of which sixteen grades are related to the performing portfolio as follows: • Investment Grade is composed of Very Strong Credit Quality (AAA to BBB-) • Non-Investment Grade is composed of: Good and satisfactory Credit Quality (BB+ to C) The lowest rating grade (Default) relates to the non-performing portfolio. 134 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 135
69. (a) The table below details the credit quality of financing and advances, net by asset class. (a) The table below details the credit quality of financing and advances, net by asset class. SAR’ 000 Loans and advances Consumer & Corporate Credit card International Others SAR’ 000 Loans and advances Consumer & Corporate Credit card Total Investment Grade - 52,400,428 1,675,437 1,450,264 55,526,129 Non-Investment Grade - 69,170,085 20,936,068 4,379,809 94,485,962 Unrated 89,927,400 3,870,060 3,365,545 4,091,054 101,254,059 Sub total 89,927,400 125,440,573 25,977,050 9,921,127 251,266,150 Less: portfolio (collective) allowance (1,027,896) (1,843,957) (302,120) (58,368) (3,232,341) Net performing 88,899,504 123,596,616 25,674,930 9,862,759 248,033,809 Investment Grade - 54,606,546 Non-Investment Grade - 75,515,027 Unrated 85,314,630 3,038,178 Sub total 85,314,630 133,159,751 Less: portfolio (collective) allowance Net performing Total financing and advances, net Neither past due nor impaired 530,515 2,836,678 1,399,993 1,806 4,768,992 (270,978) (2,338,659) (958,918) - (3,568,555) 259,537 498,019 441,075 1,806 1,200,437 89,159,041 124,094,635 26,116,005 9,864,565 249,234,246 86,735,245 123,990,121 24,702,496 9,918,116 Total non-performing Less: specific allowance Net non-performing Total financing and advances, net Neither past due nor impaired 2,149,990 958,033 495,242 - 3,603,265 30-59 days 658,704 399,994 374,271 3,011 1,435,980 60-89 days 383,461 92,425 405,041 - 880,927 3,192,155 1,450,452 1,274,554 3,011 5,920,172 89,927,400 125,440,573 25,977,050 9,921,127 251,266,150 Total performing financing and advances 84,357,995 131,421,372 22,187,103 3,115,208 100,817,338 4,978,381 3,834,578 97,165,767 28,174,761 8,945,924 255,595,066 (289,747) (40,394) (3,025,155) 27,885,014 8,905,530 252,569,911 524,214 1,916,800 1,482,864 1,604 3,925,482 (270,368) (1,659,209) (973,675) - (2,903,252) 253,846 257,591 509,189 1,604 1,022,230 84,611,841 131,678,963 28,394,203 8,907,134 253,592,141 (b) The table below details the aging of the performing financing and advances: Past due but not impaired Total past due not impaired (1,738,379) 57,611,961 245,345,978 (b) The table below details the aging of the performing financing and advances: Less than 30 days (956,635) 1,009,277 1,996,138 Non-performing: Non-performing: Net non-performing Total Performing: Performing: Less: specific allowance Others 2016 2017 Total non-performing International 81,583,426 131,731,416 26,306,590 8,945,177 248,566,609 Past due but not impaired (performing) Less than 30 days 2,675,624 935,377 1,011,486 - 4,622,487 30-59 days 787,478 332,267 401,337 747 1,521,829 60-89 days 268,102 160,691 455,348 - 884,141 3,731,204 1,428,335 1,868,171 747 7,028,457 Total past due not impaired Total performing financing and advances 85,314,630 133,159,751 28,174,761 8,945,924 255,595,066 Unrated loans mainly comprise of consumer, credit cards, small businesses and private banking financing and advances. Collateral The Group, in the ordinary course of its lending activities, holds collaterals as security to mitigate credit risk in the financing and advances. These collaterals mostly include time and demand and other cash deposits, financial guarantees, local and international equities, real estate and other long term assets. The collaterals are held mainly against corporate and consumer loans and are managed against relevant exposures at their net realizable values. 136 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 137
70. Fair value of collateral held by Group against financing and advances by each category are as follows : 2017 SAR’ 000 2016 SAR’ 000 77,135,269 79,139,805 Past due but not impaired 3,643,127 4,606,064 Impaired 1,803,307 1,698,494 82,581,703 85,444,363 Neither past due nor impaired Total Those collaterals, which are not readily convertible into cash (i.e. real estate), are accepted by the Group with intent to dispose off in case of default by the customer. (7.5) Economic Sector Risk Concentrations for the Financing and Advances and Allowances for Financing Losses are as Follows: 2017 Government and quasi Government Banks and other financial institutions Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumers Others Performing SAR’ 000 1,306,565 4,763,426 805,178 31,493,058 7,093,271 18,899,956 11,565,552 42,191,519 11,491,559 20,325,358 93,390,861 7,939,847 251,266,150 Nonperforming SAR’ 000 115 29,279 953,161 11,841 23,077 1,018,994 1,702,837 107,150 251,646 583,944 86,948 4,768,992 Specific allowance SAR’ 000 (75) (20,337) (688,581) (6,261) (17,577) (883,261) (1,303,759) (97,351) (179,020) (298,591) (73,742) (3,568,555) Portfolio (collective) allowance Financing and advances, net Performing 2016 Government and quasi Government Banks and other financial institutions Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumers Others Portfolio (collective) allowance Financing and advances, net 138 | Consolidated Financial Statements SAR’ 000 1,063,553 4,327,216 965,895 32,230,179 7,225,756 16,818,742 18,244,932 47,825,563 10,913,336 19,185,318 90,114,404 6,680,172 255,595,066 Nonperforming SAR’ 000 130 38,331 685,742 18,230 23,572 573,343 1,583,981 122,055 212,878 589,303 77,917 3,925,482 Specific allowance SAR’ 000 (93) (25,659) (507,892) (11,340) (13,820) (492,418) (1,206,817) (110,196) (171,013) (301,555) (62,449) (2,903,252) (7.6) Financing and Advances Include Finance Lease Receivables (Including Ijara in Compliance with Shariah Rules) which are Analysed as Follows: Financing and advances, net SAR’ 000 1,306,565 4,763,466 814,120 31,757,638 7,098,851 18,905,456 11,701,285 42,590,597 11,501,358 20,397,984 93,676,214 7,953,053 252,466,587 (3,232,341) 249,234,246 Financing and advances, net SAR’ 000 1,063,553 4,327,253 978,567 32,408,029 7,232,646 16,828,494 18,325,857 48,202,727 10,925,195 19,227,183 90,402,152 6,695,640 256,617,296 (3,025,155) 253,592,141 The National Commercial Bank | Annual Report 2017 2017 SAR’ 000 2016 SAR’ 000 Gross receivables from finance leases: 1,577,736 1,584,530 1 to 5 years 18,480,749 19,073,018 Over 5 years 29,928,942 25,294,665 Total 49,987,427 45,952,213 (149,587) (155,504) 1 to 5 years (3,712,737) (3,611,597) Over 5 years (8,712,654) (7,123,854) (12,574,978) (10,890,955) 1,428,149 1,429,026 1 to 5 years 14,768,012 15,461,421 Over 5 years 21,216,288 18,170,811 Total 37,412,449 35,061,258 Less than 1 year Unearned finance income on finance leases Less than 1 year Total Net finance lease receivables: Less than 1 year Allowance for uncollectable finance lease receivables included in the allowance for financing losses is SAR 675 million (2016: SAR 650 million). The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 139
71. 10 . Property, Equipment And Software, Net 8. Investment In Associates, Net 2017 SAR’ 000 2016 2017 SAR’ 000 Land, buildings and leasehold improvements Cost: At the beginning of the year 1,014,000 1,014,000 At 31 December 1,014,000 1,014,000 (582,844) (590,260) Share of results in associates 21,392 7,416 Dividends (2,500) - (563,952) (582,844) 450,048 431,156 At beginning of the year At 31 December Investment in associates, net Investment in associates consists of a 60% (2016: 60%) ownership interest in the Commercial Real Estate Markets Company and 30% (2016: 30%) ownership interest in Al-Ahli Takaful Company, which are both registered in the Kingdom of Saudi Arabia. SAR’ 000 Total SAR’ 000 4,226,812 2,721,913 1,700,762 829,526 9,479,013 3,768,578 2,453,342 1,306,889 828,006 8,356,815 (14,891) (15,766) (26,002) (73,848) (27,602) (43,547) (32,260) (50,431) (153,840) Additions 310,884 184,332 31,749 652,147 1,179,112 243,883 180,397 58,192 865,184 1,347,656 (1,237) (57,525) (7,633) - (66,395) (34,329) (36,167) (1,122) - (71,618) 720,816 26,964 242,436 (990,216) - 276,282 167,888 369,063 (813,233) - 2,860,793 1,951,548 465,455 10,517,882 4,226,812 2,721,913 1,700,762 829,526 9,479,013 1,808,829 1,020,263 - 4,659,604 787,964 - 4,105,507 Disposals and retirements Transfers As at 31 December 5,240,086 Accumulated depreciation/amortisation: At beginning of the year As at 31 December 1,830,512 1,693,180 1,624,363 (2,868) (12,369) (9,744) - (24,981) (16,570) (31,417) (25,134) - (73,121) 212,156 240,569 201,556 - 654,281 177,746 250,926 257,658 - 686,330 (3,475) (48,011) (208) - (51,694) (23,844) (35,043) (225) - (59,112) 1,989,018 1,211,867 - 5,237,210 1,830,512 1,808,829 1,020,263 - 4,659,604 465,455 5,280,672 2,396,300 829,526 4,819,409 2,036,325 SAR’ 000 Cost: Net book value: 923,291 958,671 Additions 92,608 165,020 Disposals (39,221) (200,400) At 31 December 976,678 923,291 Foreign currency translation adjustment (61,511) (56,998) Provision for impairment (53,644) (17,113) (115,155) (74,111) 861,523 849,180 At beginning of the year Work in progress (17,189) Disposals and retirements 2016 Total Foreign currency translation adjustment Charge for the year 2017 Work in progress Furniture, equipment and vehicles Software Cost: Foreign currency translation adjustment 9. Other Real Estate, Net Software Land, buildings and improvements SAR’ 000 At beginning of the year Allowance for impairment and share of results: Furniture, equipment and vehicles 2016 As at 31 December 3,203,761 871,775 739,681 913,084 680,499 Provision and foreign currency translation: At 31 December Other real estate, net 140 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 141
72. 11 . Goodwill 13. Derivatives (11.1) Net Book Value In the ordinary course of business, the Group utilises the following derivative financial instruments for both trading and hedging purposes: 2017 2016 SAR’ 000 SAR’ 000 Cost: At beginning of the year Foreign currency translation adjustment As at 31 December 801,518 (55,846) 745,672 968,302 (166,784) 801,518 Amortisation, impairment and foreign currency translation: At beginning of the year Foreign currency translation adjustment At 31 December 475,785 (33,150) 442,635 574,789 (99,004) 475,785 Net book value: At 31 December 303,037 325,733 (11.2) Türkiye Finans Katılım Bankası A.S., (TFKB) In accordance with the requirements of International Financial Reporting Standards (IFRS), the Group’s management has carried out an impairment test as at 30 November 2017 (30 November 2016), in respect of the goodwill that arised on the acquisition of Türkiye Finans Katılım Bankası A.S (TFKB). The recoverable amount for TFKB as a Cash Generating Unit (CGU) has been determined based on value in use calculation by using Dividend Discount Model, built on the five-year projections approved by the senior management of TFKB. In preparing the forecasts for the value in use calculation, management has made certain assumptions regarding the future cash flows and level of earnings. Further, the key assumptions used in the calculation of value in use are the discount rate and the perpetual growth rate; the discount rate being a function of the beta, risk free rate, equity risk premium, and expected inflation. Discount rate of 14.38% (30 November 2016: 14.42%) was used to calculate the present value of future cash flows after incorporating expected inflation adjustments. The management compared the value in use, calculated based on the above assumptions, with the carrying value of TFKB as at the date of the impairment test. As a result, the value in use of TFKB was higher than its carrying value; hence, no impairment loss on goodwill has been recognised in respect of TFKB for the year ended 31 December 2017. Since the value in use calculation resulted in a higher value than the carrying value of the TFKB CGU, as such, the fair value less cost to sell was not required to be estimated, as per the requirements of IFRS. If the discount rate used for the value in use calculation had been adjusted by +/-1% with all other factors remaining constant, the value in use of TFKB, as a CGU, would have been lower by SAR 183 million and higher by SAR 193 million, respectively. 12. Other Assets 2017 2016 1,309,455 958,051 5,697,497 2,569,603 SAR’ 000 1,400,407 895,725 1,779,035 1,734,757 10,534,606 5,809,924 SAR’ 000 Assets purchased under Murabah arrangements Prepayments and advances Margin deposits against derivatives and repos (note 34) Others Total 142 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 (a) Swaps Swaps are commitments to exchange one set of cash flows for another. For special commission rate swaps, counterparties generally exchange fixed and floating rate special commission payments in a single currency without exchanging principal. For currency swaps, fixed special commission payments and principal are exchanged in different currencies. For crosscurrency special commission rate swaps, principal and fixed and floating special commission payments are exchanged in different currencies. (b) Forwards and Futures Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specified price and date in the future. Forwards are customized contracts transacted in the over-the-counter market. Foreign currency and special commission rate futures are transacted in standardized amounts on regulated exchanges. Changes in futures contract values are settled daily. (c) Forward Rate Agreements Forward rate agreements are individually negotiated special commission rate contracts that call for a cash settlement for the difference between a contracted special commission rate and the market rate on a specified future date, based on a notional principal for an agreed period of time. (d) Options Options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, to either buy or sell at a fixed future date or at any time during a specified period, a specified amount of a currency, commodity or financial instrument at a pre-determined price. (e) Structured Derivative Products Structured derivative products provide financial solutions to the customers of the Group to manage their risks in respect of foreign exchange, special commission rate and commodity exposures and enhance yields by allowing deployment of excess liquidity within specific risk and return profiles. The majority of the Group’s structured derivative transactions are entered on a back-to-back basis with various counterparties. (13.1) Derivatives Held for Trading Purposes Most of the Group’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers and banks in order, inter alia, to enable them to transfer, modify or reduce current and future risks. Positioning involves managing market risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage involves profiting from price differentials between markets or products. (13.2) Derivatives Held for Hedging Purposes The Group has adopted a comprehensive system for the measurement and management of risk (see note 35 - credit risk, note 36 - market risk and note 37 - liquidity risk). Part of the risk management process involves managing the Group’s exposure to fluctuations in foreign exchange and special commission rates to reduce its exposure to currency and special commission rate risks to acceptable levels as determined by the Board of Directors within the guidelines issued by SAMA. The Board of Directors has established levels of currency risk by setting limits on counterparty and currency position exposures. Positions are monitored on a daily basis and hedging strategies are used to ensure that positions are maintained within the established limits. The Board of Directors has established the level of special commission rate risk by setting limits on special commission rate gaps for stipulated periods. Asset and liability special commission rate gaps are reviewed on a periodic basis and hedging strategies are used to reduce special commission rate gaps to within the established limits. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 143
73. As part of its asset and liability management , the Group uses derivatives for hedging purposes in order to adjust its own exposure to currency and special commission rate risks. This is generally achieved by hedging specific transactions as well as strategic hedging against overall statement of financial position exposures. Strategic hedging does not qualify for special hedge accounting and the related derivatives are accounted for as held for trading, such as special commission rate swaps, special commission rate options and futures, forward foreign exchange contracts and currency options. The Group uses special commission rate swaps to hedge against the special commission rate risk arising from specifically identified fixed special commission rate exposures. The Group also uses special commission rate swaps to hedge against the cash flow risk arising on certain floating rate exposures. In all such cases, the hedging relationship and objective, including details of the hedged items and hedging instrument, are formally documented and the transactions are accounted for as fair value or cash flow hedges. The tables below show the positive and negative fair values of derivative financial instruments, together with the notional amounts analysed by the term to maturity and monthly average. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year end, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Group’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor to market risk. SAR’ 000 Notional amounts by term to maturity 2017 Positive fair value Negative fair value Notional amount Within 3 months 3-12 months 1-5 years Over 5 years Monthly average Held for trading: Special commission rate instruments 1,727,770 (1,119,688) 132,471,806 - 12,282,458 63,472,831 56,716,517 114,768,806 Forward foreign exchange contracts 318,781 (48,284) 77,702,130 35,274,902 20,898,697 21,528,531 - 82,752,411 Options 13,173 (9,482) 326,049 98,574 227,475 - - 558,075 Structured derivatives 86,233 (90,513) 19,345,542 916,326 9,511,316 8,917,900 - 32,099,788 365,744 (276,401) 16,306,897 - 954,375 1,926,311 13,426,211 13,201,258 176,757 (401,072) 12,487,217 - 300,000 10,837,498 1,349,719 11,954,204 2,688,458 (1,945,440) 258,639,641 36,289,802 44,174,321 106,683,071 71,492,447 The table below shows a summary of hedged items and portfolios, the nature of the risk being hedged, the hedging instrument and its fair value. SAR’ 000 2017 Fair value Cost Risk Description of hedged items Fixed rate Fair 15,872,613 15,940,996 instruments value Fixed rate and Cash floating rate 11,249,498 11,306,777 flow instruments Hedging instrument Positive fair value Negative fair value Special commission rate instruments 365,744 (276,401) Special commission rate instruments 176,757 (401,072) 2016 Description of hedged items Fixed rate 7,127,105 instruments Fixed rate and floating rate 10,317,449 instruments 6,961,425 Fair value Special commission rate instruments 221,128 (280,887) 10,339,862 Cash flow Special commission rate instruments 144,746 (559,037) Approximately 50% (2016: 54%) of the positive fair value of the Group’s derivatives are entered into with financial institutions and 50% (2016: 46%) of the positive fair value contracts are with non-financial institutions at the consolidated statement of financial position date. Derivative activities are mainly carried out under the Group’s Treasury segment. Cash Flows Hedges: The Group is exposed to variability in future special commission cash flows on non-trading assets and liabilities which bear special commission at a variable rate. The Bank generally uses special commission rate swaps as hedging instruments to hedge against these special commission rate risks. Held as fair value hedges: Special commission rate instruments Held as cash flow hedges: Special commission rate instruments Total Negative fair value Notional amount Within 3 months 3-12 months 1-5 years Over 5 years Monthly average Special commission rate instruments 1,540,177 (1,365,467) 98,996,336 1,801,057 8,050,850 41,468,343 47,676,086 81,408,323 Forward foreign exchange contracts 419,845 (121,199) 83,576,806 44,652,869 23,776,442 15,147,495 - 86,526,024 61,550 (29,797) 523,504 228,053 294,322 1,129 - 441,870 278,803 (278,803) 48,547,647 1,019,984 15,973,080 31,554,583 - 73,901,189 221,128 (280,887) 7,217,146 - 90,231 2,881,454 4,245,461 9,460,657 Structured derivatives Held as fair value hedges: Special commission rate instruments Cash inflows (assets) Cash outflows (liabilities) Held for trading: Options Net cash inflows (outflows) 144 | Consolidated Financial Statements Over 5 years 144,746 (559,037) 11,645,102 - 39,822 9,820,737 1,784,543 2,666,249 (2,635,190) 250,506,541 47,701,963 48,224,747 100,873,741 53,706,090 11,840,772 The National Commercial Bank | Annual Report 2017 144,743 290,900 665,973 113,338 (157,860) (226,832) (553,765) (84,785) (13,117) 64,068 112,208 28,553 Within 1 year 1-3 years 3-5 years Over 5 years 2016 Cash outflows (liabilities) Held as cash flow hedges: Total 3-5 years SAR’ 000 Cash inflows (assets) Special commission rate instruments 1-3 years 2017 Notional amounts by term to maturity Positive fair value SAR’ 000 Within 1 year SAR’ 000 2016 Below is the schedule indicating as at 31 December, the periods when the hedged cash flows are expected to occur and when they are expected to affect profit or loss: Net cash inflows (outflows) The National Commercial Bank | Annual Report 2017 351,518 656,621 235,911 68,611 (329,229) (595,567) (253,352) (76,900) 22,289 61,054 (17,441) (8,289) Consolidated Financial Statements | 145
74. 16 . Debt Securities Issued 14. Due To Banks And Other Financial Institutions 2017 SAR’ 000 2016 SAR’ 000 5,449,629 4,844,183 Money market deposits 15,421,144 22,968,002 Repos (note 34a) 27,687,168 17,661,889 Total 48,557,941 45,474,074 Current accounts Issuer SAR’ 000 National Commercial Bank 2016 162,044 Time 57,974,382 79,010,133 Others 13,078,366 12,812,888 308,942,120 315,617,891 Total Türkiye Finans Katılım Bankası A.S. Other customers’ deposits include SAR 3,522 million (2016: SAR 3,754 million) of margins held for irrevocable commitments and contingencies (note 21). International segment deposits included in customers’ deposits comprise of: 2017 SAR’ 000 Current accounts Time Others Total 6,140,329 - - 14,702,820 15,539,602 451,496 572,069 21,986,035 22,252,000 2017 SAR’ 000 Others Total 146 | Consolidated Financial Statements 1,531,388 1,524,558 2014 5 years Non-convertible sukuk listed on the Irish Stock Exchange, carrying profit at a fixed rate payable semi-annually. 1,885,170 1,878,524 2014 5 years Non-convertible unlisted sukuk, carrying profit at a fixed rate payable semi-annually. 742,832 670,995 2015 5 years Non-convertible unlisted sukuk, carrying profit at a fixed rate payable semi-annually. 338,613 305,965 2016 6 months Non-convertible sukuk listed on the Borsa Istanbul, carrying profit at a fixed rate. - 475,319 2017 6 months Non-convertible sukuk listed on the Borsa Istanbul, carrying profit at a fixed rate. 696,767 - 10,250,310 9,917,765 Movement of the debt securities issued during the year is as follows: 2017 SAR’ 000 2016 2016 SAR’ 000 Balance at beginning of the year 9,917,765 9,940,717 Net movement in debt securities 263,900 53,048 68,645 (76,000) 10,250,310 9,917,765 Foreign currency translation adjustment Details on foreign currency deposits included in customers’ deposits as follows: Time 5 years Non-convertible sukuk listed on the Irish Stock Exchange, carrying profit at a fixed rate payable semi-annually. Total 6,831,719 Savings Savings 5,062,404 2016 SAR’ 000 SAR’ 000 5,055,540 223,632,826 120,628 Savings 2016 10 years 2014 SAR’ 000 237,768,744 Current accounts 2017 Particulars Non-convertible unlisted sukuk, callable on the 5th anniversary of the issue date, carrying profit payable semi-annually. 2013 2017 Tenure SAR’ 000 15. Customers’ Deposits Current accounts Year of issue Balance at the end of the year SAR’ 000 13,780,018 14,377,090 460 611 27,650,775 29,687,462 1,098,722 1,511,942 42,529,975 45,577,105 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 147
75. 17 . Other Liabilities 21. Commitments And Contingencies 2017 SAR’ 000 2016 SAR’ 000 Zakat 1,482,919 1,282,062 Staff-related payables 1,046,447 941,186 Accrued expenses and accounts payable 2,889,211 2,788,623 Allowances for indirect facilities (note 7.3) 308,793 347,273 Employee benefit obligation (note 28) 1,069,819 1,142,783 Others 3,097,269 2,584,552 Total 9,894,458 9,086,479 Zakat assessments have been finalised with the General Authority of Zakat and Tax (GAZT) for all years up to 2011. The Bank has submitted Zakat returns for the years 2012 to 2016 and obtained final Zakat certificates. The Zakat returns for the years 2012 to 2016 are currently under review by GAZT and Zakat assessment for these years is awaited. 18. Share Capital (21.1) Capital and Other Non-Credit Related Commitments As at 31 December 2017 the Bank had capital commitments of SAR 677 million (2016: SAR 502 million) in respect of building and equipment purchases. (21.2) Credit-Related Commitments and Contingencies Credit-related commitments and contingencies mainly comprise letters of credit, guarantees, acceptances and commitments to extend credit (irrevocable). The primary purpose of these instruments is to ensure that funds are available to customers as required. Guarantees including standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that customers cannot meet their obligations to third parties, carry the same credit risk as financing and advances. Cash requirements under guarantees are normally considerably less than the amount of the related commitment because the Group does not generally expect the third party to draw funds under the agreement. Documentary letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are generally collateralised by the underlying shipment of goods to which they relate and therefore have significantly less risk. Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group expects most acceptances to be presented before being reimbursed by the customers. The authorised, issued and fully paid share capital of the Bank consists of 2,000,000,000 shares of SAR 10 each (31 December 2016: 2,000,000,000 shares of SAR 10 each). The capital of the Bank excluding treasury shares (refer note 27) consists of 1,994,798,024 shares of SAR 10 each (31 December 2016: 1,996,903,527 shares of SAR 10 each). The Board of Directors of the Bank has recommended on 28 December 2017, corresponding to 10 Rabi al-thani 1439H to an Extraordinary General Shareholders Assembly, an increase of 50% of the Bank’s existing capital through bonus shares with 1 bonus share for every 2 shares owned. The number of shares will increase by 1,000,000,000 shares to reach 3,000,000,000 shares and the capital of the Bank will increase by SAR 10,000,000,000 to reach SAR 30,000,000,000 subject to approval from the official authorities and the Extraordinary General Assembly. Commitments to extend credit represent unused portions of authorisation to extended credit, principally in the form of financing, guarantees and letters of credit. With respect to credit risk relating to commitments to extend unused credit lines , the Group is potentially exposed to a loss in an amount which is equal to the total unused commitments. The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire or terminate without being funded. 19. Statutory Reserve In accordance with Saudi Arabian Banking Control Law, a minimum of 25% of the annual net income, inclusive of the overseas branches, is required to be transferred to a statutory reserve up to where the reserve equals a minium amount of the paid up capital of the Bank. Moreover, in accordance with the Regulation for Companies in Saudi Arabia, NCBC is also required to transfer a minimum of 10% of its annual net income (after Zakat) to statutory reserve. TFKB transfers 5% of its previous year annual net income to statutory reserve. The statutory reserves are not currently available for distribution. 20. Other Reserves (cumulative changes in fair values) Other reserves represent the net unrealised revaluation gains (losses) of cash flow hedges (effective portion) and available for sale investments. The movement of other reserves during the year is included under consolidated statement of other comprehensive income and the consolidated statement of changes in equity. 148 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 149
76. 22 . Net Special Commission Income (a) The contractual maturity structure of the Group’s credit-related commitments and contingencies is as follows: SAR’ 000 2017 Letters of credit Guarantees Acceptances Irrevocable commitments to extend credit Total Within 3 months 3-12 months 1-5 years Over 5 years 2017 Total 6,596,625 2,903,560 508,285 8,724 10,017,194 10,093,357 18,790,443 8,097,296 3,877,209 40,858,305 1,623,408 844,515 43,088 4,098 2,515,109 34,107 2,294,722 7,228,890 2,497,278 12,054,997 18,347,497 24,833,240 15,877,559 6,387,309 65,445,605 2016 3-12 months 1-5 years Over 5 years Total 859,123 1,138,895 7,061 29,431 Other investments held at amortised cost 2,514,324 2,434,483 Sub total - investments 3,380,508 3,602,809 734,328 667,707 Financing and advances 13,029,785 13,248,428 Total 17,144,621 17,518,944 736,045 684,594 2,032,170 2,245,145 715,428 1,039,627 3,483,643 3,969,366 13,660,978 13,549,578 Investments - available for sale Investments - held to maturity Letters of credit 5,754,135 1,994,996 314,273 267,142 8,330,546 Guarantees 7,619,786 19,425,960 13,005,690 5,166,618 45,218,054 Acceptances 1,267,190 1,367,076 79,444 3,028 2,716,738 Customers’ deposits 93,873 4,245,355 6,206,265 1,170,180 11,715,673 Debt securities issued 14,734,984 27,033,387 19,605,672 6,606,968 67,981,011 Irrevocable commitments to extend credit Total (b) The analysis of commitments and contingencies by counterparty is as follows: 2017 SAR’ 000 2016 8,615,230 Corporate and establishment 41,826,553 44,725,264 Banks and other financial institutions 15,081,684 13,778,639 1,562,140 861,878 65,445,605 67,981,011 Others Total (21.3) Operating Lease Commitments The future minimum lease payments under non-cancelable operating leases where the Group is the lessee are as follows: 2017 SAR’ 000 2016 26,356 476,951 499,009 Over 5 years 1,094,902 1,164,382 Total 1,599,528 1,689,747 1 to 5 years 150 | Consolidated Financial Statements Due to banks and other financial institutions Total Net special commission income 23. Fee Income From Banking Services, Net 2017 SAR’ 000 2016 SAR’ 000 Fee income: Shares brokerage 282,332 311,112 Investment management services 439,789 332,577 1,536,832 1,623,134 Credit cards 581,160 521,905 Trade finance 537,434 603,697 Others 396,705 401,208 3,774,252 3,793,633 (99,680) (91,855) (461,229) (338,711) (8,092) (72) Total (569,001) (430,638) Fee income from banking services, net 3,205,251 3,362,995 Finance and lending Total SAR’ 000 27,675 Less than 1 year Special commission expense: SAR’ 000 6,975,228 Government and quasi SAR’ 000 Special commission income: Due from banks and other financial institutions SAR’ 000 Within 3 months SAR’ 000 2016 The National Commercial Bank | Annual Report 2017 Fee expenses: Shares brokerage Credit cards Others The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 151
77. 24 . Trading Income, Net On 3 May 2017, the second cycle of the plan commencing 1 January 2017 was approved with a grant date fair value of SAR 40 per share and recognition of SAR 28 million of expense during the year ended 31 December 2017. Treasury Shares: 2017 SAR’ 000 2016 SAR’ 000 Derivatives 277,892 218,104 Foreign exchange (75,028) 161,745 17,830 18,995 - (2,224) 220,694 396,620 Mutual funds Bonds Total (b) During the year ended 31 December 2016, the Bank disposed of treasury shares amounting to SAR 191 million (previously acquired in satisfaction of debt), at a net gain of SAR 8.7 million. The Bank has secured all necessary regulatory approvals in respect of the share based payment plan and purchase of treasury shares. 28. Employee Benefit Obligation 25. Gains On Non-Trading Financial Instruments, Net (28.1) The Characteristics of the End of Service Benefits Scheme 2017 SAR’ 000 2016 SAR’ 000 Gains on disposal of available for sale investments, net Gains on disposal of other investments held at amortised cost, net Total 443,296 329,850 38,752 210,356 482,048 540,206 2017 SAR’ 000 2016 SAR’ 000 Share of results of associates (note 8) 21,392 7,416 Gain on disposal of property and equipment 13,835 45,495 (23,372) (109,437) 11,855 (56,526) Total The Group operates an unfunded end of service benefit plan (the plan) for its employees based on the prevailing Saudi Labor Laws. The liability in respect of the plan is estimated by a qualified external actuary in accordance with International Accounting Standard 19 – Employee Benefits, and using “Projected Unit Credit Method”. The liability recognised in the consolidated statement of financial position in respect of the plan is the present value of the defined benefit obligation at the end of the reporting period. During the year, based on the actuarial assessment, a charge of SAR 187 million (2016: SAR 178 million) related to current service and interest cost was recorded in the consolidated statement of income. The end of service liability is disclosed in note 17. (28.2) The Valuation of the Defined Benefit Obligation 26. Other Non-Operating Income (Expenses), Net Net other (expenses) (a) During the year ended 31 December 2017, the Bank in connection with its employee share based payment plan, purchased its own shares amounting to SAR 105 million to reach SAR 226 million (December 2016: SAR 121 million) which have been classified as treasury shares and presented under shareholders’ equity in the consolidated statement of changes in equity. Liability under the plan is based on various assumptions (‘actuarial assumptions”) including the estimation of the discount rate, inflation rate, expected rate of salary increase and normal retirement ages. Based on the assumptions, also taking into consideration the future salary increases, cash outflows are estimated for the Group’s employees as a whole giving the total payments expected over the future years, which are discounted to arrive at the closing obligation. Any changes in actuarial assumptions from one period to another may effect the determination of the estimated closing obligation, which is accounted for as an actuarial gain or loss for the period. The actuarial gains/losses for the year ended 31 December 2017, are not material to the consolidated financial statements taken as a whole. In addition, changes, if any, in the assumptions, within a reasonable range, would have immaterial impact on future liability estimates. 29. Basic And Diluted Earnings Per Share 27. Share Based Payments Reserve Basic earnings per share for the years ended 31 December 2017 and 31 December 2016 is calculated by dividing the net income attributable to common equity holders of the Bank (adjusted for Tier 1 sukuk costs) for the periods by the weighted average number of shares outstanding during the period. Employees’ Share Based Payment Plan and Treasury Shares: Employees’ Share Based Payment Plan: Diluted earnings per share for the years ended 31 December 2017 and 31 December 2016 is calculated by dividing the fully diluted net income attributable to equity holders of the Bank for the year by the weighted average number of outstanding shares. The diluted earning per share are adjusted with the impact of the employees’ share based payment plan. On 18 October 2016, the Bank established a share based compensation plan (“equity settled share based payment plan” or the “plan”) for its key management that entitles the related personnel to be awarded shares in the Bank subject to successfully meeting certain service and performance conditions (“plan conditions”). The vesting period shall be three years commencing 1 January 2016, while the grant date fair value is SAR 33.37 per share. As a consequence, the Group has recognised an expense of SAR 34 million during the year ended 31 December 2017 (presented under salaries and employee-related expenses) with a corresponding credit to a share based payment reserve in the consolidated statement of changes in equity. 152 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 153
78. 32 . Cash And Cash Equivalents Details of Basic and diluted earnings per share are as follows: Basic EPS Weighted-Average number of shares outstanding (in thousands) Earnings per share (in SAR) Diluted EPS 2017 2016 2017 2016 1,996,026 1,998,848 1,999,255 2,000,221 4.74 4.51 4.73 4.51 2017 SAR’ 000 Cash and balances with SAMA excluding statutory deposits (note 4) 30. Tier 1 Sukuk Due from banks and other financial institutions with original maturity of three months or less During 2017, the Bank through a Shariah compliant arrangement (“the arrangement”) issued further Tier 1 Sukuk (the “Sukuk”), amounting to SAR 1.3 billion. The initial issue amounting to SAR 5.7 billion took place during the year ended 31 December 2015 under similar arrangement. These arrangements were approved by the regulatory authorities and the shareholders of the Bank. These Sukuks are perpetual securities in respect of which there is no fixed redemption dates and represents an undivided ownership interest of the Sukukholders in the Sukuk assets, with each Sakk constituting an unsecured, conditional and subordinated obligation of the Bank classified under equity. However, the Bank shall have the exclusive right to redeem or call the Sukuks in a specific period of time, subject to the terms and conditions stipulated in the Sukuk Agreement. The applicable profit rate on the Sukuks is payable quarterly in arrears on each periodic distribution date, except upon the occurrence of a non payment event or non-payment election by the Bank, whereby the Bank may at its sole discretion (subject to certain terms and conditions) elect not to make any distributions. Such non-payment event or non-payment election are not considered to be events of default and the amounts not paid thereof shall not be cumulative or compound with any future distributions. 31. Dividend During the year, the Board of Directors recommended dividends, net of zakat, for the year as follows: Amount SAR’ 000 Dividend per share SAR 2017 2016 2017 2016 Interim dividend paid 2,196,594 1,200,000 1.10 0.60 Proposed final dividend 1,196,879 1,996,904 0.60 1.00 Total net dividend 3,393,473 3,196,904 1.70 1.60 Total 2016 SAR’ 000 19,924,122 25,110,465 8,878,037 10,550,988 28,802,159 35,661,453 33. Operating Segments An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Group’s management. The Group has five reportable segments, as described below, which are the Group’s strategic divisions. The strategic divisions offer different products and services, and are managed separately based on the Group’s management and internal reporting structure. Retail - Provides banking services, including lending and current accounts in addition to products in compliance with Shariah rules which are supervised by the independent Shariah Board, to individuals and private banking customers. Corporate - Provides banking services including all conventional credit-related products and financing products in compliance with Shariah rules to small sized businesses, medium and large establishments and companies. Treasury - Provides a full range of treasury and correspondent banking products and services, including money market and foreign exchange, to the Group’s clients, in addition to carrying out investment and trading activities (local and international) and managing liquidity risk, market risk and credit risk (related to investments). Capital Market - Provides wealth management, asset management, investment banking and shares brokerage services (local, regional and international). International - Comprises banking services provided outside Saudi Arabia including TFK. Transactions between the operating segments are recorded as per the Bank and its subsidiaries' transfer pricing system. Zakat provision for the year attributable to the Bank’s shareholders 1,361,446 1,187,734 Total gross dividend 4,754,919 4,384,638 154 | Consolidated Financial Statements Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: The supports and Head Office expenses are allocated to segments using activity-based costing. The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 155
79. (33.1) The Group’s Total Assets and Liabilities at Year End, its Operating Income and Expenses (Total and Main Items) and Net Income for the Year, by Business Segments, are as Follows: SAR’ 000 2016 SAR’ 000 2017 Retail Corporate Capital Market Treasury International Total Total assets 108,503,303 133,051,308 162,709,003 1,387,858 38,214,395 443,865,867 Total liabilities 212,693,092 73,687,694 60,627,429 274,984 32,307,070 379,590,269 Total operating income from external customers 6,148,422 6,809,581 3,047,849 635,783 -Intersegment operating income (expense) 2,155,862 (2,332,154) 285,221 - (108,929) - -Total operating income 8,304,284 4,477,427 3,333,070 635,783 1,594,664 18,345,228 1,703,593 18,345,228 Net special commission income 6,883,324 Fee income from banking services, net 1,162,545 1,045,621 96,890 618,934 281,261 3,205,251 Total operating expenses 4,246,441 2,113,111 520,634 343,663 1,168,577 8,392,426 3,251,046 2,250,717 3,606 1,272,285 13,660,978 Treasury Total assets 104,971,649 139,273,987 156,288,231 Total liabilities 201,637,470 87,963,304 Total operating income from external customers 6,007,781 -Intersegment operating income (expense) -Total operating income Capital Market International Total 1,314,208 40,809,042 442,657,117 57,900,573 222,797 35,007,255 382,731,399 6,464,464 3,258,518 580,721 2,335,895 18,647,379 1,697,186 (2,077,731) 486,252 - (105,707) - 7,704,967 4,386,733 3,744,770 580,721 2,230,188 18,647,379 Net special commission income 6,268,328 3,181,903 2,421,266 1,240 1,676,841 13,549,578 Fee income from banking services, net 1,239,793 1,065,875 113,167 560,597 383,563 3,362,995 Total operating expenses 4,650,525 1,615,573 646,280 350,967 1,911,675 9,175,020 - Depreciation/amortisation of property, equipment and software 422,219 88,108 49,068 34,667 92,268 686,330 - Impairment charge for financing and advances losses, net 501,289 608,514 8,000 - 813,162 1,930,965 - Impairment charge on investments, net - - 205,720 - - 205,720 3,048,228 2,763,479 3,086,986 233,788 283,352 9,415,833 of which: of which: - Depreciation/amortisation of property, equipment and software 408,919 - Impairment charge for financing and advances losses, net 447,262 1,115,001 - - 301,360 1,863,623 - Impairment charge on investments, net - - 75,846 - - 75,846 4,045,019 2,349,850 2,803,848 302,646 463,294 9,964,657 156 | Consolidated Financial Statements Corporate of which: of which: Net income (Equity holders of the Bank and noncontrolling interests) Retail 89,367 48,680 19,894 87,421 654,281 The National Commercial Bank | Annual Report 2017 Net income (Equity holders of the Bank and noncontrolling interests) The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 157
80. (33.2) The Group’s Credit Risk Exposure, by Business Segments, is as Follows: 34. Collateral And Offsetting SAR’ 000 2017 Retail Statement of financial position assets Commitments and contingencies (credit equivalent) Corporate Treasury Capital Market International Total 94,107,343 124,063,142 139,688,772 180,833 31,599,763 389,639,853 264,493 24,483,624 9,409,124 - 5,831,735 39,988,976 - - 6,860,015 - 224,252 7,084,267 Derivatives (credit equivalent) Following are the details of collaterals held/received by the Group and offsetting carried out as at 31 December 2017: (a) The Bank conducts Repo transactions under the terms that are usually based on the applicable GMRA (Global Master Repurchase Agreement) collateral guidelines. Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognized in the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. These assets continue to be measured in accordance with related accounting policies for investments held for trading, available for sale, held to maturity and other investments held at amortised cost. The carrying amount and fair value of securities pledged under agreement to repurchase (repo) are as follows: 2017 SAR’ 000 2016 Retail Statement of financial position assets Commitments and contingencies (credit equivalent) Derivatives (credit equivalent) 89,173,816 Corporate Treasury 131,678,965 128,061,340 SAR’ 000 Carrying amount SAR’ 000 Capital Market International 102,859 34,544,811 Total 362,260 24,658,325 8,559,222 - 8,100,017 41,679,824 - - 3,380,707 - 314,301 3,695,008 The credit exposure of assets as per the consolidated statement of financial position comprises the carrying value of due from banks and other financial institutions, investments subject to credit risk, financing and advances, positive fair value of derivatives, other receivables and refundable deposits. The credit equivalent of commitments and contingencies and derivatives is calculated according to SAMA’s prescribed methodology. Fair value Carrying amount Fair value 8,401,915 8,401,915 6,555,875 6,555,875 - - 847,696 852,783 Investments held at amortised cost 19,517,027 19,446,659 12,208,998 11,695,013 Total 27,918,942 27,848,574 19,612,569 19,103,671 Available for sale 383,561,790 2016 Held to maturity The Bank has placed a margin deposit of SAR 160 million (2016: SAR 361 million) as an additional security for these repo transactions. (b) For details of collateral held in respect of financing and advances, please refer note 7.4. (c) Collateral usually is not held against investment securities, and no such collateral was held at 31 December 2017 and 31 December 2016. (d) For details of margin deposits held for the irrevocable commitments and contingencies, please refer note 15. (e) Securities pledged with the Group in respect of reverse repo transactions comprise of SAR 1,049 million (2016: SAR 937 million). The Group is allowed to sell or repledge these securities in the event of default by the counterparty. (f) The Group executes derivative transactions under the terms that are generally based on the applicable ISDA (International Swaps and Derivatives Association) and has accordingly received and placed certain amounts as cash margins under the guidelines of applicable CSA (Credit Support Annex). Amongst these, deposits amounting to SAR 609 million (2016: Nil) and SAR 316 million (2016: Nil) are eligible for offsetting against negative fair value derivatives and positive fair value of derivatives respectively, and have been accordingly offset at the reporting date. The accuracy of segregation of margin deposits between offset and non-offset amounts is regularly monitored in view of the offsetting criteria as set out in note 3.5, while also considering emerging regulatory developments and clearing house rules requiring net settlement. This segregation has been applied consistently to all periods and the comparative amounts have been presented accordingly. 35. Credit Risk The Group manages exposure to credit risk, which is the risk that one party to a financial instrument or transaction will fail to discharge an obligation and will cause the other party to incur a financial loss. Credit exposures arise principally in credit-related risk that is embedded in financing and advances and investments. There is also credit risk in off-statement of financial position financial instruments, such as trade-finance related products, derivatives and financing commitments. For financing and advances and off-statement of financial position financing to borrowers, the Group assesses the probability of default of counterparties using internal rating models. For investments, due from banks and off-statement of financial position financial instruments held with international counterparties, the Group uses external ratings of the major rating agencies. 158 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 159
81. The Group attempts to control credit risk by monitoring credit exposures , limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. The Group’s risk management policies are designed to identify risks and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored on a daily basis. The Group manages the credit exposure relating to its trading activities by monitoring credit limits, entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases, the Group may also close out transactions or assign them to other counterparties to mitigate credit risk. The Group’s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfill their obligation and the Group assesses counterparties using the same techniques as for its financing activities in order to control the level of credit risk taken. Concentrations of credit risk may arise in case of sizeable exposure to a single obligor or when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular customer, industry or geographical location. The debt securities included in investments are mainly sovereign risk and high-grade securities. Analysis of investments by counterparty is provided in note (6.5). For details of the composition of the financing and advances refer to note (7.5). Information on credit risk relating to derivative instruments is provided in note (13) and for commitments and contingencies in note (21). The information on the Group’s total maximum credit exposure is given in note (35.1). Each individual corporate borrower is rated based on an internally developed debt rating model that evaluates risk based on financial, qualitative and industry specific inputs. The associated loss estimate norms for each grade have been developed based on the Group’s experience. These risk ratings are reviewed on a regular basis. Performing credit cards and consumer financing are classified as standard as they are performing and have timely repayment with no past dues. The Group in the ordinary course of lending activities holds collaterals as security to mitigate credit risk in the financing and advances. These collaterals mostly include time and other cash deposits, financial guarantees from other banks, local and international equities, real estate and other fixed assets. The collaterals are held mainly against commercial and individual loans and are managed against relevant exposures at their net realisable values. The Group holds real estate collateral against registered mortgage as a collateral Financial instruments such as financing and advances and customers’ deposits are shown gross on the consolidated statement of financial position and no offsetting has been done. Please refer to note 34 for details of other collaterals held. The Group also manages its credit risk exposure through the diversification of financing activities to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or businesses. It also takes security when appropriate. The Group also seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant financing and advances. The Group monitors the market value of collateral periodically and requests additional collateral in accordance with the underlying agreement and Group’s policy. Specific allowances for financing losses for the impaired financing portfolio are maintained by the Group’s Credit Risk Management in addition to credit-related specific allowance for investments. Exposures failing to fulfil their due obligations over 90 days are considered impaired and appropriate specific allowances are individually made. An additional portfolio (collective) allowance is allocated over the performing financing and advances as well as investments [refer to notes (3.13 and 2.5(a)) for accounting policy of impairment of financial assets]. 160 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 (35.1) Maximum Credit Exposure Maximum exposure to credit risk without taking into account any collateral and other credit enhancements is as follows: 2017 SAR’ 000 2016 SAR’ 000 Assets 21,966,218 19,213,063 Investments (note 6.6) 110,053,434 106,311,302 Financing and advances, net (note 7.4) 249,234,246 253,592,141 5,697,497 1,779,035 386,951,395 380,895,541 61,614,342 63,879,738 2,688,458 2,666,249 451,254,195 447,441,528 Due from banks and other financial institutions (note 5) Other assets - margin deposits against derivatives and repos (note 12) Total assets Contingent liabilities and commitments, net (notes 15, 17 and 21.2) Derivatives - positive fair value, net (note 13) Total maximum credit exposure 36. Market Risk Market risk is the risk that changes in market prices, such as special commission rate, credit spreads (not relating to changes in the obligor’s / issuer’s credit standing), equity prices and foreign exchange rates, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Group separates its exposure to market risk between trading and banking books. Trading book is mainly held by the Treasury division and includes positions arising from market making and proprietary position taking, together with financial assets and liabilities that are managed on a fair value basis. Overall authority for market risk is vested to the Board of Directors. The Risk Group is responsible for the development of detailed risk management policies (subject to review and approval by the Board of Directors) and for the day-to-day review of their implementation. (36.1) Market Risk - Trading Book The principal tool used to measure and control market risk exposure within the Group’s trading book is Value at Risk (VaR). The VaR of a trading position is the estimated loss that will arise on the position over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used by the Group is based upon a 99 percent confidence level and assumes a 1-day holding period, except for Fair Value through Income Statement (FVIS) investments which are computed over a 3-month holding period (i.e., VaR is measured daily, except for VaR on FVIS investments which are computed on a monthly basis), to facilitate the comparison with the trading income (loss) which is also computed and reported on a daily and monthly basis respectively for these products. The model computes volatility and correlations using relevant historical market data. The Group uses VaR limits for total market risk embedded in its trading activities including derivatives related to foreign exchange and special commission rate. The Group also assesses the market risks using VaR in its FVIS investments which are controlled by volume limits. The overall structure of VaR limits is subject to review and approval by the Board of Directors. VaR limits are allocated to the trading book. The daily reports of utilisation of VaR limits are submitted to the senior management of the Group. In addition, regular summaries about various risk measures including the Economic Capital are submitted to the Risk Committee of the Board. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 161
82. Although VaR is an important tool for measuring market risk , the assumptions on which the model is based gives rise to some limitations, including the following: (i) A 1-day holding period assumes that it is possible to hedge or dispose of positions within one day horizon. This is considered to be a realistic assumption in most of the cases but may not be the case in situations in which there is severe market illiquidity for a prolonged period. (ii) A 99% confidence level does not reflect losses that may occur beyond this level. Even within the model used there is a 1% probability that losses could exceed the VaR. (iii)VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day. (iv)The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature. (v)The VaR measure is dependent upon the Group’s position and the volatility of market prices. The VaR of an unchanged position reduces if the market price volatility declines and vice versa. (36.2.1) Special Commission Rate Risk Special commission rate risk arises from the possibility that changes in special commission rates will affect future cash flows or the fair values of financial instruments. The Group’s Assets-Liabilities Committee (ALCO) has established limits on the special commission rate gap. Positions are regularly monitored and reported on a monthly basis to ALCO and hedging strategies are used to ensure positions are maintained within the established limits. In case of stressed market conditions, the asset-liability gap may be monitored more frequently. The following table depicts the sensitivity due to reasonably possible changes in special commission rates, with other variables held constant, on the Group’s consolidated statement of income or equity. The sensitivity of the income is the effect of the assumed changes in special commission rates on the net special commission income for one year, based on the special commission bearing non-trading financial assets and financial liabilities held as at 31 December 2017, including the effect of hedging instruments. The sensitivity of the equity is calculated by revaluing the fixed rate available for sale financial assets, including the effect of any associated hedges, as at 31 December 2017 for the effect of assumed changes in special commission rates. The sensitivity of equity is analyzed by maturity of the assets or cash flow hedge swaps. All significant banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in local currency. The sensitivity analysis does not take account of actions by the Group that might be taken to mitigate the effect of such changes. SAR’ 000 The limitations of the VaR methodology are recognised by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading book. In addition, the Group uses stress tests to model the financial impact of exceptional market scenarios on individual trading book and the Group’s overall trading position. The table below shows the VaR related information for the year ended 31 December 2017 and 31 December 2016 for both Held for Trading and Held as FVIS portfolios: 2017 2017 Sensitivity of special commission income Sensitivity of equity (other reserves) Within 3 months 3-12 months 1-5 years Over 5 years Total Currency SAR’ 000 SAR ± 10 ± 118,400 ± - ± 120 ± 15,772 ± 2,998 ± 18,890 Held for Trading USD ± 10 ± 8,241 ± 39 ± 341 ± 8,540 ± 50,879 ± 59,799 Foreign exchange risk Special commission risk Overall risk FVIS VaR as at 31 December 2017 619 479 1,098 214,512 Average VaR for 2017 607 831 1,438 179,440 SAR’ 000 SAR’ 000 2016 Held for Trading 2016 Increase / decrease in basis points Foreign exchange risk Increase / decrease in basis points Sensitivity of special commission income Sensitivity of equity (other reserves) Within 3 months 3-12 months 1-5 years Over 5 years Total Currency Special commission risk Overall risk FVIS VaR as at 31 December 2016 234 47 281 116,651 Average VaR for 2016 255 413 668 169,204 SAR ± 10 ± 106,678 ± 15 ± - ± 2,579 ± 7,921 USD ± 10 ± 14,240 ± 8 ± 94 ± 21,282 ± 84,749 ± 10,515 ± 106,133 (a) Special Commission Rate Sensitivity of Assets, Liabilities and Off-Statement of Financial Position Items (36.2) Market Risk - Banking Book Market risk on banking book positions mainly arises from the special commission rate, foreign currency exposures and equity price changes. 162 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The Group manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market special commission rates on its consolidated financial position and cash flows. The table below summarizes the Group’s exposure to special commission rate risks. Included in the table are the Group’s assets and liabilities at carrying amounts, categorized by the earlier of the contractual re-pricing or the maturity dates. The Group manages exposure to special commission rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-statement of financial position instruments that mature or re-price in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 163
83. The table below summarizes the Group ’s exposure to special commission rate risks. SAR’ 000 SAR’ 000 2017 Within 3 months 3-12 months 1-5 years 2016 Non-special commission bearing Over 5 years Total 9,224,001 - - - 28,745,233 37,969,234 Due from banks and other financial institutions 11,104,476 1,227,607 3,431,996 - 6,202,139 21,966,218 Investments, net 28,149,042 19,739,343 33,733,775 28,453,918 4,501,747 114,577,825 - Held for trading - - - - 646,652 646,652 - Held as FVIS - - - - 1,332,121 1,332,121 2,590,105 2,755,241 5,350,090 4,154,225 2,522,974 17,372,635 265,493 200,048 231,740 - - 697,281 - Other investments held at amortised cost 25,293,444 16,784,054 28,151,945 24,299,693 - 94,529,136 Financing and advances, net 76,490,464 59,275,587 104,476,676 8,879,740 111,779 249,234,246 2,788,091 1,262,971 85,099,195 - 8,784 89,159,041 65,012,796 42,870,162 9,287,343 6,921,000 3,334 124,094,635 - International 6,765,347 9,061,263 9,526,414 758,354 4,627 26,116,005 - Others 1,924,230 6,081,191 563,724 1,200,386 95,034 9,864,565 1,294,297 720,231 236,039 7,265 430,626 2,688,458 126,262,280 80,962,768 141,878,486 37,340,923 39,991,524 426,435,981 - Available for sale - Held to maturity - Consumer & Credit Card - Corporate Positive fair value of derivatives, net Total assets Due to banks and other financial institutions 42,428,774 5,245,211 756,790 - 127,166 48,557,941 Customers’ deposits 41,994,299 15,583,738 1,977,010 1,602 249,385,471 308,942,120 - Current accounts 1,001,928 - - - 236,766,816 237,768,744 119 - - - 120,509 120,628 40,412,032 15,583,738 1,977,010 1,602 - 57,974,382 580,220 - - - 12,498,146 13,078,366 Debt securities issued 321,986 1,938,564 7,989,760 - - 10,250,310 Negative fair value of derivatives, net 994,165 494,459 272,380 36,002 148,434 1,945,440 Total liabilities 85,739,224 23,261,972 10,995,940 37,604 249,661,071 369,695,811 On-statement of financial position gap 40,523,056 57,700,796 130,882,546 37,303,319 (209,669,547) Off-statement of financial position gap 4,129,163 12,734,638 (3,326,121) (13,549,359) 636,499 Total special commission rate sensitivity gap 44,652,219 70,435,434 127,556,425 23,753,960 (209,033,048) Cumulative special commission rate sensitivity gap 44,652,219 115,087,653 242,644,078 266,398,038 57,364,990 - Time - Others 1-5 years Non-special commission bearing Over 5 years Total Cash and balances with SAMA 15,014,001 - - - 28,427,290 43,441,291 Due from banks and other financial institutions 14,854,236 204,887 1,013,525 - 3,140,415 19,213,063 Investments, net 34,989,613 6,816,666 29,864,877 34,640,291 5,197,524 111,508,971 - Held for trading - - - - 708,352 708,352 - Held as FVIS - - - - 1,819,017 1,819,017 1,274,796 1,416,114 9,351,899 5,722,538 2,670,155 20,435,502 542,775 411,082 478,575 - - 1,432,432 - Other investments held at amortised cost 33,172,042 4,989,470 20,034,403 28,917,753 - 87,113,668 Financing and advances, net 83,677,731 62,735,671 100,378,232 6,675,032 125,475 253,592,141 3,787,628 1,125,368 79,688,387 - 10,458 84,611,841 67,946,776 48,531,925 9,546,337 5,651,764 2,161 131,678,963 - International 7,319,814 9,454,450 10,588,184 1,023,268 8,487 28,394,203 - Others 4,623,513 3,623,928 555,324 - 104,369 8,907,134 1,064,721 541,551 248,308 35,736 775,933 2,666,249 149,600,302 70,298,775 131,504,942 41,351,059 37,666,637 430,421,715 Due to banks and other financial institutions 31,069,312 13,011,972 974,582 - 418,208 45,474,074 Customers’ deposits 57,224,742 20,643,797 1,717,868 3,811 236,027,673 315,617,891 7,581 - - - 223,625,245 223,632,826 270 - - - 161,774 162,044 56,644,657 20,643,797 1,717,868 3,811 - 79,010,133 572,234 - - - 12,240,654 12,812,888 228,705 291,670 9,397,390 - - 9,917,765 1,118,187 522,270 471,279 55,956 467,498 2,635,190 Total liabilities 89,640,946 34,469,709 12,561,119 59,767 236,913,379 373,644,920 On-statement of financial position gap 59,959,356 35,829,066 118,943,823 41,291,292 (199,246,742) 5,173,114 4,592,317 (4,860,409) (4,888,541) 560,065 Total special commission rate sensitivity gap 65,132,470 40,421,383 114,083,414 36,402,751 (198,686,677) Cumulative special commission rate sensitivity gap 65,132,470 105,553,853 219,637,267 256,040,018 57,353,341 - Available for sale - Held to maturity - Consumer & Credit Card - Corporate Positive fair value of derivatives, net Total assets Liabilities Liabilities - Savings 3-12 months Assets Assets Cash and balances with SAMA Within 3 months - Current accounts - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net Off-statement of financial position gap The off-statement of financial position gap represents the net notional amounts of derivative financial instruments, which are used to manage the special commission rate risk. 164 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 165
84. (36.2.2) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its consolidated financial position and cash flows. The Board has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits. At the year end, the Group had the following significant net exposures denominated in foreign currencies: 2017 SAR’ 000 Long (short) Currency 2016 SAR’ 000 Long (short) US Dollar (576,212) (108,702) TRY 4,672,914 4,668,104 A long position indicates that assets in a foreign currency are higher than the liabilities in the same currency; the opposite applies to short position. The table below indicates the extent to which the Group was exposed to currency risk at 31 December 2017 on its significant foreign currency positions. The analysis is performed for reasonably possible movements of the currency rate against the Saudi Riyal with all other variables held constant, including the effect of hedging instruments, on the consolidated statement of income; the effect on equity of foreign currencies other than Turkish Lira (TRY) is not significant. A negative amount in the table reflects a potential net reduction in consolidated statement of income, while a positive amount reflects a net potential increase. The sensitivity analysis does not take account of actions by the Group that might be taken to mitigate the effect of such changes. 2017 2016 SAR ‘000 SAR ‘000 Currency Increase/ decrease in currency rate in % Effect on profit Effect on equity Increase/ decrease in currency rate in % Effect on profit Effect on equity TRY ± ± ± ± ± ± 10% 31,439 467,291 10% 24,125 37. Liquidity Risk Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. Liquidity risk can be caused by market disruptions or credit downgrades, which may cause certain sources of funding to be less readily available. To mitigate this risk, management has diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, maintaining an appropriate balance of cash, cash equivalents and readily marketable securities and monitors future cash flows and liquidity on a daily basis. The Group has lines of credit in place that it can access to meet liquidity needs. In accordance with the Banking Control Law and the regulations issued by SAMA, the Bank maintains a statutory deposit with SAMA of 7% of total demand deposits and 4% of savings and time deposits. In addition to the statutory deposit, the Bank also maintains liquid reserves of not less than 20% of the deposit liabilities, in the form of cash, Saudi Government Development Bonds or assets which can be converted into cash within a period not exceeding 30 days. The Bank has the ability to raise additional funds through repo facilities available with SAMA against Saudi Government Development Bonds up to 75% of the nominal value of bonds held. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. One of these methods is to maintain limits on the ratio of liquid assets to deposit liabilities, set to reflect market conditions. Liquid assets consist of cash, short-term bank deposits and liquid debt securities available for immediate sale and Saudi Government Bonds excluding repos. Deposits liabilities include both customers and Banks, excluding non-resident Bank deposits in foreign currency. (37.1) Analysis of Financial Liabilities by Remaining Contractual Maturities The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2017 and 31 December 2016 based on contractual undiscounted repayment obligations; as special commission payments up to contractual maturity are included in the table, totals do not match with the consolidated statement of financial position. The contractual maturities of liabilities have been determined on the basis of the remaining period at the consolidated statement of financial position date to the contractual maturity date and do not take into account the effective expected maturities as shown on note (37.2) below (Maturity analysis of assets and liabilities for the expected maturities). Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group’s deposit retention history. 466,810 (36.2.3) Equity Price Risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in the levels of equity index and the value of individual stocks. The effect on equity (other reserves) as a result of a change in the fair value of equity instruments quoted on Saudi Stock Exchange (Tadawul) and held as available-for-sale at 31 December 2017 and 31 December 2016, due to reasonably possible changes in the prices of these quoted shares held by the Group, with all other variables held constant, is as follows: 2017 2016 SAR ‘000 SAR ‘000 Market index - (Tadawul) Increase / decrease in market prices % Impact of change in market prices ± 166 | Consolidated Financial Statements 10% Effect on equity (other reserves) Increase / decrease in market prices % ± ± 9,742 Effect on equity (other reserves) 10% ± 40,164 The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 167
85. SAR ’ 000 SAR’ 000 Financial liabilities Less than 3 months On demand 3 to 12 months Over 5 years 1 to 5 years 2017 Total 14,436,090 10,529,174 37,969,234 309,639,784 Due from banks and other financial institutions 12,979,038 8,987,180 - 21,966,218 - 237,817,166 Investments, net 265,673 113,660,585 651,567 114,577,825 - - 120,628 - Held for trading - - 646,652 646,652 15,334,560 2,353,036 1,946 58,495,039 265,673 1,066,448 - 1,332,121 128,587 - - - 13,206,951 - Available for sale - 17,367,720 4,915 17,372,635 - 413,197 2,283,422 4,041,581 5,450,521 12,188,721 - Held to maturity - 697,281 - 697,281 - Held at amortized cost - 94,529,136 - 94,529,136 - 5,508,531 447,167 26,972,963 16,020,627 48,949,288 2,099,807 247,134,439 - 249,234,246 234,858,228 84,742,328 23,382,972 55,761,983 21,473,094 420,218,605 - Consumer & Credit Card 170,459 88,988,582 - 89,159,041 - Corporate 660,010 123,434,625 - 124,094,635 22,021 26,093,984 - 26,116,005 1,247,317 8,617,248 - 9,864,565 Positive fair value of derivatives, net - 2,688,458 - 2,688,458 Investments in associates, net - - 450,048 450,048 Other real estate, net - - 861,523 861,523 Property, equipment and software, net - - 5,280,672 5,280,672 5,317,823 1,137,821 - 49,440,812 Customers’ deposits 228,713,648 41,980,012 15,334,560 23,609,618 1,946 - Current accounts 215,514,656 1,045,928 - 21,256,582 120,628 - - - 40,805,497 13,078,364 Debt securities issued Derivative financial instruments (gross contractual amounts payable) - Time Total undiscounted financial liabilities - Held as FVIS Financing and advances, net - International SAR’ 000 Financial liabilities - Others Less than 3 months On demand 3 to 12 months Over 5 years 1 to 5 years Total As at 31 December 2016 Due to banks and other financial institutions Total 13,003,970 36,840,588 - Others No-fixed maturity Cash and balances with SAMA 6,144,580 - Savings Over 1 year Assets As at 31 December 2017 Due to banks and other financial institutions Below 1 year 4,429,757 27,104,638 13,214,657 1,741,494 - 46,490,546 Customers’ deposits 236,607,757 56,757,159 13,939,705 9,317,647 4,429 316,626,697 Goodwill - - 303,037 303,037 - Current accounts 223,632,826 - - - - 223,632,826 Other assets - - 10,534,606 10,534,606 162,044 - - - - 162,044 28,348,488 386,906,752 28,610,627 443,865,867 - 56,757,159 13,939,705 9,317,647 4,429 80,018,940 12,812,887 - - - - 12,812,887 Debt securities issued - 329,642 642,090 5,887,918 6,035,785 12,895,435 Due to banks and other financial institutions 30,813,390 17,467,676 276,875 48,557,941 Derivative financial instruments (gross contractual amounts payable) - 73,918 393,100 9,777,777 14,248,752 24,493,547 Customers’ deposits 69,547,617 239,394,503 - 308,942,120 241,037,514 84,265,357 28,189,552 26,724,836 20,288,966 400,506,225 - Current accounts 47,553,749 190,214,995 - 237,768,744 24,125 96,503 - 120,628 17,392,314 40,582,068 - 57,974,382 4,577,429 8,500,937 - 13,078,366 - Savings - Time - Others Total undiscounted financial liabilities The contractual maturity structure of the credit-related and commitments and contingencies are shown under note (21.2(a)). Total assets Liabilities - Savings - Time - Others (37.2) Maturity Analysis of Assets and Liabilities Debt securities issued - 10,250,310 - 10,250,310 The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled. See note (37.1) above for the contractual undiscounted financial liabilities. Negative fair value of derivatives, net - 1,945,440 - 1,945,440 Other liabilities - - 9,894,458 9,894,458 100,361,007 269,057,929 10,171,333 379,590,269 Total liabilities 168 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 169
86. 38 . Geographical Concentration Of Assets, Liabilities, Commitments And Contingencies And Credit Exposure SAR’ 000 2016 Below 1 year Over 1 year No-fixed maturity Total Assets Cash and balances with SAMA 18,718,880 14,664,661 10,057,750 43,441,291 Due from banks and other financial institutions 12,135,817 7,077,246 - 19,213,063 Investments, net 363,803 108,213,301 2,931,867 111,508,971 - Held for trading - - 708,352 708,352 363,803 1,455,214 - 1,819,017 - 18,211,987 2,223,515 20,435,502 - Held as FVIS - Available for sale - Held to maturity - 1,432,432 - 1,432,432 - Held at amortized cost - 87,113,668 - 87,113,668 2,262,970 251,329,171 - 253,592,141 271,539 84,340,302 - 84,611,841 Financing and advances, net - Consumer & Credit Card - Corporate - International - Others 979,650 130,699,313 - 131,678,963 94,098 28,300,105 - 28,394,203 917,683 7,989,451 - 8,907,134 (38.1) The Distribution by Geographical Region for Major Categories of Assets, Liabilities and Commitments and Contingencies and Credit Exposure at Year End is as Follows: SAR’ 000 2017 The Kingdom of Saudi Arabia GCC and Middle East 34,029,626 40,944 1,326,627 1,257,202 1,314,835 37,969,234 6,645,018 5,071,551 2,264,253 6,052,735 1,932,661 21,966,218 61,729,626 20,748,827 733,367 3,994,427 27,371,578 114,577,825 Europe Other countries Turkey Total Assets Cash and balances with SAMA Due from banks and other financial institutions Investments, net 646,652 - - - - 646,652 - - 100,474 - 1,231,647 1,332,121 - Available for sale 24,758 1,817,547 203,495 3,331,007 11,995,828 17,372,635 - Held to maturity 33,861 - - 663,420 - 697,281 61,024,355 18,931,280 429,321 77 14,144,103 94,529,136 212,458,333 3,761,381 359,781 30,003,587 2,651,164 249,234,246 - Held for trading - Held as FVIS - Other investments held at amortised cost Financing and advances, net - Consumer & Credit Card - Corporate 89,157,028 2,013 - - - 89,159,041 115,122,794 3,212,528 - 3,887,582 1,871,731 124,094,635 26,116,005 Positive fair value of derivatives, net - 2,666,249 - 2,666,249 - - - 26,116,005 - Investments in associates, net - - 431,156 431,156 - Others 8,178,511 546,840 359,781 - 779,433 9,864,565 Positive fair value of derivatives, net 1,399,303 206,504 920,352 162,299 - 2,688,458 Other real estate, net - - 849,180 849,180 Property, equipment and software, net - - 4,819,409 4,819,409 Goodwill - - 325,733 325,733 Other assets - - 5,809,924 5,809,924 33,481,470 383,950,628 25,225,019 442,657,117 Total assets - International Investments in associates, net Goodwill Total 435,538 - - - 14,510 450,048 - - - 303,037 - 303,037 316,697,444 29,829,207 5,604,380 41,773,287 33,284,748 427,189,066 Liabilities 7,407,982 6,002,962 26,844,264 4,039,743 4,262,990 48,557,941 Customers’ deposits 285,398,340 1,517,461 - 21,986,035 40,284 308,942,120 - Current accounts 230,905,447 28,957 - 6,831,719 2,621 237,768,744 Due to banks and other financial institutions Liabilities - Savings 120,628 - - - - 120,628 Due to banks and other financial institutions 22,075,924 23,398,150 - 45,474,074 - Time 41,775,198 1,470,852 - 14,702,820 25,512 57,974,382 - Others 12,597,067 17,652 - 451,496 12,151 13,078,366 Customers’ deposits 72,946,525 242,671,366 - 315,617,891 10,250,310 - Current accounts 44,726,565 178,906,261 - 223,632,826 32,409 129,635 - 162,044 23,703,040 55,307,093 - 79,010,133 4,484,511 8,328,377 - 12,812,888 - 9,917,765 - 9,917,765 - Savings - Time - Others Debt securities issued Negative fair value of derivatives, net - 2,635,190 - 2,635,190 Other liabilities - - 9,086,479 9,086,479 95,022,449 278,622,471 9,086,479 382,731,399 Total liabilities Debt securities issued Negative fair value of derivatives, net Total Commitments and contingencies (note 21.2) - Letters of credit - Guarantees The National Commercial Bank | Annual Report 2017 - - 5,194,770 - 493,976 14,981 1,153,774 282,709 - 1,945,440 298,355,838 7,535,404 27,998,038 31,503,257 4,303,274 369,695,811 38,869,006 5,199,952 940,494 10,997,994 9,438,159 65,445,605 5,582,642 610,321 212,439 1,395,409 2,216,383 10,017,194 21,331,149 2,115,891 728,055 9,461,434 7,221,776 40,858,305 - Acceptances 2,373,958 - - 141,151 - 2,515,109 - Irrevocable commitments to extend credit 9,581,257 2,473,740 - - - 12,054,997 Credit exposure (credit equivalent) (note 33.2): Commitments and contingencies Derivatives 170 | Consolidated Financial Statements 5,055,540 The National Commercial Bank | Annual Report 2017 23,783,931 2,672,979 1,440,477 5,831,733 6,259,856 39,988,976 1,677,448 1,281,157 3,901,410 224,252 - 7,084,267 Consolidated Financial Statements | 171
87. (38.2) The Distribution by Geographical Concentration of Non-Performing Financing and Advances and Specific Allowance are as Follows: SAR’ 000 2016 The Kingdom of Saudi Arabia GCC and Middle East Europe Other countries Turkey Total SAR’ 000 Assets Cash and balances with SAMA 39,011,053 27,743 1,011,393 1,209,319 2,181,783 43,441,291 7,299,078 2,575,289 1,736,425 5,924,378 1,677,893 19,213,063 43,062,701 28,380,037 3,246,881 3,929,553 32,889,799 111,508,971 708,352 - - - - 708,352 - - 189,116 - 1,629,901 1,819,017 - Available for sale 538,677 2,740,857 1,540,781 3,097,308 12,517,879 20,435,502 - Held to maturity 20,044 - 580,143 832,245 - 1,432,432 41,795,628 25,639,180 936,841 - 18,742,019 87,113,668 Financing and advances, net 216,789,045 3,125,778 - 31,127,982 2,549,336 253,592,141 - Consumer & Credit Card 84,610,086 1,755 - - - 84,611,841 124,240,998 2,844,062 - 2,733,779 1,860,124 131,678,963 - - - 28,394,203 - 28,394,203 - Others 7,937,961 279,961 - - 689,212 8,907,134 Positive fair value of derivatives, net 1,183,541 169,989 1,118,296 184,666 9,757 2,666,249 427,110 - - - 4,046 431,156 - - - 325,733 - 325,733 307,772,528 34,278,836 7,112,995 42,701,631 39,312,614 431,178,604 Due from banks and other financial institutions Investments, net - Held for trading - Held as FVIS - Other investments held at amortised cost - Corporate - International Investments in associates, net Goodwill Total Liabilities Due to banks and other financial institutions 13,934,510 6,996,986 15,762,207 6,638,284 2,142,087 45,474,074 Customers’ deposits 290,800,553 2,470,583 25,125 22,252,000 69,630 315,617,891 - Current accounts 217,421,759 24,112 - 6,140,329 46,626 223,632,826 161,774 270 - - - 162,044 - Time 61,007,322 2,438,084 25,125 15,539,602 - 79,010,133 - Others 12,209,698 8,117 - 572,069 23,004 12,812,888 5,062,404 - - 4,855,361 - 9,917,765 594,511 19,094 1,611,577 409,922 86 2,635,190 310,391,978 9,486,663 17,398,909 34,155,567 2,211,803 373,644,920 39,402,591 3,999,184 2,808,693 13,146,055 8,624,488 67,981,011 5,134,239 623,612 1,271,526 773,204 527,965 8,330,546 22,026,719 1,901,362 1,321,993 11,962,075 8,005,905 45,218,054 - Acceptances 2,305,962 - - 410,776 - 2,716,738 - Irrevocable commitments to extend credit 9,935,671 1,474,210 215,174 - 90,618 11,715,673 24,239,477 2,191,060 1,381,728 8,100,017 5,767,542 41,679,824 799,319 620,859 1,960,529 314,301 - 3,695,008 - Savings Debt securities issued Negative fair value of derivatives, net Total Commitments and contingencies (note 21.2) - Letters of credit - Guarantees 2017 Non performing financing and advances Less: specific allowance Net The Kingdom of Saudi Arabia Turkey Total 3,368,998 1,399,994 4,768,992 (2,609,636) (958,919) (3,568,555) 759,362 441,075 1,200,437 2,442,618 1,482,864 3,925,482 (1,929,573) (973,679) (2,903,252) 513,045 509,185 1,022,230 2016 Non performing financing and advances Less: specific allowance Net 39. Fair Values Of Financial Assets And Liabilities 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. The fair values of on-statement of financial position financial instruments, except for other investments held at amortised cost and held-to-maturity investments which are carried at amortised cost, are not significantly different from the carrying values included in the consolidated financial statements. The fair values of financing and advances, commission bearing customers’ deposits, due from/to banks and other financial institutions which are carried at amortised cost, are not significantly different from the carrying values included in the consolidated financial statements, since the current market commission rates for similar financial instruments are not significantly different from the contracted rates, and for the short duration of due from/to banks and other financial institutions. The estimated fair values of held-to-maturity investments and other investments held at amortised cost are based on quoted market prices when available or pricing models when used in the case of certain fixed rate bonds respectively, the fair values of these investments are disclosed in note 6.4. The fair values of derivatives and other off-statement of financial position financial instruments are based on the quoted market prices when available and/or by using the appropriate valuation techniques. 40. Determination Of Fair Value And Fair Value Hierarchy Credit exposure (credit equivalent) (note 33.2): Commitments and contingencies Derivatives The credit equivalent of commitments and contingencies and derivatives is calculated according to SAMA’s prescribed methodology. 172 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either: - In the accessible principal market for the asset or liability, or - In the absence of a principal market, in the most advantageous accessible market for the asset or liability. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 173
88. b . Fair Value Information for Financial Instruments Not Measured at Fair Value Fair value information of the Group’s financial instruments is analysed below. a. Fair Value Information for Financial Instruments at Fair Value The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: quoted prices in active markets for the same instrument. Level 2: quoted prices in active markets for similar assets and liabilities or valuation techniques for which all significant inputs are based on observable market data, and Level 3: valuation techniques for which any significant input is not based on observable market data. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: Level 1 Level 2 Level 3 Total Financial assets Derivative financial instruments - 2,688,458 - 2,688,458 Financial assets held as FVIS - 1,291,844 40,277 1,332,121 11,597,666 5,338,726 436,243 17,372,635 646,652 - - 646,652 - 13,031,739 - 13,031,739 12,244,318 22,350,767 476,520 35,071,605 Financial assets available for sale Held for trading Other investments held at amortized cost, net - fair value hedged (see note (6.2)) Total The fair values of due from banks and other financial institutions, due to banks and other financial institutions, customers deposits and debt securities issued at 31 December 2017, 31 December 2016 approximate their carrying values. c. Valuation Technique and Significant Unobservable Inputs for Financial Instruments at Fair Value The Group uses various valuation techniques for determination of fair values for financial instruments classified under levels 2 and 3 of the fair value hierarchy. These techniques and the significant unobservable inputs used therein are analysed below. SAR’ 000 2017 The fair value of financing and advances, net amounts to SAR 249,850 million (2016: SAR 249,953 million).The fair value of the held to maturity and other investments held at amortized cost is disclosed in note 6.4. The Group utilises fund manager reports (and appropriate discounts or haircuts where required) for the determination of fair values of private equity funds and hedge funds. The fund manager deploys various techniques (such as discounted cashflow models and multiples method) for the valuation of underlying financial instruments classified under level 2 and 3 of the respective fund’s fair value hierarchy. Significant unobservable inputs embedded in the models used by the fund manager include risk adjusted discount rates, marketability and liquidity discounts and control premiums. For the valuation of unquoted debt securities and derivative financial instruments, the Group obtains fair value estimates from reputable third party valuers, who use techniques such as discounted cash flows, option pricing models and other sophisticated models. d. Transfer Between Level 1 and Level 2 There were no transfers between level 1 and level 2 during 31 December 2017 (2016: Nil). e. Reconciliation of Level 3 Fair Values Financial liabilites Derivative financial instruments - 1,945,440 - 1,945,440 Total - 1,945,440 - 1,945,440 The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values. Movement of level 3 is as follows: 2017 SAR’ 000 2016 SAR’ 000 Level 1 Level 2 Level 3 Total Balance at beginning of the year Financial assets Derivative financial instruments - 2,666,249 - 2,666,249 Financial assets held as FVIS - 1,713,941 105,076 1,819,017 12,513,409 7,507,573 414,520 20,435,502 708,352 - - 708,352 - 4,239,300 - 4,239,300 13,221,761 16,127,063 519,596 29,868,420 Financial investments available for sale Held for trading Other investments held at amortized cost, net - fair value hedged (see note (6.2)) Total Total gains/(losses) (realised and unrealised) in consolidated statement of income Total (losses)/gains in consolidated statement of comprehensive income Purchases (Sales) Transfer to/(from) level 3 Balance at end of the year 519,596 962,900 (143,833) - - (58,831) 220,610 242,834 (119,853) (448,918) - (178,389) 476,520 519,596 Transfer Out of Level 3 Financial liabilites Derivative financial instruments - 2,635,190 - 2,635,190 Total - 2,635,190 - 2,635,190 174 | Consolidated Financial Statements 2016 The National Commercial Bank | Annual Report 2017 During the year ended 31 December 2017, an amount of SAR Nil (31 December 2016: SAR 178 million) was transferred to level 1 pursuant to the initial public offering of a private equity investment held by Eastgate MENA Direct Equity L.P. (note 1.2). The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 175
89. f . Sensitivity Analysis for Significant Unobservable Inputs in Valuation of Financial Instruments at Fair Value (41.2) Income and Expenses Pertaining to Transactions with Related Parties Included in the Financial Statements are as Follows: 2017 No significant unobservable inputs were applied in the valuation of hedge funds and private equities for the year ended 31 December 2017 and hence sensitivity analysis is not applicable for the year. 41. Related Party Transactions In the ordinary course of its activities, the Group transacts business with related parties. In the opinion of the management and the Board, the related party transactions are performed on an arm’s length basis. The related party transactions are governed by the limits set by the Banking Control Law and the regulations issued by SAMA. Related party balances include the balances resulting from transactions with Governmental shareholders. All other Government transactions are entered/conducted also at market rates. Major shareholders represent shareholdings of more than 5% of the Bank’s issued share capital. Related parties are the persons or close members of those persons’ families and their affiliate entities where they have control, joint control or significant influence over these entities. SAR’ 000 SAR’ 000 Bank’s Board of Directors and Senior Executives: Financing and advances 133,751 367,969 Customers’ deposits 117,801 227,086 33,557 100,895 7,504 4,668 36,789 32,082 2,753,873 2,686,374 Customers’ deposits 795,338 765,180 Commitment and contingencies 288,894 274,370 Customers’ deposits 6,922,855 12,530,609 Investments (Assets under Management) 2,726,782 2,458,136 654,988 708,201 82,093 44,998 1,687,500 1,737,500 11,968 2,408 363,750 363,750 Commitments and contingencies Investments (Assets under Management) Other liabilities - end of service benefits 62,228 55,956 Special commission expense 212,594 367,163 Fees and commission income and expense, net 261,457 210,674 (41.3) The Total Amount oOf Compensation Paid to the Group’s Board of Directors and Key Management Personnel During the Year is as Follows: 2017 SAR’ 000 Directors’ remuneration End of service benefits 2016 SAR’ 000 Special commission income Short-term employee benefits (41.1) The Balances as at 31 December Included in the Consolidated Financial Statements are as Follows: 2017 SAR’ 000 2016 2016 SAR’ 000 7,582 11,815 106,065 118,533 2,392 3,955 The Bank’s Board of Directors includes the Board and Board related committees (Executive Committee, Risk Management Committee, Compensation and Nomination Committee and Audit Committee). For Group’s senior executives compensation (note 42). Balances of companies and institutions owned by 5% or more by related parties: Financing and advances Major shareholders: Group’s investment funds: Investments Customers’ deposits Subsidiaries: Financing and advances Customers’ deposits Investments 176 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 177
90. 42 . Group’s Staff Compensation 43. Capital Adequacy The following table summarizes the Group’s employee categories defined in accordance with SAMA’s rules on compensation practices and includes the total amounts of fixed and variable compensation paid to employees during the years ended 31 December 2017 and 2016, and the forms of such payments: (43.1) Capital Adequacy Ratio 2017 Categories of employees 2016 Fixed compensation (on accrual basis) Number of employees Variable compensation (on cash basis) SAR’ 000 Number of employees Fixed compensation (on accrual basis) Variable compensation (on cash basis) SAR’ 000 The Group’s objectives when managing capital are to comply with the capital requirements set by SAMA to safeguard the Group’s ability to continue as a going concern and to maintain a strong capital base. The Group monitors the adequacy of its capital using the ratios and weights established by SAMA. These ratios measure capital adequacy by comparing the Group’s eligible capital with its consolidated statement of financial position assets, commitments and contingencies and notional amount of derivatives at a weighted amount to reflect their relative credit risk, market risk and operational risk. SAMA requires banks to hold the minimum level of the regulatory capital and maintain a ratio of total eligible capital to the risk-weighted asset at or above the agreed minimum of 8%. Regulatory Capital is computed for Credit, Market and Operational risks which comprise the Pillar 1 minimum capital requirements. SAMA has issued the framework and guidance regarding implementation of the capital reforms under Basel III - which are effective from 1 January 2013. Accordingly, the Group’s consolidated Risk Weighted Assets (RWA), total eligible capital and related ratios on a consolidated group basis are calculated under the Basel III framework. 23 39,178 70,360 23 38,156 95,621 Employees engaged in risk taking activities 333 127,457 49,444 315 124,505 46,273 Employees engaged in control functions 462 160,291 52,266 411 148,656 51,739 Risk weighted assets 7,173 1,298,807 271,859 7,286 1,316,928 231,626 2017 Senior Executives Other employees The following table summarizes the Bank’s Pillar-1 Risk Weighted Assets, Tier 1 and Tier 2 capital and capital adequacy ratios. SAR’ 000 Other employee related benefits Subsidiaries - 399,825 - - 412,842 - 457,182 127,452 4,275 463,286 97,294 311,695,219 33,970,252 32,802,763 9,452,340 8,048,978 361,106,727 352,546,960 63,825,327 59,670,175 8,232,300 8,025,155 72,057,627 67,695,330 Core capital (Tier 1) 17.7% 16.9% Core and supplementary capital (Tier 1 and Tier 2) 20.0% 19.2% Market risk Total Pillar-1 - risk weighted assets Group total 13,436 2,482,740 571,381 12,310 2,504,374 SAR’ 000 317,684,135 Credit risk Operational risk 5,445 2016 522,554 Core capital (Tier 1) All forms of payment for fixed and variable compensation are in cash. The Bank’s Senior Executives are those persons, including an executive director, having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. Supplementary capital (Tier 2) Employees engaged in risk taking activities comprise those officers of the business sectors of Consumer Banking, Corporate and Treasury, who are the key drivers in undertaking business transactions, and managing related business risks. Core and supplementary capital (Tier 1 and Tier 2) Employees engaged in control functions include employees in Risk Management, Internal Audit, Compliance, Finance and Legal divisions. Capital Adequacy Ratio (Pillar 1): The Group’s variable compensation recognized as staff expenses in the consolidated statement of income for 2017 is SAR 595 million (2016: SAR 579 million). Tier 1 capital of the Group comprises share capital, statutory reserve, other reserves, proposed dividend, retained earnings, tier 1 eligible debt securities and non-controlling interests less treasury shares, goodwill, intangible assets, foreign currency translation reserve and other prescribed deductions. Tier 2 capital comprises of eligible debt securities issued and prescribed amounts of eligible portfolio (collective) provisions less prescribed deductions. The Group uses the Standardized approach of Basel III to calculate the risk weighted assets and required Regulatory Capital for Pillar -1 (including credit risk, market risk and operational risk). The Group’s Risk Management is responsible for ensuring that minimum required Regulatory Capital calculated is compliant with Basel III requirements. Quarterly prudential returns are submitted to SAMA showing the Capital Adequacy Ratio. 178 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 179
91. 44 . Group’s Interest In Other Entites (44.2) Involvement with Unconsolidated Structured Entities The table below describes the types of structured entities that the Group does not consolidate but in which it holds an interest. (44.1) Material Partly-Owned Subsidiaries (a) Significant Restrictions The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which TFKB operate. The supervisory frameworks require TFKB to keep certain levels of regulatory capital and liquid assets, limits its exposure to other parts of the Group and comply with other ratios. The carrying amounts of TFKB’s assets and liabilities are SR 38,359 million and SR 34,320 million respectively (2016: SR 41,014 million and SR 37,118 million respectively). (b) Non-Controlling Interests in Subsidiaries Type of structured entity Nature and purpose Interest held by the Group Mutual funds To generate fees from managing assets on behalf of third party investors. These funds are financed through the issue of units to investors. • Investments in units issued by the funds. Hedge funds To generate returns from trading in the units/ shares of the fund and/or via distributions made by the fund. These funds are financed through the issue of units/shares to investors. • Investments in units issued by the funds. Private equity funds To generate returns from long-term capital appreciation in the net worth of the fund, reaslised via periodic distributions and eventual exit at the end of the life of the fund. These funds are financed through the issue of units/ shares to investors. • Investments in units/ shares issued by the funds. The following table summarises the information relating to the Group’s subsidiary (TFKB) that has material non-controlling interests (NCI). 2017 SAR’ 000 2016 SAR’ 000 Summarised statement of financial position Financing and advances, net 26,116,005 28,394,203 Other assets 11,863,117 12,136,879 Liabilities 34,319,468 36,998,013 3,659,654 3,533,069 Net assets • Management fees. The table below sets out an analysis of the carrying amounts of interests held by the Group in unconsolidated structured entities. The maximum exposure to loss is the carrying amount of the assets held. 2017 SAR’ 000 Carrying amount of NCI 1,206,588 1,164,853 1,591,613 2,222,377 Net income 469,026 284,944 Total comprehensive income (loss) 214,959 (586,288) 70,872 (193,299) Total operating income Total comprehensive income (loss) allocated to NCI 69,347 1,805,529 (415,601) (989,863) Net cash from financing activities 253,621 53,104 Net (decrease) increase in cash and cash equivalents (92,633) 868,770 Net cash (used in) investing activities 180 | Consolidated Financial Statements 646,652 708,352 Hedge funds 1,332,121 1,819,017 486,838 482,177 2,465,611 3,009,546 Total The Group considers itself a sponsor of a structured entity when it facilitates the establishment of the structured entity. At 31 December 2017, the Group holds an interest in all structured entities it has sponsored. These are mainly represented by mutual funds established and managed by NCBC and private equity funds established and managed by NCB Capital Dubai Inc. 45. Investment Services Summarised cash flow statement Net cash from operating activities SAR’ 000 Mutual funds Private equity funds Summarised statement of income 2016 The National Commercial Bank | Annual Report 2017 The Bank offers investment management services to its customers through its subsidiary NCB Capital Company. Assets under management outstanding at 31 December 2017 amounted to SAR 119,546 million (2016: SAR 113,003 million) (note 3.23). The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 181
92. 46 . Comparative Figures Certain prior year figures have been reclassified to conform to current year presentation, which are not material in nature. 47. Prospective Changes In Accounting Policies The Group has chosen not to early adopt the following new standards which have been issued but not yet effective for the Group’s accounting years beginning on or after 1 January 2018 and is currently assessing their impact. Implementation and Impact Analysis of IFRS-9 Implementation Strategy In July 2014, the IASB issued IFRS-9 “Financial Instruments”, the standard that will replace IAS 39 effective from 1 January 2018, with early adoption permitted. The Group considers it as a significant project and therefore has set up a multidisciplinary implementation team with members from its Credit risk and Modeling, Finance, IT, Operations, and respective businesses to achieve a successful and robust implementation. The IFRS 9 project (the “Project” or “Program”) is managed by the Chief Financial Officer and Chief Risk Officer. Classification and Measurement Financial Assets The classification and measurement of financial assets will depend on how these are managed (the Group’s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income (‘FVOCI’) or fair value through profit or loss (‘FVTPL’). For equity instruments that are not held for trading, the Group may irrevocably elect to designate them as FVOCI, with no subsequent reclassification of gains or losses to the income statement. This election is made on an investment-byinvestment basis. Financial Liabilities Under IFRS 9, the accounting for financial liabilities will largely remain similar to IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVTPL. Hence the Group does not expect any material change to the classification of its financial liabilities upon transition. The de-recognition rules have been retained from IAS 39 and have not been changed. Impairment The Group will recognize impairment allowances based on Expected Credit Loss (ECL) on financial assets that are not measured via FVTPL. This mainly include, financing and advances, investments that are measured at amortised cost or at FVOCI (other than equity investments), interbank placements, margin deposits, other receivables, financial guarantees and credit commitments. No impairment loss will be recognised on equity investments. The key inputs into the measurement of ECL are the term structure of the following variables: The Group will also consider the forward-looking information in its assessment of significant deterioration in credit risk since origination as well as the measurement of ECLs. The forward-looking information will include the elements such as macroeconomic factors (e.g., unemployment, GDP growth, inflation, profit rates and house prices) and economic forecasts obtained through internal and external sources. To evaluate a range of possible outcomes, the Group intends to formulate various scenarios. For each scenario, the Group will derive an ECL and apply a probability weighted approach to determine the impairment allowance in accordance with the accounting standards requirements. Hedge Accounting The general hedge accounting requirements aim to simplify hedge accounting, strengthen links with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. However, they do not explicitly address macro hedge accounting strategies, which are particularly important for banks. As a result, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting. Based on the analysis performed to date, the Group expects to exercise the accounting policy choice to continue IAS 39 hedge accounting and therefore is not currently planning to change hedge accounting. Expected Impact According to transitional provisions for initial application of IFRS 9, the Group is allowed to recognise any differences between previous carrying amount under IAS 39 and the carrying amount at the beginning of the annual reporting period that includes the date of initial application in opening total equity. Based on the Group’s assessment to date, following impacts are anticipated as a result of transition to IFRS 9: Classification Based on management’s assessment of business models and nature of financial instruments carried at the reporting date, it expects the impact on classification to be as follows: • The majority of financial assets that are classified as loans and receivables and are measured at amortised cost under IAS 39 are expected to be measured at amortised cost under IFRS 9 as well. • The majority of the Group’s debt instruments that are currently classified as available for sale (AFS) will satisfy the conditions for classification as FVOCI and hence there will be no change in the accounting for these assets except for new impairment requirements. • The majority of Equity and Funds’ investments currently measured at FVOCI will be classified as FVTPL under IFRS 9. • Probability of default (PD) • Loss given default (LGD) • Exposure at default (EAD) The Group plans to categorizes its financial assets into following three stages in accordance with the IFRS-9 methodology: • Stage 1 – Performing assets: Financial assets that are not significantly deteriorated in credit quality since origination. The impairment allowance will be recorded based on 12 months Probability of Default (PD). 182 | Consolidated Financial Statements • Stage 2 – Underperforming assets: Financial assets that has significantly deteriorated in credit quality since origination. This credit quality assessment is made by comparing the remaining lifetime PD as at reporting date with the remaining lifetime PD point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations). The impairment allowance will be recorded based on lifetime ECL. The impairment allowance will be recorded based on life time PD. • Stage 3 – Impaired assets: For Financial assets that are impaired, the Group will recognize the impairment allowance based on life time PD. The National Commercial Bank | Annual Report 2017 • The majority of the Group’s debt instruments that are currently classified as IAC will be classified as HTC under IFRS 9 and continue to be carried at amortized cost. The remainder shall be classified as HTCS (carried at FVOCI) under IFRS 9 and accordingly fair valued at the transition date. Impairment As a result of Group’s transition to the expected loss methodology for computation of credit losses, it anticipates an increase in allowance for such credit losses in respect of financial assets carried as at 1 January 2018. Furthermore and as a result, the Bank’s Tier 1 ratio may be impacted primarily from potential increase in credit impairment provisions, net of tax. The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 183
93. Disclosure IFRS 15 IFRS 15 Revenue from contracts with customers provides a framework that replaces the existing revenue recognition model under IAS 18 . Entities applying IFRS 15 would need to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. The Group is in the process of evaluating how the new revenue recognition model will impact its revenue generating arrangements. Amendments to IAS 40 The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. 1 January 2018 IFRIC 22 The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration. 1 January 2018 Amendments to IAS 28 IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment - by - investment choice. Amendments to IAS 28  The amendments clarify that the Group applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. Amendments to IFRS 9  Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. The new standard also introduces extended disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. 1 January 2018 Net Financial Impact Based on the foregoing, the Group expects a net reduction of 1% to 1.4% in its total equity as at the transition date, represented primarily by increase in allowance for credit losses at the transition date and recognition of unrealised marked to market gains/losses for financial assets, previously carried at amortised cost, and expected to be classified as HTCS under IFRS 9. Governance and Controls The Group’s Program included the establishment of a Governance framework (the “Framework”) and related controls, consistent with the IFRS-9 Guidance Documents issued for banks in the Kingdom of Saudi Arabia. The Program is supported by a Steering Committee that includes representation from Finance, Risk and IT, as well as the involvement of subject matter experts in the areas of methodology reviews, data sourcing, risk modelling, and formulating judgements with respect to the aspects of significant increase in credit risk determination, macroeconomic assumptions and forward looking factors. The Framework and related controls are currently in the process of approvals by the board of directors. 1 January 2018 Caveat The estimated decrease in shareholders’ equity includes the impact of both balance sheet classification and measurement changes and the increase to credit impairment provisions compared to those applied at 31 December 2017 under IAS 39. The assessment above is a point in time estimate and is not a forecast. The actual effect of the implementation of IFRS 9 on the Bank could vary significantly from this estimate. The Group continues to refine models, methodologies and controls, and monitor developments in regulatory rule-making in advance of IFRS 9 adoption on 1 January 2018. The following is a brief on the other new IFRS and amendments to IFRS, effective for annual periods beginning on or after 1 January 2018: Effective for annual periods beginning on or after Standard, amendment or interpretation Summary of requirements (2015-2017 annual improvements cycle) IFRS 3, IAS 12 and IAS 23 The standards affected under the 2015-2017 annual improvements cycle, and the subjects of the amendments are: - IFRS 3 business combinations and IFRS 11 Joint arrangements previously held interest in a joint operation. - IAS 12 Income Taxes - income tax consequences of payments on financial instruments classified as equity. - IAS 23 Borrowing Costs - borrowing costs eligble for capitalisation. 1 January 2019 IFRS 16 IFRS 16 Leases eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating leases. The Group is in the process of evaluating how the new lease accounting model will impact its leasing arrangements. 1 January 2018 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions. 1 January 2019 184 | Consolidated Financial Statements The National Commercial Bank | Annual Report 2017 1 January 2019 1 January 2019 48. Board Of Directors’ Approval The consolidated financial statements were approved by the Board of Directors on 4 February 2018 (corresponding to 18 Jumada Alawwal 1439H). The National Commercial Bank | Annual Report 2017 Consolidated Financial Statements | 185
94. The National Commercial Bank 800 244 1005 P .O. Box 3555 | Jeddah 21481 Saudi Arabia www.alahli.com 188 | Board of Directors' Report The National Commercial Bank | Annual Report 2017