Samba Bank: Interim Condensed Consolidated Financial Statements 30-September-2018

Transcription

1. SAMBA FINANCIAL GROUP INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED September 30 , 2018 PUBLIC
5. SAMBA FINANCIAL GROUP STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (Unaudited) Three months ended Sep 30, 2018 Sep 30, 2017 (SR '000) (SR '000) Net income for the periods 1,416,868 1,308,077 Nine months ended Sep 30, 2018 Sep 30, 2017 (SR '000) (SR '000) 4,122,361 3,810,113 Other comprehensive income for the periods - items that cannot be reclassified subsequently to the statement of consolidated income: FVOCI financial assets - equities: (29,442) - 490,369 - (5,609) (2,100) (28,023) 1,569 (181,555) 24,717 (242,888) 104,179 1,540 (18,409) (9,810) (34,821) - Change in fair values (25,328) 99,483 (42,694) 172,105 - Transfers to statements of consolidated income (12,372) (16,452) (41,874) (39,625) Other comprehensive income for the periods (252,766) 87,239 125,080 203,407 Total comprehensive income for the periods 1,164,102 1,395,316 4,247,441 4,013,520 1,164,890 1,396,311 4,246,093 4,012,327 (788) (995) 1,348 1,193 1,164,102 1,395,316 4,247,441 4,013,520 - Change in fair values Other comprehensive income for the periods - items that may be reclassified subsequently to the statement of consolidated income: Exchange differences on translation of foreign operations FVOCI debt / AFS financial assets: - Change in fair values - Transfers to statements of consolidated income Cash flow hedges: Attributable to: Equity holders of the Bank Non-controlling interest Total The accompanying notes 1 to 20 form an integral part of the interim condensed consolidated financial statements. PUBLIC 5
6. SAMBA FINANCIAL GROUP STATEMENTS OF CONSOLIDATED CHANGES IN EQUITY (Unaudited) Attributable to equity holders of the Bank Note (SR ‘000) Share capital For the nine months period ended Sep 30, 2018 Balance at the beginning of the period as originally reported Effect of change in accounting policy 20,000,000 4 Balance at the beginning of the period as restated 20,000,000 Statutory reserve 15,811,044 15,811,044 General reserve 130,000 130,000 Other reserves AFS / Exchange FVOCI translation financial reserve assets (191,160) 318,500 (294) (191,160) 318,206 Cash flow hedges (28,826) (28,826) Retained earnings Noncontrolling interest Total equity 44,582,668 99,484 44,682,152 - (2,521,825) - (2,521,825) - (1,021,743) 42,060,843 99,484 42,160,327 70,857 - 70,857 (1,593,948) - (1,593,948) Proposed dividends Treasury stocks Total 9,564,853 - (1,021,743) (2,521,531) - 7,043,322 - - - - - - 46,723 - 24,134 - - - - - - (1,593,948) - - 2017 Final dividend - - - - - - (1,494,400) 2017 Final dividend paid - - - - - - Net changes in treasury stocks 2018 Interim dividend 16 Subtotal 20,000,000 15,811,044 130,000 (191,160) 318,206 - - - Other comprehensive income / (loss) for the period - - - (41,068) 257,398 (84,568) - - - (41,068) - 257,398 - (84,568) - Total comprehensive income / (loss) for the period Provision for zakat & income tax 19 Balance at end of the period - - (28,826) Net income for the period - - 1,494,400 - (1,494,400) - - (1,494,400) - (1,494,400) 4,001,697 - 39,043,352 99,484 39,142,836 4,114,331 - - 4,114,331 8,030 4,122,361 - - 131,762 (6,682) 125,080 4,114,331 (476,250) - - 4,246,093 (476,250) 1,348 - 4,247,441 (476,250) - (997,609) 42,813,195 100,832 42,914,027 (1,045,623) 42,443,279 101,489 42,544,768 57,204 - 20,000,000 15,811,044 130,000 (232,228) 575,604 (113,394) 7,639,778 20,000,000 14,554,971 130,000 (168,991) 217,056 (126,493) 7,884,606 (997,609) - For the nine months period ended Sep 30, 2017 Balance at the beginning of the period Net changes in treasury stocks 2017 Interim dividend 16 2016 Final dividend paid - - - - - - 34,495 - 22,709 - - - - - - (1,494,400) - - - Subtotal 20,000,000 14,554,971 130,000 - - (168,991) 217,056 (126,493) Net income for the period - - - - - Other comprehensive income / (loss) for the period - - - (2,243) 73,941 132,480 - - - (2,243) 73,941 132,480 - - - - - Total comprehensive Income for the period Provision for zakat & income tax Balance at end of the period 19 997,753 20,000,000 14,554,971 130,000 (171,234) 290,997 - - (997,753) 6 (1,494,400) (997,753) (1,494,400) - (997,753) 6,424,701 - (1,022,914) 40,008,330 101,489 40,109,819 3,808,149 - - 3,808,149 1,964 3,810,113 - - 204,178 (771) 203,407 1,193 4,013,520 3,808,149 - - 4,012,327 - (468,950) - - (468,950) 5,987 9,763,900 - (1,022,914) The accompanying notes 1 to 20 form an integral part of the interim condensed consolidated financial statements. PUBLIC - 57,204 - 43,551,707 102,682 (468,950) 43,654,389
8. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General Samba Financial Group ("the Bank"), a Joint Stock Company incorporated in the Kingdom of Saudi Arabia, was formed pursuant to Royal Decree No. M/3 dated 26 Rabie Al-Awal 1400H (February 12, 1980). The Bank commenced business on 29 Shabaan 1400H (July 12, 1980) when it took over the operations of Citibank in the Kingdom of Saudi Arabia. The Bank operates under commercial registration no. 1010035319 dated 6 Safar 1401H (December 13,1980). The Bank's head office is located at King Abdul Aziz Road, P.O. Box 833, Riyadh 11421, Kingdom of Saudi Arabia. The objective of the Bank is to provide a full range of banking and related services. The Bank also provides its customers Shariah approved Islamic banking products. 1. The interim condensed consolidated financial statements include financial statements of the Bank and its following subsidiaries, hereinafter collectively referred to as "the Group". Samba Capital and Investment Management Company (Samba Capital) In accordance with the securities business regulations issued by the Capital Market Authority (CMA), the Bank has established a wholly owned subsidiary, Samba Capital and Investment Management Company under commercial registration number 1010237159 issued in Riyadh dated 6 Shaa’ban 1428H (August 19, 2007), to manage the Bank’s investment services and asset management activities related to dealing, arranging, managing, advising and custody businesses. The company is licensed by the CMA and has commenced its business effective January 19, 2008. Samba Capital was converted from a limited liability company to a closed joint stock company on 28 Rajab 1438H (April 25, 2017), which is the date of commercial registration of the closed joint stock company. During 2017, Samba Capital has formed a wholly owned subsidiary “Samba Investment Real Estate Company” which is incorporated in the Kingdom of Saudi Arabia under commercial registration number 1010715022 issued in Riyadh dated 23 Shawaal 1438H (July 17, 2017). The company has been formed as a limited liability company (sole ownership) and is engaged in managing real estate projects for and on behalf of a mutual fund managed by Samba Capital. Samba Bank Limited, Pakistan (SBL) An 84.51% owned subsidiary incorporated as a banking company in Pakistan and engaged in commercial banking and related services, and listed on the Pakistan Stock Exchange. Co-Invest Offshore Capital Limited (COCL) A wholly owned company incorporated under the laws of Cayman Islands for the purpose of managing certain overseas investments through an entity; Investment Capital (Cayman) Limited (ICCL) which is fully owned by COCL. ICCL has invested in approximately 41.2% of the share capital of Access Co-Invest Limited, also a Cayman Island limited liability company, which manages these overseas investments. Samba Real Estate Company A wholly owned subsidiary incorporated in Saudi Arabia under commercial registration no. 1010234757, issued in Riyadh, dated 9 Jumada II, 1428H (September 24, 2007). The company has been formed with the approval of Saudi Arabian Monetary Authority (“SAMA”) for the purpose of managing real estate projects on behalf of the Bank. Samba Global Markets Limited A wholly owned company incorporated as a limited liability company under the laws of Cayman Islands on February 1, 2016, with the objective of managing certain treasury related transactions. The company started its commercial operations during the fourth quarter of 2016. Basis of Preparation The interim condensed consolidated financial statements of the Group as at and for the period ended September 30, 2018 have been prepared and are in compliance with: 2. - IAS 34 as modified by SAMA for the accounting of zakat and income tax (relating to the application of International Accounting Standard (IAS) 12 “Income Taxes” and IFRIC 21 - “Levies” in so far as these relate to accounting for Saudi Arabian zakat and income tax); and The Banking Control Law and the Regulations for Companies in the Kingdom of Saudi Arabia. These interim condensed consolidated financial statements do not include all information and disclosures required in the annual consolidated financial statements and should be read in conjunction with the annual consolidated financial statements of the Group for the year ended December 31, 2017. PUBLIC 8
9. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The preparation of interim condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated financial statements, the significant judgments made by management in applying the Bank’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual consolidated financial statements as at and for the year ended December 31, 2017, except for changes in accounting policies disclosed in Note 4. Financial assets and financial liabilities are offset and the net amount reported in the statement of consolidated financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Income and expenses are not offset in the statement of consolidated income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. The interim condensed consolidated financial statements are expressed in Saudi Arabian Riyals (SR) and amounts are rounded to the nearest thousand. 3. Consolidation These interim condensed consolidated financial statements include the financial position and results of Samba Financial Group and its subsidiary companies. The financial statements of subsidiaries are prepared for the same reporting period as that of the Bank except for COCL whose financial statements are made up to the previous quarter end for consolidation purposes to meet the Group reporting timetable. Wherever necessary, adjustments have been made to the financial statements of the subsidiaries to align with the Bank's financial statements. Significant inter-group balances and transactions are eliminated upon consolidation. Subsidiaries are the entities that are controlled by the Bank. The Bank controls an entity when it is exposed, or has a right, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over that entity. Subsidiaries are consolidated from the date on which control is transferred to the Bank and cease to be consolidated from the date on which control is transferred from the Bank. The results of subsidiaries acquired or disposedoff during the period are included in the statements of consolidated income from the date of the acquisition or up to the date of disposal, as appropriate. Non-controlling interest represent the portion of net income or loss and net assets not owned, directly or indirectly, by the Bank in subsidiaries and are presented in the statement of consolidated income and within equity in the statement of consolidated financial position, separately from the equity holders of the Bank. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Bank. The cost of acquisition is measured at the fair value of the consideration given at the date of exchange. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair value at the date of acquisition. The excess of the cost of acquisition over the fair value of the Bank’s share of identifiable net assets acquired is recorded as intangible asset – goodwill. In addition to the subsidiaries stated above under Note 1, the Bank is also a party to certain special purpose entities which are formed with the approval of SAMA solely to facilitate certain Shariah compliant financing arrangements. The Bank has concluded that these entities cannot be consolidated as it does not control these entities. However, the exposures to these entities are included in the Bank’s loans and advances portfolio. 4. Impact of changes in accounting policies due to adoption of new standards Effective January 1, 2018, the Group has adopted two new accounting standards issued by the International Accounting Standards Board (IASB) and the impact of the adoption of these standards is explained below: 4.1 IFRS 15 - Revenue from Contracts with Customers The Group has adopted IFRS 15 ‘Revenue from Contracts with Customers’ issued in May 2014 and is effective for mandatory compliance for annual periods commencing on or after January 1, 2018. IFRS 15 outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes current revenue guidance, which is found currently across several Standards and Interpretations within IFRS. The Group has carried out an internal assessment based on which it has concluded that adoption of IFRS 15 does not have a material impact on the revenue recognition policy of the Group which is already compliant with applicable IFRS. PUBLIC 9
10. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 4.2 IFRS 9 – Financial Instruments The Group has adopted IFRS 9 - Financial Instruments issued in July 2014 with a mandatory application date of January 1, 2018. The requirements of IFRS 9 represent a significant change from IAS 39 Financial Instruments: Recognition and Measurement applied earlier by the Group. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities. As permitted by IFRS 9, the Group has elected to continue to apply the hedge accounting requirements of IAS 39. Classification of financial assets and financial liabilities IFRS 9 allows for three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVOCI”) and fair value through income statement (“FVIS”). This classification is generally based, except for the equity instruments and derivatives, on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the existing IAS 39 categories of heldto-maturity, loans and receivables and available-for-sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never bifurcated. Instead, the whole hybrid instrument is assessed for classification. For an explanation of how the Bank classifies financial assets under IFRS 9, see respective section of significant accounting policies. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognized in statement of consolidated income, under IFRS 9 fair value changes are presented as follows: • • The amount of change in the fair value that is attributable to changes in the credit risk of the issuer is presented in other comprehensive income; and The remaining amount of change in the fair value is presented in statement of consolidated income. Impairment of financial assets IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' model (“ECL”). IFRS 9 requires the Bank to record an allowance for ECLs for all loans and other debt financial assets not held at FVIS, together with loan commitments and financial guarantee contracts. The allowance is based on the ECLs associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination. If the financial asset meets the definition of purchased or originated credit impaired, the allowance is based on the change in the ECLs over the life of the asset. Transitional arrangements Changes in accounting policies resulting from the adoption of IFRS 9 have been applied using the modified retrospective approach which requires the recognition of the cumulative impact of adoption in equity. • A difference in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in retained earnings and reserves as at January 1, 2018. Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented for 2018 under IFRS 9. • The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. i. ii. iii. The determination of the business model within which a financial asset is held. The designation and revocation of previous designated financial assets and financial liabilities as measured at FVIS. The designation of certain investments in equity instruments not held for trading as FVOCI. For financial liabilities designated as at FVIS, the determination of whether presenting the effects of changes in the issuer’s credit risk in OCI would create or enlarge an accounting mismatch in the statements of consolidated income. It is assumed that the credit risk has not increased significantly for those debt securities which carry low credit risk at the date of initial application of IFRS 9. PUBLIC 10
11. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) a) Financial Assets and Financial Liabilities i) Re-classification of financial assets and financial liabilities on the date of initial application of IFRS 9 The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets and financial liabilities as at January 1, 2018: Original classification under IAS 39 New classification under IFRS 9 Financial Assets Cash and balances with central banks AC AC 25,195,066 25,195,066 Due from banks and other financial institutions AC AC 11,031,480 11,007,946 Investments, net: - Fixed rate securities - Structured credits - Hedge funds - Fixed & floating rate securities - Equities & private equities - Equities & private equities - Fixed & floating rate securities - Mudaraba FVIS FVIS FVIS AFS AFS AFS AC AC FVIS FVIS FVIS FVOCI FVIS FVOCI FVOCI AC 315,346 62,784 1,898,941 20,766,434 821,459 2,798,693 25,916,221 11,332,532 315,346 62,784 1,898,941 20,752,938 821,459 2,798,693 25,898,145 11,318,846 Derivatives FVIS FVIS 6,514,708 6,514,708 Loans and advances, net L&R AC 117,684,729 116,803,537 Other assets AC AC 568,885 224,907,278 568,885 223,957,294 Financial Liabilities Due to banks and other financial institutions AC AC 6,551,464 6,551,464 Customer deposits Customer deposits AC FVIS AC FVIS 167,363,111 559,543 167,363,111 559,543 Derivatives FVIS FVIS 3,976,298 3,976,298 AC AC 4,413,594 182,864,010 5,985,435 184,435,851 Other liabilities PUBLIC 11 Original New carrying carrying value value under under IAS 39 IFRS 9 SR ‘000
12. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) ii) Reconciliation of carrying amounts under IAS 39 to carrying amounts under IFRS 9 at the adoption of IFRS 9 The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9 on transition to IFRS 9 on January 1, 2018. IAS 39 carrying amount as at December 31, 2017 Reclassification Re-measurement IFRS 9 carrying amount as at January 1, 2018 SR ‘000 Financial Assets: Amortized Cost Cash and balances with central banks Due from banks and other financial institutions Investments, net Loans and advances, net Other assets Total amortized cost 25,195,066 11,031,480 37,248,753 117,684,729 568,885 191,728,913 (25,916,221) (25,916,221) Available for sale Investments, net 24,386,586 (24,386,586) - - - 46,682,655 2,798,693 49,481,348 (31,572) (31,572) 46,651,083 2,798,693 49,449,776 2,277,071 6,514,708 8,791,779 821,459 821,459 - 3,098,530 6,514,708 9,613,238 6,551,464 167,363,111 4,413,594 178,328,169 - 1,571,841 1,571,841 6,551,464 167,363,111 5,985,435 179,900,010 559,543 3,976,298 4,535,841 - - 559,543 3,976,298 4,535,841 Fair value through other comprehensive income Investments (Debt) Investment (Equity) Total FVOCI Fair value through income statement Investments, net Derivatives Total FVIS (23,534) (13,686) (881,192) (918,412) 25,195,066 11,007,946 11,318,846 116,803,537 568,885 164,894,280 Financial Liabilities: Amortized cost: Due to banks and other financial institutions Customer deposits Other liabilities Total amortized cost Fair value through income statement : Customer deposits Derivatives Total FVIS iii) Impact on retained earnings and other reserves Closing balance under IAS 39 (December 31, 2017) Reclassifications / re-measurement under IFRS 9 Recognition of expected credit impairment provisions under IFRS 9 (including lease receivables, loan commitments and financial guarantee contracts and those measured at FVOCI ) Opening balance under IFRS 9 (January 1, 2018) PUBLIC 12 Retained Other earnings reserves SR ‘000 9,564,853 98,514 (2,363) (294) (2,519,168) 7,043,322 98,220
13. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) b) The following table reconciles the credit impairment provisions recorded as per the requirements of IAS 39 and to that of IFRS 9: December 31, 2017 (IAS 39) ReReclassification measurement SR ‘000 Loans and receivables (IAS 39)/Financial assets at amortised cost (IFRS 9): Due from banks and other financial institutions Investments, net Loans and advances, net Total 1,974,621 1,974,621 AFS & Held to maturity (IAS 39)/Financial assets at amortised cost (IFRS 9): Investment, net - Loan commitments and financial guarantee contracts - Total - 1,974,621 - January 1, 2018 (IFRS 9) 23,534 13,686 881,192 918,412 23,534 13,686 2,855,813 2,893,033 - 28,915 28,915 - 1,571,841 1,571,841 2,519,168 4,493,789 c) Classification of financial assets and financial liabilities: The following tables provide carrying value of financial assets and financial liabilities in the statement of consolidated financial position, by class of assets: Mandatorily at FVIS Designated as at FVIS Financial Assets Cash and balances with central banks Due from banks and other financial institutions Investments, net Derivatives Loans and advances, net Other assets Total financial assets 4,529,657 3,326,851 7,856,508 - Financial Liabilities Due to banks and other financial institutions Customer deposits Derivatives Other liabilities Total financial liabilities 2,328,520 2,328,520 551,238 551,238 Sep 30, 2018 (IFRS 9) FVOCI – FVOCI – debt equity instruments investments SR ‘000 Amortized cost Total carrying amount - - - - 22,639,682 22,639,682 - - - - 18,865,946 18,865,946 10,778,191 114,703,350 1,189,890 168,177,059 64,862,320 3,326,851 114,703,350 1,189,890 225,588,039 6,793,838 169,071,914 6,618,284 182,484,036 6,793,838 169,623,152 2,328,520 6,618,284 185,363,794 46,335,972 46,335,972 - PUBLIC 13 3,218,500 3,218,500 -
14. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Trading / FVIS Designated as FVIS December 31, 2017 (IAS 39) Held to Loans and Available maturity receivables for sale Amortized cost Total carrying amount SR ‘000 Financial Assets Cash and balances with central Bank Due from banks and other financial institutions Investments, net Derivatives Loans and advances, net Other assets Total financial assets - - - - - 25,195,066 25,195,066 - - - - - 11,031,480 11,031,480 3,178,930 3,178,930 117,684,729 117,684,729 34,069,823 568,885 70,865,254 63,912,410 6,514,708 117,684,729 568,885 224,907,278 - - - 6,551,464 6,551,464 - - - 167,363,111 4,413,594 178,328,169 167,922,654 3,976,298 4,413,594 182,864,010 315,346 6,514,708 6,830,054 1,961,725 1,961,725 24,386,586 24,386,586 Financial Liabilities Due to banks and other financial institutions Customer deposits Derivatives Other liabilities Total financial liabilities 5. 3,976,298 3,976,298 559,543 559,543 Significant Accounting Policies The accounting policies used in the preparation of these interim condensed consolidated financial statements are consistent with those used in the Group's annual consolidated financial statements for the year ended December 31, 2017 except for the policies explained below. Based on the adoption of new standards explained in note 4, the following accounting policies are applicable effective January 1, 2018 replacing, amending or adding to the corresponding accounting policies set out in 2017 financial statements. Classification of financial assets On initial recognition, a financial asset is classified as measured at amortized cost, FVOCI or FVIS. Financial Assets at amortised cost A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as FVIS: • • the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial Assets at FVOCI A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as FVIS: • • the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest income and foreign exchange gains or losses are recognised in Statement of Consolidated Income. Equity Instruments On initial recognition, for an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an instrument-by-instrument basis. PUBLIC 14
15. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Financial Assets at FVIS All other financial assets are classified as measured at FVIS. This may include equity held for trading and debt securities not classified neither as AC nor FVOCI. In addition, on initial recognition, the Group may also irrevocably designate a financial asset at FVIS that otherwise meets the requirements to be measured at amortized cost or at FVOCI, if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. Business model assessment The Group assesses the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: • • • • • the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management's strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realizing cash flows through the sale of assets; how the performance of the portfolio is evaluated and reported to the Group's management; the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; how managers of the business are compensated. For example, whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group's stated objective for managing the financial assets is achieved and how cash flows are realized. The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’ scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. Financial assets that are held for trading and whose performance is evaluated on a fair value basis are measured at FVIS because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Assessments whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, 'principal' is the fair value of the financial asset on initial recognition. 'Interest' is the consideration for the time value of money, the credit and other basic lending risks associated with the principal amount outstanding during a particular period and other basic lending costs (e.g. liquidity risk and administrative costs), along with profit margin. PUBLIC 15
16. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers: • • • • • contingent events that would change the amount and timing of cash flows; leverage features; prepayment and extension terms; terms that limit the Group's claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and features that modify consideration of the time value of money (e.g. periodical reset of interest rates.) Designation at fair value through income statement At initial recognition, the Group has designated certain financial assets at FVIS. Before January 1, 2018, the Group also designated certain financial assets as at FVIS because the assets were managed, evaluated and reported internally on a fair value basis. Policy applicable before January 1, 2018 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 as FVIS. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the consolidated statement of income. All money market deposits, customer deposits, term loans, subordinated debts and other debt securities in issue are initially recognized at fair value less transaction costs. Subsequently, financial liabilities are measured at amortized cost, unless they are required to be measured at fair value through income statement or the Group has opted to measure a liability at FVIS as per the requirements of IFRS 9. For financial liabilities classified as FVIS using fair value option, after the initial recognition any changes in fair value related to changes in own credit risk are presented separately in OCI and all other fair value changes are presented in the income statement. Amounts in OCI relating to own credit risk are not recycled to the income statement even when the liability is derecognized and the amounts are realized. Financial guarantees and loan commitments that the Group chose to measure at FVIS will have all fair value movements recognized in the income statement. Policy applicable after January 1, 2018 The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortized cost. Amortized cost is calculated by taking into account any discount or premium on issue funds, and costs that are an integral part of the effective rate of interest. PUBLIC 16
17. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 6. Investments, net Investment securities are classified as follows: Sep 30, 2018 (Unaudited) (SR'000) Held at fair value through income statement (FVIS) 4,529,657 Held at fair value through other comprehensive income (FVOCI) Held at amortized cost Available for sale Dec 31, 2017 (Audited) (SR'000) 2,277,071 Sep 30, 2017 (Unaudited) (SR'000) 2,258,173 49,554,472 - - 10,781,040 - 34,069,823 24,386,586 32,279,607 25,669,544 - 3,178,930 3,203,897 63,912,410 63,411,221 - - 63,912,410 63,411,221 1,490,967 Dec 31, 2017 (Audited) (SR'000) 1,549,623 Sep 30, 2017 (Unaudited) (SR'000) 1,519,062 Consumer loans 16,543,370 17,021,699 17,071,683 Commercial loans and advances 97,954,566 99,960,713 103,009,981 Performing loans and advances 115,988,903 118,532,035 121,600,726 1,605,736 1,127,315 1,074,434 Gross loans and advances 117,594,639 119,659,350 122,675,160 Credit impairment provision (2,891,289) (1,974,621) (1,997,174) 114,703,350 117,684,729 120,677,986 Held to maturity Sub-total 64,865,169 Credit impairment provision (2,849) Total investments, net 64,862,320 7. Loans and advances, net The total loans and advances, which are held at amortised cost, are as follows: Sep 30, 2018 (Unaudited) (SR'000) Credit cards Non-performing loans and advances Total loans and advances, net PUBLIC 17
18. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 8. Customer Deposits Customer deposits comprise of the following: Sep 30, 2018 Dec 31, 2017 Sep 30, 2017 (Unaudited) (Audited) (Unaudited) (SR'000) (SR'000) (SR'000) Demand 96,289,023 99,546,112 100,352,678 Saving 7,454,523 7,224,513 7,163,634 Time 60,242,854 54,884,115 53,305,580 Other 5,636,752 6,267,914 5,879,231 169,623,152 167,922,654 166,701,123 Total customer deposits 9. Derivatives The table below sets out the positive and negative fair values of derivative financial instruments, which have been accounted for in these interim condensed consolidated financial statements, together with their notional amounts. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the end of the period, 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. All derivatives are reported in the statement of consolidated financial position at fair value. In addition, where applicable, all such contracts covered by master netting agreements are reported net. Gross positive or negative fair values are netted with the cash collateral received or paid to a given counterparty pursuant to a valid master netting agreement. Positive Fair Value Held at FVIS Commission rate swaps Commission rate futures and options Forward foreign exchange contracts Currency Options Swaptions Equity & commodity options Other Held as fair value hedges: Commission rate swaps Held as cash flow hedges: Commission rate swaps Sep 30, 2018 (Unaudited) (SR’000) Negative Notional Fair Amount Value Positive Fair Value Dec 31, 2017 (Audited) (SR’000) Negative Fair Value Notional Amount Positive Fair Value Sep 30, 2017 (Unaudited) (SR’000) Negative Fair Value Notional Amount 3,329,972 2,744,547 142,154,176 6,231,314 4,970,558 141,672,493 6,686,225 5,174,848 122,421,009 42,928 54,568 7,722,808 35,455 40,300 12,404,532 41,125 61,640 6,130,155 65,799 58,053 20,061 47,987 52,316 1,339 15,728,847 2,111,246 4,343,250 139,574 120,316 16,537 186,108 121,395 233 29,118,406 8,000,585 4,498,310 119,711 124,950 53,509 174,484 131,274 30,877 34,579,195 12,151,697 2,812,500 114,205 - 114,205 305 1,265,000 750,000 115,618 - 115,618 - 1,342,478 - 116,012 - 116,012 - 1,362,801 - 4,122 7,048 375,000 48,635 3,000,000 4,589 85,471 4,902,500 43,218 14,261 4,747,500 42,501 6,615 4,832,500 Sub-total 3,639,729 3,107,786 179,352,827 6,702,032 5,448,473 201,784,304 7,184,033 5,744,385 187,289,857 Cash collateral received / paid (312,878) (779,266) (187,324) (1,472,175) (188,836) (1,741,871) Total 3,326,851 2,328,520 6,514,708 3,976,298 6,995,197 4,002,514 - PUBLIC 18 - - -
19. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 10. Loan Commitments and Financial Guarantee Contracts The Group's loan commitments and financial guarantee contracts are as follows: Sep 30, 2018 (Unaudited) Dec 31, 2017 (Audited) Sep 30, 2017 (Unaudited) (SR '000) (SR '000) (SR '000) Letters of credit 5,596,390 5,805,219 5,497,528 31,814,372 34,051,976 35,205,393 Acceptances 1,467,652 1,834,042 1,537,878 Irrevocable commitments to extend credit 2,555,709 3,073,827 3,308,996 722,188 687,177 679,114 42,156,311 45,452,241 46,228,909 Letters of guarantee Other Total loan commitments and financial guarantee contracts The Group has started allocating credit impairment provisions against loan commitments and financial guarantee contracts. An amount of SR 1,594 million calculated in accordance with IFRS 9 is classified under ‘Other Liabilities’ as at September 30, 2018. 11. Cash and Cash Equivalents Cash and cash equivalents included in the statements of consolidated cash flows comprise the following: Sep 30, 2018 (Unaudited) (SR '000) Cash and balances with central banks excluding statutory deposits Due from banks and other financial institutions maturing within ninety days Total cash and cash equivalents Dec 31, 2017 (Audited) (SR '000) Sep 30, 2017 (Unaudited) (SR '000) 13,672,145 15,952,887 11,726,569 8,405,891 5,020,361 5,651,742 22,078,036 20,973,248 17,378,311 12. Operating Segments The Group is organized into the following main operating segments: Consumer - comprises of individual customer time deposits, current, call and savings accounts, as well as credit cards, retail investment products, individual and consumer loans. Corporate - comprises of corporate time deposits, current and call accounts, overdrafts, loans and other credit facilities as well as the Group's customer derivative portfolios and its corporate advisory business. Treasury - principally manages money market, foreign exchange, commission rate trading and derivatives for corporate and institutional customers as well as for the Group's own account. It is also responsible for funding the Group's operations, maintaining liquidity and managing the Group's investment portfolio and statement of financial position. Investment banking - engaged in investment management services and asset management activities related to dealing, managing, arranging, advising and custody businesses. The investment banking business is housed under a separate legal entity Samba Capital and Investment Management Company. PUBLIC 19
20. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The Group's primary business is conducted in the Kingdom of Saudi Arabia with three overseas branches and three overseas subsidiaries. However, the results of overseas operations are not material to the Group's overall financial position. On June 8, 2016, the Board of Directors of the Group has decided to close the operations of UK branch as its operations are no longer consistent with the business strategy of the Group. The management believes that the financial impact of this decision will not be material to the overall operations of the Group. Transactions between the operating segments are on normal commercial terms. Funds are ordinarily reallocated between segments, resulting in funding cost transfers. Special commission charged for these funds is based on market-based interbank rates. There are no other material items of income or expense or other internal revenues between the operating segments. The Group's total assets and liabilities as at September 30, 2018 and 2017, together with special commission income net, total operating income, total operating expenses, credit impairment provisions, net income, capital expenditure, and depreciation expense for the periods then ended, by operating segments, are as follows: SR'000 Consumer Sep 30, 2018 (Unaudited) Investment Corporate Treasury banking Total 32,836,651 97,020,024 98,252,759 168,387 89,029,133 86,271,202 9,949,395 114,064 Special commission income, net 1,782,014 1,729,750 1,014,136 37,662 185,363,794 4,563,562 Total operating income 2,253,944 2,248,762 1,271,055 354,500 6,128,261 Total operating expenses, of which: Provision for credit impairment, net of recoveries / reversals 1,277,400 496,427 82,491 149,582 2,005,900 71,361 63,301 33 33,588 47,116 694 4,210 85,608 976,544 1,752,335 1,188,564 204,918 4,122,361 64,745 66,605 5,535 403 137,288 Total assets Total liabilities Depreciation Net income for the period Capital expenditure SR'000 Consumer - 228,277,821 134,695 Sep 30, 2017 (Unaudited) Investment Corporate Treasury banking Total Total assets 33,928,477 104,220,643 90,558,391 130,330 228,837,841 Total liabilities Special commission income, net Total operating income 97,042,053 74,950,333 13,066,968 124,098 185,183,452 1,592,923 1,687,918 890,928 19,586 4,191,355 2,117,304 2,269,550 1,243,416 358,284 5,988,554 1,351,885 589,003 93,396 144,157 2,178,441 118,803 123,213 - 36,635 49,470 786 5,438 92,329 765,419 1,680,547 1,150,020 214,127 3,810,113 67,356 51,737 15,641 3,554 138,288 Total operating expenses, of which: Provision for credit impairment, net of recoveries / reversals Depreciation Net income for the period Capital expenditure PUBLIC 20 - 242,016
21. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 13. Financial Risk Management Credit risk Credit risk is the risk that a customer will fail to discharge its financial obligation to the Group and will cause the Group to incur a financial loss. The Board of Directors is responsible for the overall risk management approach and for approving the risk management strategies and principles. The Board has appointed the Board Risk Committee which monitors the overall risk process within the bank and has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. The Group seeks to manage its credit risk exposure by ensuring that its customers meet the minimum credit standards defined by the Group’s management and through diversification of lending activities to ensure that there is no undue concentration of risks with individuals, or within groups of customers in specific locations or businesses. The Group continually assesses and monitors credit exposures to ensure timely identification of potential problem credits. In addition to monitoring credit limits, the Group manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and by limiting the duration of exposure. In certain cases the Group may also close out transactions and settle on a net present value basis. Concentrations of credit risk arise 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 industry or geographical location. The Group limits the impact of concentration risk in exposure by setting progressively lower limits for longer tenors and taking security, where considered appropriate, to mitigate such risks. a) Credit quality analysis The following table sets out information about the credit quality of financial assets measured at amortized cost and debt investments classified as FVOCI. Unless specifically indicated, for financial assets the amounts in the table below represent gross carrying amounts. SR’000 12 Months ECL September 30, 2018 Life time ECL not Life time ECL credit impaired credit impaired Total Due from banks and other financial institutions at amortised cost Debt instrument at amortised cost 18,904,407 - - 18,904,407 10,781,040 - - 10,781,040 Debt instrument at FVOCI 46,244,397 91,575 - 46,335,972 107,442,625 7,928,873 2,223,141 117,594,639 183,372,469 8,020,448 2,223,141 193,616,058 723,143 620,999 1,588,457 2,932,599 182,649,326 7,399,449 634,684 190,683,459 73,554 137,319 1,382,990 1,593,863 Loans and advances at amortised cost Less: Credit impairment provision Total Credit impairment provisions against Loan Commitments and Financial Guarantee Contracts b) Amounts arising from ECL – Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available ‘without undue cost or effort’. This includes both quantitative criteria such as risk grading and delinquency, and qualitative information and analysis used in the assessment of the classification assigned to the obligor. These are based on the Group's historical experience and expert credit assessment and includes the forward-looking information. PUBLIC 21
22. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Credit risk grades The Group allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of default while also applying experienced credit judgment. Credit risk grades are defined using qualitative and quantitative factors that are indicative of the risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Credit risk grades are defined and calibrated such that the risk of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in risk of default between credit risk grades 1 and 2 is smaller than the difference between credit risk grades 2 and 3. Each exposure is allocated to a credit risk grade at initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being subsequently moved to a different credit risk grade. The monitoring typically involves use of the following data. • • • Corporate exposures Information obtained during periodic review of customer files e.g. audited financial statements, management accounts, budgets and projections. Examples of areas of particular focus are: gross profit margins, financial leverage ratios, debt service coverage, compliance with covenants, quality of management, and senior management changes/succession planning. Data from credit reference agencies, press articles, changes in external credit ratings. Actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities. Retail exposures • Internally collected data and customer behaviour e.g. utilization of credit card facilities. • Affordability metrics. • External data from credit reference agencies. All exposures • Payment record – this includes overdue status as well as a range of variables about payment ratios. • Utilization of the granted limit. • Requests for and granting of forbearance. • Existing and forecast changes in business, financial and economic conditions. Generating the term structure of probability of default The 12 month Probabilities of Default (PD) derived from approved internal rating models are a primary input into the determination of the PD term structure for exposures. For some portfolios, information sourced from external credit reference agencies is also used. The Group extrapolates these PDs into a term structure by using macro-economic factors and transition matrices to generate both estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time. This analysis includes the identification and calibration of relationships between changes in default rates and macroeconomic factors as well as in-depth analysis of the impact of certain other factors (e.g. forbearance experience) on the risk of default. For most exposures the key macro-economic indicators include the estimation for GDP growth, inflation rates and oil price. Based on advice from the Group’s team of Economists, and consideration of a variety of external actual and forecast information, the Group formulates 'base case, ‘upside’ and ‘downside' views of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios (see discussion below on incorporation of forward-looking information). The Group then uses these forecasts to adjust its estimates of PDs. Determining whether credit risk has increased significantly The criteria for determining whether credit risk has increased significantly vary by portfolio and include both quantitative factors expressed in the form of a classification as well as a qualitative assessment based on delinquency. Using its expert credit judgment and, where possible, relevant historical experience, the Group may determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis. These typically include expectations of forbearance occurring, high risk events (such as breach of covenants etc.), cross obligor defaults and designation on risk watch-lists. PUBLIC 22
23. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) As a backstop, the Group considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. Due dates are determined without considering any grace period that might be available to the borrower. The performance of borrowers is monitored on a regular basis against the pre-defined classification/delinquency triggers to ensure the effectiveness and relevance thereof and to confirm that: • • • the criteria are capable of identifying significant increases in credit risk before an exposure is in default; the criteria are no more liberal than the point in time when an asset becomes 30 days past due; and there is stability in the loss allowance arising from transfers between 12-month PD (stage 1) and lifetime PD (stage 2). Modified financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognized and the renegotiated loan recognized as a new loan at fair value in accordance with the accounting policy. The Group may renegotiate loans to customers in financial difficulties (referred to as 'forbearance activities’) to maximize collection opportunities and minimize the risk of default. Under the Group's forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants and a detailed forbearance policy has been implemented by the Group. For financial assets modified as part of the Group's forbearance policy, the estimate of PD reflects whether the modification has improved or restored the Group's ability to collect interest and principal and the Group's previous experience of similar forbearance action. As part of this process, the Group evaluates the borrower's payment performance against the modified contractual terms and considers various behavioural indicators. Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired or in-default. Consequently all such exposures continue to be measured using the lifetime ECL and a customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be credit-impaired or in-default, or the PD is considered to have decreased such that the loss allowance reverts to being measured at an amount equal to 12-month ECL. Definition of ‘Default’ “Default” is defined as either non-payment of a material financial obligation persisting for 90 days or the occurrence of events that would lead the Group to consider that the obligor is unlikely to service its credit obligations to the Group. In assessing whether a borrower is in default, the Group considers indicators that are: • • • qualitative e.g. breaches of covenant; quantitative e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and based on data developed internally and obtained from external sources. The definition of default used by the Group for IFRS 9 purposes aligns with that applied by the Group for regulatory capital purposes. Incorporation of forward-looking information The Group incorporates forward-looking information into its measurement of ECL. Based on advice from the team of Economists and consideration of a variety of external actual and forecast information, the Group formulates a ‘base case' view of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. This process involves developing two additional economic scenarios (‘upside’ and ‘downside’) and considering the relative probabilities of each outcome. External information includes economic data and forecasts published by governmental bodies and monetary authorities in the Kingdom and selected private-sector and academic forecasters. PUBLIC 23
24. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The base case represents a most-likely outcome and is aligned with information used by the Group for other purposes such as strategic planning and budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. Periodically, the Group carries out stress testing of more extreme shocks to calibrate its determination of these other representative scenarios. The Group has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. The economic scenarios used as at September 30, 2018 included the ranges of key indicators such as the GDP growth rate, oil price, rate of inflation and data on fiscal spending etc. Predicted relationships between the key macro-economic indicators, default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past significant number of years. Measurement of ECL The key inputs into the measurement of ECL are the following variables: • • • probability of default (PD); loss given default (LGD); and exposure at default (EAD). These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above. These models are validated on an annual basis to ensure the quality of the outputs generated. PD estimates are estimates at a certain date which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. Where it is available, market data may also be used to derive the PD for large corporate counterparties. If a counterparty or exposure migrates between ratings classes, then this will lead to a change in the estimate of the associated PD. LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure of the claim and recovery costs of any collateral that is integral to the financial asset. EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortization. The EAD of a financial asset is its gross carrying amount. For loan commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on regulatory defined credit conversion factors for non-retail customers and historical observations for the retail portfolio. As described above, and using a 12-month PD for financial assets for which credit risk has not significantly increased, the Group measures ECL considering the risk of default over the maximum contractual period (including any borrower's extension options) over which it is exposed to credit risk, even if, for risk management purposes, the Group considers a longer period. The maximum contractual period extends to the date at which the Group has the right to require repayment of an advance or terminate a loan commitment or guarantee. For retail overdrafts and credit card facilities that include both a loan and an undrawn commitment component, the Group measures ECL over a period of 12 months. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. The Group can cancel them with immediate effect but this contractual right is not enforced in the normal day-to-day management but only when the Group becomes aware of an increase in credit risk at the facility level. This longer period is estimated taking into account the credit risk management actions that the Group expects to take and that serve to mitigate ECL. These include a reduction in limits, cancellation of the facility and/or turning the outstanding balance into a loan with fixed repayment terms. PUBLIC 24
25. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Where modelling of a parameter is carried out on a collective basis, the financial instruments are ranked on the basis of shared risk characteristics that include: • instrument type; • payment behaviour; • external credit bureau characteristics; • date of initial recognition; • remaining term to maturity; and • customer demographics The ranking is subject to regular review to ensure that exposures within a particular pool remain appropriately homogeneous. The following tables shows reconciliations from the opening to the closing balance of the credit impairment provisions in respect of loans and advances. SR ‘000 Balance as at January 1, 2018 Transfer to 12 months ECL Transfer to life time ECL not credit impaired 12 Month ECL Life time ECL not credit impaired Life time ECL credit impaired 737,363 491,806 1,626,644 12,048 (12,043) (5) - (50,821) 57,120 (6,299) - - (11,516) 11,516 - Transfer to life time ECL credit impaired Net measurement of loss allowance New financial assets originated, purchased or renewed Financial asset that have been derecognised Balance as at Sep 30, 2018 Total 2,855,813 8,720 47,610 (25,064) 31,266 572,513 294,302 138,709 1,005,524 (597,989) (246,281) (157,044) (1,001,314) 681,834 620,998 1,588,457 2,891,289 14. Share Capital The authorized, issued and fully paid share capital of the Bank consists of 2,000 million shares (2017: 2,000 million shares) of SR 10 each. 15. Basic and Diluted Earnings per Share Basic and diluted earnings per share for the periods ended September 30, 2018 and 2017 are calculated by dividing the net income for the periods attributable to the equity holders of the Bank by 2,000 million shares. 16. Dividends An interim dividend of SR 1,911 million from the net income for the six-month period ended June 30, 2018 (June 30, 2017: SR 1,807 million) has been approved on July 1, 2018 for payment to shareholders. After deducting zakat, this interim dividend resulted in a net payment of SR 0.80 per share (June 30, 2017: SR 0.75 per share) to the Saudi shareholders. The interim dividend for foreign shareholders has been paid net of applicable taxes. 17. Fair Values of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: Level 2: Level 3: Quoted prices in active markets for the same instrument (i.e. without modification or repackaging); Quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant inputs are based on observable market data; and Valuation techniques for which any significant input is not based on observable market data. PUBLIC 25
26. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) The fair values of the financial assets, financial liabilities and the derivative financial instruments classified under the appropriate valuation hierarchy, is given below: SR '000 Sep 30, 2018 (Unaudited) Financial Assets: Level 1 Investments held at FVIS Investments held at FVOCI Investments held at amortized cost Derivatives 429,107 15,038,394 3,129 Financial Liabilities: Financial liabilities at FVIS Derivatives Level 2 3,334,663 34,141,914 10,241,550 3,323,722 - 551,238 2,328,354 166 SR '000 765,887 374,164 - Total 4,529,657 49,554,472 10,241,550 3,326,851 551,238 2,328,520 Sep 30, 2017 (Unaudited) Financial Assets: Level 1 Investments held at FVIS Investments available for sale Investments held to maturity Other Investments held at amortized cost Derivatives 183,401 12,657,358 3,136,148 10,082 Financial Liabilities: Financial liabilities at FVIS Derivatives Level 3 Level 2 2,074,772 11,913,407 186,208 31,747,029 6,985,115 - 559,537 3,979,749 22,765 Level 3 1,098,779 444,026 - Total 2,258,173 25,669,544 3,322,356 32,191,055 6,995,197 559,537 4,002,514 The fair values of on-balance sheet financial instruments, except for investments held at amortized cost and loans and advances, are not significantly different from the carrying values included in the interim condensed consolidated financial statements. The Group’s portfolio of loans and advances to customer is well diversified by industry. More than three quarters of the portfolio reprices within less than a year and accordingly the fair value of this portfolio approximates the carrying value, subject to any significant movement in credit spreads. The fair value of the remaining portfolio is not significantly different from its carrying values. The estimated fair values of the Group’s loans and advances portfolio as at Sep 30, 2018 was SR 115 billion (Sep 30, 2017: SR 121 billion). The fair values of special commission bearing customers’ deposits, due from and due to banks and other financial institutions, other assets and other liabilities which are carried at amortized cost, are not significantly different from the carrying values included in the interim condensed consolidated financial statements, since the current market special commission rates for similar financial instruments are not significantly different from the contracted rates, and for the short duration of due from and due to banks. During the period, there have been no transfers within levels of the fair value hierarchy. The estimated fair values of investments held at amortized cost are based on quoted market prices when available or pricing models when used in the case of certain fixed rate bonds respectively. The value obtained from the relevant valuation model may differ, with the transaction price of a financial instrument. The difference between the transaction price and the model value is commonly referred to as ‘day-one profit or loss’. It is either amortized over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable data, or realized through disposal. Subsequent changes in fair value are recognized immediately in the statements of consolidated income without reversal of deferred day-one profits or losses. The valuation of each publicly traded investment is based upon the closing market price of that stock as of the valuation date, less a discount if the security is restricted. PUBLIC 26
27. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Investments classified as Level 2 are fair valued using discounted cash flow techniques that generally use observable market data inputs for yield curves, credit spreads and reported net asset values of the funds. Derivatives classified as Level 2 are fair-valued using the Bank’s proprietary valuation models that are based on discounted cash flow techniques. The data inputs to these models are based on observable market parameters in which they are traded and are sourced from independent brokers. Fair values of private equity investments classified in Level 3 are determined based on the investees’ latest reported net assets values as at the date of statements of financial position. The movement in Level 3 financial instruments during the period relates to fair value movement only. 18. Capital Adequacy The Group monitors the adequacy of its capital using the methodology and ratios established by the Basel Committee on Banking Supervision and as adopted by SAMA, with a view to maintain a sound capital base to support its business development and meet regulatory capital requirement as defined by SAMA. These ratios measure capital adequacy by comparing the Group’s eligible capital with its statement of consolidated financial position assets, commitments and contingencies, notional amount of derivatives at a weighted amount to reflect their relative credit risk, operational risk and market risk. During the period, the Group has fully complied with such regulatory capital requirement. The management reviews on a periodical basis its capital base and level of risk weighted assets to ensure that capital is adequate for risks inherent in its current business activities and future growth plans. In making such assessments, the management also considers Group’s business plans along with economic conditions which directly and indirectly affects business environment. The overseas subsidiary manages its own capital as prescribed by local regulatory requirements. SAMA has issued the framework and guidance regarding implementation of the capital reforms under Basel III and the related disclosures which are effective from January 1, 2013. Accordingly, calculated under the Basel III framework, the Group’s consolidated Risk Weighted Assets (RWA), total capital and related ratios on a consolidated group basis and on a standalone basis for its significant banking subsidiary calculated for the credit, operational and market risks, are as follows: Sep 30, 2018 (Unaudited) (SR '000) Samba Financial Group (consolidated) Dec 31, 2017 (Audited) (SR '000) Sep 30, 2017 (Unaudited) (SR '000) Credit risk RWA Operational risk RWA Market risk RWA 178,526,247 13,719,047 11,675,673 187,944,475 13,303,620 15,165,875 201,222,796 13,303,620 12,186,775 Total RWA 203,920,967 216,413,970 226,713,191 Tier I capital Tier II capital 45,096,940 1,278,711 44,622,638 1,126,685 43,551,793 1,127,071 Total tier I & II capital 46,375,651 45,749,323 44,678,864 Capital Adequacy Ratio % Tier I ratio Tier I + II ratio 22.1% 22.7% 20.6% 21.1% 19.2% 19.7% Capital adequacy ratios for SBL are as follows: Tier I ratio Tier I + II ratio 20.1% 20.2% 19.2% 19.5% 22.8% 23.4% PUBLIC 27
28. SAMBA FINANCIAL GROUP NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) SAMA through its circular number 391000029731 dated 15/03/1439AH, which relates to the interim approach and transitional arrangements for the accounting allocations under IFRS 9, has directed banks that the initial impact on the capital adequacy ratio as a result of applying IFRS can be transitioned over 5 years. 19. Zakat and Income Tax Zakat attributable to Saudi shareholders for the period ended Sep 30, 2018 is estimated at SR 450 million (2017: SR 444 million) on a shareholding of 98.46% (2017: 96.44%). Income Tax for non-Saudi shareholders for the same period is estimated at SR 26.25 million (2017: SR 25 million). The estimate of zakat and income tax liabilities is based on the financial position as at Sep 30, 2018 and results of operations of the Bank for the period then ended. 20. Prior period reclassifications Certain prior period balances have been reclassified to conform to the current period presentation. PUBLIC 28